Securities Industry Commentator by Bill Singer Esq

3Cir Says Never Is Better Than Late In FINRA Arbitration Appeal (BrokeAndBroker.com Blog)

New York Hedge Fund Founder Pleads Guilty To Bankruptcy Fraud In Connection With Neiman Marcus Bankruptcy (DOJ Release)

SEC Obtains Final Judgment Against Former Portfolio Manager for Insider Trading (SEC Release)

Man Admits Operating Lottery Scam that Defrauded Connecticut Victim of Nearly $1.2 Million (DOJ Release)

Two More People Charged in Connection with Multi-State Scheme to Defraud Financial Institutions of Millions of Dollars (DOJ Release)

FINRA Censures and Fines HSBC Securities Over Fingerprinting and Screening

In the Matter of HSBC Securities (USA) Inc., Respondent (FINRA AWC)

FINRA Expungement Proves That No Good Deed Goes Unpunished

In the Matter of the Arbitration Between Jason Todd Skolnick, Claimant, v. Purshe Kaplan Sterling Investments, Respondent (FINRA Arbitration Award)

The Neiman Marcus Bankruptcy

Neiman Marcus, an American chain of luxury department stores with stores located across the United States, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") in May 2020.  At the outset of the bankruptcy, Marble Ridge, through KAMENSKY, applied to be on the Official Committee of Unsecured Creditors (the "Committee") and was thereafter appointed to be a member of the Committee.  As a member of the Committee, KAMENSKY had a fiduciary duty to represent the interests of all unsecured creditors as a group.

During the bankruptcy process, the Committee had negotiated with the owners of Neiman Marcus to obtain certain securities, known as MyTheresa Series B Shares (the "MYT Securities"), and ultimately, the Committee was successful in coming to a settlement to obtain 140 million shares of MYT Securities for the benefit of certain unsecured creditors of the bankruptcy estate.  In July 2020, KAMENSKY was negotiating with the Committee for Marble Ridge to offer twenty cents per share to purchase MYT Securities from any unsecured creditor who preferred to receive cash, rather than MYT Securities, as part of that settlement.

KAMENSKY's Fraudulent Scheme

On July 31, 2020, KAMENSKY learned that a diversified financial services company headquartered in Manhattan, New York (the "Investment Bank") had informed the Committee that it was interested in bidding a price between thirty and forty cents per share -- substantially higher than KAMENSKY's bid -- to purchase the MYT Securities from any unsecured creditor who was interested in receiving cash.

That afternoon, KAMENSKY sent messages to a senior trader at the Investment Bank ("IB Employee-1") telling him not to place a bid, and followed those messages up with a phone call with IB Employee-1 and a senior analyst of the Investment Bank ("IB Employee-2," and collectively the "Employees").  During that call, KAMENSKY asserted that Marble Ridge should have the exclusive right to purchase MYT Securities, and threatened to use his official role as co-chair of the Committee to prevent the Investment Bank from acquiring the MYT Securities.  KAMENSKY also stated that Marble Ridge had been a client of the Investment Bank in the past but that if the Investment Bank moved forward with its bid, then Marble Ridge would cease doing business with the Investment Bank.

The Investment Bank thereafter decided to not make a bid to purchase MYT Securities and informed the legal advisor to the Committee of its decision.  The Investment Bank further told the legal advisor they made that decision because KAMENSKY-a client of the Investment Bank-had asked them not to.

Advisors to the Committee informed counsel for Marble Ridge of their call with the Employees, and after speaking with KAMENSKY, counsel for Marble Ridge falsely informed the advisors that KAMENSKY had not asked the Employees not to bid, but instead had told them to place a bid only if they were serious.  Later that evening, KAMENSKY contacted IB Employee-1 and attempted to influence what IB Employee-1 would tell others, including the Committee and law enforcement, about KAMENSKY's attempt to block the Investment Bank's bid for the MYT Securities.  KAMENSKY said at the outset of the call, in substance, "this conversation never happened."  During the call, KAMENSKY asked IB Employee-1 to falsely say that IB Employee-1 had been mistaken and KAMENSKY had actually suggested that the Investment Bank only bid if it was serious, and made comments including the following:  "Do you understand . . . I can go to jail?"  "I pray you tell them that it was a huge misunderstanding, okay, and I'm going to invite you to bid and be part of the process."  "But I'm telling you . . . this is going to the U.S. Attorney's Office.  This is going to go to the court."  "[I]f you're going to continue to tell them what you just told me, I'm going to jail, okay? Because they're going to say that I abused my position as a fiduciary, which I probably did, right? Maybe I should go to jail. But I'm asking you not to put me in jail."

