The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

June 17, 2020









http://www.brokeandbroker.com/5266/booker-morgan-stanley/
On June 16, 2020, Marilyn Booker filed a Complaint in the United States District Court for the Eastern District of New York charging Morgan Stanley & Co., LLC, James Gorman, and Barry Krouk with ten causes of action including discrimination; retaliation; aiding and abetting unlawful discrimination and retaliation; and violations of equal pay laws. Marilyn Booker,  individually, and on behalf of similarly situated Black female employees, Plaintiff, v. Morgan Stanley & Co., LLC, James Gorman, in his individual and professional capacities, and Barry Krouk, in his individual and professional capacities, Defendants (Complaint, EDNY, 20-CV-02662)
http://brokeandbroker.com/PDF/BookerComplEDNY200616.pdf  Plaintiff Booker's allegations are not revelations or disclosures. They are the stuff of Wall Street's dirty little secrets. The industry knows all too well how it has failed to keep pace. Worse, Wall Street's regulatory community is more an enabler than the necessary voice of conscience.

Regulators never thought investors would be gullible enough to buy Hertz 'garbage,' Harvey Pitt says (CNBC) https://www.cnbc.com/2020/06/16/regulators-never-thought-investors-would-be-gullible-enough-to-buy-hertz-garbage-harvey-pitt-says.html
Following its May 11, 2020, Chapter 11 bankruptcy filing, Hertz filed a secondary offering on June 15, 2020, for $500 million. So . . . about a month after filing for bankruptcy, Hertz is now looking to sell $500 million in stock . . . $500 million . . . in stock . . . while in Chapter 11? Okay, sure-- why not? For starters, are you an idiot? I mean, you know, I get the whole idea of taking a risk and hoping that the once #1 in rentals returns to that lofty perch. Like I said, I get it. On the other hand, Hertz is in bankruptcy. There's lots of competition. There's the whole AI-driverless car thing on the horizon. There's the whole COVID-19 pandemic and its impact on tourism and travel. Then there's the easier question as to don't you think that there are better investment opportunities out there in June 2020 than Hertz? Hey, it's your money. I wish you the best. Prove me wrong. Keep in mind that I also was the guy who never thought anyone would paid $3 or $4 for a cup of Starbuck's coffee, and I also never thought that Jeff Bezos was going to figure out how to make Amazon profitable. Be that as it may, it's hard to argue with former SEC Chair Pitt's observation as reported in the CNBC article:

"As an intellectual proposition, most securities experts had always thought you could offer garbage for sale to the public as long as you said 'we are offering you garbage, and you really shouldn't buy this but you have a chance to buy it,' " Pitt said. "No one ever really anticipated that people would be gullible enough to do that."

IMF set to slash economic forecasts and warns of a crisis 'unlike anything the world has seen'  (CNBC by Silvia Amaro)
https://www.cnbc.com/2020/06/16/imf-set-to-slash-economic-forecasts-amid-crisis-unlike-no-other.html
At first the International Monetary Fund warned us that the global economy would suffer the worst financial crisis since the Great Depression. So, you know, that's like the worst thing in about 90 years -- let's round it up to the past Century, okay? As the COVID-19 pandemic has spread, the IMF has changed the level of its "worst thing" scale and, as reported by CNBC:

"For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated," Gita Gopinath, the IMF's chief economist, said in a blog post.

The Fund also said the current crisis, which it dubbed the Great Lockdown, is "unlike anything the world has seen before."

Whoa! Unlike anything the word has seen before! Just talkin' as a member of this world, I fully understand why IMF Chief Economist Gopinath is freaking out but, even so, this world has seen a lot before. Just to rattle off some things: There was that Chicxulub asteroid hitting the planet about 66 million years ago and causing the extinction of almost everything and supposedly evaporating the oceans. Mind you, I wasn't there at the time but an extinction event strikes me as an example of a worse or worst event. Then we had the Bubonic Plague of the 14th Century during which time the Black Death (lovely name, no?) killed off something like 50% of Europe's population. Not that I'm rushing through a lot of bad things but, just moving into the more recent eras, we had World War I and World War II, both vying for all-time "worse" or "worst." I'm not looking to make an exclusive list here, so, hey, add what you want. Also, let's not forget Godzilla or Mothra (okay, I agree, let's forget Mothra) or any number of Zombie apocalypses. Frankly, even King Kong was unlike anything the world had seen before until he got into that weirdness with Ann Darrow -- two crazy young kids in love but it would never have worked out. Alas, Chief Economist Gopinath, I feel your pain and I understand why you're worried about the negative growth rate caused by the COVID-19 crisis, but, "unlike anything" this planet has ever seen? Sorry, I'm not buying it; but, hey, let's give it a few more months and see if events change my mind. You never know. That's truly the scary thing!






