The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

November 19, 2018

http://www.brokeandbroker.com/4293/finra-cambridge-arbitration/
You'd sort of think -- sort of expect -- that as among FINRA's BrokerCheck and a FINRA Arbitration Decision and a TSSB Disciplinary Order that we would know what was happening. The TSSB Disciplinary Order states that Respondent Gable applied for investment adviser representative registration with Texas and that the state granted his registration but then immediately suspended him for 150 days. Notably absent from the TSSB Disciplinary Order was the imposition of any fines or other monetary sanctions. Similarly absent from the picture is any FINRA regulatory action, which implies that all the fuss about the block trading may not have been all that big a deal. Which might also explain why Texas granted Gable's IAR registration. Which might also explain why three FINRA arbitrators told Claimant Cambridge to take a hike. Which doesn't even remotely begin to explain what the hell is going on here. Because something is happening here but you don't know what it is. Do you, Mr. Jones?

Statement on Digital Asset Securities Issuance and Trading (SEC Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets)
https://www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading
  1. initial offers and sales of digital asset securities (including those issued in initial coin offerings ("ICOs")); 
  2. investment vehicles investing in digital asset securities and those who advise others about investing in these securities; and 
  3. secondary market trading of digital asset securities. Below, we provide the Divisions' views on these issues. 
In delving into the developing landscape, the Statement muses as to when  a digital asset becomes a "security" for purposes of the federal securities laws; and, further, if a digital asset is a security, what SEC registration requirements apply. In the Statement's concluding remarks, the following admonition is provided:

The Divisions encourage and support innovation and the application of beneficial technologies in our securities markets. However, the Divisions recommend that those employing new technologies consult with legal counsel concerning the application of the federal securities laws and contact Commission staff, as necessary, for assistance . . .

Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities (SEC Release) 
https://www.sec.gov/news/press-release/2018-264
The SEC announced its first cases imposing civil penalties solely for Initial Coin Offering securities offering registration violations.  CarrierEQ Inc. d/b/a "Airfox" raised approximately $15 million worth of digital assets to finance its development of a token-denominated "ecosystem" starting with a mobile application that would allow users in emerging markets to earn tokens and exchange them for data by interacting with advertisements.  Paragon raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. Neither Airfox nor Paragon registered their ICOs or qualified for a registration exemption. Without admitting or denying the findings, the two companies settled the SEC Orders, which imposed $250,000 penalties against each company and include undertakings to compensate harmed investors; also, the companies will register their tokens as securities and file periodic reports for at least one year.  READ the 
CarrierEQ Inc (Airfox) Order 
https://www.sec.gov/litigation/admin/2018/33-10575.pdf 
Paragon Order 
https://www.sec.gov/litigation/admin/2018/33-10574.pdf

How nice! Family values and wedded bliss!!
https://www.justice.gov/usao-ma/pr/bank-executive-and-husband-sentenced-after-embezzling-27-million
In an Indictment filed in the United States District Court for the District of Massachusetts, former Bank of America Global Wealth & Investment Management Division Senior Vice President Palestine Ace a/k/a Pam Ace and her husband, Jonathan Ace, were charged with engaging in an embezzlement and kickback scheme to defraud Bank of America of about $2.7 million. Palestine Ace misappropriated funds from a marketing budget and authorized 75 transactions, each under $50,000, to be transferred to non-profit organizations; thereafter, Palestine and her husband informed the non-profit organizations that a substantial portion of the donated funds had to be returned in order to ensure that Bank of America would continue to fund the organization; and the returned funds were transacted via a check to Jonathan Ace or a co-conspirator, or to a Bank of America account to which the couple had access. Allegedly, at times, Jonathan Ace pressured the recipients of the donated funds to return a higher percentage of the funds to him, by using intimidation and threats of public humiliation. Palestine Ace pled guilty to one count of conspiracy to commit bank fraud, five counts of wire fraud, and 12 counts of bank fraud; and Jonathan Ace pled guilty to one count of conspiracy to commit bank fraud, three counts of wire fraud, and one count of engaging in an unlawful monetary transaction. Palestine Ace was sentenced to one year and one day in prison plus two years of supervised release and ordered to pay restitution of $2,778,000; Jonathan Ace was sentenced to two years in prison plus two years of supervised release and ordered to pay restitution of $1,855,000. 
Bill Singer's Comment: I was so intrigued by this scam that I actually located a copy of the Indictment. READ the Indictment http://brokeandbroker.com/PDF/AceIndict.pdf I was particularly intrigued by these paragraphs:

11. By virtue of her position at BOA, ACE could process and approve payments of less than $50,000 from a BOA marketing budget. As ACE well knew, payments above $50,000 required further scrutiny and approval. ACE purposefully exploited this lack of scrutiny to embezzle funds belonging to BOA. 

