Securities Industry Commentator by Bill Singer Esq

[In]Securities Guest Blog: tZero/No Limit by Aegis Frumento Esq (BrokeAndBroker.com Blog)

Maryland Man Sentenced to Prison for Intentionally Damaging the Computers of His Former Employer (DOJ Release)

SEC Charges BMW for Disclosing Inaccurate and Misleading Retail Sales Information to Bond Investors (SEC Release)

Jason Galanis Sentenced In Manhattan Federal Court For Multiple Securities Fraud Schemes (DOJ Release)

Man who Swindled Schoolteacher out of Entire Retirement Savings Sentenced to Prison (DOJ Release)

Head Of Financial Services Firm Charged In Manhattan Federal Court In Connection With Multimillion-Dollar Securities Fraud Scheme / Chairman, CEO, and President of Concorde Group Holdings Inc. Charged with Defrauding Investors Out of Approximately $4.4 million (DOJ Release)

Three California Men Sentenced for Scheme to Manipulate Stock Prices of Two Public Companies (DOJ Release)

SEC Charges Texas Investment-Adviser Firm and Its Owner for Misappropriating Assets (SEC Release)

SEC Charges Lighting Products Company and Four Executives With Accounting Violations (SEC Release)

SEC Charges Florida Real Estate Developer with Fraud for Paying Unauthorized Commissions in Sale of Promissory Notes (SEC Release)

Suburban Manufacturer to Pay $1.7 Million Civil Penalty to SEC as Part of Resolution of Fraud Investigation by U.S. Attorney's Office (DOJ Release)

Engine Manufacturing Company to Pay Penalty, Take Remedial Measures to Settle Charges of Accounting Fraud (SEC Release)

FINRA Fines and Suspends Rep Over Loans from Customer

In the Matter of Jay Howard Bluestine, LLC, Respondent (FINRA AWC)

FINRA Censures and Orders Restitution from Capital City Securities Financial Over Third-Party Trade Surveillance 

In the Matter of Capital City Securities, LLC, Respondent (FINRA AWC)

Witnesses testified that in 2014, Stafford was promoted to the managerial role of technical site lead for the Washington office.  In March 2015, Stafford was demoted back to an IT support role, due to performance issues in his management position.  Stafford's performance issues continued and he was fired on Aug. 6, 2015.  Stafford did not return the laptop he was previously provided by Business A.

The evidence proved that on the evening of Aug. 6, 2015, Stafford repeatedly attempted to remotely access Business A's computer networks from his residence, using the company laptop.  Stafford unsuccessfully attempted to access the company's network approximately 10 times, using his own credentials and the credentials of a former co-worker, whom he had previously assisted.  In the early morning hours of Aug. 8, 2015, Stafford successfully used the co-worker's credentials and the company laptop to access, without authorization, the computer in the Washington office that had been located under his desk.  Stafford used the Washington IT computer to execute demands to delete all of the file storage drives used by the Washington office, then changed the password to access the storage management system.  The deletion of the files caused a severe disruption to the company's operations and the loss of some customer and user data.  Changing the password hindered the company's efforts to determine what happened and restore access to its remaining files.    As a result of the deletion of the network file storage drives, Washington users were unable to access their stored files for approximately three days, until the data could be restored from backups.  Customer and user data that was not included in the most recent backup prior to Stafford's deletion of the files was permanently lost.

On Aug. 11, 2015, Stafford unsuccessfully attempted to remotely access the company's computer network from his home approximately 13 times, using credentials that were not his.  On Aug. 13, 2015, a company representative spoke to Stafford and demanded that he cease and desist his attempts to unlawfully access Business A's computer systems.  The evidence showed that despite the Company's demand, between Aug. 21 and Sept. 9, 2015, Stafford attempted to access the company's network from his home approximately 17 times, using credentials that were not his.  On Sept. 14, 2015, Stafford used the credentials of another former co-worker to access a network file storage system computer that he had been responsible for maintaining in the IT department of the company's Baltimore office, intending to cause the same type of damage he did when he deleted the Washington office's stored files.  However, Stafford's attempt failed because Business A had changed the password after Stafford's attack on the Washington files.

The actual loss to Business A resulting from Stafford's damage and attempted damage to their computer systems, including the cost of restoring the deleted systems, investigating what happened, and responding to the intrusion is at least $38,270.  In addition, Business A incurred legal fees totaling $133,950.60 and a fee of $21,037.50 for a forensic investigation. 

