Securities Industry Commentator by Bill Singer Esq

SEC Announces $97 Million Enforcement Action Against TIAA Subsidiary for Violations in Retirement Rollover Recommendations (SEC Release)

Attorney General James Announces $97 Million in Restitution for TIAA Customers Misled Into Investing in Higher-Fee Accounts (NYAG Release)

SEC Charges New York Attorney with Multi-Million Dollar Offering Fraud (SEC Release)

SEC Charges Individuals with Deceiving Retail Investors Through the Offer and Sale of Binary Options (SEC Release)

Two Remaining Defendants of $1.3 Billion Investment Fraud (Ponzi) Scheme - One of the Largest Ever Charged in South Florida - Plead Guilty to Mail and Wire Fraud Conspiracy (DOJ Release)

SEC Charges SPAC, Sponsor, Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination / Charges Relate to Planned Merger of Stable Road Acquisition Company and Space Transportation Company Momentus Inc. (SEC Release)

Introducing Stephanie Dumont (FINRA Unscripted)

FINRA Arbitrators Directly Nullify Indirect Non Solicitation Agreement (BrokeAndBroker.com Blog)

Wasted Time By FINRA Regulatory Notice (BrokeAndBroker.com Blog)

[F]rom Jan. 1, 2013 through March 30, 2018, TC Services and its Wealth Management Advisers (WMAs) did not adequately disclose the full nature and extent of their conflicts of interest in recommending to clients that they roll over their retirement assets into a managed account program called "Portfolio Advisor." The order finds that TC Services failed to adequately disclose compensation practices that incentivized the firm and its WMAs to recommend Portfolio Advisor for reasons other than a client's particular investment needs.  Further, TC Services trained its WMAs to make, and its WMAs made, representations that they offered "objective" and "non-commissioned" advice, "put the client first," and acted in the client's best interest while holding themselves out as fiduciaries.  This was misleading because TC Services' financial incentives for WMAs rendered their advice non-objective and TC Services did not ensure that WMA's recommendations were, in fact, in the best interest of its clients. TC Services simultaneously applied continual pressure to compel WMAs to prioritize the rollover of ESP assets into Portfolio Advisor over lower cost alternatives.  The order also finds that TC Services failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act in connection with rollover recommendations. 

27. Advisors also experienced supervisory pressure to sell Portfolio Advisor. For instance, one supervisor instructed his team that managed accounts "should be presented to 100%" of clients and that they were "the right fit for most if not all" TIAA clients. 

28. Advisors who identified clients with large amounts of investable assets were required to participate in "WHALE calls" with other Advisors and supervisors to discuss the client's situation and strategize ways to sell Portfolio Advisor or other TIAA products or accounts. Supervisors discouraged the option of clients directing their own investments and pushed Advisors to identify "pain points" that could make clients "uncomfortable" and motivate them to change their investment approach. Advisors also were required to report back to their supervisors about the outcome of the sales process for all opportunities presented on WHALE calls. 

29. Advisors' scorecards and progress toward their sales targets were tracked on internal TIAA databases and were visible to other Advisors and supervisors at all times. Advisors were ranked on their performance against the scorecard. Many supervisors for local or regional sales teams emailed their teams with weekly or monthly updates on sales rankings. Supervisors congratulated Advisors for the number or size of new Portfolio Advisor accounts and exhorted Advisors with fewer new managed accounts to increase their efforts. 

30. When Advisors failed to meet their sales goals, TIAA Services placed them on performance improvement plans. A significant number of Advisors who were put on performance improvement plans resigned from TIAA Services rather than face potential termination. On the other hand, when Advisors met or exceeded their annual sales goals, TIAA Services increased those goals for the following year, resulting in consistent pressure to increase production and asset growth.

. . .

45. Most significantly, TIAA has made two major changes that impact rollovers from employer-sponsored plans to Portfolio Advisor. First, in June 2020, prior to the implementation of the SEC's Regulation Best Interest, TIAA announced that it would treat managed account rollover recommendations as an investment adviser service subject to a fiduciary duty. This transition eliminated the misleading "hat switch" between financial planning and recommendation of a managed account and established a single internal standard of conduct for all discussions of rollovers to managed accounts. Second, effective in 2021, TIAA has substantially revised its compensation policy to remove differential compensation between managed account sales and other retirement product sales.  

