The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

January 31, 2019

Citizen of India Charged with Operating "Provisional Credit" Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-ct/pr/citizen-india-charged-operating-provisional-credit-fraud-scheme
In a Complaint filed in the United States District Court for the District of Connecticut, Kishore Babu Ammisetti was charged with bank fraud and wire fraud in connection with allegations that he used the Facebook Marketplace and other media to victimize individuals, primarily of Indian decent, who advertised items for sale or rooms for rent. In response to such notices, Allegedly, Ammisetti expressed an interest in purchasing an item or renting a room, and would would offer to make a "deposit" directly into the victim's bank account via a Peer-to-Peer ("P2P") transfer. Upon obtaining the victim's bank account information and other personal information, Ammisetti purportedly contacted the victim's bank and, posing as the victim, claimed to have made an ATM deposit that did not register. While researching the "unregistered deposit," the bank would credit the victim's account with a provisional credit.  Ammisetti would then contact the victim and claim that the provisional credit was a mistaken transfer from him, and he requested a refund via P2P. After the bank determined that there was no unregistered deposit to the victim's account, the provisional credit would be removed from the victim's account, thus resulting is some $800,000 in losses from over 400 victims. The Complaint notes that Ammisetti had entered the U.S. in 2013 on a student visa, which was revoked in 2014. Further, it is alleged that Ammisetti often operated this scheme while staying at casino hotels in Connecticut.

David Lerner Associates, Inc. Wins $1 Million FINRA Arbitration Against Wells Fargo Advisors and 9 Individuals -- What Happened? Why? How Come There's A Dissent? FINRA mum.
In the Matter of the Arbitration Between David Lerner Associates, Inc., Claimant, v.  Wells Fargo Advisors, LLC, Daniel Robert Burns, Edward Thomas Finocchiaro, Mitchell Lewis Fischer, Joseph Michael Lafferty, Charles Joseph Margiasso, Michael Robert Rosen, Loreto Thomas Testani, Martin David Weiss, and Timothy J. Cheriaparampil (FINRA Arbitration Decision 15-02443 / January 29, 2019)
http://www.finra.org/sites/default/files/aao_documents/15-02443.pdf
In a FINRA Arbitration Statement of Claim filed in September 2015 and as amended, FINRA member firm David Lerner Associates asserted  breaches of contract, the duty of loyalty and good faith, and fiduciary duty; aiding and abetting breach of fiduciary duty; tortious interference with contract, tortious interference with economic relations; unfair competition; and, misappropriation of trade secrets, confidential and proprietary information. Claimant , sought a permanent injunction restraining Respondents from soliciting any Claimant accounts for a period of one year from the date of the award and requiring Respondents to immediately return to Claimant all records and information regarding any Claimant's clients. Further, Claimant sought at least $10 million in compensatory damages, punitive damages, attorneys' fees, and  costs. Respondents generally denied the allegations and asserted various affirmative defenses.The FINRA Panel of Arbitrators found by a 2:1 majority that Respondents jointly and severally liable and ordered them to pay to Claimant David Lerner Associates $1.08 million in compensatory damages. No explanation was provided as to why one arbitrator dissented.
Bill Singer's Comment: After some 3 1/3 years from the date of the filing of the arbitration Complaint, we have a dispute in which Claimant David Lerner Associates asserted some very, very serious claims and sought the jaw-dropping sum of at least $10 million -- and on the Respondents' side of the caption are 10 parties with no less a heavyweight FINRA member firm than Wells Fargo Advisors, LLC. Sadly, all that FINRA tells us is that two of three arbitrators awarded Lerner $1.08 million in compensatory damages. We have no inkling as to what prompted the dispute. We have no explanation as to why the Panel rejected Claimant's damage calculation yet awarded a still impressive $1.08 million. We are told the Award is for compensatory damages but not told compensation for what. Worse, we have a split decision but not so much as a word as to why. In an industry using mandatory arbitration, there should be some minimum explanation as to what happened, why arbitrators ruled as they did, and, certainly, some brief reference to the basis for any dissent by any arbitrator(s).