The SEC's order notes BMW's significant cooperation during the investigation amid challenges posed by the COVID-19 pandemic, including travel restrictions, work-from-home orders, and office closures, and that this cooperation was taken into account in imposing a penalty.

[F]rom 2015 to 2019, BMW inflated its reported retail sales in the U.S., which helped BMW close the gap between its actual retail sales volume and internal targets and publicly maintain a leading retail sales position relative to other premium automotive companies. The order finds that BMW of North America LLC (BMW NA) maintained a reserve of unreported retail vehicle sales - referred to internally as the "bank" - that it used to meet internal monthly sales targets without regard to when the underlying sales occurred. The order also finds that BMW NA paid dealers to inaccurately designate vehicles as demonstrators or loaners so that BMW would count them as having been sold to customers when they had not been. Additionally, the order finds that BMW NA improperly adjusted its retail sales reporting calendar in 2015 and 2017 to meet internal sales targets or bank excess retail sales for future use. As a result, according to the order, the information that BMW provided to investors in the bond offerings by BMW's U.S. financing subsidiary, BMW US Capital LLC, and to credit rating agencies contained material misstatements and omissions regarding BMW's U.S. retail vehicle sales.

The Gerova Scheme

From 2009 to 2011, GALANIS, along with his co-conspirators John Galanis, Gary Hirst, Derek Galanis, Ymer Shahini, and Gavin Hamels, engaged in a scheme to defraud the shareholders of Gerova and the investing public, by effecting securities transactions in Gerova stock for the purpose of conferring millions of dollars of undisclosed remuneration to GALANIS and his co-conspirators, without adequate disclosure of GALANIS's role in directing the transactions or the benefits received by GALANIS and his co-conspirators.

As a part of the scheme to defraud, GALANIS obtained sufficient 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.  GALANIS obtained this control without causing himself to be identified as an officer or director of Gerova so as to purport to abide by an SEC-imposed bar that forbade him from holding such positions at publicly traded companies.  Among other means and methods, GALANIS, with the assistance of Hirst, caused over 5 million shares of Gerova stock, which represented nearly half the company's public float and which were intended for GALANIS's ultimate benefit, to be issued to and held in the name of Ymer Shahini, who knowingly served as a foreign nominee for GALANIS.  GALANIS, John Galanis, Jared Galanis, Derek Galanis, Hirst, and Shahini understood that the purpose of the stock grant to Shahini was to disguise 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, GALANIS's co-conspirators, with his knowledge and approval, 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 GALANIS's ownership of and control over the Gerova stock.

GALANIS, among others, also fraudulently induced investment advisers, including Gavin Hamels, 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, GALANIS and others were able to, among other things, effectuate the sale of large quantities of Gerova stock from the Shahini Accounts that 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, GALANIS and his co-conspirators reaped nearly $20 million in profits.

The Scheme to Defraud Clients of Investment Firm-1

From 2007 to 2010, GALANIS along with an investment adviser identified in the Information as "CC-2," participated in a scheme to defraud the clients of CC-2's investment advisory firm, identified in the Information as "Investment Firm-1."  Oftentimes in exchange for compensation from GALANIS, CC-2 caused Investment Firm-1 clients to invest in notes issued by entities associated with GALANIS. 

When obligations owed by entities associated with GALANIS became due, CC-2 used client funds to purchase either notes issued by other entities associated with GALANIS or publicly traded shares held by such entities.  The funds generated were then used to pay the original obligations owed to other Investment Firm-1 clients.  Through these securities trades, funds in client accounts of one set of Investment Firm-1 investors were used to pay obligations owed to a different set of Investment Firm-1 investors by entities associated with GALANIS.   

The Tribal Bond Scheme

From March 2014 through April 2016, GALANIS, along with his co-conspirators Gary Hirst, John Galanis, a/k/a "Yanni," Hugh Dunkerley, Michelle Morton, Devon Archer, and Bevan Cooney, engaged in a fraudulent scheme to misappropriate the proceeds of bonds issued by the Wakpamni Lake Community Corporation ("WLCC"), a Native American tribal entity (the "Tribal Bonds"), and to use funds in the accounts of clients of asset management firms controlled by GALANIS and his codefendants to purchase the Tribal Bonds, which the clients were then unable to redeem or sell because the bonds were illiquid and lacked a ready secondary market. 

