The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
December 24, 2018
GUEST BLOG: This Christmastide by Aegis Frumento Esq (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/4357/aegis-frumento-christmas/
Our Christmas really is a modern holiday, and those who would peg it back to biblical times and declare war over it need to get a grip. Still, we should celebrate it gladly, if only because the planet still makes its annual trip around the sun unmindful of our collective imbecility. The winter solstice has come again, and we are again in that time of year when the hope of brighter days is newly born. That's worth the festivities; we need no better reason.
In the Matter of Wealthfront Advisers, LLC, f/k/a Wealthfront, Inc., Respondent.(SEC Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order,Invest. Adv. Act Rel. No.5086, Admin. Proc. File No. 3-18949)
https://www.sec.gov/litigation/admin/2018/ia-5086.pdf
In anticipation of the institution of proceedings and without admitting or denying the findings, Respondent Wealthfront submitted an Offer of Settlement, which the SEC accepted. In furtherance of the settlement, the SEC Censured Respondent and ordered the firm to cease-and-desist from cited violations, and to pay an $250,000 civil money penalty. As set forth in the "Summary" portion of the SEC Order:
Wealthfront is a registered investment adviser to retail clients that uses a software-based "robo adviser" platform. Wealthfront applies a proprietary tax loss harvesting program ("TLH") to clients' taxable accounts. Wealthfront designed TLH to create tax benefits for clients by selling certain assets at a loss that, if realized, can be used to offset income or gains on other transactions, thereby reducing clients' tax liability in a given year. Wealthfront makes available on its website for clients whitepapers containing client disclosures and outlining TLH, among other topics. From October 2012 through mid-May 2016, Wealthfront falsely stated in its TLH whitepaper that it monitored all client accounts to avoid any transactions that might trigger a wash sale. Generally, a wash sale occurs when an investor sells a security at a loss and, within 30 days of this sale, buys the same or a substantially identical security. A wash sale prevents the tax benefit of having sold the asset to realize a loss. In fact, until mid-May 2016, Wealthfront did not monitor client accounts to avoid any transaction that might trigger a wash sale. In Wealthfront's TLH program, wash sales could occur, or were permitted, in certain circumstances relating to the management of a client account such as rebalancing a client portfolio or client directed transactions. In addition, Wealthfront retweeted certain tweets from its clients on its Twitter account that constituted testimonials, which investment advisers are not permitted to publish without required disclosure. Wealthfront also paid bloggers for new client referrals, based on the amount of assets the new client initially deposited, without complying with applicable disclosure and documentation requirements. Wealthfront also failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.
In the Matter of Hedgeable, Inc., Respondent.(SEC Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order,Invest. Adv. Act Rel. No.5087, Admin. Proc. File No. 3-18950)
https://www.sec.gov/litigation/admin/2018/ia-5087.pdf
https://www.sec.gov/litigation/admin/2018/ia-5087.pdf
In anticipation of the institution of proceedings and without admitting or denying the findings, Respondent Hedgeable, Inc. submitted an Offer of Settlement, which the SEC accepted. In furtherance of the settlement, the SEC Censured Respondent and ordered the firm to cease-and-desist from cited violations, and to pay an $80,000 civil money penalty. As set forth in the "Summary" portion of the SEC Order:
1. This matter involves a registered investment adviser-Hedgeable-that disseminated false and misleading marketing materials and performance data. Hedgeable operates a "robo-adviser": an automated digital investment advisory program that is marketed to individuals, small business owners, trusts, corporations and partnerships through the fund's website, Hedgeable.com, as well as through social media platforms.2. From at least 2016 until April 2017, Hedgeable posted on its website and social media platforms a "Robo-Index," which purportedly allowed clients and prospective clients to compare the performance from 2014 and 2015 of two other robo-advisers-"Robo-Adviser 1" and "Robo-Adviser 2"-to the performance of Hedgeable's clients during the same period, which were aggregated in a "Hedgeable Composite." The Robo-Index and Hedgeable Composite were misleading in several respects. First, the Hedgeable Composite only included a small subset-less than 4%-of the total number of Hedgeable clients during the 2014 and 2015 period. Second, Hedgeable's calculation methodology of the Robo-Index was incorrect, as it was not based on Robo-Adviser 1's or 2's actual trading models, but was instead an approximation of Robo-Adviser 1's or 2's performance based on information available from their websites. Third, even using its own methodologies, Hedgeable incorrectly calculated the annualized returns for both the RoboIndex and the Hedgeable Composite. Hedgeable failed to maintain sufficient documentation to substantiate the returns presented in the Robo-Index or the Hedgeable Composite. Hedgeable also posted misleading fact sheets on its website that overstated the returns of various Hedgeable ETFs, as compared to certain benchmarks of blended index returns.3. Hedgeable's dissemination of false and misleading marketing materials and performance data was caused, in part, by its ineffective compliance program. Hedgeable's compliance policies and procedures did not require any officer of Hedgeable to review or approve marketing materials or performance data posted on Hedgeable's digital media platforms.
