Securities Industry Commentator by Bill Singer Esq

Perplexing, Baffling FINRA Arbitration Award Affirmed in 4Cir Majority Opinion (BrokeAndBroker.com Blog)

Graham, N.C. Man Is Sentenced To More Than Five Years For $1.1 Million Investment Scheme (DOJ Release)

Attorney Sentenced in International Securities Fraud Scheme (DOJ Release)

California Man Charged with Investment Fraud (DOJ Release)

Ariel Quiros Pleads Guilty to Fraud Charges Related to The Jay Peak EB-5 AnC Vermont Project in Northeast Vermont (DOJ Release)

FINRA Censures and Fines Network 1 Financial Securities for AML lapses and Non-compliance with Arbitration Discovery

In the Matter of Network 1 Financial Securities Inc, Respondent (FINRA AWC)

FINRA Imposes Suspension on Rep for Outside Activity as COO and Loan Officer

In the Matter of Clifton Hideki Roberts, Respondent (FINRA AWC)

According to filed court documents and statements made in court, from April 2008 to September 2013, Ramsey defrauded more than 20 victims out of nearly $1.1 million through a fraudulent investment scheme.  Court records show that Ramsey operated various purported investment companies, including Hypertrend, Cascade Investments, GH Gardner, Layton-McCall, Pandrox, and Good Living. Ramsey induced victim-investors by falsely representing that their money would be used to make legitimate investments. He also promised his victims that they would receive a guaranteed return on their investments, and that their principal investments would not be at risk. During the relevant time period, Ramsey used multiple purported investment corporations, as well as numerous fraudulent documents, including false Form-1099s, fake investment agreements, and fabricated stock certificates, to convince potential victims his investments were legitimate and profitable. To further induce victims, court records reflect that Ramsey showed potential investors documents purportedly backing up his claim that he had made one million dollars from a ten thousand dollar investment.

According to court records, Ramsey failed to disclose to his victims, some of whom were at or near retirement age, that he was not registered to sell securities in the State of North Carolina, or that the investment opportunities he presented were not registered as required by statute. Rather than invest the victims' money as promised, Ramsey spent the investors' money on Ponzi-style payments to other investors and to fund his personal lifestyle.

From 2013 to 2018, Patel and co-conspirators Morrie Tobin, Matthew Ledvina and Roger Knox conspired to disguise their ownership and control of various microcap securities, and to employ paid promotional campaigns and manipulative trading techniques to artificially inflate the price and trading volume of those stocks so that Tobin and others could secretly sell their shares at a substantial profit. Patel, together with Ledvina, helped Tobin create shell companies to disguise Tobin's control of the shares, enabling Tobin to sell the shares to unsuspecting investors.   

Tobin pleaded guilty in February 2019 and was sentenced yesterday to one year and one day in prison and ordered to pay a fine of $100,000 and forfeiture of $4 million. Ledvina was sentenced in June 2020 to 30 months of probation and ordered to pay a fine of $50,000. Knox previously pleaded guilty and is currently scheduled to be sentenced on Sept. 30, 2020.

In 2014, Glynn maintained a variety of corporate entities, including U.S. Grant Distribution Group, PG Philanthropic Initiative, Perrarus Global Philanthropic Initiative, and others. Glynn also claimed affiliation with an international trust that purportedly was funded with billions of dollars, whose stated purpose was to "aide in the economic recovery of each of the individual US States, as well as the United States of America as a whole." 

Relying on the air of legitimacy created by his various entities and the international trust, Glynn approached two victims in Vineland, New Jersey, and offered them a "once in a lifetime opportunity" to invest in a "business development loan" related to the international trust. Glynn told the victims that this business development loan would be used for authorized business and legal expenses related to his entities and the international trust. The loan also would be used for expenses related to an animal care foundation and shelter that Glynn was helping the victims to set up, in memory of the victims' recently deceased family member. Glynn assured the victims that the international trust would guarantee their business development loan, the loan would generate specific returns for the victims, and the victims could use the returns to fund their animal care foundation and shelter. 