Documents governing the Tribal Bonds specified that an investment manager would invest the proceeds of the Tribal Bonds in investments that would generate annuity payments sufficient to pay interest on the Tribal Bonds and provide funds to the WLCC to be used for tribal economic development purposes.  In fact, none of the proceeds of the Tribal Bonds were turned over to the investment manager specified in the closing documents.  Instead, significant portions of the proceeds were misappropriated by GALANIS and his codefendants for their own personal use. 

Specifically, the proceeds of the Tribal Bonds were deposited into a bank account in the name of Wealth Assurance Private Client Corporation ("WAPCC"), an entity controlled by Dunkerley and Hirst.  Dunkerley transferred more than $38 million from the WAPCC account to an account controlled by GALANIS, who then misappropriated more than $8.5 million of the proceeds for his personal use, including for expenses associated with his home, jewelry and clothing purchases, travel and entertainment, and restaurant meals. 

There was no ready secondary market for the Tribal Bonds.  Nonetheless, without prior notice to their clients, Morton and Hirst, acting at the direction of GALANIS, used funds belonging to clients of two related investment advisers, Hughes Capital Management, Inc. ("Hughes"), and Atlantic Asset Management, LLC ("Atlantic"), to purchase the Tribal Bonds, even though GALANIS, Hirst, and Morton were well aware that material facts about the Tribal Bonds had been withheld from clients in whose accounts they were placed, including the fact that the Tribal Bond purchases fell outside the investment parameters set forth in the investment advisory contracts of certain Hughes clients and of the Atlantic pooled investment vehicle in which the Tribal Bonds were purchased.  When Hughes and Atlantic clients learned about the purchase of the Tribal Bonds in their accounts, several of them demanded that the Tribal Bonds be sold.  However, because there was no ready secondary market for the Tribal Bonds, no Tribal Bonds have been sold from any Hughes or Atlantic client accounts.  In addition, GALANIS and his codefendants failed to apprise clients of Hughes and Atlantic regarding substantial conflicts of interest with respect to the issuance and placement of the Tribal Bonds before the Tribal Bonds were purchased on these clients' behalf. 

In addition, a portion of the misappropriated proceeds was recycled and provided by GALANIS to entities affiliated with Archer and Cooney in order to enable Archer and Cooney to purchase subsequent Tribal Bonds issued by the WLCC.  As a result of the use of recycled proceeds to purchase additional issuances of Tribal Bonds, the face amount of Tribal Bonds outstanding increased and the amount of interest payable by the WLCC increased, but the actual bond proceeds available for investment on behalf of the WLCC did not increase. 

[A]tkins and his victim met while the victim was working as a schoolteacher. Atkins convinced her to retire, drain from her retirement account all of the money she had saved during years of work, and invest that money into Atkins' Fort Lauderdale-based company -- All Points Aviation and Associates. Atkins promised the victim that he would use the money for his business and that he would repay her within two months. The victim agreed. In 2015, she directed her retirement account management company to disburse the money, which it did in three checks. Each check was made to the joint order of the victim and All Points Aviation and Associates. Without the victim's authorization, Atkins had the largest check endorsed with the victim's signature.  All three checks were deposited into a bank account that he controlled.  Atkins used the victim's retirement money to pay for his own personal expenses and never repaid her. The retired schoolteacher had not heard from Atkins since 2016, when he left South Florida.  

CRAIG ZABALA was the chairman, CEO, and president of various affiliated and intertwined purported financial services companies:  Holdings, Concorde Group, Inc. ("Group"), Blackhawk Capital Group BDC, Inc. ("Blackhawk"), DBL Holdings, LLC, d/b/a "Drexel Burnham Lambert" ("DBL"), Concorde Investment Managers, LLC ("CIM"), and Concorde Europe, Ltd. ("Concorde Europe").  In or about August 2019, FINRA barred ZABALA from the broker-dealer industry, including because of his failure to cooperate with a FINRA investigation.

Holdings was a Delaware corporation formed in or about 2015, with an office in Jersey City, New Jersey, and a mailing address in New York, New York.  Holdings purported to provide financial services, including merchant banking, investment banking, asset management, and securities brokerage services, to entrepreneurs, investors, and businesses in the middle market, meaning small to mid-sized companies with revenue and market capitalizations of less than $1 billion, in North America, Europe, and Asia.  Holdings' purported affiliates included Group, DBL, Blackhawk, CIM, and Concorde Europe.  ZABALA was a majority owner of Holdings.

