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Securities Industry Commentator by Bill Singer Esq

October 26, 2021











http://www.brokeandbroker.com/6132/finra-ubs-yes/
In poker and arbitration there is the game within the game. There's the bluff. There's misdirection. There's tactical betting. There's strategic betting. There's knowing when to hold. And when to fold. All of which may not make much of a difference if you're dealt a crapola hand. In a recent FINRA arbitration, former UBS customers sought $10 million in damages based upon allegations about the firm's options program. Ante up.

https://www.sec.gov/litigation/litreleases/2021/lr25246.htm
In a Complaint filed in the United States District Court for the District of Colorado
https://www.sec.gov/litigation/complaints/2021/comp25246.pdf, the SEC charged Ann M. Vick, sole owner of the pooled investment fund AMV Investments LLC, with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the allegations in the SEC Complaint, Vick  consented to the entry of a judgment that permanently enjoins her from future violations of the charged provisions and from participating in the offer or sale of any securities, and requires her to pay disgorgement of $570,150 together with prejudgment interest thereon in the amount of $27,929, and to pay a civil penalty of $570,150. Further, Vick  agreed to be prohibited from acting as an officer or director of any public company. As alleged in part in the SEC Release:

[F]rom August 2018 through January 2021, Vick represented herself to investors as a consistently successful options trader and promised investors exorbitant investment returns. As alleged, however, Vick's options trading resulted in a volatile mix of gains and losses, and she had never generated the consistent profits necessary to pay investors the returns she promised. According to the complaint, after suffering significant trading losses in early 2020, Vick began making Ponzi-like payments to investors and misappropriated approximately $570,150 of investor funds.

https://www.sec.gov/litigation/litreleases/2021/lr25247.htm
The United States District Court for the District of New Jersey entered a final judgment against Denis Georgiyevich Sotnikov, Adaptive Technology LLC, AGQ Business Group LLC, ATL Business Group LLC, BO&SA Corporation, DN Industrial LLC, and Expert Digital LLC, finding that they had violated the anti-fraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The judgment permanently enjoins the Defendants from further violations; requires Sotnikov and the entities he controlled to collectively pay $2,628,260 in disgorgement, plus prejudgment interest; also requires Sotnikov to pay a civil penalty of $2,535,611 and requires each entity that he controlled to pay a separate $975,230 civil penalty; and, finally, requires his wife, Natalia Mazitova and the other relief defendants to collectively pay $1,277,900 in disgorgement, plus prejudgment interest. As alleged in part in the SEC Release:

[T]he scheme involved purchasing internet ads that targeted investors who were searching for CDs with above-market rates. The ads allegedly included links to phony websites, which falsely claimed that the firms offering the CDs were members of FINRA and the FDIC, and that deposits were FDIC-insured.  The complaint alleged that, when investors called the phone number on the websites, an "account executive" impersonating a real registered representative directed investors to wire funds to so-called "clearing" partners.  These purported clearing partners were allegedly entities used by Sotnikov and other participants in the scheme to launder and misappropriate millions of dollars in investor funds.  The complaint also alleged that several relief defendants received misappropriated investor funds, including Sotnikov's wife, Natalia Aleksandrovna Mazitova, and several entities they controlled.

https://www.justice.gov/usao-ndia/pr/chicago-man-sentenced-federal-prison-fraudulent-concert-scheme
Romel Murphy, 43, pled guilty in the United States District Court for the Northern District of Iowa to one count of wire fraud, and he was sentenced to 77 months in prison plus three years of supervised release, and ordered to pay $414,433.23 in restitution.  As alleged in part in the DOJ Release:

[M]urphy operated a talent booking agency that ostensibly booked artists for performances at concert venues around the United States.  From about November 2017 through March 2019, Murphy used his business to induce potential clients to send him funds to secure artists' performances at concerts.  For instance, Murphy sent signed contracts to victims that appeared to have come from the artists.  In fact, Murphy had drafted and signed the contracts himself.  The victim would sign the contracts and wire deposit funds to Murphy.  Murphy did not send the money to the artists and converted the funds to his own use, including gambling.  As the concert dates approached and the victims had advertised the concerts, the victims would discover that the artists had not received any funds, frequently through communications from the artists' actual representatives.  In total, Murphy defrauded his victims out of more than $410,000.  Murphy had three prior convictions for federal fraud-related offenses.  He committed two of those offenses while on federal supervised release.      

