Securities Industry Commentator by Bill Singer Esq

SEC Whistleblower Program: Three Persons Deemed One Claimant and the 8/10ths of a Human Being (BrokeAndBroker.com Blog)

Husband And Wife Admit Ponzi Scheme Relating To Hedge Fund Investments In Foreign Currencies (DOJ Release)

Brooklyn Businessman Sentenced to 18 Months' Imprisonment for Defrauding Investors in Cryptocurrency Initial Coin Offerings (DOJ Release)

Alleged Cryptocurrency Fraudster Extradited From Thailand To Face Charges In Multi-Million Dollar Investment Scheme / Roger Karlsson allegedly defrauded more than 3,500 victims of more than $11 million (DOJ Release)

Raymond James' Rep Hit with TRO In JP Morgan Case.J.P. Morgan Securities LLC, Plaintiff, v. Erik W. Weiss, Defendant (Order on Plaintiff's Motion for Temporary Restraining Order, United States District Court for the Southern District of Indiana, 19-CV-04163) 

FINRA Fines and Suspends Rep For Restaurant Business. In the Matter of Michael Jason Collins, Respondent (FINRA AWC)

FINRA Bars Merrill Lynch Registered Senior Client Associate For Conversion. In the Matter of Julie Ann Mineard, Respondent (FINRA AWC)

Alcibiades and Jennifer Wee Cifuentes engaged in an investment fraud scheme from 2012 through March 2015. They fraudulently induced victims to invest in the foreign currency and commodity markets through Cifuentes Fund Management (CFM), their hedge fund that purportedly invested in foreign currencies. Instead, they almost immediately spent those investment funds on personal items, such as an Audi R8 and jewelry. The couple would then pay back a portion of the victims' money with money received from newly duped victims. The couple defrauded approximately 25 victims of more than $500,000.

In July 2017, Zaslavskiy marketed RECoin as "The First Ever Cryptocurrency Backed by Real Estate," and subsequently Diamond as an "exclusive and tokenized membership pool" hedged by diamonds.  In reality, Zaslavskiy bought neither real estate nor diamonds, and the certificates he sent to investors were worthless. Zaslavskiy also falsely advertised that REcoin had a "team of lawyers, professionals, brokers and accountants" who would invest the proceeds from the REcoin ICO in real estate, and that 2.8 million REcoin tokens had been sold.

[K]arlsson, also known by several aliases including Steve Heyden, Euclid Deodoris, Joshua Millard, Lars Georgsson, Paramon Larasoft, and Kenth Westerberg, used websites to communicate false representations to victims in a scheme to defraud potential investors.  For example, one website, www.easternmetalsecurities.com, allegedly was registered to a fictitious person and advertised shares in a product called a "Pre Funded Reversed Pension Plan" (PFRPP).  The complaint alleges Karlsson used the website to invite potential investors to purchase shares of the plan for $98 per share in exchange for an eventual payout of 1.15 kilograms of gold per share, even though as of January 2, 2019, 1.15 kilograms of gold was worth more than $45,000.  

Karlsson also allegedly advised investors that, in the unlikely event that the gold payout did not happen, he guaranteed to them 97% of the amount they invested. According to the complaint, the government found no evidence of any accounts held by Karlsson that would allow him to pay off the investors.  Instead, the complaint alleges, the funds provided by victims were transferred to Karlsson's personal bank accounts and now appear to be tied up in real estate in Thailand.

The complaint further describes how Karlsson allegedly used a second website, www.hci25.com, to make multiple false communications to potential investors.  Karlsson allegedly brought the investors in HCI25 together with the investors in the PFRPP and posted multiple communications to delay the moment investors would realize there would be no payout.  For example, on one occasion, Karlsson allegedly explained that a payout had not occurred because releasing so much money all at once could cause a negative effect on financial systems throughout the world.  Karlsson also falsely represented that EMS was working with the U.S. Securities and Exchange Commission to prepare the way for a payout.

The complaint alleges Karlsson directed his victims to make investments using virtual currencies, such as Bitcoin.  Karlsson allegedly defrauded no less than 3,575 victims of more than $11 million.  

This matter is before the Court on a Motion for Temporary Restraining Order (Filing No. 3) filed by Plaintiff J.P. Morgan Securities LLC ("JPMorgan"). JPMorgan initiated this lawsuit against former employee, Defendant Erik W. Weiss ("Weiss") for breach of contract, misappropriation of trade secrets, breach of fiduciary duty, and unfair competition, among other things. JPMorgan asks the Court to issue a temporary restraining order to protect its trade secrets, goodwill, and customer relationships until such time as a duly appointed panel of arbitrators at the Financial Industry Regulatory Authority ("FINRA") renders an award in the underlying dispute. The parties submitted evidence and briefing, and the Court held a hearing on JPMorgan's motion on Friday, November 8, 2019. For the following reason, JPMorgan's Motion for Temporary Restraining Order is granted.