During a subsequent interview with the Office of the United States Trustee, which was conducted under oath and in the presence of counsel, KAMENSKY stated that his calls to IB Employee-1 were a "terrible mistake" and "profound errors in lapses of judgment."

After this series of events, Marble Ridge resigned from the Committee and has advised its investors that it intended to begin winding down operations and returning investor capital.

In November 2012, the SEC filed a complaint in this action, charging Martoma with insider trading. As alleged, Martoma obtained confidential information about clinical trial results for a drug being jointly developed by two pharmaceutical companies from a doctor involved in the trials. According to the complaint, on the basis of the confidential information, Martoma then caused trades in the securities of the two companies to be made in several hedge fund portfolios ahead of the negative announcement of the trial results, thereby reaping profits and avoiding losses totaling over $275 million for funds advised by CR Intrinsic and S.A.C Capital.

In March 2013, the SEC filed an amended complaint naming S.A.C. Capital Advisors and four hedge funds managed by CR Intrinsic and S.A.C. Capital as relief defendants because they each received ill-gotten gains from the insider trading scheme. As part of the SEC's litigation in this matter, the court established a fund to compensate investor victims of the fraud. The fund comprised over $601 million in disgorgement, prejudgment interest, and civil penalties paid in settlement by CR Intrinsic and the relief defendants. In separate distributions in August 2017 and July 2020, over $531 million was distributed to over 4,800 harmed investors. These payments fully reimbursed those investors.

In February 2014, Martoma was convicted after trial of insider trading for the same conduct alleged in the SEC's complaint. In connection with his criminal conviction, Martoma was sentenced to 9 years in prison, and ordered, among other things, to forfeit more than $9 million, representing his compensation tied to the illegal trading. Martoma has now consented to the entry of a final judgment enjoining him from future violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

According to court documents and statements made in court, between approximately 2015 to 2018, Fernandez and others, including Minique Morris and Horace Crooks, defrauded an elderly Mystic resident in a lottery scam.  As part of their scheme, Fernandez spoke to the victim on the telephone and used various pseudonyms, including "Damian Jackson," "Jesse Jackson," and "Huckleberry Finn."  During the phone calls, Fernandez falsely claimed that the victim had won a lottery or sweepstakes and was required to pay fees purportedly to cover taxes, insurance, handling and other charges related to the winnings.  Fernandez directed the victim to pay fees in various ways, including by mailing checks and money orders to Morris in Brampton, Ontario, and Crooks in Orlando, Florida; wiring funds to bank accounts controlled by Morris and Crooks; and purchasing and sending precious metals products to Morris and Crooks.  Fernandez instructed his co-conspirators how to transfer or deliver the fraud proceeds to him in Argentina or Jamaica, where Fernandez resided.

Through this scheme, the victim was defrauded of $1,196,207.

SIDE BAR: Try as I might, I can't find a reference in the DOJ Release to the specific count(s) to which Spiker pled, which is a somewhat odd omission. I'm guessing that she pled out to a money-laundering count but you'd sort of think that DOJ would be a tad more attentive to disclosing such a detail. 

[S]piker worked as a money launderer for scammers, who are believed to be located in India.  Typically, the scammers send out robocalls claiming to have an urgent message for the victim and, when the victim, mostly elderly or otherwise vulnerable, returns the call, the scammers threaten or cajole the victims into sending money.  

The scammers that Spiker worked for operated two different scams.  In the first, they told victims that their Social Security number (SSN) was used in a crime and they would be arrested, or their SSN canceled, unless they paid money.  In the second, the scammers offered the victims a reduced mortgage payment if they first paid a fee. Once the victim agreed to make the payment, the scammers directed them to wire money or send money orders to individuals, like Spiker, in the United States who worked for the scammers.

Since at least June 2019 until July 2020, Spiker received money from victims all over the United States. She used various fake IDs to pick up money wired to an Orlando-area store.  Victims also mailed money orders to her directly.  Spiker was introduced to the scam when she was a victim of the mortgage scam. 