https://www.justice.gov/usao-wdnc/pr/indian-trail-man-sentenced-three-and-half-years-investment-scheme
Bryan John Cohen, 46, pled guilty in the Western District of North Carolina to wire fraud, and he was sentenced to 42 months in prison plus one year of supervised release, and ordered to pay $291,000 in  restitution. As alleged in part in the DOJ Release:

[F]rom 2015 to 2020, Cohen defrauded at least 10 victims of more than $385,000, by inducing them to invest money in his purported investment businesses, OTC Bully, Ascension Trading, and Recharge Investments, and in other business ventures. Court records show that Cohen falsely represented to victims, most of whom were Cohen's friends and acquaintances, that he was a financially savvy investor with a successful track record in the financial industry, and that he would invest their funds using a computer algorithm called the "Dewey System."

As Cohen previously admitted in court, to convince victims their investments were legitimate, Cohen provided them with bogus Investment Agreements that purported, among other things, that Cohen would not charge any investment fees, and that the money would be invested in a manner "expected of a reputable, experienced and competent professional investment manager." To further lull victims into thinking their investments were safe, Cohen supplied them with fake profit and loss sheets on a monthly basis, which falsely indicated the victims' investments were growing.

Contrary to claims Cohen made to his victims, court documents show that Cohen did not invest their money as promised. Rather, Cohen used the money to pay for personal expenses and to make Ponzi-style payments to older investors using new investors' money. In November 2020, Cohen pleaded guilty to wire fraud.

https://www.justice.gov/usao-sdny/pr/manhattan-man-pleads-guilty-69-million-scheme-defraud-loan-program-intended-help-small
Marcus Frazier pled guilty in the United States District Court for the Southern District of New York
to two counts of wire fraud affecting a financial institution. As alleged in part in the DOJ Release:

The Coronavirus Aid, Relief, and Economic Security ("CARES") Act is a federal law enacted on March 29, 2020, designed to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic.  One source of relief provided by the CARES Act was the authorization of up to $349 billion in forgivable loans to small businesses for job retention and certain other business expenses through the Paycheck Protection Program (the "PPP").  The PPP allows qualifying small businesses and other organizations to receive unsecured loans guaranteed by the U.S. Small Business Administration (the "SBA").  PPP loan proceeds must be used by businesses for payroll costs, mortgage interest, rent, and/or utilities, among other specified expenses.  Pursuant to the CARES Act, the amount of PPP funds a business is eligible to receive is determined by the number of employees employed by the business and its average payroll costs.  Businesses applying for a PPP loan must provide documentation to confirm that they have in the past paid employees the compensation represented in the loan application. 

Between in or about May 2020 and in or about April 2021, FRAZIER submitted to the SBA at least seven applications for PPP loans for various businesses that he controlled (collectively, the "Frazier Companies").  These applications relied upon fraudulent statements regarding the number of employees of each business and the amount of payroll involved in each business, and were submitted, in many cases, alongside fake bank statements, designed to support FRAZIER's false statements.  These fake bank statements included, among other things, fraudulent account statements for a checking account that showed balances far greater than the account actually held, and that depicted payroll withdrawals that never occurred.  FRAZIER also submitted lists of employees on the purported payrolls of the Frazier Companies, which included names and Social Security numbers which do not match the records of the Social Security Administration, suggesting that FRAZIER fabricated the employee records.  On at least one occasion, FRAZIER also provided documents purporting to show that one of the Frazier Companies had been in existence for approximately 10 years.  In fact, the corporate entity had not been registered until in or about July 2020, months after the onset of the COVID-19 pandemic.