Co-Founder Of Cryptocurrency Company Pleads Guilty For Role In ICO Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-sdny/pr/co-founder-cryptocurrency-company-pleads-guilty-role-ico-fraud-scheme
Robert Joseph Farkas pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud conspiracy and one count of wire fraud conspiracy. As alleged in part in the DOJ Release:

In or about July 2017, FARKAS, along with co-defendants Sohrab Sharma and Raymond Trapani, founded a company called Centra Tech that claimed to offer cryptocurrency-related financial products, including a purported debit card, the "Centra Card," that supposedly allowed users to make purchases using cryptocurrency at establishments accepting Visa or Mastercard payment cards.  From approximately July 30, 2017, through October 5, 2017, FARKAS and his co-defendants solicited investors to purchase unregistered securities, in the form of digital tokens issued by Centra Tech ("Centra tokens" or "CTR tokens"), through a so-called "initial coin offering" or "ICO."  As part of this effort, FARKAS and his co-defendants represented, in oral and written offering materials that were disseminated via the internet: (a) that Centra Tech had an experienced executive team with impressive credentials, including a purported CEO named "Michael Edwards" with more than 20 years of banking industry experience and a master's degree in business administration from Harvard University; (b) that Centra Tech had formed partnerships with Bancorp, Visa, and Mastercard to issue Centra Cards licensed by Visa or Mastercard; and (c) that Centra Tech had money transmitter and other licenses in 38 states, among other claims.  Based in part on these claims, victims provided millions of dollars' worth of digital funds in investments for the purchase of Centra Tech tokens.  In or about October 2017, at the end of Centra Tech's ICO, those digital funds raised from victims were worth more than $25 million.  At certain times in 2018, as the defendants' fraud scheme was ongoing, those funds were worth more than $60 million.

The claims that FARKAS and his co-conspirators made to help secure these investments, however, were false.  In fact, the purported CEO "Michael Edwards" and another supposed member of Centra Tech's executive team were fictional people who were fabricated to dupe investors; Centra Tech had no such partnerships with Bancorp, Visa, or Mastercard; and Centra Tech did not have such licenses in a number of those states.

On or about May 2018 and October 2018, this Office and the Federal Bureau of Investigation ("FBI") seized, pursuant to judicially authorized seizure warrants, 100,000 Ether units, consisting of digital funds raised from victims who purchased digital tokens issued by Centra Tech during its ICO based on fraudulent misrepresentations and omissions. 

When Bakers Demanded More Flour, King Arthur Went to the Mills / The 230-year-old company leaned on its partners to keep the pandemic loaves rising (Bloomberg Businessweek by Elizabeth G. Dunn)
https://www.bloomberg.com/news/features/2020-06-16/how-king-arthur-dealt-with-a-flour-shortage-during-the-pandemic?srnd=premium
Seems like everyone started baking once the COVID pandemic set in. Among the first shortages we all noticed at the grocery store were the missing bags of flour -- any kind of flour: all purpose, whole wheat, ancient grains. As reported in part by Bloomberg's Dunn:

King Arthur's retail flour sales almost tripled in March; in some grocery stores, when shipments arrived, shoppers picked the pallets clean before anything made it to the shelves. In two weeks, the entire "safety stock"-essentially, the company's strategic flour reserve-was depleted, and so were baking aisles across the country.

Former Bumble Bee Ceo Sentenced To Prison For Fixing Prices Of Canned Tuna (DOJ Release)
https://www.justice.gov/opa/pr/former-bumble-bee-ceo-sentenced-prison-fixing-prices-canned-tuna
After a four-week federal trial, former Bumble Bee Foods LLC Chief Executive Officer/President Christopher Lischewski was found guilty of one count of participating in a conspiracy to fix prices of canned tuna, and he was sentenced to was sentenced to 40 months in federal prison and ordered to pay a $100,000 criminal fine. The DOJ Release asserts that in imposing sentence, the "Court found that Lischewski was a leader or organizer of the conspiracy and that it affected over $600 million dollars of canned tuna sales." Previously, Bumble Bee pled guilty and was sentenced to pay a $25 million criminal fine. Similarly, In September, StarKist Co. was sentenced to pay a statutory maximum $100 million criminal fine. 40 months in prison for fixing the price on a lousy can of tuna? Wow, who knew?