After paying money to reduce her mortgage payment, and realizing that she had been scammed, she was recruited to receive money from other victims. 

In July 2020, law enforcement executed a search warrant on Spiker's residence.  Inside, they found 52 fake IDs each bearing her image with a different name.  Spiker admitted that she had been working with the scammers since June 2019, that she picked up approximately five or six money transactions each week, and that she received a percentage from each cash pick up.  Spiker communicated with the scammers by text message or email and had never met anyone in person.  Spiker admitted that she picked up over $300,000 in scam funds.

From March 2018 through April 2020, Abbas and Arif conspired with each other and others to defraud several financial institutions. Abbas and Arif and their conspirators established bank accounts associated with sham entities that had no legitimate purpose, and thereafter issued checks payable to other shell companies associated with the criminal organization, knowing that the payor accounts had insufficient funds. Abbas and Arif also conducted numerous fraudulent credit card and debit card transactions between shell companies to fraudulently credit payee accounts and fraudulently overdraw payor accounts. Abbas and Arif would use these shell companies to execute temporary refund credits, commonly referred to as "charge-backs," to checking accounts associated with the criminal organization. 

Abbas and Arif withdrew the "existing" funds (through ATMs or bank tellers) that banks had credited to the payee bank accounts at the time of the fraudulent transactions. Because Abbas and Arif withdrew the credited funds from the payee accounts before the banks could recognize the fraudulent transactions, the banks were left with substantial losses.

Law enforcement identified approximately 200 bank accounts used to facilitate the fraudulent schemes. Abbas, Arif, and other conspirators' unlawful activities attempted to cause a $10 million loss on financial institutions. The loss attributable to Abbas and Arif exceeded $1 million.

Between January 1, 2011 and March 25, 2019, HSBC failed to establish and maintain a supervisory system or written supervisory procedures reasonably designed to screen 2,191 non-registered associated persons for statutory disqualification. The Firm's written procedures only addressed fingerprinting and screening for statutory disqualification of registered individuals or those required to be registered. The procedures did not require that non-registered associated persons be fingerprinted and screened for statutory disqualification under the Exchange Act. The firm also failed to assign personnel to identify and screen non-registered associated persons under the Exchange Act.

Because of this failure, although HSBC fingerprinted the 2,191 non-registered associated persons, the Firm did not screen them for statutory disqualification under the Exchange Act. Rather, the Firm screened them under the narrower requirements of Section 19 of the Federal Deposit Insurance Act. Section 19 requires banks to obtain approval to hire or retain anyone who has been convicted of, or entered into a pretrial diversion or similar program related to, any criminal offense involving dishonesty or a breach of trust or money laundering. The requirements under the Exchange Act are broader. They call for broker-dealers to obtain approval prior to associating with anyone convicted, within the past ten years, of criminal offenses (including misdemeanors) similar to those specified in Section 19, as well as anyone convicted of any domestic felony or subject to specified findings or actions by certain financial regulators. 

After identifying this issue, as part of its remedial efforts, HSBC was able to fingerprint and screen 1,837 of the 2,191 non-registered associated persons pursuant to Exchange Act standards. Through this process, HSBC did not identify any individuals who were subject to statutory disqualification. However, HSBC was unable to fingerprint and screen 304 of the 2,191 individuals because they were no longer associated with the Firm, and HSBC could thus not determine whether those individuals were subject to statutory disqualification. 

. . .

SANCTIONS CONSIDERATIONS

In determining the appropriate sanctions in this matter, Enforcement considered, among other factors, that the Firm: (i) initiated, prior to intervention by a regulator, an extensive review of the Firm's systems, practices, and procedures with respect to fingerprinting and screening non-registered associated persons; (ii) shared the results of that review with FINRA; (iii) promptly commenced correcting supervisory deficiencies identified by the Firm's internal review; and (iv) provided substantial assistance to FINRA in its investigation. 

