Securities Industry Commentator by Bill Singer Esq

The Hottest Hedge-Fund Strategy Is Facing an Existential Crisis (Bloomberg by Nishant Kumar)

NYC Rental Market Pushed to Breaking Point by Tenant Debts /  Stopgap measures are keeping renters in their apartments, even as their bills stack up. (Bloomberg by Prashant Gopal)

Pennsylvania man admits to bank fraud (DOJ Release)

Ex-Beverly Hills Stockbroker Sentenced to 6 Years in Prison for Role in $215 Million Portfolio-Pumping Stock Manipulation Scheme (DOJ Release)

The Walls Came Down Between Research and Investment Banking (BrokeAndBroker.com Blog)

SEC Obtains Final Judgments Against Lawyer and Stock Promoters in Pump-And-Dump Case (SEC Release)

Orange County Man Indicted on Charges that He Stole Boeing Employees' Identities, Siphoned Money from Their Retirement Plan (DOJ Release)

Pro Se Appeal of FINRA Bar Dismissed

In the Matter of the Application of Stephen Robert Williams for Review of Action Taken by FINRA (SEC Opinion)

Regulation Best Interest: Implementing a New Standard of Conduct (FINRA Unscripted)

For one, it's hard to imagine worse future conditions for companies than the impact of coronavirus, and yet their share prices are still holding up. Secondly, interest rates are forecast to stay close to zero for a very long time, which will inevitably act as a tailwind for all stocks.

Look at 25-year-old Jessica Lee and her husband, who needed four roommates to afford their $4,000-a-month four-bedroom apartment in Brooklyn's hip Bedford-Stuyvesant neighborhood, a relative bargain in the Big Apple. Now her husband and everyone else in the house have all lost their restaurant jobs and she's the only one still working-at a company making hand sanitizer. The landlord is threatening legal action to collect the $20,000 in back rent. "Nobody is hiring in the food industry," she says. "I'm on the hook, because I am the only employed person on the lease."

[S]mail defrauded Pendleton Community Bank of approximately $552,533. Smail created a fictitious account statement from Kraken Bitcoin Exchange, showing he had $640,000,000 in Bitcoin currency that he produced when applying for a loan from the bank, knowing he did not own any Bitcoin currency. He also produced other fictitious paperwork, showing $10,000,000 in another bank that he transferred from his cryptocurrency account, all of which he knew was false. He used these false documents to defraud the bank.

Ficeto was the president of Hunter World Markets (HWM), a Beverly Hills-based broker-dealer that he co-owned with German financier Florian Wilhelm Jürgen Homm. Homm founded Absolute Capital Management Holdings (Absolute Funds), a Cayman Island-based company that managed eight hedge funds and which Homm operated from Mallorca, Spain. Homm, 60, was indicted in March 2013 on charges of securities fraud and wire fraud after he was arrested in Italy, but later fled to Germany and remains there as a fugitive from justice.

Between September 2004 and September 2007, Ficeto used HWM's investment arm to find small, private companies that could be converted into publicly traded penny-stock businesses. Once the penny stock companies went public, Ficeto arranged financing deals where Homm invested millions of dollars from the Absolute Funds to acquire a majority of the new company's stock. Through these financial deals, Ficeto and Homm paid themselves substantial "placement agent" fees and issued themselves and their co-conspirators millions of shares of the newly created penny stock companies.

Ficeto also caused existing shareholders in the penny stock companies to enter into "lock-up agreements" that prevented them from traded these companies' shares. Meanwhile, Ficeto, Homm and their co-conspirators freely traded the shares they controlled, and executed their scheme by trading the penny stocks - through HWM - at prices set by Homm and co-defendant Colin Heatherington, 45, of Port Alberni, Canada, along with his brother, Craig Heatherington, 42, of Queensland, Australia. In several of the penny stock companies, Ficeto and his co-conspirators accounted for more than 90 percent of the companies' trading volume.

Ficeto, Homm, and other co-conspirators fraudulently manipulated the penny stocks to inflate their prices, exaggerating the purported profitability of the Absolute Funds. As a result, the co-conspirators were able to sell their own shares of the penny stocks at the inflated prices to the hedge funds.

For example, over the span of four minutes near the end of the trading day on May 15, 2007, Ficeto, Homm and Colin Heatherington, through manipulative cross-trades at HWM, caused the price of a penny stock company's shares to increase from $3.25 to $12.

The stock price inflation also served to overstate the performance of the hedge funds that, in turn, generated substantial performance fees and other compensation for defendant Homm and his co-conspirators. The co-conspirators then used the inflated performance figures to induce investments from unsuspecting victim-investors.

Ficeto admitted at trial to making more than $27 million through HWM from 2005 and 2008, money that he spent lavishly on luxury cars, expensive homes and a yacht.

As the scheme unraveled, Homm abruptly resigned from the firm in the middle of the night on September 18, 2007 and fled to avoid prosecution. Redemption requests from concerned Absolute Funds investors poured in when they discovered that significant portions of their investments were placed in speculative, illiquid and essentially worthless penny stocks. HWM ceased operations in 2009.