[B]etween May 2014 and March 2018, Rosenfeld solicited at least five investors by promising them that he would pool their funds to purchase and then resell real estate for a profit, which he would then split with the investors. The investors, all friends of Rosenfeld, provided Rosenfeld with approximately $7 million for the proposed real estate transactions. The complaint alleges that, contrary to what Rosenfeld told investors, he never used investor funds to purchase any real estate. Instead, Rosenfeld allegedly misappropriated the investor funds and used them to trade securities in his own personal brokerage account. According to the complaint, while Rosenfeld returned approximately $1 million to investors, his undisclosed and unsuccessful securities trading resulted in the loss of the remaining $6 million of investor funds.

[D]efendants owned and ran JMRB Media, Ltd., an Israeli company that operated "boiler rooms" where salespersons used lies, tricks, and high-pressure sales tactics to offer and sell binary options under the brand names Porter Finance and Dalton Finance. Binary options are securities whose payouts are contingent on the outcome of a yes/no proposition, typically whether an underlying asset will be above or below a specified price at the time the option expires. The SEC alleges that JMRB employees lied to investors about their names, location and financial expertise, and earned investors' trust by falsely stating that the brokers only earned money if investors made money.  In reality, the brokers allegedly earned money from investor losses and the operation was designed to maximize the likelihood that investors would lose money.  The SEC's complaint further alleges that defendants devised a "win button" that, when activated, helped to produce winning trades for investors. Salespersons allegedly used this device to create a track record of recommending or placing successful trades for an investor, which was then used to solicit additional investor deposits. The complaint alleges that most investors who made deposits and traded binary options through the brokers lost money, and some individuals lost hundreds of thousands of dollars.

[S]hapiro spearheaded and concealed an enormous Ponzi scheme through his business, Woodbridge.  Woodbridge employed approximately 130 people and had offices located throughout the United States, including in Boca Raton, Florida; Sherman Oaks, California; Colorado; Tennessee; and Connecticut.  The scheme ran from at least July 2012 to December 2017, when Woodbridge filed for Chapter 11 bankruptcy and defaulted on its obligations to investors.

Throughout the conspiracy, Woodbridge's main business model was to solicit money from investors and, in exchange, issue investors promissory notes reflecting purported loans to Woodbridge that paid high monthly interest rates.  Woodbridge falsely claimed that these investments were tied to real property owned by third parties and that the third parties would be making the interest payments to Woodbridge and its investors; it was portrayed as an investment in a hard-money lending business. 

Roseman started working for Woodbridge as a sales agent in or around August 2012.  Between 2015 and 2017 he served as the sales manager of Woodbridge.  Acevedo started working for Woodbridge as a sales agent in or around 2009, and in 2013 to December 2014 he served as the sales manager of Woodbridge.  As sales managers, these defendants sold Woodbridge securities and trained and supervised Woodbridge internal sales agents who sold Woodbridge securities.  Using high-pressure sales tactics, Shapiro, Roseman, Acevedo, and others marketed and promoted these investments as low-risk, safe, simple, and conservative.  And at minimum, investors were made to believe that Woodbridge's real estate dealings would generate the funds used to pay the return on their investments. 

The Woodbridge sales operation controlled by Shapiro, managed by Acevedo then Roseman, functioned as a "phone room" and featured high-pressure sales tactics, deception, and manipulation.  Woodbridge promoted investments through telephone and in-person conversations, e-mails and website displays.  The scheme also involved misrepresentations to financial planners who helped Woodbridge to sell investments to potential investors. 

Despite Woodbridge's claims that these investments would be backed by properties owned by third parties, in fact, to the extent that the properties existed, they were secretly owned by Shapiro.  Unbeknownst to investors, Shapiro created and controlled a network of more than 270 limited liability companies, which he used to acquire and sell the properties pitched to investors. 

