Securities Industry Commentator by Bill Singer Esq

Pottsville Woman Sentenced to 5+ Years in Prison for Perpetrating Elder Financial Fraud Known as "Grandparents Scheme" (DOJ Release)

Attorney Admitted He Embezzled Millions of Dollars from Charitable Trusts and Filed False Tax Returns (DOJ Release)

Fee Based Rep Seeks Expungement Over Commissions He Never Charged (BrokeAndBroker.com Blog)

Atlanta man sentenced in million-dollar diamond and high-end jewelry fraud scheme (DOJ Release)

Ymer Shahini Sentenced To 18 Months In Connection With Scheme To Defraud Investors And Shareholders (DOJ Release)

FINRA Fines and Suspends former Windsor Capital Supervisor. In the Matter of Anthony Pace, Respondent (FINRA AWC)

The scheme operated as follows: an individual called an elderly victim posing as the grandchild of the victim, or posing as an attorney representing the grandchild. The caller claimed that the grandchild was in a vehicular accident and was arrested for driving under the influence (or some type of legal trouble). The caller then said that the grandchild needed money for bail or legal representation, and persuaded the victim to send thousands of dollars in cash via overnight delivery service to an address where the schemers retrieved the package. The schemers then continued to call the victim and demanded more money until the victim realized that he or she had been defrauded and stopped sending money.

Diaz played a leadership role in this scheme, which was based in Allentown and Bethlehem, Pennsylvania. For example, she identified and arranged for access to residential locations where her co-schemers instructed victims to send the fraud proceeds. Diaz recruited and controlled additional participants in the scheme who allowed her to use their residences for the receipt of proceeds, and who helped retrieve the packages and shared the proceeds with other co-schemers. Diaz engaged in numerous incidents of the Grandparents Scheme, as well as credit card fraud. In the Grandparents Scheme, Diaz and her co-schemers defrauded at least 10 elderly victims of at least $158,800 and attempted to defraud those victims of at least an additional $69,000.

[F]eldman was the trustee of several charitable trusts as early as 1996. He was also an attorney and Certified Public Accountant (CPA) licensed in the State of California. As early of January 2012 and continuing up to and including April 15, 2015, Feldman made more than $1.6 million in unauthorized wire transfers and withdrawals from the bank accounts of the charitable trusts under his control. To conceal his theft of trust funds, he filed false and fictitious tax returns with the IRS that inflated and falsely reported the amount of charitable gifts allegedly made by him as trustee of the charitable trusts. In lieu of making these authorized gifts, Feldman misappropriated trust assets for his own personal expenses, including but not limited to: paying his personal mortgages; paying taxes on properties he owned; making his personal federal and state tax payments; purchasing personal vehicles; paying contractors working on his personal residence; transferring funds from the charitable trust accounts to his personal brokerage account; and paying his personal credit cards.

In total, Feldman admitted he stole approximately $1,648,531.40 from the charitable trusts. Since his fraud was uncovered, Feldman has repaid approximately $1,547,444.16. As part of his plea agreement, Feldman agreed to repay the remaining balance of the restitution in the amount of $101,087.24 to over fifty individual charities. At the hearing, Feldman informed the court that he had written the check for the remaining amount of restitution and intended to deposit it today with the clerk of the court. 

In addition to his embezzlement scheme, Feldman admitted in court that he also filed false tax returns. He failed to report the money he embezzled on his tax returns for tax years 2012 through 2014. Feldman admitted that he owes the IRS more than $575,000 in federal income taxes. At the hearing, Feldman informed the Court that he had written the check payable to the IRS for the total amount of taxes due, with interest, and that he intended to mail the check to the IRS today.

[B]eginning by November 2016 and continuing until September 2018, Smith and others conspired to defraud diamond and jewelry retailers and wholesalers by taking advantage of the fact that many transactions in the industry are done by "memo financing."

Memo financing is a type of consignment arrangement under which diamond or jewelry dealers will borrow diamonds or jewelry from a supplier (typically another dealer or wholesaler) and will pay for the merchandise only after they are sold (or otherwise return the items unsold). The use of memo financing is widespread in the diamond and jewelry industry and has been used for generations. In order to minimize the risk associated with memo financing, diamond and jewelry dealers will often only deal with well-established diamond/jewelry buyers with whom they have previously conducted business. After the transaction is arranged, the merchandise is usually transported via UPS, FedEx, or another common commercial interstate carrier.

Smith took advantage of this "memo financing" system by contacting jewelry and diamond suppliers across the United States and falsely representing that he was employed or affiliated with a well-known or established diamond or jewelry dealer. Smith would then direct that the merchandise in question be sent to an actual jewelry store in Georgia or elsewhere and typically provide the actual address of the detailer/retailer he was falsely purporting to represent. After receiving the tracking information for a particular shipment, Smith would then contact the shipper (i.e., UPS, FedEx) and have the shipment re-routed to a residential address or a FedEx or UPS facility or retail store near where the actual diamond/jewelry dealer he was falsely purporting to represent was located. Smith would thereafter arrange to have "runners" pick-up the shipment from the FedEx or UPS location or residential address. Smith facilitated this process by making travel arrangements for the runners to travel from Atlanta to out-of-state locations, including North Carolina, Oklahoma, South Carolina, Tennessee, and Virginia, to pick up the packages containing the diamonds/jewelry. Over the course of the nearly two-year scheme, Smith defrauded more than a dozen diamond and jewelry wholesalers and retailers nationwide.  

