Securities Industry Commentator by Bill Singer Esq

List Brokerage Firm Pleads Guilty To Facilitating Elder Fraud Schemes / Corporate Guilty Plea Follows Guilty Plea and Indictment of Executives (DOJ Release)

Owner of Bitcoin Exchange Convicted of Racketeering Conspiracy for Laundering Millions of Dollars in International Cyber Fraud Scheme (DOJ Release)

SEC Charges Amazon Finance Manager and Family With Insider Trading (SEC Release)

SEC Increases Whistleblower Award Above CRS Recommendation
SEC Order Determining Whistleblower Award Claim

Fiat Chrysler Agrees to Pay $9.5 Million Penalty for Disclosure Violations (SEC Release)

SEC Charges Recidivist Securities Law Violator with Fraud Against Advisory Clients (SEC Release)

SEC Charges Companies, Former Executives as Part of Risk-Based Initiative / Interface and Two Former Executives Charged With Accounting and Disclosure Violations; Fulton Financial Corporation Charged With Disclosure Violations (SEC Release)

SEC Charges Georgia Investment Adviser Firm and Its Owner and Founder

Regulation ATS for ATSs that Trade U.S. Government Securities, NMS Stock, and Other Securities; Regulation SCI for ATSs that Trade U.S. Treasury Securities and Agency Securities; and Electronic Corporate Bond and Municipal Securities Markets (SEC Rule Proposal)

CFTC Orders New York Firm and its Trader to Pay $585,000 for Spoofing (CFTC Release)

CFTC Charges Georgia Man with Fraudulent Scheme to Profit from COVID-19 (CFTC Release)

CFTC Orders Three Citibank Affiliates to Pay $4.5 Million for Supervision Failures That Led to Deletion of Subpoenaed Audio Recordings (CFTC Release)

CFTC Charges Foreign Trading Platform with Offering Illegal Leveraged Transactions in Ether, Litecoin, and Bitcoin (CFTC Release)

FINRA Imposes Fine and Suspension for Rep's Use of Customers' Nonpublic Personal Information

In the Matter of Michael R. Jeppson, Respondent (FINRA AWC)

FINRA Imposes Fine and Suspension for Rep's Use of NSF Checks

In the Matter of Joshua K. Staudinger, Respondent (FINRA AWC)

The information alleges that Macromark provided list-brokerage services for more than 11 years to clients who were running mass-mailing fraud schemes.  Macromark specifically helped fraudulent mass mailers both acquire lists of potential victims to defraud and sell their lists of victims to other mass mailers.  Macromark executives and employees engaged in this conduct despite knowing that their clients were mailing hundreds of thousands of deceptive prize notifications that misled victims into believing that they would receive a cash prize or personalized services upon payment of a fee.  The potential-victim lists that Macromark brokered were essential to its fraudulent mass-mailer clients, allowing them to more effectively reach consumers who were susceptible to their schemes.  Many victims who lost money to the schemes were elderly and vulnerable.  In pleading guilty, Macromark admitted that the lists it provided to fraudulent clients resulted in losses to victims of at least $9,500,000.

. . .

According to the information, Macromark facilitated fraud schemes from 2005 until September 2016, when Inspectors with the U.S. Postal Inspection Service executed search warrants on the company's offices and the Civil Division's Consumer Protection Branch obtained a federal court order enjoining the company from facilitating mass-mailing fraud.  The court order resulted in a permanent injunction that permanently prohibited Macromark from dealing in certain promotions or solicitations that purport to offer prizes or services for a fee, including sweepstakes reports, wealth-building programs or psychics.  Macromark was also required to hire a compliance officer, and to audit a sample of all list orders for five years. 

According to court documents and evidence presented at trial, Iossifov and his co-conspirators participated in a criminal conspiracy that engaged in a large-scale scheme of online auction fraud that victimized at least 900 Americans.  Specifically, Romania-based members of the conspiracy posted false advertisements to popular online auction and sales websites-such as Craigslist and eBay-for high-cost goods (typically vehicles) that did not actually exist.  Members of the conspiracy would convince American victims to send money for the advertised goods by crafting persuasive narratives, for example, by impersonating a military member who needed to sell the advertised item before deployment.