SEC Settles Charges with Previously Barred Buffalo, N.Y. Adviser (SEC Release)
https://www.sec.gov/litigation/litreleases/2018/lr24377.htm
https://www.sec.gov/litigation/litreleases/2018/lr24377.htm
In a Complaint filed in the United States District Court for the Western District of New York, the SEC
charged Walter F. Grenda, Jr., with violating a July 2015 Commission Order barring him (with the right to reapply after three years) from association with an investment adviser and with aiding and abetting violations of the Investment Advisers Act of 1940. The Complaint alleged that notwithstanding the 2015 Bar, Grenda had continued to associate with Grenda Group, LLC (an entity he and his son, Gregory M. Grenda, formed in part to replace his previous investment advisory business, Reliance Financial Advisors, LLC). In violation of the Bar, Grenda met with a prospective client and current clients in Grenda Group's offices and made discretionary changes to clients' investment accounts; and he impersonated his son on telephone calls to the firm's broker-dealer. Without admitting or denying the allegations in the Complaint, Grenda consented to a final judgement that permanently enjoining him from violating the antifraud provisions of Sections 206(1) and 206(2) and the associational bar provision of Section 203(f) of the Advisers Act. Also, he was ordered to pay a $25,000 civil penalty. In addition, on December 20, 2018, the Commission issued an order against Walter Grenda, barring him from association with an investment adviser, with no right to reapply. Ongoing is the SEC litigation against Gregory Grenda and Grenda Gourp. READ the SEC Complaint https://www.sec.gov/litigation/complaints/2018/comp24377.pdf
SEC Charges a Taiwan-Based Insurance Company and a Former Insider with Fraudulent Market Manipulation Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2018/lr24378.htm
https://www.sec.gov/litigation/litreleases/2018/lr24378.htm
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleges that The SEC's complaint alleges that China United Insurance Service, Inc. and Cheng-Hsiung Huang violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. The Complaint alleges that from approximately December 2013 through March 2018, China United Insurance Services and Huang deceived the investing public and Nasdaq, for the purpose of obtaining a listing on Nasdaq. The Complaint alleges that acting on the company's behalf, Huang used multiple brokerage accounts to engage in numerous transactions in the company's stock for the purpose of boosting trading volume, which was flagged by a brokerage firm for high volume and possible prearranged trading. After several of the accounts were frozen, Huang and two colleagues contacted the brokerage firm and lied about their identities, their relation to China United, and their reasons for trading. Without admitting or denying the allegations in the complaint, China United and Huang agreed to the entry of a final judgment that enjoins them from violating the charged provisions of the federal securities laws, orders China United to comply with its undertaking to retain an independent compliance monitor, and orders Huang to pay a penalty of $30,000. Based upon China United's cooperation with the SEC's investigation, the SEC is not seeking a monetary penalty against the company. READ the Complaint https://www.sec.gov/litigation/complaints/2018/comp24378.pdf
http://brokeandbroker.com/PDF/Kuczora7Cir.pdf
If you had the misfortune to run into Gregory Kuczora after 2007, when h lost his finance job, he would have presented himself to you as the Managing Director of the KCS Financial, which he said operated for over a decade in 12 countries. Notwithstanding how impressive that all may have sounded, the purported finance firm was an operation run out of Kuczora's basement, which, in and of itself isn't necessarily wrong but it's all the other stuff that went along with this scam that would have tipped the scales. Kuczora tole his victims that he could secure financing through Kensington Capital Partners, Ltd. -- and it would only require a $10,000 to $25,000 wire per underwriting fee. Yeah, I know, that's impressive sounding also. And, guess what, it's another bogus company whose mail was forwarded to the old basement address. Once Kuczora got your fee, he started making excuses about why your funds were delayed, and, at some point, he just stopped responding to you. Over four years, Kuczora defrauded roughly 68 victims out of $1,216,755, which he spent on personal expenses, such as his family's necessities to a luxury car and an expensive horse. In November 2015, he was indicted on two counts of wire fraud and pled guilty to one count.The Sentencing Guidelines recommended a sentence of 33 to 41 months in prison, but the District Court judge imposed a 70-month sentence.