As part of his fraudulent scheme, Glynn sent emails and other correspondence and contracts to the victims. Glynn also arranged for conference calls between himself, his associates, and the victims, including one call that purportedly included "a direct representative from the NSA (National Security Agency), and a representative from either DHS (Department of Homeland Security) or the FBI."  Glynn took these steps in order to convince the victims that they were investing in a legitimate business opportunity. 

Glynn ultimately directed the victims to wire funds to various bank accounts that Glynn controlled, in order to fund the "business development loan." The victims did so, relying on Glynn's representations about how the funds would be used.

Instead of using the loan in the manner he had promised, however, Glynn and his associates misappropriated the victims' loan money and used it for personal expenses and other expenses that were unrelated to any charitable or business purpose that the victims sought to advance or that Glynn promised to achieve.

Glynn also took out credit cards in the name of the victims' animal foundation, which he promised that he and his associates would only use for authorized expenses related to that foundation. Instead of using the credit cards in the manner he had promised, Glynn and his associates used the credit cards for retail items and other unauthorized personal expenses and incurred late fees.

[Q]uiros admitted participating in a scheme conceived in 2011 and carried through until he lost control of the project in April 2016. The AnC Vermont project, managed by Quiros and Stenger, was designed to raise $110 million from 220 immigrant investors in order to build and operate a biotechnology company on a property in Newport.  From 2012 to 2016, Quiros and his co-defendants obtained approximately $85 million, plus approximately $8 million in "administrative fees", from approximately 169 immigrant investors in the AnC project. Under the EB-5 program created by Congress, immigrant investors could obtain lawful permanent residency (green cards) by investing $500,000 each in a United States business that would create ten jobs per investment. Pursuant to federal law, the AnC project was regulated and monitored by USCIS and the Vermont Regional Center, a part of state government.

Quiros admitted that the scheme involved misleading AnC investors about important information, including how investor money would be used, the timing of job creation for the project, and Choi's role in the project. For example, Quiros knew that investors were given a use-of-funds chart that contained a number of misrepresentations about the amount of funds Quiros and Choi planned to receive. Moreover, as the defendants raised investor money, Quiros used investor funds for purposes unrelated to the project, including the payoff of a loan at Raymond James and as collateral for a separate loan at Citibank. Quiros also acknowledged that he participated in concealing this misuse of funds.

Quiros further admitted that the scheme included misrepresentations about the timing of the jobs that would be created by the project and the business revenue that would be generated from the project. Marketing the project to immigrant investors depended on job creation and future revenue, since the defendants emphasized their ability to satisfy the job creation standards under EB-5 law and repay immigrant investors. Quiros understood that his co-defendants devised job and revenue projections based on the number of jobs needed to obtain project approval from USCIS, and Quiros did not inquire whether they had a viable plan to actually create those jobs or achieve those revenues. AnC Vermont would supposedly rent clean rooms, market stem cell therapies, and manufacture artificial organs. Quiros admitted that investors were deceived in regard to all three facets of the future business.

In addition to the wire fraud conspiracy charges, Quiros admitted using AnC investor funds for personal expenses, specifically a $6 million payment to the IRS in early 2015 funded by the Citibank loan described above. In addition, Quiros helped conceal from the Vermont Regional Center that Choi, who was deeply involved in the project, was being investigated in Korea for financial crimes.

In the plea agreement, Quiros agreed to cooperate in the government's ongoing matters. The plea agreement caps Quiros's jail sentence at 97 months, so long as he abides by the terms of the agreement. The government agreed that it would not recommend a fine or forfeiture, but instead focus on seeking a restitution order for victims. The government requested that the Court delay Quiros's sentencing pending his ongoing cooperation.

Co-defendants Kelly and Stenger have entered not guilty pleas to the pending charges, which are only allegations. These defendants are presumed to be innocent unless and until proven guilty beyond a reasonable doubt in a court of law. The Court has scheduled their trial for 2021.  Co-defendant Choi remains at large. 

From January 2016 through October 2017 (the "AML Relevant Period"), Network failed to develop and implement a written anti-money laundering ("AML") program, and failed to establish and Implement policies and.procedures that were reasonably expected to detect and cause the reporting of potentially suspicious transactions, As a result, Network I violated FINRA Rules 3310 and 2010.

