The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq WEEK IN REVIEW
August 11, 2018
2018 FINRA Industry Snapshot The FINRA Industry Snapshot 2018 provides an overview o the number of FINRA-registered individuals, firms and their revenues, and market activity. Among the more troubling data-points is found on Page 4 of the report, which asserts that in 2017 the so-called "average" FINRA member firm had 171 registered representatives but the "median" FINRA member firm had only 11 reps.
Mean Spirited FINRA Must Respect Membership Median (BrokeAndBroker.com Blog) I am not credited with having brow beat NASD and then FINRA into revising the regulator's published industry statistics, I will, nonetheless, take my own personal victory lap with the satisfaction of believing that my my unceasing, years' long, harangue prompted the disclosure of data that I proposed be calculated in my above Comment. As I worked my way through what comes off largely as a FINRA community in decline over the years, I came upon a nugget on Page 4 of the FINRA 2018 Snapshot, which, at long last, proves my suspicions and confirms my assertion. Under a page heading "Average and Median Number of FINRA-Registered Representatives per Firm," we learn that for the last calculated year of 2017 that the "Average" number of registered reps per member firm was 171 but the "Median" number was only 11.
SEC Charges Michigan Investment Professional in an Investment Scam Targeting His Brokerage Customers (SEC Litigation Release No. 24230) In a Complaint filed in the United States District Court for the Eastern District of Michigan, the SEC alleged that John C. Maccoll violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking a judgment ordering Maccoll to disgorge his ill-gotten gains with prejudgment interest, and to pay civil penalties. The Complaint alleges that Maccoli used high pressure sales tactics to solicit at least 15 of his retail brokerage customers (mostly elderly and retired) to invest in what he described as a highly-sought-after private fund investment. that would allow them to diversify their portfolios, receive annual investment returns as high as 20%, and give them investment growth potential that was better than the growth they received in their brokerage accounts. The Complaint asserts that Maccoli stole nearly $4 million and paid over $400,000 in Ponzi-like payments to certain of the customers to keep the scheme alive. READ the FULL TEXT SEC Complaint.
Former Belmont Resident Sentenced for $6 Million Investment Fraud Scheme (DOJ Press Release) From 2001 through 2012, John William Cranney a'k'a Jack Cranney solicited over $6 million from 15 individuals with whom he had personal and business relationships and represented that he would invest their money in an investment fund or a retirement plan he said he managed. Cranney spent his victims' savings and retirement on his own bills and debts to fund his declining health and nutrition products distributorship. After a two-week trial in the United States District Court for the District of Massachusetts, Cranney was convicted on three counts of wire fraud, 12 counts of mail fraud and three counts of money laundering, and he was sentenced to five years in prison, three years of supervised release and ordered to pay $5,587,432 restitution.
12 Defendants Charged In Manhattan Federal Court With Nationwide Cellphone Fraud Scheme, Which Caused Losses Of Over $1 Million /This Fraud Ring Used the Dark Web to Purchase Customers' Personal Identifying Information, Accessed More Than 3,300 Customers' Accounts, and Fraudulently Obtained More Than 1,200 Cellphones (DOJ Press Release) Pursuant to a Criminal Complaint filed in the United States District Court for the Southern District of New York, Isaac Concepcion Aquino a/k/a "Kaka," Mario Diaz, a/k/a "Memin," Tomas Guillen, a/k/a "Diddy," Ronnie De leaon, Jose Argelis Diaz, Joel Pena, Jhonatan Diaz, a/k/a "Nino," Eddy Morrobel, Ruddy Sanchez, Michael Roque, Rayniel Robles and Joandra Tejada Gonzalez were each charged with one count of conspiracy to commit wire fraud and one count of aggravated identity theft. The charges arose in connection with defendants alleged role in improperly accessing over 3,300 customers' cellphone accounts, fraudulently obtaining over 1,200 cellphones, and causin over $1 million in losses. READ the FULL TEXT Complaint
IRS Employee Pleads Guilty to Identity Theft (DOJ Press Release) Between September 2012 and March 2013, when taxpayers called into the IRS for assistance, and Contact Representative Stephanie Parker handled their inquiries, which often allowed her to obtain Social Security numbers and addresses. On at least five occasions, Parker used the taxpayers' personal information without authorizing to electronically file fraudulent tax returns in their names, and, thereafter, directed the fraudulent tax refunds to bank accounts controlled by her friends. Parker, withdrew funds from at least one of those accounts and deposited a portion of the money into her own bank account and used it for personal expenses. Parker pled guilty in the United States District Court to one count of aggravated identity theft.