As set forth in part in the Syllabus to the 7Cir Opinion:
[K]uczora argues that the judge did not adequately explain the upward variance and failed to give him advance notice of the grounds that supported it. He also argues that the sentence is substantively unreasonable.We affirm. The district judge thoroughly explained his reasoning, and we have never held that a judge must give advance warning of an upward variance. To the contrary, every defendant is on notice that the court has the discretion to impose a sentence above, below, or within the Guidelines range based on the factors listed in 18 U.S.C. § 3553. Finally, the 70-month sentence is not substantively unreasonable. Although the Guidelines can be a rough approximation of what § 3553(a) warrants, the judge did not exceed his broad discretion in concluding that a heavier penalty was justified here.
Kendall County Real Estate Professional Charged with Operating $23 Million Ponzi Scheme (DOJ Release)
https://www.justice.gov/usao-ndil/pr/kendall-county-real-estate-professional-charged-operating-23-million-ponzi-scheme
Michelle Labra, the owner/operator of Labra Group Realtors LLC, was indicted in the United States District Court for the Northern District of Illinois on with three counts of wire fraud and one count of making a false statement to the U.S. Treasury Inspector General for Tax Administration. The Indictment alleges that Labra claimed that investor funds would be be fully repaid, used to make short-term, high-interest loans to borrowers, and that the loans would be secured by the borrowers' residences. Allegedly, Labra never entered into any agreements with borrowers, and she took steps to conceal her fraud. In one example, Labra falsely claimed that IRS agents had issued levies and seized investor funds from the Labra Group's bank accounts, the indictment states. The Indictment alleges taht at least 25 investors invested $23 million, of which Labra spent approximately $19.6 million to pay earlier investors via Ponzi-type payments, while misappropriating more than $3.3 million for her personal benefit, including expensive jewelry and vacations in Jamaica, Mexico and Guatemala, the indictment states. READ the Indictment https://www.justice.gov/usao-ndil/press-release/file/1122676/download
Report on Selected Cybersecurity Practices 2018 (FINRA)
http://www.finra.org/sites/default/files/Cybersecurity_Report_2018.pdf
As set forth in the Report's preamble:
In the Matter of the Arbitration Between Kathryn L. Honea, Claimant, v. Raymond James Financial Services, Inc. and Bernard Ross Michaud, Respondents (FINRA Arbitration 06-03491 / January 2, 2008) http://brokeandbroker.com/PDF/HoneaFINRAArb.pdf, public customer Honea filed a Statement of Claim in 2006 asserting in part fraud, breaches of fiduciary duty and contract, and negligence in connection with transactions in such securities as Applied Micro Circuits; Juniper Networks, Inc.; Nokia Corp.; Nortel Networks Corp.; Oracle Corporation; Siebel Systems Inc.; Sun Microsystems Inc.; Lucent Technologies; JDS Uniphase; Cisco Systems; and. Motorola Inc. Claimant Honea sought $1.2 million in compensatory and also in punitive damages, interest, and attorneys' fees. Respondents generally denied the allegations. The FINRA Arbitration Panel denied all of Claimant's claims notwithstanding that:When selecting the topics for this report, FINRA considered the evolving cybersecurity threat landscape, firms' primary challenges and the most frequent cybersecurity findings from our firm examination program. First, we address how firms have strengthened their cybersecurity controls in branch offices, which is especially important for firms with decentralized business models. Second, we discuss limiting phishing attacks, which remain a top cybersecurity challenge for many firms. Third, we explain the importance of identifying and mitigating insider threats, which are of concern for many firms. Fourth, we describe the elements of a strong penetration testing program. Finally, we share observations regarding establishing and maintaining controls on mobile devices, which have emerged as a significant risk for many firms because of their increasingly widespread use by employees and customers.