12. Over the course of the scheme, ACE fraudulently caused BOA to pay approximately $2.7 million in purported donations, in approximately 75 different transactions each under $50,000, to various non-profit organizations in the Boston and Atlanta area. ACE was not authorized to make these payments and in fact did not have the authority to make charitable donations or sponsorships on behalf of BOA. ACE attempted to conceal the fraud by instructing others within BOA to exclude the fraudulent transfers from regular accounting reports to her supervisor. 

13. After causing BOA to make the payments to the various non-profit organizations, ACE and J.ACE caused the non-profits to return a substantial portion of the necessary to ensure additional funding from BOA. At various times, J.ACE pressured the recipients of the BOA funds to give him a higher percentage of the funds by using intimidation and threats of public humiliation. 

14. As a further means, to avoid detection, ACE caused a significant portion of the funds the non-profits paid back to ACE to be deposited into a BOA account in the name of a family relative who resided in California ("the Relative's Account"). For the most part, each of the cash deposits into the Relative's Account were below $10,000 and were calculated to avoid reporting requirements under the Bank Secrecy Act for cash deposits over $10,000.

So, lemme see if I got this. One of the world's biggest banks sets a $50,000 level at which payments need to be subjected to enhanced scrutiny and approval -- which, like, duh, invites crooks to simply structure payments just at or below $50,000 in order to exploit that threshold and fly under the radar. Then, this same too-big-to-fail bank has such a rigorous in-house audit and compliance system that all you need to do to steal millions of dollars is utilize subterfuge that merely requires " instructing others within BOA to exclude the fraudulent transfers from regular accounting reports to her supervisor." One disappointment was the lack of detail as to how the specifics of Jonathan Acer's "intimidation and threats of public humiliation," that "pressured the recipients of the BOA funds to give him a higher percentage of the funds." Finally, yet again, we have the old $10,000 Bank Secrecy Act reporting threshold and, yet again, we have a bunch of crooks who merely structure their transactions below that BSA cut-off point. Sadly, I had hoped to come across some clever embezzlement but merely found another droll example of how porous large corporations audit and compliance protocols remain.

https://www.justice.gov/usao-ndga/pr/financial-analyst-sentenced-federal-prison-embezzling-more-11-million-honeywell
Former Honeywell International, Inc. principal finance analyst Errol Buggs was authorized to approve vouchers initiated by colleagues; however, Buggs used the log-in of a colleague and two former employees in order to approve fictitious vouchers, resulting in 28 wire transfers and a check sent to Tredd LLC, a shell company incorporated by Buggs and for which he had entered into Honeywell's invoice payment system via a legitimate vendor's address. Overall, Buggs embezzled $1,134,493.35. He was sentenced in the United States District Court for the Northern District of Georgia to two years in federal prison plus three years of supervised release, and ordered to pay $1,134,493.35 in restitution to Honeywell.

https://www.justice.gov/opa/pr/former-registered-financial-advisor-pleads-guilty-bank-fraud-role-scheme-fraudulently-obtain
Former UBS Financial Services Inc. of Puerto Rico registered financial advisor José G. Ramirez-Arone Jr., pled guilty in the United States District Court for the District of Coumbia to one count of bank fraud in connection with his role in a scheme to fraudulently obtain and misuse non-purpose credit lines for purchasing securities, resulting in over $1 million in improperly generated commissions; and, further, he admitted knowing that his clients then misused the credit line by drawing funds ffor purchasing securities, directly violating the credit lines' terms of use. As a result of at least a portion of his illicit activity, Ramirez-Arone improperly generated about $1,225,500 in commissions.
https://www.cftc.gov/PressRoom/PressReleases/7842-18?utm_source=govdelivery
In a Complaint filed by the CFTC and the Utah Department of Commerce, Division of Securities in the United States District Court for the District of Utah, Defendants Gaylen Dean Rust (Rust) and Rust Rare Coin, Inc. (RRC) are charged with defrauding at least 200 individuals and fraudulently obtaining over $170 million from investors in a precious metals Ponzi scheme that involved a purported pool that bought and sold silver. The Complaint alleges that the pool was a sham and investors' funds were used to make Ponzi-like payments to other investors and to pay personal expenses. The Court entered a restraining order freezing the assets of the Defendants and the Relief Defendants and permitting the CFTC and the State of Utah to inspect all defendants' relevant records; and appointed a temporary receiver to take control of RRC and the corporate Relief Defendants, as well as the assets of Rust and the individual Relief Defendants.  READ the 
Complaint https://www.cftc.gov/sites/default/files/2018-11/enfrrarecoincomplaint111318.pdf
Order https://www.cftc.gov/sites/default/files/2018-11/enfrrarecoinorder111518.pdf

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