Congressman Christopher Collins And Others Charged In Manhattan Federal Court With Insider Trading And Lying To Federal Law Enforcement Agents (DOJ Press Release) New York Congressmen Christopher Collins, his son Cameron Collins, and Stephen Zarsky (the father of Cameron's fiancee) were indicted in the United States District Court for the Southern District of New York with conspiracy, securities fraud, wire fraud, and making false statements to the FBI.for participating in a scheme to commit insider trading relating to securities of Innate Immunotherapeutics, an Australian biotechnology company on whose Board of Directors Congressman Collins served. Allegedly, Cameron Collins, Zarsky and others avoided about $768.000 in losses by trading on the alleged insider information. Separately, the SEC filed a civil action against the three defendants. READ the FULL TEXT Indictment and SEC Complaint
Biotechnology Executive Convicted Of Defrauding Investors And Making False Statements To Federal Law Enforcement (DOJ Press Release) Former Nuclea Biotechnologies President Patrick Muraca was found guilty in the United States District Court for the Southern District of New York on one count each of making false statements to federal law enforcement and wire fraud. Between 2016 and July 2017, Muraca solicited and obtained over $1 million from investors by making false and misleading representations that the funds would be used to expand two businesses that he had founded: NanoMolecularDX LLC ("NMDX") and MetaboRx LLC ("Metabo"). Muraca misappropriated hundreds of thousands of dollars for personal expenses such as rent, utilities, mortgage payments, cigars, tattoos, and food distributor expenses related to the operation of his fiancee's restaurant. During the FBI and US Attorney's investigations, Muraca made a material false statement about his use of investor funds.
Where There's A Will, FINRA Says No Way! (BrokeAndBroker.com Blog)
Where there's a will, there's a way. That's a nice saying. On the other hand, where there's a Will, you will likely have some folks saying "no way" when they learn that they've been cut out as a beneficiary or some questionable character has been cut in. Nothing like death, families, and cash to make a lot of work for lawyers. In today's featured FINRA regulatory settlement, we got an elderly client and a stockbroker who became a beneficiary of the client's estate. Wall Street's got rules and regulations about that type of a relationship. Wall Street's got in-house policies about that stuff too. The question is whether Wall Street has the "will" to do anything effective when it comes to dealing with circumstances where elderly clients designate their stockbroker as a beneficiary.
South Texas Investment Promoter Gets 25-Year Sentence for Multi-Million-Dollar Fraud (TSSB Press Release) After pleading guilty to first-degree felony offenses of theft, money laundering, and misapplication of fiduciary property, former licensed insurance agent Gabriel Claudio Jr. was sentenced to 25 years in Texas state prison and ordered to pay $2,795,254 in restitution. The TSSB's Petition for Notice of Seizure and Intended Forfeiture alleged that Claudio spent the money he stole from investors to gamble in Las Vegas ($300,000); make child support payments ($193,000); pay private school tuition ($156,655); pay home expenses ($169,211); buy jewelry ($151,646); make cash withdrawals of $656,394; and to pay off the mortgage on a house in Portland, in San Patricio County, and buy two Mercedes-Benz automobiles. In response to the Petition, Claudio and his wife, Briana Claudio, signing a judgment to forfeit the assets they acquired with investor funds. Between 2010 and 2016, Claudio converted from a couple who were his clients, 19 checks made payable to him totaling $2,393,567 that were to be invested in indexed annuities but never got paid to the designated insurance company..From 2009 to 2013, Claudio sold fraudulent investments to at least nine victims, totaling $600,000. READ the FULL TEXT Petition and Notice of Seizure
SEC Charges Fixed Income Trader with Entering Fictitious Sales to Avoid Brokerage Firm's Inventory Limits (SEC Litigation Release No. 24229) In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC alleged that former J.P. Turner & Company, LLC trader Salvadore D. Palermo had entered fictitious sales of market-linked certificates of deposit (MLCDs) in order to avoid his firm's inventory limitations for the fixed income products. Allegedly, Palermo paid above-market prices to acquire MLCDs from J.P. Turner brokerage customers, and then held the CDs in inventory. Knowing that the counterparty never agreed to buy the MLCDs and that each trade would ultimately be cancelled, Palermo allegedly entered dozens of fictitious trades over a seven-month period in order to give the impression that the MLCDs had been sold from inventory. READ the FULL TEXT SEC Complaint.