Shapiro, Roseman, and Acevedo falsely claimed that Woodbridge was profitable and advertised high rates of return to investors.  However, Shapiro's real estate portfolio failed to generate sufficient cash flow to satisfy the loan obligations and interest payments owed to investors.  To make up for the cash deficiency, Shapiro resorted to making Ponzi payments, i.e., hundreds of millions of dollars invested by new investors were used to pay "returns" to older, existing Woodbridge investors.  In some instances, Shapiro made these fraudulent "interest" payments even when the advertised investment properties were never acquired. 

As its sole owner and chief operator, Shapiro compartmentalized Woodbridge operations to restrict access to information concerning Woodbridge's finances.  Neither Roseman nor Acevedo had access to or knowledge of Woodbridge's finances and were unaware that Shapiro was using new investor money to pay prior investors.  Thus, neither Roseman nor Acevedo had direct knowledge that Shapiro was operating a Ponzi scheme by using new Woodbridge investor money to pay prior investors.

In total, Shapiro and his co-conspirators convinced more than approximately 9,000 investors to invest more than $1.29 billion to Woodbridge.  According to the Superseding Information and Superseding Indictment, at least 2,600 of these investor victims invested their retirement savings, totaling approximately $400 million.  Of that, Shapiro misappropriated approximately $25 million to $95 million in investor money for himself and for the benefit of his immediate family members.  Roseman received approximately $2.5 million in Woodbridge money and Acevedo received approximately $1.1 million.  The U.S. Securities and Exchange Commission (SEC) filed parallel civil enforcement actions against Woodbridge, Shapiro, his wife, and Acevedo and Roseman related to the fraud. 

Kokorich Complaint (United States District Court of the District of Columbia) https://www.sec.gov/litigation/complaints/2021/comp-pr2021-124.pdf

SEC Order https://www.sec.gov/litigation/admin/2021/33-10955.pdf

According to the SEC's settled order, Kokorich and Momentus, an early-stage space transportation company, repeatedly told investors that it had "successfully tested" its propulsion technology in space when, in fact, the company's only in-space test had failed to achieve its primary mission objectives or demonstrate the technology's commercial viability. The order finds that Momentus and Kokorich also misrepresented the extent to which national security concerns involving Kokorich undermined Momentus's ability to secure required governmental licenses essential to its operations. In addition, the order finds that Stable Road repeated Momentus's misleading statements in public filings associated with the proposed merger and failed its due diligence obligations to investors. According to the order, while Stable Road claimed to have conducted extensive due diligence of Momentus, it never reviewed the results of Momentus's in-space test or received sufficient documents relevant to assessing the national security risks posed by Kokorich. The order finds that Kabot participated in Stable Road's inadequate due diligence and in filing its inaccurate registration statements and proxy solicitations. The SEC's complaint against Kokorich includes factual allegations that are consistent with the findings in the order.

. . .

The SEC's order finds that Momentus violated scienter-based antifraud provisions of the federal securities laws and caused certain of Stable Road's violations. It also finds that Stable Road violated negligence-based antifraud provisions of the federal securities laws as well as certain reporting and proxy solicitation provisions. The order finds that Kabot violated provisions of the federal securities laws related to proxy solicitations and that Kabot and SRC-NI caused Stable Road's violation of Section 17(a)(3) of the Securities Act of 1933. Without admitting or denying the SEC's findings, Momentus, Stable Road, Kabot, and SRC-NI consented to an order requiring them to cease and desist from future violations. Momentus, Stable Road, and Kabot will pay civil penalties of $7 million, $1 million, and $40,000, respectively. Momentus and Stable Road have also agreed to provide PIPE (private investment in public equity) investors with the right to terminate their subscription agreements prior to the shareholder vote to approve the merger; SRC-NI has agreed to forfeit 250,000 founders' shares it would otherwise have received upon consummation of the business combination; and Momentus has agreed to undertakings requiring enhancements to its disclosure controls, including the creation of an independent board committee and retention of an internal compliance consultant for a period of two years.

FINRA's Market Regulation and Transparency Services department sits at the center of the U.S. securities markets, conducting ongoing oversight within and across markets and providing transparency to help investors make informed decisions. 

On this episode, we meet Stephanie Dumont, the new head of FINRA's Market Regulation and Transparency Services department. Stephanie shares her priorities, her vision for the department, and how FINRA is responding to recent market events. 

• Securities Industry Commentator
• Bill Singer