Ficeto then lied to investigators with the Securities and Exchange Commission and the Financial Industry Regulatory Authority. He also suborned lies from his company's chief stock trader in an attempt to conceal the fraud.

[L]arson obtained controlling shares of Crown Dynamics Corp., a shell company that merged with a private entity. With the assistance of Zouvas, who served as general counsel for the company, Larson allegedly transferred Crown shares to his nominees. He then paid $400,000 for a "call center" to promote Crown and placed manipulative trades in his own brokerage account to create the appearance of market interest in the stock. The complaint further alleges that Robb prepared materially misleading press releases about the company's business success, and that Larson's nominees sold Crown shares and wired most of the sale proceeds - at least $865,000 - to accounts Larson controlled.

[F]rom January 2019 to June 2019, Vo obtained the personal identifying information of Boeing employees, along with information about their retirement accounts, known as Voluntary Investment Plan (VIP) accounts. Vo then allegedly made fraudulent withdrawal requests for checks and electronic money transfers totaling hundreds of thousands of dollars from the VIP accounts of various Boeing employees.

Knowing that notifications and checks related to these fraudulent requests would be mailed out, Vo placed holds on the Boeing employees' mail with the United States Postal Service, the indictment further alleges. Once the mail was held, Vo allegedly intercepted the mail by presenting to a postal employee a fraudulent California driver's license with a Boeing employee's personal identifying information, and a fraudulent note purportedly written or signed by the Boeing employee authorizing Vo to pick up the employee's mail.

Vo allegedly then deposited the stolen checks into a bank account that had been fraudulently opened in a Boeing employee's name. Vo also cashed checks written to himself from the fraudulently opened bank account by using the Boeing employee's forged signature, and endorsed the checks himself, according to the indictment.

In total, Vo attempted to obtain approximately $783,328 from Boeing employees' VIP accounts, and actually obtained approximately $360,847, the indictment alleges.

On August 29, 2019, more than nine months after FINRA sent the Bar Notice, Williams sent the Commission a letter seeking to appeal the bar. In the letter, Williams attempted to respond to FINRA's Rule 8120 requests by discussing issues surrounding his 2011 Indiana tax return. Williams also explained that he was "going through boxes to try and find all documentation" and that he was "attempting to get the emails between [him] and LPL regarding the situation." The letter bore Williams's CRD address as the return address. On September 20, 2019, FINRA moved the Commission to dismiss Williams's application for review. 

We find, and Williams does not dispute, that he failed to exhaust his administrative remedies for challenging FINRA's actions before appealing to the Commission. FINRA's initial requests for information repeatedly warned Williams that a failure to respond could result in disciplinary action. Then, before imposing sanctions, FINRA sent Williams notices describing FINRA's administrative process for avoiding such sanctions by: (1) "taking corrective action" by producing the information FINRA requested in a timely manner; (2) "requesting a hearing in response to the notice of suspension"; or (3) "filing for termination of the suspension" on the ground of full compliance with the requests for information. We have previously said that applicants who do not avail themselves of FINRA's administrative processes thereby forfeit any future challenge to FINRA's actions before the Commission. 

Here, Williams had actual notice of FINRA's requests for information and of the proceeding against him. Williams appears to have signed several certified mail receipts, including those for the first and fourth FINRA Rule 8210 requests and the Suspension Notice, using a signature that is similar to that on his application for review. FINRA also sent several requests-as well as the Pre-Suspension Notice, Suspension Notice, and Bar Notice-to an email address Williams repeatedly used to correspond with FINRA. Only one certified mailing-the Bar Notice-was returned, and only because it was "unclaimed/unable to forward." FINRA confirmed from public records that the CRD address was Williams's "current address," and he used it as the return address on his application for review. For his part, Williams does not deny that he had actual notice of the requests or the proceeding against him. Despite having actual knowledge of FINRA's proceedings and of the consequences for not responding to its requests or seeking relief through its administrative process, Williams did not timely respond to all of FINRA's requests or take other steps to avoid being barred. 

In his application for review, Williams argues that he should not be barred because of some factual confusion about the underlying tax lien that was the subject of FINRA's requests, his belief that this did not "need[] to be reported to LPL," and his attempts to "find all the documentation." We do not consider these arguments because they go to the merits of the bar FINRA imposed. Williams cannot argue about the merits of the bar since he did not timely raise these issues in the first instance to FINRA through its administrative process.

EPISODE SUMMARY

As of June 30, 2020, the U.S. Securities and Exchange Commission's Regulation Best Interest-or Reg BI-is officially in effect. What does a post implementation-date world look like? And how is FINRA working to ensure a consistent approach to examining around and enforcing the new regulation? Tune in to learn more. 

EPISODE NOTES

As of June 30, 2020, the U.S. Securities and Exchange Commission's Regulation Best Interest-or Reg BI-is officially in effect. That means brokerage firms now have to comply with a new standard of conduct when working with retail clients.

On this episode we talk to Meredith Cordisco and Jim Wrona of FINRA's Office of General Counsel about what a post implementation date world looks like for FINRA member firms and what FINRA has been doing to train staff to ensure a consistent approach to examining around and enforcing the new rule across the organization.

And listen to the end for a special surprise from Jim. 

• Securities Industry Commentator
• Bill Singer