Securities Industry Commentator by Bill Singer Esq

Former Foreign Exchange Trader Sentenced To Prison For Price Fixing And Bid Rigging (DOJ Release)

In the Matter of the Claims for an Award in Connection with Redacted (SEC Order Determining Whistleblower Award Claim)

Lucy's Human: Remarks at Virtual Roundtable on The Role of Asset Management in ESG Investing Hosted By Harvard Law School and the Program on International Financial Systems (Speech by SEC Commissioner Hester Peirce)

SEC Charges Ohio Investment Adviser with Defrauding Retail Investors (SEC Release)

Founder And CEO Of Cyberfraud Prevention Company Arrested And Charged With Securities Fraud Scheme / Adam Rogas Allegedly Raised $123 Million from Investors Using Financial Statements that Showed Tens of Millions of Dollars of Revenue and Assets that Did Not Exist (DOJ Release)

SEC Charges Former CEO of Technology Company With Raising $123 Million in Fraudulent Offerings (SEC Release)

SEC Charges Pharmacy Chain Employee with Insider Trading (SEC Release)

11Cir Says No Mulligan for Citigroup in Wrongful Termination of At-Will Employee

Christian S. Gherardi, Plaintiff/Appellant, v. Citigroup Global Markets Inc., Defendant/Appellee (Opinion, United States Court of Appeals for the Eleventh Circuit, No. 18-13181)

FINRA NAC Modifies Findings and Sanctions for Rep Who converted funds, made material misrepresentations, and executed bad checks and failed electronic transfers

In the Matter of Department of Enforcement, Complainant, v. Michael Joseph Clarke, Respondent (FINRA NAC Decision)

[T]he defendant engaged in near-daily communications with his co-conspirators by phone, text, and through an exclusive electronic chat room to coordinate their trades of the CEEMEA currencies in the FX spot market.  The jury heard evidence that the defendant and his co-conspirators manipulated exchange rates by agreeing to withhold bids or offers to avoid moving the exchange rate in a direction adverse to open positions held by co-conspirators and by coordinating their trading to manipulate the rates in an effort to increase their profits.  By agreeing not to buy or sell at certain times, the conspiring traders protected each other's trading positions by withholding supply of or demand for currency and suppressing competition in the FX spot market for emerging market currencies.  They also heard evidence that the defendant and his co-conspirators took steps to conceal their actions by, among other steps, using code names, communicating on personal cell phones during work hours, and meeting in person to discuss particular customers and trading strategies.  

The Antitrust Division has charged five companies and six individuals in its investigation of collusion in the FX spot market.  On May 20, 2015, four major banks - Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland plc - pleaded guilty and agreed to collectively pay more than $2.5 billion in criminal fines for their participation in an antitrust conspiracy in the euro-U.S. dollar FX spot market.  On Jan. 25, 2018, BNP Paribas USA, Inc. pleaded guilty and agreed to pay a $90 million criminal fine for its participation in an antitrust conspiracy involving emerging market FX prices.  On Jan. 4, 2017 and Jan. 12, 2017, plea agreements were announced for two former traders in connection with an antitrust conspiracy involving emerging market FX prices. 

We have determined to treat Claimants 1 and 2 jointly as a "whistleblower" for purposes of the award determination given that they jointly submitted their Form TCR and provided substantively identical whistleblower award applications. See Exchange Act Section 21F(a)(6) (defining "whistleblower" to mean "2 or more individuals acting jointly who provide[] information relating to a violation of the securities laws to the Commission"). Our proceeding in this way has not impacted the net total award percentage to Claimants 1 and 2. Unless Claimants 1 and 2, within ten (10) calendar days of the issuance of this Order, make a joint request, in writing, for a different allocation of the award between the two of them, the Office of the Whistleblower is directed to pay each of them individually 50% of their joint award.