From 2009 to 2011, YMER SHAHINI, along with co-defendants Jason Galanis, John Galanis, Derek Galanis, Gary Hirst, and Gavin Hamels, engaged in a scheme to defraud the shareholders of a publicly traded company called Gerova Financial Group, Ltd. ("Gerova"), and the investing public, by obtaining secret control over millions of shares of Gerova stock and then manipulating the market for the stock as the defendants caused their secretly held shares to be sold.  As part of the scheme, the defendants fraudulently generated demand for Gerova stock by bribing investment advisers to purchase for client accounts the Gerova stock that was sold by the defendants, thereby enabling the defendants to cash out from the scheme and make millions in illegal profits.   

As a part of the scheme to defraud, Jason Galanis obtained such control over Gerova so as to be able to cause Gerova to enter into transactions of his design, and for his benefit, including the issuance of Gerova stock.  Jason Galanis obtained this control without identifying himself as an officer or director of Gerova to avoid the SEC-imposed bar that prohibited him from holding such positions at publicly traded companies.  Among other means and methods, Jason Galanis, with the assistance of Gary Hirst, caused more than 5,000,000 shares of Gerova stock, which represented nearly half the company's public float and which were intended for Jason Galanis's ultimate benefit, to be issued to and held in the name of YMER SHAHINI, who knowingly served as a foreign nominee for Jason Galanis.  SHAHINI, Jason Galanis, John Galanis, Derek Galanis, and Hirst understood that the purpose of the stock grant to SHAHINI was to disguise Jason Galanis's ownership interest in the stock, and to evade the SEC's regulations for issuing unregistered shares of stock. 

At the same time, and as a further part of the scheme to defraud, John Galanis and Derek Galanis, among others, with the knowledge and approval of YMER SHAHINI and Jason Galanis, opened and managed brokerage accounts in the name of SHAHINI (the "SHAHINI Accounts"), effected the sale of Gerova stock from the SHAHINI Accounts, and received and concealed the proceeds, knowing that this activity was designed to conceal from the investing public Jason Galanis's ownership of and control over the Gerova stock.

Jason Galanis also fraudulently induced investment advisers, including Gavin Hamels and others, to purchase shares of Gerova stock in the investment advisers' client accounts by offering compensation and/or other benefits to the respective investment adviser.  By causing the purchase of Gerova stock at the time, quantity, and/or price of their choosing, Jason Galanis was able to, among other things, effectuate the sale of large quantities of Gerova stock from the SHAHINI Accounts that Jason Galanis controlled, while artificially maintaining the price of Gerova stock through coordinated match trading.  Such coordinated trading served to manipulate the market for Gerova stock and deceive the investing public.  As a result, Jason Galanis and his co-conspirators reaped nearly $20 million in profits.

designated supervisor for JA, a registered representative at Windsor Street. During this period, JA was on heightened supervision, subjecting him to additional supervisory oversight. Pace was responsible for implementing the additional supervisory guidelines as detailed in JA's Heightened Supervision Plan ("HS Plan"). Pursuant to the HS Plan, Pace was required to preapprove all purchase and sale orders JA submitted prior to execution, by verifying each order with the customer. Additionally, the Firm's written supervisory procedures ("WSPs") required supervisors to review for excessive trading and churning, including reviewing turnover rates and cost-equity ratios. The Firm provided Pace with tools, such as the Active Account Report ("AA Report"), on a monthly basis to assist with the reviews. Moreover, the WSPs required documentation of all reviews and follow-up activities. Pace did not pre-approve all customer orders JA submitted, and he did not otherwise follow the Firm's procedures to review for excessive trading and churning. 

More specifically, during the Relevant Period, Pace failed reasonably to supervise JA's trading in the accounts of two customers, LW and FP. Pace did not pre-approve the orders that JA submitted for LW and FP, or otherwise verify each order with the customer. Moreover, soon after JA became the registered representative on the accounts for LW and FP, both accounts began to appear on Windsor Street's AA Report over multiple months. The AA Reports included the amount of commission, number of trades and activity levels, which indicated excessive trading. The turnover rates and cost-equity ratios for LW's and FP's accounts exceeded annualized turnover rates of thirty and annualized cost-equity ratios of 100 percent, both of which exceed indicia of excessive trading. Pace also failed to follow up on other red flags, including the following: 

• Pace was aware that LW was 81 years old at account opening and although LW's new account documentation showed an investment objective of "growth and income," the account had a high level of activity. Rather than investigate the 2 suitability of the transactions or confirm with the customer, Pace relied on JA's representation that the investment objective was "speculation." 
  
  
• Pace was copied on email correspondence from FP in which FP questioned JA's trading. For example, in one email, FP questioned JA on the aggressive and frequent trading in the account, asking that JA move to a more conservative trading approach. Pace failed to follow up with the customer or JA regarding the issues raised in any of the emails. 

Apart from sending LW an activity letter, Pace did not investigate this trading, or otherwise document any review or follow-up activity he conducted related to trading in LW's and FP's accounts. The activity letter used boiler- plate language without detailing explicitly any information specific to that account's activity, except for the account's investment objective and risk tolerance, and required LW's signature acknowledgement. 

• Securities Industry Commentator
• Bill Singer