The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
September 9, 2019
FINRA Cites Kalos Capital For Poor Supervision of Leveraged and Inverse Exchange Traded Funds (LIETFs). In the Matter of Kalos Capital, Inc. and Darren Michael Kubiak, Respondents (FINRA AWC 2016048196801)
https://www.finra.org/sites/default/files/fda_documents/2016048196801
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%20Darren%20Michael%20Kubiak%20CRD%201239086%20%20AWC%20va.pdf
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For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Kalos Capital, Inc. and Darren Michael Kubiak submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon member firm Kalos Capital a Censure, $30,000 fine, and $86,614 in restitution plus interest; and upon Kubiak a $5,000 fine and a three-month suspension from associating with any FINRA member firm in all capacities. As set forth under the AWC heading "Overview" [Ed: footnotes omitted]:
Between August 2011 and January 2015, Kubiak recommended the purchase of Leveraged and Inverse Exchange Traded Funds (LIETFs) to 17 customers without having a sufficient understanding of the risks and features associated with the LIETFs and thereby failing to have a reasonable basis to make these recommendations. Kubiak recommended these customers purchase a total of 19 LIETFs, which the customer then held for an average of 722 days. Accordingly, between August 2011 and January 2015, Kubiak violated NASD Rule 2310 (for conduct prior to July 9 2012) and FINRA Rules 2111 (for conduct on or after July 9, 2012) and 2010.From August 2011 until April 2015, Kalos failed to establish, maintain and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to ensure compliance with NASD Rule 2310 and FINRA Rule 2111 in relation to the sale of LIETFs by its registered representatives. Additionally, Kalos failed to reasonably supervise Kubiak, the Firm's sole registered representative who sold LIETFs to customers, by failing to ensure that Kubiak had a reasonable basis to recommend LIETFs. As a result, between August 2011 and April 2015, Kalos violated NASD Rules 3010(a) and 3010(b) (for conduct prior to December 1, 2014) and FINRA Rules 3110(a), 3110(b) (for conduct on or after December 1, 2014) and 2010.
Bill Singer's Comment: Frankly, FINRA seems to have been a bit overly charitable with its sanctions. If the AWC's fact pattern is to be believed, then Kalos had one and only rep selling LIETFs, which should have prompted the member firm to have been far more diligent with its oversight then if there were numerous reps trading this product. I'm not quite sure what FINRA was thinking here with its relatively light slaps on the wrists, and I'm not quite understanding how this tepid regulation protects the investing public. According to the AWC: "[K]ubiak did not understand that LIETFs are generally expected to lose value over time and that losses are compounded because of how the LIETFs' valuations are reset each day." I allow for the fact that the cited trades took place between 2011 and 2015 and that the inherent risk and properties of such non-traditional ETFs are far better understood in 2019. On the other hand, how the hell can Wall Street's so-called leading self-regulatory-organization only now be addressing unsuitable trades from 2011 -- and even as recent as 2015? This case speaks poorly of Kalos and Kubiak but sure as hell does nothing to burnish FINRA's credentials as a Wall Street regulator. The stale prosecution of unsuitable trading that was not reasonable supervised is a black eye for all Wall Street participants!
Former Associated Persons Awarded Over $1.7 million Against Credit Suisse. In the Matter of the Arbitration Between Christian N. Cram, Andrew E. Firstman, and Mark G. Horncastle, Claimants, v. Credit Suisse Securities (USA) LLC, Respondent (FINRA Arbitration Decision 17-01632)
https://www.finra.org/sites/default/files/aao_documents/17-01632.pdf
In a FINRA Arbitration Statement of Claim filed in June 2017, associated person Claimants asserted in part constructive discharge; fraudulent
inducement; fraudulent intentional and/or negligent misrepresentation; breaches of
contract, of the covenant of good faith and fair dealing, and of securities industry rules, regulations and standard of conduct; unjust enrichment;
conversion; promissory estoppel; retaliation; and violations of various state labor laws. Ultimately, Claimants sought $3,689,122.00 in compensatory damages inclusive of interest; attorneys' fees of $1,209,707.00; and $97,595.00 in costs.Respondent Credit Suisse generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting breaches of contract and of fiduciary; unfair competition; misappropriation of trade secrets;
unjust enrichment; and declaratory relief against Claimants (unvested deferred contingent
Awards).Ultimately Credit Suisse sought $14,213.00 in overpayments and $100,011.58 in compensatory damages; and a Declaration that Claimants are not are not entitled to vesting or delivery of their unvested deferred contingent awards. The FINRA Arbitration Panel found Respondent Credit Suisse liable and ordered the firm to pay the Claimants as follows:
Firstman: $1,010 million in compensatory damagesHorncastle: $660,000 in compensatory damagesCram: $85,000 in compensatory damages
Further, the Awards were ordered payable with interest, $97,506.47 in costs, $719,000 in attorneys' fees, and $375 in FINRA filing fee.