Group was a Delaware corporation formed in or about 1995, based in New York, New York, that purported to provide the same types of financial services as Holdings.  Group's purported affiliates included DBL, Blackhawk, CIM, and Concorde Europe.  ZABALA was a majority owner of Group.  Between in or about 2001 and in or about 2014, Group purportedly raised approximately $18 million from investors.

From at least in or about 2015 through in or about 2020, ZABALA and others perpetrated a scheme to defraud at least approximately 18 investors out of at least approximately $4.4 million in Holdings notes, warrants, and equity, almost all of whom invested in a private offering by Holdings of $25 million in senior secured notes with attached warrants paying 13 percent interest (the "Holdings Offering"). 

ZABALA and others falsely represented that the proceeds from the offerings would be used to grow Holdings' purported business by investing in and buying other financial services companies.  In truth and in fact, and as ZABALA well knew, Holdings did not make any investments in or buy other companies.

ZABALA and others falsely represented to Holdings investors that Holdings had raised nearly $25 million in the Holdings Offering.  In truth and in fact, and as ZABALA well knew, Holdings only raised a few million dollars. 

ZABALA and others falsely represented to Holdings investors that the family office of a wealthy German family had invested millions of dollars in Holdings.  In truth and in fact, and as ZABALA well knew, this family office never invested in, and never committed to invest in, Holdings.

ZABALA and others falsely represented to Holdings investors that Holdings would soon have an initial public offering ("IPO"), which would result in large profits to Holdings investors.  In truth and in fact, and as ZABALA well knew, Holdings was not close to an IPO. 

ZABALA converted at least approximately 70 percent of the approximately $4.4 million in Holdings investor funds in the form of cash withdrawals and other transfers to himself, payments to his girlfriend, payments of his personal credit card bills, and repayment of Group investors in a Ponzi-like fashion. 

[M]orris and Lakeside misappropriated approximately $55,184 from a private oil and gas partnership that was an advisory client of Lakeside, and then used the funds to cover expenses of another entity controlled by Morris. The complaint also alleges that the defendants misappropriated $65,000 in investment returns generated for a second partnership advised by Lakeside, and spent those funds on Morris's personal expenses, including car payments, club dues, and credit card bills.

Minsky, Matin, and Hackley conspired to manipulate the stock price and trading volume of public companies. As part of this conspiracy, Minsky and Matin attempted to manipulate the stock of two public companies:  WGE Holdings Corp. (ticker symbol WGE), a gold mining business, and Holy Grail (ticker symbol HGRL), which produced and sold hemp and Cannabidiol ("CBD") products. Hackley joined the scheme later, participating only in the manipulation of HGRL.

The conspirators planned to manipulate the stock of these companies by establishing control over both their restricted and free trading shares and coordinating the issuance of press releases with the stock promotions in order to give the false impression of market interest in the stock. As part of this conspiracy, they also agreed to engage in prearranged stock trades and to bribe purchasers to buy the stock.

In attempting to manipulate the stock of both WGE and HGRL, Minsky and Matin intended to generate approximately $9 million in illegal proceeds for themselves and their co-conspirators, and to cause corresponding losses to the conspiracy's victims. With respect to HGRL, Hackley intended to generate approximately $4 million in illegal proceeds.

Minsky, Matin, and Hackley were charged by separate Informations, each charging conspiracy, wire fraud, and securities fraud. Minsky pleaded guilty on May 2, 2019, Hackley on May 15, 2019, and Matin on October 10, 2019.

[F]rom late 2014 to mid-2018, Revolution Lighting improperly recognized revenue for sales much earlier than permitted by accounting rules or the firm's own written revenue-recognition policies. The complaint alleges that as Revolution Lighting approached the end of each fiscal quarter, LaPenta and DePalma pressured Garner, O'Neal and sales personnel to improperly record anticipated future sales as current "bill and hold" sales to make up for revenue shortfalls. The company then allegedly recognized revenue from the uncompleted sales. On multiple occasions, Garner allegedly concealed this practice by providing backdated documents related to "bill and hold" sales to the company's auditor. As alleged, DePalma kept careful track of Revolution Lighting's reporting of bill and hold transactions through a "bill and hold schedule" that Garner, and later O'Neal, prepared. The complaint alleges that the defendants failed to disclose that "bill and hold" sales represented a significant portion of Revolution Lighting's revenue or that the company was materially deviating from its stated revenue-recognition policies.