Racine Woman Indicted for Defrauding Beneficiaries of Estates Being Administered by her Father's Law Firm (DOJ Press Release) Kathleen A. Fetek was indicted in the United States District Court for the Eastern District of Wisconsin following charges that she obtained over $775,000 while she was employed at Fetek Law Offices, S.C., (her's father's law firm), as a result of writing checks to herself from the firm's account; cashing the checks at banks, liquor stores, and other locations; and preparing and mailing materially false distribution summaries and account documentation to beneficiaries of estates handled by the law firm.
Former Convergex Global Markets CEO Pleads Guilty in New Jersey for Role in Securities and Wire Fraud Scheme (DOJ Press Release) Former ConvergEx Global Markets Limited (CGM Limited) Chief Executive Officer Anthony Blumberg pled guilty in the United States District Court for the District of New Jersey to one count of conspiracy to commit securities and wire fraud. To hide the fact that spread had been taken, on several occasions from 2007 to 2011, Blumberg and traders acting under his direction, acting in response to requests by clients for information that could reveal the existence of spread, sent false reports (known as time and sales reports) to these clients. Blumberg also admitted that he and his co-conspirators agreed to violate a client's instructions to provide real-time transactional data through an immediate data feed with details of trades that CGM Limited executed for the client by providing "batch fills" that hid the actual information the client sought.
Blumberg is the fourth individual to plead guilty as a result of the investigation into ConvergEx Group and CGM Limited's practices. Collectively, the two ConvergEx entities paid $43.8 million in criminal penalties and restitution.
SEC Broker Standards Rule Falls Far Short (Press Release, Americans for Financial Reform) READ the FULL TEXT AFR Memo, which states, in part that many financial regulators are steering full-tilt toward deregulation, tearing down rules put in place after the 2008 financial crisis, and leaving the public at greater risk of abuse.
The Greek Yogurt Justice Of Strained FINRA Mercy (BrokeAndBroker.com Blog) When the BrokeAndBroker.com Blog's publisher, Bill Singer, read today's featured FINRA regulatory settlement, he wasn't a happy camper. The underlying facts didn't seem to warrant FINRA's imposition of a fine and suspension -- particularly since the respondent was essentially an industry rookie. And then Bill re-read FINRA's AWC. And then he did some research. And then he followed down a few leads. And then Bill did a 180 degree turn, which isn't an easy spin for him because he has two artificial hips. Regardless of the degree of difficulty, Bill did a complete reversal of direction and came around to accept FINRA's sanctions. After Bill was done changing course and agreeing with FINRA, he couldn't stop thinking about greek yogurt. On top of that, Bill couldn't stop humming Marvin Gaye's catchy tune "Mercy Mercy Me (the Ecology);" and being that Bill's in a generous mood today, he embedded into today's blog a video of a live performance of the tune by Marvin Gaye.
SEC Charges Cloud Communications Company and Two Senior Executives With Misleading Revenue Projections (SEC Release 2018-150) Without admitting or denying the findings, Sonus Networks Inc. (post-merger conducts business as Ribbon Communications Inc.), its former Chief Financial Officer Mark Greenquist and Vice President of Global Sales Michael Swade consented to the entry of an SEC Order, which found that they violated Section 17(a)(2) of the Securities Act of 1933, and that Ribbon violated, and Greenquist and Swade caused Ribbon's violations of, the reporting provisions of the Securities Exchange Act of 1934, and ordered Ribbon, Greenquist and Swade to pay penalties of $1.9 million, $30,000, and $40,000 respectively. The SEC alleged that Greenquist, was aware of red flags which undermined the company's first quarter 2015 revenue estimates; and that such warnings included the company having pulled forward deals initially projected to close in 2015 in order to achieve its fourth quarter 2014 revenue guidance. The company issued guidance of $74 million which reflected certain forecasted sales that had been improperly reclassified, due to pressure from Swade. Subsequently, before the quarter's close, Sonus announced that it was lowering its first quarter revenue estimate to between $47 million and $50 million. Following this announcement, Sonus's stock price dropped over 33 percent.
READ the FULL TEXT SEC Order.