http://www.brokeandbroker.com/4412/Aegis-Frumento-DAO/
A distributed autonomous organization or DAO is a virtual organization governed entirely by smart contracts, which execute transactions on a blockchain according to their code, to fund projects, collect revenues, pay expenses, and distribute profits, all without centralized controls. In theory, no central authority can alter transactions recorded in a blockchain. As a result, DAO smart contracts recorded on and executed through the Ethereum blockchain should not be hackable. In theory. In May 2016, blockchain developer iSlock.it set up a DAO fancifully called "The DAO" and tested that theory with all the hubris of sailing the Titanic through an ice field. The DAO raised about $150 million selling DAO tokens in exchange for Ethereum's cryptocurrency, ether. But then The Attacker diverted a third of The DAO's ether to his own account. The DAO code was in no way compromised. The Attacker followed it to the letter. As did the Selbees, The Attacker simply found a way to profit that others had overlooked.

Associated Persons Win Employment Claims in FINRA Arbitration Against Kingsbury Capital, LLC and Spencer Trask Ventures, Inc.
In the Matter of the Arbitration Between: Lawrence Michael Doody, John Christopher Fichera, and John James Hoidas, Claimants, v. Kingsbury Capital, LLC, Spencer Trask Ventures, Inc., William David Vellon, and Asher Dov Wolmark, Respondents (FINRA Arbitration Decision 14-02170 / January 29, 2019)
http://www.finra.org/sites/default/files/aao_documents/14-02170.pdf
In a FINRA Arbitration Statement of Claim filed in July 2014, associated person Claimants asserted violation of Illinois Wage Payment and Collection Act, breach of contract, unjust enrichment, conversion, defamation/Form U5 defamation, intentional interference with existing contracts and business expectancy, fraud/constructive fraud, and negligence. Allegedly, the causes of action arose in connection with Claimants contention that the Respondents failed to fully compensate them for their purported placements in Invivo Therapeutics, Labstyle Innovations, Organovo Holdings, Inc., Metavena/Moodwire, Armada Water Asset, Matinas Biopharma, and Rearden Commerce. Further, Claimants  alleged that Respondent Kingsbury terminated them before they could resign, physically locked them out of the office, and then copied customer files from their computers and, thereafter, destroyed those computers. Finally, Claimants alleged that Respondents made disparaging and defamatory statements about them to their clients and on their Forms U5. Claimants sought at least $250,00 in compensatory damages, return/restitution of warrants; attorneys' fees, interest, cost, and punitive damages. At the close of the hearing, Claimants requested: damages of $1,824,306.00, Illinois wage interest of $1,897,278.24, expert fees of $17,600.00, unspecified attorneys' fees; FINRA fees, and an expungement.
Respondents generally denied the allegations and asserted affirmative defenses. The Respondents filed a Counterclaim asserting  malicious prosecution, defamation of Respondent Vellon and Respondent Wolmark, disparagement of Respondent Kingsbury, and breach of employment contracts with Respondent Kingsbury. Respondent Spencer Trask Ventures filed a Counterclaim alleging that Claimants' claims were frivolous. Spencer Trask Ventures filed a Cross-Claim against Respondent Wolmark asserting indemnification.  As set forth in part under the heading "Award" in the FINRA Arbitration Decision, the FINRA Arbitration Panel found:

1. Respondents are jointly and severally liable for and shall pay to Claimants the sum of $120,000.00 in compensatory damages. 

2. Respondents are jointly and severally liable for and shall pay to Claimants $1,125.00 as reimbursement for the non-refundable portion of the Initial Claim Filing Fee. 

3. The Panel recommends the expungement of the Reason for Termination and Termination Explanation from the Form U5 filed by Kingsbury, LLC (CRD # 147102) on October 4, 2013 for John Cristopher Fichera (CRD #2613679), maintained by the CRD based on the defamatory nature of the information. The Panel recommends that the Reason for Termination be changed to "voluntary" and that the Termination Explanation appear blank. The Form U5 is not automatically amended to include the changes indicated above. John Cristopher Fichera must forward a copy of this Award to FINRA's Registration and Disclosure Department for review. This recommendation shall apply to all subsequent disclosures concerning this event. 