[(1)] Claimants alerted Commission staff to the potential violations, prompting staff in the Division of Enforcement to open an investigation; (2) Claimants communicated with Enforcement staff early in the investigation; (3) there are high law enforcement interests here; and (4) one of the Claimants internally reported his/her concerns. In determining the appropriate award percentage, we also considered that while Claimants' initial information identified the specific parties and transactions that were ultimately the subjects of the Covered Action, the Covered Action charged different violations, many of their allegations did not directly relate to the Commission's charges in the Covered Action, and the case was largely built through the investigative efforts of Commission staff.

[F]ries recommended that certain individuals, including several of his brokerage customers and their relatives, provide him funds to invest outside of his relationship with the registered broker-dealer and investment adviser. Between January 2016 and March 2019, at least seven people allegedly gave Fries a total of at least $178,000 to invest. As alleged in the complaint, Fries betrayed the investors' trust and spent their money on his own personal expenses. To cover up his fraud, Fries allegedly created fake account statements, lied to his employer, and used a Ponzi-like scheme to repay a couple who demanded return of their investment with funds from other investors.

[NS8], based in Las Vegas, Nevada, is a cyberfraud prevention company that developed and sold electronic tools to help online vendors assess the fraud risks of customer transactions.  In the fall of 2019 and the spring of 2020, NS8 engaged in fundraising rounds through which it issued Series A Preferred Shares and obtained approximately $123 million in investor funds.

ROGAS maintained control over a bank account into which NS8 received revenue from its customers, and periodically provided monthly statements from that account to NS8's finance department so that NS8's financial statements could be created.  ROGAS also maintained control over spreadsheets that purportedly tracked customer revenue, which were also used to generate NS8's financial statements.

ROGAS altered the bank statements before providing them to NS8's finance department to show tens of millions of dollars in both customer revenue and bank balances that did not exist.  In the period from January 2019 through February 2020, between at least approximately 40% and 95% of the purported total assets on NS8's balance sheet were fictitious.  In that same period, the bank statements that ROGAS altered reflected over $40 million in fictitious revenue.

ROGAS used these materially misleading financial statements to raise approximately $123 million from investors in the fall of 2019 and the spring of 2020.  During the fundraising process, ROGAS also provided the falsified bank records he had created to auditors who were conducting due diligence on behalf of potential investors.  After these fundraising rounds concluded, NS8 conducted a tender offer with the funds raised from investors, and ROGAS received $17.5 million in proceeds from that tender offer, personally and through a company he controlled.

[F]rom at least 2018 through June 2020, Rogas altered NS8's bank statements to show millions of dollars in payments from customers. Rogas allegedly sent the falsified bank statements and revenue figures on a monthly basis to NS8's finance department, which used them to prepare NS8's financial statements. In at least two securities offerings, NS8 and Rogas allegedly provided investors and prospective investors the false financial statements, showing millions of dollars in revenue and assets and other information incorporating the falsified revenue figures. The SEC alleges that as a result of Rogas's fraud, NS8 raised approximately $123 million in 2019 and 2020, and that Rogas ultimately pocketed at least $17.5 million of investor funds.

[S]heinfeld disposed of nearly $1 million in Rite Aid securities in advance of disappointing news that caused the price of Rite Aid securities to drop when revealed to the market. The complaint alleges that, on January 18, 2017, one day after learning confidentially through his employment that the anticipated merger between Rite Aid and Walgreens would not close by an end-of-January deadline, Sheinfeld liquidated all of his exercisable Rite Aid employee stock options. The complaint further alleges that on January 19, 2017, Sheinfeld accessed the accounts of his sister-in-law and adult daughter and sold all of their Rite Aid stock as well. Following a January 20, 2017 news article reporting that Federal Trade Commission officials likely would not approve the merger by the deadline, Rite Aid's stock price fell, closing over 13% lower than the prior day's closing price. The complaint alleges that Sheinfeld avoided losses of at least $140,000, and his family members avoided losses of at least $15,000.