Oops I Did It Again Is No Defense In Second FINRA AWC (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/4797/finra-awc-suspension/
You got your suspension of disbelief. You got your FINRA suspension. For the FINRA suspension to have meaning and for it to actually work, the subject registered representative has to really, really believe that when Wall Street's self-regulatory-organization says that you're suspended, well, you know, the regulator means it. For that to work, the rep has to suspend his disbelief that FINRA is actually monitoring his daily activities during the term of suspension, and, further, that the regulator will do anything about any misconduct during said period of suspension. Sadly, some folks don't quite buy into the suspension of disbelief as a working component of the whole Wall Street regulatory scheme of suspensions.
Investment Adviser Sentenced to 70 Months in Prison for Stealing Millions of Dollars from Clients (DOJ Release)
https://www.justice.gov/usao-nj/pr/investment-adviser-sentenced-70-months-prison-stealing-millions-dollars-clients
Gary Baralian pled guilty to an Information in the United States District Court for the District of New Jersey to one count of wire fraud and one count of investment adviser fraud; and he was sentenced to 70 months in prison plus three years of supervised release. As set forth in part in the DOJ Release:
Basralian was a registered broker who provided investment advisory services to clients and received compensation for advising them about investing in, purchasing, or selling securities. From 1989 until December 2017, he was registered with the Financial Industry Regulatory Authority (FINRA), or its predecessors, as working at "Securities Firm A," a registered investment adviser and broker-dealer with its principal place of business in Jersey City, New Jersey. Securities Firm A provided a broker-dealer platform for more than 2,000 independent financial advisers across the United States.From July 2007 through November 2017, Basralian defrauded his clients by falsely telling them that he would invest their money in securities and other investments when, in fact, he misappropriated those funds and used them for his own personal expenditures - including payments on a BMW automobile and tens of thousands of dollars in credit card bills.In one instance Basralian wired money from at least one victim client's investment account at Securities Firm A to various accounts that he controlled and used the proceeds for his own benefit. When the victim asked why the account had diminished in value, Basralian sent the victim a phony spreadsheet showing that the money was being invested as loans to various companies and would be paid back with interest. Basralian admitted stealing at least $2 million.