FRAZIER sought a total of more than approximately $6.9 million in PPP loans and was awarded at least approximately $2.17 million.  A substantial portion of the funds awarded was spent not on payroll for the Frazier Companies but, rather, on FRAZIER's personal expenses.  During the period between on or about June 18, 2020, shortly after his first PPP loan was funded, and on or about April 7, 2021, FRAZIER utilized PPP funds to spend approximately $124,982 on hotels, including more than approximately $88,791 at a luxury hotel located in Miami, Florida.  During the same period, FRAZIER spent approximately $63,000 on restaurants and food service, approximately $17,000 on transportation using the ride-hailing app Uber, approximately $16,519 on airline travel, and approximately $11,000 on clothing.  During this same period, FRAZIER collected approximately $21,000 in unemployment benefits.

In addition, between in or about January 2018 and in or about November 2019, FRAZIER engaged in a scheme to obtain personal loans from financial institutions and to evade the payment of credit card debt by making false representations, and sending fake documents, to lenders and banks. 

https://www.justice.gov/usao-ri/pr/indictment-unsealed-charges-three-fraud-scheme-targeting-rhode-island-seniors
In an Indictment filed in the United States District Court for the District of Rhode Island, Bryan Valdez-Espinosa was charged with conspiracy to commit wire fraud; Diego A. Alarcon and Jason Hatcher were charged with conspiracy to commit wire fraud and aggravated identity theft. The Indictment was filed in connection with a so-called :Grandparent Scam,"  whereby at least eleven elderly Rhode Island residents in nine communities were alleged defrauded out of thousands of dollars. As alleged in part in the DOJ Release:

[B]etween June 9 and June 11, 2021, the three men allegedly participated in a scheme to contact elderly Rhode Islanders and pose as the person's grandchild, claiming that they had been arrested and needed money for bail. The victims were instructed to gather the necessary funds in cash and provide the cash to a courier who would arrive at their home later that day. Several victims were contacted multiple times, in some instances by an individual claiming to be an attorney, seeking additional funds because, they claimed, the amount of cash bail had increased due to additional and more serious criminal charges being brought against their grandchild. The victims were instructed to provide the additional cash to a courier; to mail the cash to an address in Florida; or to electronically transfer the funds to an account in the Dominican Republic. Some victims were told that a "gag order" was in effect and that they were prohibited from telling anyone about the case or the cash payments.

Eleven of the twelve victims allegedly contacted by members of the conspiracy provided cash payments ranging from $6,000 to $99,225. Relatives of one person targeted by the scammers intervened and chased away a person who attempted to retrieve $9,500 in cash.

https://www.sec.gov/litigation/litreleases/2021/lr25245.htm
In the United States District Court for the Northern District of Illinois, Marcus Boggs consented to entry of a final judgment permanently enjoining him from violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and ordering him to pay disgorgement in the amount of $1,719,493, plus prejudgment interest thereon in the amount of $195,458, for a total of $1,914,951, which shall be deemed satisfied by the restitution order entered against Boggs in a parallel federal criminal case, in which he was sentenced to 42 months in prison and ordered to pay restitution of $3,085,256.  As alleged in part in the SEC Release:

[B]oggs, without his clients' knowledge or authorization, misappropriated his clients' money by selling securities in their advisory accounts and then transferring the proceeds to his personal credit card account. The complaint further alleged that from 2016 to 2018, Boggs made more than 200 illegal transfers from three advisory clients' accounts to his personal credit card account.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-93233; Whistleblower Award Proc. File No. 2022-1)
https://www.sec.gov/rules/other/2021/34-93414.pdf
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending a Whistleblower Award of over $1.5 million to Claimant 1 and Claimant 2. The Commission ordered that CRS' recommendations be approved. In rendering its Award, the Commission treated several cited actions as a single Covered Action "arising out of the same nucleus of operative facts." As further explained in part in Footnote 1:

[A[s such, and in light of the unique facts and circumstances here, including Claimants 1 and 2's clear intention to apply for awards in connection with all actions that arose out of the same nucleus of operative facts, that the NoCA posting for Covered Action  Redacted cross-referenced the proceeding later posted as Covered Action Redacted, that Claimants 1 and 2 were unrepresented, and the fact that the claims for the Covered Actions had not yet been adjudicated, we treat Claimant 1 and 2's award claims in both Covered Actions as timely.

https://www.finra.org/sites/default/files/fda_documents/2017056197102
%20NYLIFE%20Securities%20LLC%20CRD%205167%20AWC%20jlg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, NYLIFE Securities LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that NYLIFE Securities LLC has been a FINRA member firm since 1970 with 9,000 registered persons at 2,500 branches. In accordance with the terms of the AWC, FINRA found that NYLIFE had violated FINRA Rules 3110 and 2010; and the regulator imposed upon NYLIFE a Censure, $200,000 fine, $63,347 in restitution, and an undertaking to review and update the Managing Partner Field Supervision Guide and training module relating to the firm's mutual fund and cross-product switching supervisions. As alleged in part in the AWC:

The firm's supervisory system and procedures were not reasonably designed or enforced to detect and prevent unsuitable mutual fund switching. 

From January 2015 through March 2019, NYLIFE Securities' written supervisory procedures defined mutual fund switching as using the "proceeds from the redemption of one mutual fund to purchase one or more other mutual funds" and noted that mutual fund switching was problematic when the "benefit to the client does not justify the incidental costs." The firm surveilled for mutual fund switches on a weekly basis, identifying transactions that the firm deemed "letterable," such as a switch from an A share to A share where accounts incurred front-end sales charges. A letterable switch resulted in a letter to the customer that disclosed the mutual fund purchase and sale at issue, but did not disclose the sales charges incurred on either transaction. 

When a registered representative had five or more letterable switches in a quarter, NYLIFE Securities' system flagged the transactions on a quarterly mutual fund switching report for a quarterly switch review conducted, in part, by the firm's compliance department. NYLIFE Securities also tasked the flagged registered representative's direct supervisor, known as the Managing Partner, with a review of the transactions through the completion of a mutual fund switch checklist that required the Managing Partner to determine whether the customer received an "overall benefit as a result of the transaction(s)." The Managing Partner could delegate the review of transactions to another supervisor but was responsible for making the final determination about the transactions. 

The firm, however, did not have written supervisory procedures or adequately train supervisors on how to determine whether the clients benefitted from the mutual fund switch transactions or whether the transactions were suitable. The firm provided Managing Partners with the sales charges incurred on mutual fund purchase transactions. However, the firm did not provide Managing Partners with other critical information such as the holding periods and costs (such as front-end sales charges) associated with the mutual fund shares sold. The Managing Partners also could not readily access historic transaction information for the customers' accounts. Without this information, the Managing Partners could not independently determine if short-term trading was taking place in the customer's account or assess the overall financial impact of the transactions to the customer. 

The firm failed to reasonably supervise Broker A's mutual fund trading. 

The firm failed to take reasonable steps to review Broker A's recommended short-term trades of Class A mutual funds in ten customers' accounts, many of which belonged to senior customers.2 Specifically, on hundreds of occasions between January 2015 and March 2019, Broker A recommended that these ten customers buy and sell Class A mutual funds after holding the shares for short periods of time. As a result of these shortterm trades, the ten customers paid approximately $175,000 in unnecessary front-end sales charges for Class A mutual fund shares, with Broker A earning approximately $116,000 in commissions. 

To the extent NYLIFE Securities' system flagged Broker A's mutual fund switches for a quarterly switch review related to customers, his Managing Partner did not have adequate tools and was not properly trained to review the suitability of the transactions in order to determine whether a switch provided a benefit to the customer. The firm's compliance department typically closed Broker A's mutual fund switching flags largely on the basis of the Managing Partner's unreasonable review. 

In January 2017, the firm issued a letter of education to Broker A for mutual fund switching in two customer accounts and missed mutual fund breakpoints. The firm's system continued to flag Broker A for mutual fund switch transactions in 2017 and 2018. Even then, the flags remained open for weeks without an adequate supervisory review. Further, although Broker A had multiple switch transactions in every quarter from 2015 through 2018, for 11 quarters, the firm did not flag his trading for supervisory review because the firm's threshold for review was five letterable switches in one quarter. 