[T]he Panel makes an express finding that Respondent Michaud did not sufficiently know his client nor make sufficient inquiry to attempt to know his client, her holdings, and/or her investment experience. These failures contributed to losses in Claimant's account. However, Claimant's claims are all barred by the applicable statutes of limitations.
Honea moved to vacate the FINRA Arbitration Award in the Jefferson Circuit Court in Alabama alleging manifest disregard of the law for the Panel's finding that her breach of contract claims were barred by the statute of limitations; and she also challenged the arbitrators' impartiality.
Kathryn L. Honea v. Raymond James Financial Services, Inc. and Bernard Michaud
Kathryn L. Honea v. Raymond James Financial Services, Inc. and Bernard Michaud
Raymond James Financial Services, Inc. and Bernard Michaud v. Kathryn L. Honea (Opinion, Supreme Court of Alabama, 1130590) http://brokeandbroker.com/PDF/HoneaSCTAL.pdf
In its Syllabus to its Opinion, the Supreme Court of Alabama states:
In case no. 1130590, Kathryn L. Honea appeals from the denial of her motion to vacate an arbitration award entered in favor of Raymond James Financial Services, Inc. ("Raymond James"), and Bernard Michaud, an employee of Raymond James (hereinafter referred to collectively as "RJFS"). We affirm in part, reverse in part, and remand. In case no. 1130655, RJFS appeals the trial court's denial of its motion to dismiss for lack of jurisdiction; that appeal is dismissed.
Maybe it's the looming government shutdown? Maybe it's the looming Christmas and New Year holidays? Whatever it may be, the SEC just dumped a load of new Administrative Proceeding and it's too much to synopsize, so, if the spirit moves you, have at it:
Barbara Duka https://www.sec.gov/litigation/admin/2018/33-10599.pdfhttps://www.sec.gov/litigation/admin/2018/33-10598.pdfTod A. Ditommaso, Esq. https://www.sec.gov/litigation/admin/2018/33-10597.pdfMichael W. Crow https://www.sec.gov/litigation/admin/2018/33-10596.pdfFrank H. Chiappone, et al. https://www.sec.gov/litigation/admin/2018/33-10595.pdfBioElectronics, Corp., et al. https://www.sec.gov/litigation/admin/2018/33-10594.pdfPaul Edward "Ed" Lloyd, Jr. https://www.sec.gov/litigation/admin/2018/ia-5089.pdfhttps://www.sec.gov/litigation/admin/2018/ia-5088.pdfTimbervest, LLC https://www.sec.gov/litigation/admin/2018/ia-5093.pdfhttps://www.sec.gov/litigation/admin/2018/34-84922.pdfhttps://www.sec.gov/litigation/admin/2018/34-84919.pdfJames P. Griffin https://www.sec.gov/litigation/admin/2018/34-84915.pdfDarren M. Bennett, CPA https://www.sec.gov/litigation/admin/2018/34-84912.pdfhttps://www.sec.gov/litigation/admin/2018/34-84911.pdfhttps://www.sec.gov/litigation/admin/2018/34-84918.pdf