Ex-White House Military Aide and Maryland Businessman Found Guilty For Operating Fraudulent EB-5 Visa Scheme (DOJ Release)
https://www.justice.gov/usao-edla/pr/ex-white-house-military-aide-and-maryland-businessman-found-guilty-operating-fraudulent
After a three-week trial in the United States District Court for the Eastern District of Louisiana, William B. "Bart" Hungerford, Jr. and Timothy O. Milbrath (former U.S. Air Force colonel who served as a White House military aide for three presidential administrations) were found guilty of conspiracy to commit wire fraud and mail fraud, conspiracy to commit immigration fraud, conspiracy to commit money laundering, and six counts of wire fraud. As set forth in part in the DOJ Release, the Defendants:
[C]onspired together to defraud immigrants who sought to apply for EB-5 visas. The visa program permits immigrants to invest a minimum of $1,000,000.00 in a United States job-creating enterprise and obtain permanent residency if, after two years, that investment created or preserved ten American jobs. The minimum investment required was lowered to $500,000.00 if the investment was made in a targeted employment area ("TEA"), defined as an area with an unemployment rate of 150% of the national average.The superseding indictment alleged that HUNGERFORD and MILBRATH formed NobleOutReach, LLC, to operate the EB-5 investment fund, and they contracted with the City of New Orleans to run the New Orleans Regional Center. Because New Orleans was a designated TEA in the years after Hurricane Katrina, immigrant investors only had to invest $500,000.00 in order to qualify under the EB-5 visa program. HUNGERFORD and MILBRATH represented to investors that their $500,000.00 investment would be used to create jobs in New Orleans and contribute to the rebuilding of the City. A total of 31 immigrants invested a total of $15.5 million in the defendants' investment fund.Evidence at trial showed that, instead of investing the immigrant investors' entire $15.5 million into New Orleans-based job-creating enterprises, HUNGERFORD and MILBRATH fraudulently misappropriated investor funds for their own personal gain. HUNGERFORD and MILBRATH wrote themselves checks drawn from investor funds which they disguised as "loans" or "loan repayments." The evidence showed that the defendants created multiple companies in order to conceal the path of investor funds and misappropriate them. The defendants also spent investor funds to purchase vacation and rental properties for their own benefit. In the course of perpetrating the fraud, the defendants made false representations to investors, U.S. Citizenship and Immigration Services (USCIS), and the City of New Orleans.
Stock Promoter Who Caused Tens of Millions in Losses Pleads Guilty to Securities Fraud Charges (DOJ Release)
https://www.justice.gov/usao-edpa/pr/stock-promoter-who-caused-tens-millions-losses-pleads-guilty-securities-fraud-charges
Dino Paolucci pled guilty in the United States District Court for the Eastern District of Pennsylvania to four counts of securities fraud in connection with his role in the alleged pump-and-dump manipulation of the price and trading volume of LiveWire Ergogenics ("LVVV"), YaFarm Technologies ("YFRM"), Resource Ventures ("REVI"), and Medical Cannabis Payment Solutions ("REFG"). As set forth in part in the DOJ Release:
[P]aolucci, a stock promoter, worked with others to artificially increase the price and volume of the stocks through the use of false and misleading press releases, email blasts, radio advertisements and tweets, often in coordination with planned trading by other participants in the scheme. The misleading promotion in concert with planned trading was designed to control the price and volume of the stock. In order to hide their scheme from investors and regulators, Paolucci and his fellow schemers used offshore corporations and brokerage accounts, intermediaries, and even fake names, causing tens of millions of dollars of losses to investors while gaining millions in profits for themselves.
SEC Charges Los Angeles-Based Entertainment Company and Two Executives for Their Roles in $19 Million IIIegal Securities Offering (SEC Release)
https://www.sec.gov/litigation/litreleases/2019/lr24588.htm
https://www.sec.gov/litigation/litreleases/2019/lr24588.htm
In a Complaint filed in the United States District Court for the Central District of California https://www.sec.gov/litigation/complaints/2019/comp24588.pdf, the SEC charged Toon Goggles Inc. and its founder Ira Warkol with iolating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act, and Warkol with also violating the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act. Without admitting or denying the allegations in the complaint, Warkol consented to the entry of a final judgment permanently enjoining him from violating the charged provisions, ordering disgorgement plus prejudgment interest of $2 million, and imposing an $189,427 penalty. In an SEC Order Instituting Proceedings https://www.sec.gov/litigation/admin/2019/34-86887.pdf, the SEC chargedToon Goggles'irector of Operations, Brendan Pollitz, for facilitating broker-dealer registration violations. Pollitz consented to the entry of a cease-and-desist order, and agreed to pay disgorgement plus prejudgment interest of $34,117, and civil penalties of $9,472. As set forth in part in the SEC Release:
[F]rom at least August 2012 through late 2016, Toon Goggles and Warkol raised over $19 million from approximately 400 retail investors. According to the SEC's complaint, Warkol, acting as an unregistered broker, set up boiler rooms inside Toon Goggles' offices and hired sales agents to cold-call investors. Warkol allegedly provided the sales agents with scripts to lure investors into purchasing the offered securities. According to the complaint, Toon Goggles also failed to maintain accurate and complete records of its investors, the number of shares sold to each investor, and the amount of money raised from each investor.