SEC Obtains Final Judgments Against Movie Director, His Partner, and Their Companies (SEC Release)
https://www.sec.gov/litigation/litreleases/2020/lr24837.htm
Places everyone . . . and . . . action! Securities and Exchange Commission v. Daniel Adams, Michael Flanders, Spiderworx Media LLC, and An L.A. Minute LLC, (SEC Release)
In a Complaint filed in the United States District Court for the Central District of California
SEC Complaint https://www.sec.gov/litigation/complaints/2019/comp24411.pdf, the SEC charges Daniel Adams, music producer Michael Flanders, and their companies, Spiderworx Media LLC, and An L.A. Minute LLC, with violations of the antifraud provisions of Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder. Previously, Adams pled guilty to tax fraud and larceny in 2012, was ordered to pay nearly $4.4 million in restitution to the State of Massachusetts, and served a twenty-one month prison term.

The Complaint alleged in part that Adams and Flanders falsely stated to an investor that they had each invested in a film and would not receive any of the funds being raised until bank financing was obtained;, and further, Adams had misrepresented how investor proceeds had previously been spent, and that he had fraudulently stated that the money the investor had provided would be used exclusively to pay attorneys. The Complaint alleged that, in fact, Adams and Flanders received $21,062 and $18,500, respectively, from the $60,000 investment, and that only $20,000 was paid to an attorney. 

In dealing with a second investor, who said he would invest $100,000 only if $200,000 was first raised elsewhere; the Complaint alleged that Flanders forwarded the investor two fabricated emails Adams had prepared containing a fictitious wire transfer confirmation and a forged signature page, in order to create the false appearance that $200,000 had been raised from another investor. The Complaint alleged that Adams and Flanders personally received $29,000 and $10,000, respectively, from the second investor's $100,000 investment.

The SEC obtained Final Judgments against: 

https://www.sec.gov/litigation/litreleases/2020/24837-judgment-daniel-adams.pdf, which enjoins him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule l0b-5(b) thereunder; and further enjoins Adams from participating in the issuance, purchase, offer, or sale of any security in an unregistered offering; and orders him to pay disgorgement of $50,562 plus prejudgment interest of $7,087.99 and a $50,562 civil penalty.

https://www.sec.gov/litigation/litreleases/2020/24837-judgment-michael-flanders.pdf, which enjoins him from violating the same antifraud provisions noted for Adams, and orders him to pay disgorgement of $28,500 plus prejudgment interest of $4,354.20 and a $28,500 civil penalty.

https://www.sec.gov/litigation/litreleases/2020/24837-judgment-spiderworx-media-llc.pdf; and
https://www.sec.gov/litigation/litreleases/2020/24837-judgment-an-la-minute.pdf, 
which were entered February 27, 2020, and enjoin both companies from violating the same antifraud provisions, and order them to pay civil penalties in the amounts of $60,000 and $100,000, respectively.

CLOs Are Not CDOs, Not Even During a Pandemic / The structured products have their problems but are hardly about to topple the banking system (Bloomberg by Brian Chappatta)
https://www.bloomberg.com/opinion/articles/2020-06-16/coronavirus-clos-are-not-cdos-not-even-during-a-pandemic
Bloomberg's Chappatta offer a compelling Opinion-piece in which he re-visits the Collateralized Debt Obligations (among the cited culprits of the Great Recession) and compares them to the current crop of Collateralized Loan Obligations. In part, Chappatta notes that:

Whether speculators face losses is not the question at hand, however. It's about financial giants like JPMorgan Chase & Co. and Citigroup Inc., two banks flagged as owning $35 billion and $20 billion of CLOs as of March 31, respectively. Setting aside that these are once again absolute numbers, even if Moody's double-digit default rates over the next year come to pass, investment-grade tranches seem destined to come out unscathed. According to the credit-rating company's analysis, the cumulative collateral default rate would have to reach 70% to 80% before double-A CLOs take losses, assuming a 60% recovery rate. DoubleLine Capital Chief Investment Officer Jeffrey Gundlach, for one, said on a webcast last week that middle-of-the-capital-structure CLOs were among his picks for most attractive assets, given that he sees a "significant march towards par in their future." 

Certainly, every loan and CLO has its own quirks. Barclays Plc strategists flagged the bankruptcy plans of Acosta Inc. and J.C. Penney Co., which gave CLOs a recovery rate 20 to 30 points lower than other first-lien holders. The problem, they found, was that an aggressive approach from a small group of distressed investors can put CLOs at a disadvantage, in part because many quickly bail on the loans when they're downgraded, and also because stated investment criteria largely ban purchases of defaulted assets or bridge loans. If this relative lack of flexibility takes a bite out of recovery rates time and again, Moody's and others may have to reconsider their loss scenarios.

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