Christian Gherardi won a substantial arbitration award against his former employer, Citigroup Global Markets. Unhappy with its loss, Citi sought vacatur in federal court. Citi argued that because Gherardi had been an at-will employee, the arbitrators exceeded their powers by finding that he had been wrongfully terminated. The district court agreed. Gherardi's appeal presents two questions of contract interpretation. First, did the parties agree to arbitrate wrongful termination disputes? Second, was Gherardi a purely at-will employee, or did some provision in his agreements with Citigroup offer a way to contest his treatment? Our answer to the first, much easier question relieves us of the need-and the authority-to answer the second question. Citi and Gherardi agreed to arbitrate all disputes about Gherardi's employment. Under the Federal Arbitration Act, the merits of Gherardi's dispute were thus committed to the arbitrators. Citi does not get a mulligan in federal court because it identifies a possible legal error in arbitration. No doubt this is a tough rule, but it applies to employer and employee alike. The district court erred by substituting its own legal judgment for that of the arbitrators. We reverse its vacatur of the award.

According to Gherardi, other financial advisors tried to poach his business from time to time. D.E. 13-1 at 12 ¶ 14. On April 21, 2015, he confronted one such financial advisor, Rodrigo Motta, and discussed Motta's alleged attempts to poach Gherardi's business. Id. On June 8, 2015, Michael Averett ("Averett"), Gherardi's supervisor, had a meeting with Gherardi, regarding his exchange with Motta. Id. at 13 ¶ 17. Subsequently, on June 25, 2015, Averett sent Gherardi a "Final Warning" letter. Id. at 44-45. The final warning letter referenced Averett's prior meeting with Gherardi and noted that further unprofessional conduct would lead to termination. Id. On December 8, 2015, after challenging the final warning internally, Gherardi sent an email to Citi's Human Resources Department, indicating that he was inclined to arbitrate the final warning letter. Id. at 15 ¶ 26. On December 11, 2015, Gherardi was terminated. D.E. 13-1 at 16 ¶ 27. In its U-5 termination notice, Citi cited "Business decorum issues, noninvestment related conduct" as the explanation for the termination. Id. ¶ 29. 

Michael Joseph Clarke appeals a May 8, 2019 Hearing Panel decision pursuant to FINRA Rule 9311. The Hearing Panel found that Clarke converted funds, made material misrepresentations, and wrote 46 bad checks and authorized 14 electronic transfers that failed to clear because of insufficient funds, in violation of FINRA Rule 2010. For his misconduct, the Hearing Panel imposed on Clarke two separate bars in all capacities and ordered him to pay $612,400 in restitution. 

The majority of the underlying facts are undisputed. While associated with various broker-dealers, Clarke ran an outside business brokering events tickets. Clarke offered his securities industry colleagues and other individuals the chance to participate in his ticket business. Clarke claimed to have many contacts willing to sell him various sports and events tickets at a discounted price, and buyers willing to repurchase the tickets at a premium. Clarke did not have the funds to purchase the tickets, so he proposed that others front the money to buy the tickets and that he would repay them the full amount plus a share of the profits after the resale of the tickets. In fact, Clarke never repaid in full the individuals who fronted him the money for the ticket sales, and instead he used the funds to pay personal expenses while repeatedly offering excuses for his nonpayment. 

After an independent review of the record, we modify, in part, the Hearing Panel's liability findings and sanctions. We affirm the Hearing Panel's liability findings with respect Clarke's conversion and material misrepresentations and modify the findings with respect to his bad checks and failed electronic transfers. We also modify the sanctions.

Clarke converted funds, made material misrepresentations, and executed bad checks, in violation of FINRA Rule 2010. For the conversion and misrepresentations, we bar Clarke. For the bad checks, we suspend Clarke in all capacities for six months and impose a $10,000 fine, but do not impose these additional sanctions in light of the bar. We also order that Clarke make restitution in the amount of $612,400, plus interest from the date of that Clarke received the principal amounts from each individual, as described in this decision. Finally, we affirm the Hearing Panel's order that Clarke pay $9,337.89 in hearing costs. 

• Securities Industry Commentator
• Bill Singer