[B]etween 2013 and 2018, Rudnick, through his entities Southeast Lot Acquisitions, LLC and Mary A II, LLC, sold approximately $16.7 million in promissory notes to more than 80 investors. According to the complaint, Rudnick relied on Dana J. Bradley and Marlin S. Hershey to prepare the offering documents and conduct the offerings. Rudnick allegedly failed to adequately review the offering materials, which stated that no commissions would be paid to employees or unregistered broker-dealers, when, in truth, Rudnick, Southeast Lot, and Mary A paid Hershey and Bradley-both of whom were listed as employees and neither of whom was a registered broker-dealer-and affiliated entities approximately $2.1 million in commissions. The Commission previously charged Bradley and Hershey with conducting several other offering frauds and operating as unregistered brokers with respect to those offerings and with respect to Rudnick's offering.

PSI, which is based in Wood Dale, admitted in resolution documents that from 2014 to 2016, executives and other employees of the company participated in a scheme to defraud shareholders and other investors in connection with PSI's common stock, which at the time was listed on the Nasdaq Stock Market.  PSI admitted that during the scheme it fraudulently inflated by millions of dollars the revenue the company reported to the investing public in certain periods.  In doing so, PSI admitted that it deceived the company's shareholders and other investors about the company's financial health and performance.

[P]ower Solutions fraudulently recorded revenue in several circumstances that were not in accordance with U.S. generally accepted accounting principles. For example, the order finds that Power Solutions recorded revenue for purported sales of products that were not complete, for products that the customer had not agreed to accept, for products for which the price was falsely inflated, and for improper "bill and hold" arrangements. The order finds that, as a result of its fraud, Power Solutions issued materially misstated financial statements in its public filings from the fourth quarter of 2014 through the fourth quarter of 2015. The SEC previously charged Power Solutions' former CEO Gary Winemaster and two former senior sales executives, Craig Davis and James Needham, for their roles in the fraud.

Between approximately May 2016 and July 2016, while associated with UBS, Bluestine accepted two loans totaling $200,000 from his firm customer, who was a friend of Bluestine but not an immediate family member or financial institution. In September 2018, while associated with Raymond James, Bluestine accepted an additional $100,001 loan from the same individual, who was then Bluestine's customer at Raymond James. The customer made each of the loans to Bluestine without documentation or an understanding as to the duration or interest rate of the loan. To date, Bluestine has repaid $176,000 to the customer. 

Throughout the relevant period, both UBS's and Raymond James' written procedures prohibited registered representatives from borrowing money from a customer without written approval. Bluestine did not seek or obtain approval from UBS or Raymond James for the loans he received from his customer. Additionally, in a UBS compliance questionnaire, completed on February 23, 2017, Bluestine falsely stated that he had not borrowed money from any customer even though he had received two loans totaling $200,000 from the customer in 2016.

Between August 2015 and June 2016 (the "Relevant Trading Period"), Capital City failed to establish and maintain a supervisory system, and failed to establish, maintain and enforce written supervisory procedures, that were reasonably designed to achieve compliance with FINRA's suitability rules. Specifically, the firm used a third-party automated trade surveillance application to supervise and review registered representative trading recommendations and strategies yet did not re-configure, modify, or alter that surveillance tool to monitor unique trading strategies like that of registered representative CK. Second, with respect to CK, the firm bifurcated responsibility for supervising his equity and options recommendations by product, even where those recommendations impacted the same customer account as part of a singular, active trading strategy. As a result, individual supervisors were unable to identify patterns and evaluate the trading strategy employed by CK, who effected quantitatively unsuitable transactions in five customer accounts over which he had discretionary trading authority. CK's trading in these customer accounts generated cost-to-equity ratios and turnover rates ranging from 19.7% to 31.7% and 8.2 to 12.7, respectively. Through this conduct, Capital City violated FINRA Rules 3110 and 2010. 

In addition, between July 30, 2015 and August 10, 2015, Capital City failed to conduct a reasonable due diligence review of a private placement by registered representative JM, in violation of FINRA Rules 3110 and 2010. 

Finally, between July 22, 2015 and August 24, 2016, Capital City failed to preserve and maintain certain books and records required by Section 17(a) of the Securities Exchange Act of 1934 ("the Exchange Act") and Rule 17a-4 promulgated thereunder ("SEA Rule 17a-4"). Specifically, Capital City failed to preserve and maintain over 200 of JM's business-related electronic communications conducted through his personal email address. As a result, the firm violated Section 17(a) of the Exchange Act, Rule 17a-4 thereunder, and FINRA Rules 4511 and 2010. 

• Securities Industry Commentator
• Bill Singer