Securities Industry Commentator by Bill Singer Esq

Department of Enforcement filed a Complaint against Respondent Austin Wayne Morton consisting of two causes of action. The first cause of action alleges that, on two separate occasions in September and October 2016, Morton converted a total of $36,000 from "GR" in violation of FINRA Rule 2010. The Complaint alleges that the first conversion occurred when Morton allegedly took possession of $20,000 cash that GR had withdrawn from his bank account. The Complaint further alleges that the second conversion occurred when Morton obtained, filled out, and cashed a check signed by GR for $22,000, when GR had intended the check to be for $6,000. At the time of the alleged conversions, GR was 82 years old and had been diagnosed with dementia. He had been a customer of Morton's at FINRA member Edward D. Jones & Co until mid-September 2016.

The second cause of action alleges that Morton was compensated in the amount of $2,000 cash for assisting GR in locating and cashing out a variable annuity and thereby engaged in an undisclosed outside business activity in violation of FINRA Rules 3270 and 2010.

A hearing was held in Fayetteville, Arkansas on December 5-6, 2017. A majority of the Hearing Panel concludes that Enforcement failed to meet its burden of proving the two causes of action: conversion of funds from GR and receipt of compensation in the amount of $2,000 cash for an alleged undisclosed outside business activity.

On April 24, 2017, Morton filed an answer in which he denied engaging in any misconduct. The Hearing Panel held a two-day hearing on December 5 and 6, 2017. Six witnesses testified during the hearing.¹ Morton testified both during Enforcement's case and in his defense. He testified concerning his long-standing relationship with GR and the events in September and October 2016, which mostly only he and GR witnessed, that are at issue in this case. Morton, consistent with his answer, denied all allegations of wrongdoing. 

Two witnesses testified about their interactions or conversations with GR and Morton concerning the transactions that are at issue in this case. The first witness, KF, is GR's daughter. She testified about the assistance Morton provided GR with locating and surrendering an annuity; her claim that Morton admitted taking $2,000 from GR as compensation for providing that service; and a written complaint that she filed on GR's behalf with Edward Jones, the FINRA member with which Morton was registered at the time of the events at issue. 

The second witness, Katherine Ferguson ("Ferguson"), is an Edward Jones compliance investigator and investigated KF's written complaint. She testified about interviews she conducted with GR, KF, and Morton and the decision of Edward Jones to terminate Morton for accepting a loan from GR. 

The final three witnesses who testified at the hearing included RH, GR's friend and neighbor; Shalene Woods ("Woods"), Morton's branch office assistant; and Sean FitzPatrick ("FitzPatrick"), an Enforcement case manager who testified about Morton's financial condition in 2016, evidence of which Enforcement put forward to suggest that Morton possessed the motive to steal from GR.

===

Footnote 1: GR did not testify. As we discuss below, infra Part II.B., two doctors diagnosed GR with vascular dementia in 2012, and he entered an assisted-living facility in November 2016. GR, who at the time of the hearing was 83 years old, possessed little or no recollection of the happenings that resulted with Enforcement filing a disciplinary action against Morton.  

In summary, Enforcement failed to prove the amount of the undocumented loan GR gave to Morton, and we are left unable to find that Morton, more likely than not, converted any sum of money from the $22,000 check that GR signed on October 9, 2016. We thus affirm the Hearing Panel majority's findings that Enforcement did not prove, by a preponderance of the evidence, that Morton converted $16,000 from GR's $22,000 check.  

In reaching this conclusion, we highlight first that there is no direct evidence that Morton took or exercised ownership of any of portion of the $22,000 in cash that GR withdrew from his bank account on September 13, 2016. Although Enforcement asserts in its opening appeal brief that GR departed Morton's company that day without the cash he withdrew from the bank, and that GR told Ferguson, the Edward Jones compliance investigator, Morton took it, these claims find no support in the record. Morton testified consistently, and without contradiction, both during Edward Jones's investigation and in this matter, GR departed Morton's car possessing all of the cash GR withdrew from the bank on September 13, 2016. Moreover, far from claiming that Morton took his cash, the evidence instead shows that GR, when asked about the $22,000 cash withdrawal in October and November of 2016 by both KF and Ferguson, had no recollection of it, or "even going to the bank." 

Unable to produce direct evidence of Morton's alleged conversion, and confronted with Morton's consistent denials of any wrongdoing, Enforcement argued to the Hearing Panel that several pieces of circumstantial evidence proved Morton stole $20,000 from the $22,000 in cash GR withdrew from the bank on September 13, 2016. Of course, circumstantial evidence is permissible in FINRA disciplinary proceedings. See John D. Audifferen, Exchange Act Release No. 58230, 2008 SEC LEXIS 1740, at *12 n.9 (July 25, 2008) ("[T]he Supreme Court has held  that circumstantial evidence can be more than sufficient to satisfy the burden of proof in civil actions." (internal quotation marks omitted)). Nevertheless, "the probative value of circumstantial evidence depends entirely on the strength of the inferences that can be drawn from the proven circumstances." Mosier v. Stonefield Josephson, Inc., 815 F.3d 1161, 1171 (9th Cir. 2016). 