NYLIFE Securities failed to maintain a reasonable surveillance system for mutual fund and cross-product switches. 

NYLIFE Securities' procedures defined "cross-product switching activity" as switching activity amongst products (e.g., mutual fund to annuity/life, and/or vice versa) and a "purchase and sale, or a combination of such transactions, occurring within a 90-day period." The firm's system flagged registered representatives' cross-product switch activity on a cross-product switching report, similar to the quarterly mutual fund switching reports, for supervisory review when multiple switch transactions met one or more tests during one quarter. 

Starting in approximately April 2016, as the result of a software upgrade, a database connectivity issue caused incomplete information to flow to the firm's mutual fund switching reports and cross-product switching reports. While the firm conducted limited spot checks for mutual fund switching activity in the ninety days following the software upgrade to check whether the system was properly functioning, the firm did not continue to monitor the system. Further, the firm did not conduct any tests on its cross-product switching surveillance system from January 2015 through March 2019. Notably, in 2017, the first full year after the software upgrade, the number of representatives flagged for quarterly mutual fund and cross-product switching reviews declined by approximately 80% and 69%, respectively, compared to 2015, the last full year before the software upgrade. Still, despite this significant decline, the firm failed to identify red flags of potential system issues during this period and only discovered the cause of the software failure in March 2019 during FINRA's investigation. As a result of the firm's failure to identify this system error, the firm failed to capture approximately 5,700 mutual fund transactions (22% of all mutual fund transactions) for supervisory review, resulting in the failure to supervise 326 mutual fund switch transactions, including those of Broker A, and 1,229 cross-product switch transactions that should have been elevated to a quarterly switching report, according to the firm's procedures. 

During FINRA's review, NYLIFE Securities voluntarily enhanced the firm's procedures and controls concerning mutual fund and cross-product switching; conducted extensive lookback reviews over multiple years to identify potentially overlooked switching activity; and paid restitution of $271,182 to Broker A customers, primarily consisting of front-end sales charges incurred by customers following the April 2016 software failure.

= = = = =

Footnote 2: Broker A entered into an AWC with FINRA relating to his misconduct. AWC No. 2017056197101 (Nov. 2019). 

https://www.finra.org/sites/default/files/fda_documents/2020066023101
%20Michael%20Miles%20Hartlett%20CRD%201022139%20AWC%20sl.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Michael Miles Hartlett submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Michael Miles Hartlett entered the industry in 1982 and by February 2018, he was registered with FINRA member LPL Financial LLC. In accordance with the terms of the AWC, FINRA imposed upon Hartlett a $5,000 fine and a 10-business-day suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC:

In May 2018, a customer opened three brokerage accounts at LPL with Hartlett as the assigned representative. The customer did not execute any documentation granting Hartlett discretionary trading authority in the three accounts. However, the customer orally granted Hartlett discretionary trading authority. Hartlett did not disclose this grant of authority to the firm. From May 2018 through February 2020, Hartlett exercised discretionary trading authority without obtaining prior written authorization from the customer in a total of 22 trades in the three accounts held by the customer. Between 2018 and 2020, Hartlett also falsely stated in three annual compliance questionnaires that he had not exercised discretionary trading authority in any customers' brokerage accounts. 

Therefore, Hartlett violated NASD Rule 2510(b) and FINRA Rules 3260(b) and 2010. 

http://www.brokeandbroker.com/6122/finra-equitable-awc/
FINRA censured and fined Equitable Advisors, LLC after the firm had settled a customer arbitration via an agreement in which the customer agreed to "not oppose, object to, or otherwise interfere with" any expungement motion. Although such a pre-conditioned settlement runs afoul of FINRA's rules, the regulator conceded that the offensive language was not inserted by Equitable and had inadvertently slipped by the firm's oversight. Which begs lots of questions for which there are no answers provided by FINRA.

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