After reviewing the parties' arguments, the evidence before the Court, and the case law, the Court is persuaded that JPMorgan has a reasonable likelihood of success on the merits of its breach of contract claim. There is no dispute that the contract between the parties exists. The contract clearly provides for the non-solicitation of customers/clients for a period of twelve months following Weiss' departure from JPMorgan. While Weiss argues that the provision is overly broad, he ignores that the provision is appropriately limited by the language that the prohibited solicitation applies to clients who were serviced by Weiss or whose names became known to him through his employment. While the contract includes JPMorgan Chase Bank, N.A. and its affiliates in the definition of "JPMC" and uses the acronym "JPMC" within the non-solicitation provision, the provision is limited by Weiss' actual employment with JPMorgan. There is no need for the Court to blue-pencil, modify or rewrite the contract in order to enforce the restrictive covenant. JPMorgan's requested preliminary injunctive relief fits within the bounds of the restrictive covenant. Furthermore, JPMorgan's assertion is well-taken that its decision not to pursue a broader restraining order was a litigation cost-benefit decision, not a concession that the provision is overly broad. 

The Court also concludes that the restrictive covenant and the requested restraining order do not prohibit Weiss from making a permissible announcement that he has changed employers. Likewise, contrary to Weiss' assertion regarding FINRA policy, the restrictive covenant does not interfere with any client's ability to transfer their accounts to the broker or brokerage firm of their choosing. Rather, the provision restricts a broker's ability to solicit particular clients for a defined period of time. Furthermore, Weiss' argument that JPMorgan is not entitled to protection based on it being a signatory to the Protocol is unavailing. JPMorgan joined the Protocol in a limited capacity, expressly limiting its applicability to certain divisions or lines of business, none of which apply to the circumstances of this case. Weiss expressly acknowledged in his Declaration that the division he worked in at JPMorgan is not part of the Protocol (Filing No. 25-1 at 3-4). 

As recognized by many other courts (see Filing No. 4-1), JPMorgan has a legitimate business interest in its client relationships, lists, and information. JPMorgan has expended significant resources and time to build its goodwill, client relationships, and client lists. The knowledge of JPMorgan's particular clients and their particular financial needs and the financial services available to address those needs is not publicly available. The restrictive covenant to which Weiss agreed is reasonably tried to and no greater than is required for the protection of JPMorgan's legitimate business interest. As Weiss has acknowledged, an employer's enforceable legitimate interest applies to the former employee's "use of client relationships which [the employer] enabled him to acquire through his performance of . . . services for the firm's clientele during the course of his employment." BDO Seidman, 712 N.E.2d at 1225. Such is the case here. The restrictive covenant protects the client information and relationships that Weiss obtained only through his employment with JPMorgan.

Weiss' client affidavits provide evidence that some clients were not solicited by Weiss to leave JPMorgan. However, those client affidavits do not negate the evidence provided by JPMorgan that other clients were solicited in violation of Weiss' employment contract. JPMorgan presented evidence that Weiss solicited its clients and successfully transferred approximately forty of JPMorgan's clients to Raymond James, and those accounts total more than $27 million in assets. Weiss' client affidavits account for only a small portion of the approximately forty transferred clients. Weiss argued that JPMorgan should have presented affidavits from clients who complained that Weiss had pressured them or solicited them, and JPMorgan responded that clients' confidentiality and the sensitivity of the financial relationship warranted not providing affidavits from such clients. JPMorgan's response is well-taken. At this stage of the litigation, JPMorgan's evidence is sufficient to support a successful breach of contract claim based on the non-solicitation provision.

Between February 2014 and December 2015, Collins solicited 15 individuals to invest approximately $200,000 in membership units of an LLC organized to operate a new restaurant in Chicago, Illinois. Although the Firm had approved Collins and his father's own investment in the LLC, the Firm prohibited Collins from soliciting any other investors. Despite this instruction, Collins participated in the sale of the membership interests by, among other things, introducing the investors to the business partners in the investment, discussing his own investments in the project with them, and attending networking events with the investors where the investment was discussed. Seven of the investors were customers of the Firm. The restaurant opened in early 2017 and closed approximately nine months later. 

Collins failed to provide notice to the Firm of his participation in the 15 individuals' investments, and also failed to disclose that participation on his annual compliance attestations in 2014 and 2015. 

In addition, in 2016, Collins helped arrange for the LLC to repurchase the membership units from certain of the investors as part of a broader agreement. Collins also separately paid the investors who participated in the agreement the difference between their original investment and the amount they received pursuant to the agreement. Collins did not disclose his involvement in this arrangement to the Firm. 

[A]t the end of 2006, Mineard was assigned to work with IH, a Firm General Securities Representative. Mineard routinely assisted IH in paying his personal bills by making check requests for disbursements from IH's Firm brokerage account. 

On three dates during the period from July through September 2017, Mineard submitted four check requests for the disbursement of funds from one of IH's brokerage accounts at the Firm (the "IH Account"). Mineard inputted requests into the Firm's online check request system to direct disbursements totaling approximately $24,044 from the IH Account to Mineard's personal bank accounts (the "Check Requests"). The Check Requests were made without IH's prior knowledge or authorization. 

As a result of the Check Requests, funds were disbursed from the IH Account in the amounts of $4,744.02, $2,500, $3,800, and $13,000, and deposited to bank accounts belonging to Mineard. Mineard subsequently used these funds for her personal expenses. 

• Securities Industry Commentator
• Bill Singer