The Hearing Panel majority concluded that the circumstantial evidence Enforcement presented in support of its claims was unpersuasive and the inferential connections Enforcement drew from the evidence were "tenuous." In this appeal, Enforcement argues that the Hearing Panel majority failed to give sufficient weight to circumstantial evidence showing Morton's "motive and opportunity" to steal. We disagree. Like the Hearing Panel majority, we find that the circumstantial evidence Enforcement mustered does not lead to a conclusion that it was more likely than not that Morton took $20,000 from GR on September 13, 2016. . . .

Jury Rules in SEC's Favor, Finds Brokerage Firm and Two of Its Executives Liable for Fraud (SEC Release)
https://www.sec.gov/news/press-release/2019-70

fraud and related charges in connection with making material misrepresentations and omissions in American Growth Funding II LLC (AGF II)'s private placement offering. The SEC alleged that AGF II, which raised capital from investors to provide loans to businesses, and its owner, Ralph C. Johnson, promised investors 12 percent annual returns and falsely claimed in offering documents that its financial statements were being audited each year.  The SEC further alleged that PAA, Allen, and Wasserman knew the offering documents were inaccurate yet continued using them to solicit sales of AGF II securities. 

Earlier this year, the SEC obtained a final consent judgment against AGF II and Johnson, who were charged with lying to investors who purchased AGF II's high-yield securities.

Clarence Investment Advisor Sentenced For Bilking Clients Out Of Hundreds Of Thousands Of Dollars (DOJ Release)
https://www.justice.gov/usao-wdny/pr/clarence-investment-advisor-sentenced-bilking-clients-out-hundreds-thousands-dollars
Michael Giokas, a financial advisor and President of Giokas Wealth advisors was convicted in the United States District Court for the Western District of New York for his role in two schemes,which defrauded victims out $1,473,396.  Giokas was sentenced to 52 months in prison and ordered to pay restitution totaling $916,396. As set forth in part in the DOJ Release:

Between May 2017 and October 2017, the defendant persuaded certain clients to withdraw money from their investment accounts at Nationwide Mutual Insurance Company and invest the money in a company called Trinity Council, LLC. Giokas claimed that Trinity Council was a fund that invested in private corporations; that investments were guaranteed to earn interest between eight and nine percent per year; and that investment principal was guaranteed. The defendant also provided a fraudulent promissory note to one of his clients to convince the client that his investment in Trinity Council was legitimate.

Trinity Council was actually a shell company that engaged in no investment or business activity. Giokas was the sole member and only owner of Trinity Council, and the only person with signature authority on its bank accounts, which the defendant opened for the purpose of executing this scheme to defraud.

In a separate scheme, between 2015 and October 2017, Giokas prompted Nationwide to transfer money from his clients' Nationwide accounts to the defendant under the guise of "fee requests." Giokas claimed that he was entitled to the requested money as investment advisory fees, despite the fact that the requested amounts greatly exceeded what the defendant was entitled to pursuant to his fee agreements with his clients.

Bandimere Moves Forward at SEC. in David F. Bandimere, Petitioner, v. United States Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the Tenth Circuit, 15-9586 / December 28, 2016), upon considering Petitioner Bandimere's appeal, the Court of Appeals for the Tenth Circuit ("10Cir") preliminarily explained that:

When the Framers drafted the Appointments Clause of the United States Constitution in 1787, the notion of administrative law judges ("ALJs") presiding at securities law enforcement hearings could not have been contemplated. Nor could an executive branch made up of more than 4 million people, most of them employees. Some of them are "Officers of the United States," including principal and inferior officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, § 2, cl. 2. In this case we consider whether the five ALJs working for the Securities and Exchange Commission ("SEC") are employees or inferior officers.

Based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), we conclude the SEC ALJ who presided over an administrative enforcement action against Petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause Exercising jurisdiction under 15 U.S.C. §§ 77i(a) and 78y(a)(1), we grant Mr. Bandimere's petition for review.

Following its defeat at 10Cir, the SEC filed a Petition for Certiorari with the United States Supreme Court, which was denied on June 28, 2018. In the Matter of David F. Bandimere and John O. Young (SEC ALJ Order Concerning Division Production of Documents; Admin Proc. Rul. Rel. No. 6574; Admin. Proc. File No. 3-15124 / May 14, 2019) https://www.sec.gov/alj/aljorders/2019/ap-6574.pdf some 2 1/2 years after the 10Cir Opinion, Bandimere is back before another SEC Administrative Law Judge -- this time,  James E. Grimes. In response to an ongoing dispute between Bandimere and Enforcement about whether certain materials are entitled to protection as work-product, ALJ Grimes has ordered as follows:

Respondent David F. Bandimere has subpoenaed the notes taken by counsel for the Division of Enforcement during witness interviews. The parties disagree about the extent to which the work-product doctrine protects the notes from production. However, the Division has agreed to produce the factual portion of the notes, on the condition that the production will not be deemed a waiver of any privilege or protection. The parties agree to the following three points. 

1. The production of privileged or work-product protected documents, electronically stored information ("ESI") or information, whether inadvertent or otherwise, is not a waiver of the privilege or protection from discovery in this case or in any other federal or state proceeding. This order shall be interpreted to provide the maximum protection allowed by Federal Rule of Evidence 502(d). 

2. Nothing contained herein is intended to or shall serve to limit a party's right to conduct a review of documents, ESI or information (including metadata) for relevance, responsiveness and/or segregation of privileged and/or protected information before production.

3. Nothing contained herein is intended to or shall serve to limit a party's right to challenge claims of privilege or work product asserted to withhold documents or ESI.  

• Securities Industry Commentator
• Bill Singer