Emergency Action Taken Under Vulnerable Adult Financial Exploitation Law (TSSB Press Release) In the first action taken under Texas new law protecting elderly and vulnerable adults who may be the victim of financial scamse, the Texas State Securities Board (TSSB) entered an Emergency Cease and Desist Order against a computer repairman who transferred $27,000 from a financial account of an 88-year-old. The alleged elderly victim ;purportedly hired Mike Chamley to fix his computer. Shortly after they met, Chamley allegedly began trading securities in the elderly client's account, and Chamley allegedly promising to split trading profits. Earlier this year, Chamley was added as a co-account holder to the edlerly custoer's credit union account. TSSB alleges that from mid-March to mid-July, $27,853 was withdrawn via 16 fund transfers from the elderly man's securities account without his knowledge, and, as of July 25, $30 remained in the credit union account. On July 25, the securities dealer where the elderly man's account is held filed a report detailing suspected exploitation. Also, the dealer temporarily blocked online trading in the securities account and the withdrawal of funds from the account. Chamley has 31 days to contest the order before the State Office of Administrative Hearings.READ the FULL TEXT TSSB Emergency Order
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Amend FINRA Rule 9000 Series (Code of Procedure) to Reflect an Internal Reorganization of FINRA's Enforcement Operations (SEC Rel.No. 34-83781; File No. SR-FINRA-2018-027) FINRA announced its plan to consolidate its existing enforcement functions into a unified Department of Enforcement. On July 26, 2018, FINRA announced that it had completed the final phase of this consolidation.The unified structure is intended to improve FINRA's ability to streamline investigations, share information, enhance consistency and maximize resources to protect investors and the markets. If you are moved by a burning passion for all things Wall Street regulatory, you may wish to shower the SEC with your comments on the proposed FINRA reorganization. Learn how to make your voice heard.
Prolific Fraudster Sentenced to 40 Years / Fugitive Faces Justice After Extradition from Mexico (FBI Press Release) A truly mesmerizing tale about 75-year-old "Butch" Ballow who is described in the FBI release as a "financial predator" who engaged in "outrageous" and "despicable" fraud dating back to the 1980s. At the end of Butch's trail, he faces 40 years in the clink and ordered to pay over $37 million in restitution -- yeah, good luck with that later bit. In recent years, the aging crook used phony companies to sell land and ownership interests in a number of proposed resort developments in Mexico. Potential investors were even taken on tours of the properties. As you may imagine, no resorts got built. Maybe the feds will show some compassion and put him in a cell with another inmate named "Sundance"?
GUEST BLOG: Securities Fraud? Or Just Bullshit? by Aegis J. Frumento Esq (BrokeAndBroker.com Blog) News broke last week that the feds decided to stop torturing Jesse Litvak. Jesse, you may recall, was a mortgage-backed securities sales-trader charged with criminal securities fraud. Jesse, in selling to an institutional customer, told the customer that he was flipping the bond to it after just having bought it himself at the customer's price. Instead, Jesse had it in inventory at a much lower cost. Jesse was twice tried, twice convicted, and twice freed on appeal. The government announced it won't try him a third time. Jesse persisted, won, and I say, good for him.
Amherst Man Pleads Guilty To Wire Fraud And Money Laundering In Scheme That Bilked Three Victims Out Of More Than $800,000 (DOJ Press Release) Raymond Clark pled guilty in the United States District Court for the Western District of New York to wire fraud and money laundering in connection with allegations that he had induced three victims to send him $870,000 for supposed investments, including investments in hedge funds and publicly traded companies. Clark kept the investors' money and spent it on personal expenses. As part of the plea agreement, Clark will pay restitution to the victims.
SEC Updates List of Firms Using Inaccurate Information to Solicit Investors (SEC Press Release 2018-149) An SEC press release announces that the SEC "has updated its list of unregistered firms that use misleading information to primarily solicit non-U.S. investors, adding 16 soliciting entities, four impersonators of genuine firms, and nine bogus regulators." My, my, my, what a wonderful and innovative idea to regulation: Publish lists of suspected bad guys. Why, geez, that's almost as useful and effective as going out and getting the malefactors. Then again, why do the actual work of charging and convicting folks when you can publish and update a list. Yeah, I know, I'm being unfair and overly cynical. But did you notice that it's like 100 degrees out today and you can chew the air. You think I'm in a bubbly mood? As more fully set forth in part in the release:
The SEC's list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being a victim of fraud. The latest additions are firms that the SEC staff found were providing inaccurate information about their affiliation, location, or registration. Under U.S. securities laws, firms that solicit investors generally are required to register with the SEC and meet minimum financial standards and disclosure, reporting, and recordkeeping requirements.