4. The Termination Explanation for John James Holdas (CRD #1937971) was reported on his Form U5 by an Investment Advisor. Although the Panel finds that the same facts apply to both Hoidas and Fichera, the Panel does not have jurisdiction over investment advisors, and therefore declines to rule on Hoidas' request for expungement of the termination explanation of his Form U5. . . .

Phony Baloney in Companies' Sauces
https://www.justice.gov/usao-nj/pr/jersey-city-man-sentenced-37-months-prison-scamming-investors-34-million
Antonio Fasolino pled guilty in the United States District Court for the District of New Jersey to three counts of wire fraud and one count of transacting in criminal proceeds. As set forth in the Indictment, Fasolino owned several companies that were purportedly involved in the manufacture, sale and distribution of pasta, tomato sauce, olive oil and other food products. In 2012, Fasolino obtained approximately $3.4 million from two victims by falsely representing that his companies had been awarded lucrative contracts to sell olive oil. In furtherance of his scam,  Fasolino supplied the victims with altered bank statements and spent the money on himself, including car and mortgage payments, apartment rentals, a wedding, college tuition and credit card payments. Fasolino was sentenced to 37 months in prison plus  three years of supervised release and ordered  to pay $3.4 million restitution.

Key Points Reforming the Securities and Exchange Commission (Backgrounder, the Heritage Foundation by David R. Burton / January 30, 2019)
https://www.heritage.org/sites/default/files/2019-01/BG3378.pdf
As set forth under the heading "Abstract" in the Heritage Foundation paper:

The U.S. Securities and Exchange Commission is the most important regulator of U.S. capital markets. Although its budget has increased by 82 percent over 10 years, its effectiveness remains in question. Resources have flowed into unnecessary management, "support," and ancillary functions, while core functions have been neglected. Its organizational structure is unwieldy. The Commission needs to be better managed-it does not need (as has been proposed) more managers. The number of direct reports to the Chairman needs to be reduced. Its information technology programs appear to be poorly managed and are unnecessarily costly. The SEC bases its decisions on inadequate data and does much less than most agencies to provide data to Commissioners, other policymakers, and the public. Its enforcement efforts directed at fraud and other malfeasance by managers of large financial institutions are inadequate. The Commission does little to remove unnecessary regulatory impediments to entrepreneurial capital formation. Reforms are necessary so that the SEC can better support well-functioning capital markets.

As set forth on pages 6 - 7 of the FINRA SEC filing 
http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2019-004.pdf:

FINRA is proposing three amendments to the Codes to enhance the discovery process for forum users, particularly non-parties. First, FINRA is proposing to amend the Codes to extend the response time for non-parties to object to an order or subpoena from 10 calendar days of service to 15 calendar days of receipt of the order or subpoena. Receipt of overnight mail service, overnight delivery service, hand delivery, email or facsimile is accomplished on the date of delivery. FINRA believes that the proposed rule change would address forum users' concerns because the proposal would help ensure that non-parties wanting to object to an order or subpoena have sufficient time to do so 

Second, FINRA is proposing to amend the Codes to exclude first-class mail as an option to serve documents on the non-party and as an option for the non-party to file the objection to the scope or propriety of the order or subpoena.7 FINRA believes that by requiring forum users to serve or transmit discovery-related documents through overnight mail service, overnight delivery, hand delivery, email or facsimile, forum users are better able to confirm and facilitate the timing of discovery obligations. 

Third, FINRA is proposing to amend the Codes to codify the current practice that the Director sends, at the same time, objections and responses to the panel after the reply date has elapsed, unless otherwise directed by the panel. The Director sends the complete set of motion papers to the panel to ensure that the panel receives the advocacy positions of all parties at the same time. FINRA believes that the proposed rule change will enhance forum users' understanding of existing case administration procedures and will improve transparency concerning forum operations.8 

As noted in Item 2 of this filing, if the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 30 days following publication of the Regulatory Notice announcing Commission approval.

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