Doc Kennedy, J.D. https://advisorlawllc.com/executives/#doc 

Benjamin Winograd, J.D. https://advisorlawllc.com/executives/#ben

Factual Background 

Claimant started his career in 1995 as a licensed registered advisor. Since 2005 he has been a principal in his own firm (First National Corporation, a registered investment advisor) and has been affiliated with Respondent since 2006. Claimant is licensed per the Series 7, 31, 63, 65 and SIE examinations; has over 150 household clients whose investments he manages directly and another 100 that he serves jointly with his business partner. The Customer was referred to Claimant in 2006 by the Customer's accountant and, after several meetings, Respondent PKSI was engaged to service the John Hancock USA 401k plan for the Customer's dental practice. The Customer and his partner were the trustees for the plan. On or about June 1, 2006, the Customer engaged Claimant to take over management of some of his other investments, including four (4) taxable and retirement Charles Schwab accounts with a "Growth" investment objective. Claimant credibly testified that he and the Customer had quarterly conversations until sometime in the latter part of 2016 or early 2017 when there was a disagreement over investments in the Customer's personal (non-401K) accounts. Claimant testified that the Customer wanted to change to "Aggressive" investments, which Claimant declined to make because he believed such investments were unsuitable. Subsequently, the Customer became antagonistic and belligerent toward Claimant and his staff. The Customer terminated the relationship in a letter dated February 24, 2017, which identified three (3) accounts but the Customer's letter did not terminate Claimant or Respondent PKSI's role with the 401K plan. The Customer had an opportunity to add the 401k plan when he received Claimant's confirmation letter, which plainly identified the three accounts to be transferred to another investment advisor. Claimant testified that the Customer had asked him to stay on as investment advisor for the 401K plan until a replacement investment advisor could be found. Moreover, Claimant credibly testified, and the record reflects that his repeated requests that the Customer transfer the 401K plan to another broker were ignored by the Customer. It should be noted that the Customer's dental practice added a new partner, who was supposed to become the sole trustee, but there is no indication that Claimant and the new trustee ever met or that Claimant's requests for the practice to appoint a new broker were ever passed on to the new trustee. 

In any event, on May 1, 2019, after finding that (contrary to the Customer's assertions) the commissions were properly paid, Respondent PKSI denied the Customer's demand for a return of $11,371.54 in commissions. Claimant testified that the commissions would not have been paid to the Customer, but instead to the investment advisor who managed the plan as the broker of record. Nevertheless, shortly after receiving Respondent PKSI's denial letter, the Customer filed a complaint with the U.S. Securities and Exchange Commission ("SEC"). In a February 21, 2020, email, the SEC's Office of Investor Education and Advocacy asked Claimant to contact the Customer and let the SEC know the outcome. By this time, Respondent PKSI had washed its hands off the matter inasmuch as, they said, the 401K plan was managed by Claimant's firm and was no longer Respondent PKSI's responsibility. 

Claimant was understandably alarmed by how this matter was escalating and decided, after consultation with an attorney, to pay the Customer the commissions amount, even though a portion of the amount had been retained by Respondent PKSI and had never been received by Claimant. Accordingly, on April 9, 2020, Claimant, his firm (First National Corporation), and the Customer executed a settlement agreement that set forth the facts herein, admitted no wrongdoing, and did not contain any provisions making payment of the settlement contingent on the Customer's agreement not to participate in these proceedings. 

Claimant's Counsel has formally represented that the John Hancock USA prospectus, which would have addressed payment of commissions, could not be located because the 401K plan was established with a previous advisor long before Claimant's involvement began in 2006. Counsel also represented that the April 17, 2006, Change of Dealer form, used to replace the pre-existing advisor broker, along with a list of the 'gross commission/trails' paid between 2017-2019 were the only records Claimant was able to obtain.

Conclusion 

The foregoing leads the Arbitrator to conclude that (i) Claimant made reasonable efforts to ensure that the Customer knew that it was the Customer's responsibility to appoint a new investment advisor for the 401K plan; (ii) Respondent PKSI confirmed that the commissions were disclosed to the Customer in John Hancock USA's prospectus, and therefore such information was known or should have been known to him and his agents over the two year period that they were paid to Claimant; (iii) it is unclear if the Customer suffered any actual losses because in all likelihood his investment advisor would have claimed the commissions as the replacement broker of record; (iv) to his detriment, Claimant graciously allowed the Customer more than ample time to find a replacement broker; and (v) there is nothing in the history of Claimant's 25+ year career that indicates any pattern of customer complaints or other CRD disclosures. . . .

• Securities Industry Commentator
• Bill Singer