SEC Obtains Final Judgment Against Defendants in Hedge Fund Fraud Scheme (SEC Litigation Release No. 24226) The United States District Court for the District of Massachusetts entered a final judgment against Yasuna Murakami, a former Massachusetts-based hedge fund manager, and two advisory entities (MC2 Capital Management, LLC and MC2 Canada Capital Management, LLC) he operated in connection with a scheme to defraud investors by hiding trading losses and misappropriating investor funds. Murakami and his two companies settled with the SEC and collectively agreed to pay over $7.9 million in disgorgement and prejudgment interest, to be deemed satisfied by a restitution order entered in a related criminal case against Murakami. The SEC permanently barred Murakami from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.
Navy Officer Pleads Guilty to $2.7 Million Fraud Scheme (DOJ Press Release) Naval officer Randolph M.. Prince pled guilty in United States District Court for the Eastern District of Virginia to to wire fraud and making a false statement in connection with his 2014 tax return. Federal prosecutors had alleged that Prince defrauded the Navy out of over $2.7 million through a procurement fraud scheme in which:
he, as a member of his Navy unit's supply staff, steered government contracts to sham companies who were created and run by his friends. Prince had the authority to make purchase requests for military equipment on behalf of his command, and also had the ability to sign for goods when a company delivered them to his unit on the back end.Prince took advantage of his position to direct purchases to the sham companies, which had been opened for the sole purpose of receiving government contracts from Prince. When a contract landed on the desk of one of these companies, Prince, and others, would generate fraudulent documentation to suggest the company had honored its end of the bargain. With this documentation in hand, the Navy would then pay the company. However, the sham companies never provided the Navy with anything at all. Instead, they distributed the Navy money amongst Prince and his associates.
Ohhhh . . . so that's what those morons were trying to do when they kept contacting me and asked if I would represent them with all sorts of lawsuits in the United States. And you mean to tell me that some idiots fell for this scam? Wow. Canadian Man Sentenced To 18 Years' Imprisonment For Multi-Million Dollar Fraud Targeting U.S. Lawyers (DOJ Press Release) After a three-day bench trail in the United States District Court for the Middle District of Pennsylvania, Henry Okpalefe was convicted on conspiracy to commit mail fraud, wire fraud and money laundering. Okpalefe was sentenced to 216 months' imprisonment and three years' supervised release, and ordered to pay $23 million in restitution and forfeit $504,787. As set forth in the Press Release:
[B]etween 2008 and 2010, Okpalefe and his co-conspirators stole over $23 million from hundreds of lawyers and law firms in the Middle District of Pennsylvania and nationwide. Under the guise of seeking legal representation, the conspirators contacted attorneys and law firms in the United States using fake email accounts. Once an attorney or law firm agreed to represent the purported client, the conspirators sent bank checks through the mail and instructed them to deposit the money into their IOLTA accounts. From there, the attorneys were provided with wire instructions and they wired their legitimate funds to Asian bank accounts. Before the counterfeit checks were returned as fraudulent, the money had already been withdrawn by co-conspirators in Asia and distributed to conspirators' bank accounts in Nigeria and Canada. Okpalefe and his co-conspirators operated in Canada, Nigeria, Japan and South Korea.
SEC Obtains Final Judgment Against Research Scientist Charged with Insider Trading (SEC Litigation Release No. 24225) Research scientist Fei Yan agreed to settle with the SEC and consented in the United States District Court for the Southern District of New York to the entry of a judgment permanently enjoining him from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and ordering him liable for disgorgement of $119,429, the payment of which is deemed satisfied by the forfeiture ordered in a parallel criminal case. Yan, who pled guilty in that case, is serving a 15-month sentence of imprisonment. The settlement and pleas were in connection with Yan's insider trading based on confidential information obtained from his wife, an associate at a law firm that worked on the subject deals.
AAA Arbitrator Disclosures Mess Upends JPMorgan Chase Bank Employment Lawsuit (BrokeAndBroker.com Blog) In today's BrokeAndBroker.com Blog we consider the ramifications of an arbitrator who made disclosures that weren't all provided to the parties in a timely manner. At our most charitable, lets just say that a page went missing and not everything that should have been disclosed to all the parties made it through the disclosure pipeline in one piece. At a point in time after the AAA arbitrator rendered her initial decision but before she published her final decision, the losing party learned about the failure of the arbitration forum to provide all of the pages that would have constituted the full disclosure packet -- and further learned that the arbitrator was involved with other ongoing arbitrations involving the law firm that was defending the respondent (who turned out to win the case). When the losing party challenged the arbitrator's alleged undisclosed conflict in that period before the decision was finalized, the arbitrator rejected the challenge and issued the decision.