Between July 2018 and July 2019 (the "Arbitration Relevant Period"), Network 1 failed to provide several categories of discovery in an arbitration proceeding that a former customer brought in FINRA's Dispute Resolution forum, As a result, Network I violated IM-12000 and FINRA Rule 2010.

The Firm's written AML procedures did not address potential insider trading by Firm customers, Moreover, Network I had no system for detecting potential customer Insider trading during the AML Relevant Period, The Firm knew that certain of its customers were insiders of the securities In which they were trading based on information disclosed to the Firm in those customers' new account forms, But, the Finn's systems did not identify those customers' transactions for AML review. Therefore, when Firm personnel reviewed trade blotters, they had no way to identify which customers were insiders of the securities in which they were trading without manually referencing customer new account forms, which they did not do. 

As a result, the Firm failed to identify that Customer A, a self-Identified corporate insider of a miorocap issuer, was actively trading the stock of his own company during the AML Relevant Period, Tho Firm consequently failed to conduct any investigation or cause the reporting of that potentially suspicious activity, as described in more detail below. 

Network I failed to produce required discovery to Customer B in the arbitration, and this interfered with Customer B's ability to prove his allegations in the arbitration. 

Network I claimed that it had no documents responsive to item 5(a) in Document Production List 1. This claim was false, in fact, Network 1 was in possession of due diligence files related to two private placements that the Firm's representatives had recommended and sold to Customer B, but the Firm did not produce these files in discovery, These files contained, among other things, presentations, overviews, checklists, financial statements, officer questionnaires and news articles about the two issuers and/or their private placements, Network I knew it had these files because it had produced a number of the documents to FINRA previously in a separate matter, yet still claimed in the arbitration that it did not have any responsive documents.

Although the Firm asserted that it would produce responsive documents to the extent they existed with respect to item 7(n) in Document Production List I, the Firm failed to provide the relevant RR's heightened supervisory plan, RR I was on a plan of heightened supervision commencing April 2015, which lasted for two years, The period the plan of heightened supervision was in place coincided, in part, with the trading in Customer B's account, RR l's heightened supervision plan was memorialized in a memorandum that set forth, among other things, the reasons why the plan was implemented and the steps RR l's supervisor would follow In performing the supervisory review, The memorandum, for example, stated that RR 1 was experiencing a "higher than normal rescission rate on initial orders entered for now accounts" and also referenced RR I's disciplinary history with FINRA and customer complaints and arbitrations, The plan required, among other things, a random review of initial orders, review of correspondence, monitoring and review of telemarketing activities, regular meetings and tnentorIng, and active account reviews.

Similarly, Network 1 asserted that it would produce responsive documents to the extent that they existed with respect to items 13(a) and 13(b) In Document Production List 1, but again failed to produce responsive documents to Customer B in the arbitration, For example, Customer B appeared on six exception reports, including reports the Firm utilized to flag actively traded accounts, One of these reports dated October 2016 showed that in the seven months since Customer B opened their account, Customer B paid a total of $35,152 in commissions, In addition, there were other documents evidencing the Firm's supervisory review of Customer B's account such as account statements with handwritten notations made by RR l's supervisor and "Compliance/ Broker Meeting" forms reflecting that Customer B's account was reviewed by RR 2 and RR 2's supervisor, Network 1 failed to produce the six exception reports and these supervisory review documents during discovery. 

From February 2016 through September 2016, Roberts was engaged in business activities outside the scope of his relationship with LPL through Company A. Holding himself out as the Chief Operating Officer of Company A, Roberts served as a loan officer for a third-party entity. Roberts did not receive any compensation for this outside business during the relevant period. 

LPL's written supervisory procedures during the relevant period required that registered representatives provide prior written notice to, and receive approval from, the firm before engaging in an outside business activity. Roberts did not provide written notice to, or seek approval from, LPL to conduct business through Company A. Nor did Roberts disclose Company A as an outside business activity on his 2016 annual compliance questionnaire for LPL. By virtue of the foregoing, Roberts violated FINRA Rules 3270 and 2010

• Securities Industry Commentator
• Bill Singer