According to court documents, members of the conspiracy created fictitious online accounts to post these advertisements and communicate with victims, often using the stolen identities of Americans to do so.  They also delivered invoices to the victims bearing trademarks of reputable companies in order to make the transaction appear legitimate.  Members of the conspiracy also set up call centers, impersonating customer support, to address questions and alleviate concerns over the advertisements.

According to court documents, once victims were convinced to send payment, the conspiracy participants engaged in a complicated money laundering scheme wherein domestic associates would accept victim funds, convert these funds to cryptocurrency, and transfer proceeds in the form of cryptocurrency to foreign-based money launderers.

According to evidence presented at trial, Iossifov was the owner of RG Coins, a Bulgaria-based Bitcoin exchange.  From at least September 2015 to at least December 2018, he exchanged cryptocurrency into local fiat currency on behalf of the Romania-based members of the conspiracy, knowing that the Bitcoin represented the proceeds of illegal activity.  According to trial testimony, for example, in just the span of about two and a half years, Iossifov exchanged over $4.9 million worth of Bitcoin for just four other members of the criminal enterprise. 

Seventeen total defendants have been convicted in this case.  Three others are fugitives.

[L]aksha Bohra worked as a senior manager in Amazon's tax department, where she prepared and reviewed calculations used to finalize numbers included in Amazon's quarterly and annual earnings that were filed with the SEC. Beginning in January 2016 and continuing through July 2018, Laksha Bohra allegedly acquired, and tipped her husband Viky Bohra with, highly confidential information about Amazon's financial performance. The complaint alleges that Viky Bohra and his father, Gotham Bohra, traded on this confidential information in 11 separate accounts maintained by different members of the Bohra family. The complaint further alleges that Laksha Bohra disregarded quarterly reminders prohibiting her from passing material nonpublic information or recommending the purchase or sale of Amazon securities. As alleged, the family reaped illicit profits of approximately $1.4 million from their unlawful trading in Amazon securities.

positively assessed the following facts: (i) Claimant, an unaffiliated outsider of the company, was expeditious in reporting the information to the Commission; (ii) Claimant's information was significant as it alerted the staff to the ongoing securities violations, and; (iii) the charges brought by the Commission bear a close nexus to the information provided by Claimant. We also recognize that Claimant was not in a position to provide continuing helpful information and assistance during the investigation.

[I]n February 2016, FCA represented in both a press release and an annual report that it conducted an internal audit which confirmed that FCA's vehicles complied with environmental regulations concerning emissions.  As found in the order, FCA's statements did not sufficiently disclose the limited scope of its internal audit, which focused only on finding a specific type of defeat device, or that the audit was not a comprehensive review of FCA's compliance with U.S. emissions regulations. In addition, at the time FCA made these statements, engineers at the U.S. Environmental Protection Agency (EPA) and California Air Resource Board (CARB) had raised concerns to FCA about the emissions systems in certain of its diesel vehicles.

[S]need held himself out to clients, some of whom he met by targeting members of churches, as an investment expert who would help them earn guaranteed outsized returns. As alleged in the complaint, Sneed actively concealed his lengthy criminal and regulatory history, falsely claimed to hold numerous financial certifications, and failed to disclose that he was being paid commissions from companies he recommended to clients. The complaint alleges that, while Sneed's clients lost at least approximately $1.1 million, Sneed allegedly received more than $400,000 in fees and undisclosed commissions.

As set forth in the complaint, Sneed's recidivist history includes pleading guilty to felony securities fraud and other securities violations in Utah and being ordered to cease and desist from securities offerings in multiple states on numerous occasions from 2006 through 2018, including for committing fraud in violation of state securities laws. As set forth in the complaint, the SEC previously charged Sneed with violations of the antifraud and registration provisions of the federal securities. Sneed agreed to be enjoined from violating the charged provisions to resolve the action. The complaint alleges that he failed to disclose this history to clients.

The Securities and Exchange Commission today filed settled actions against two public companies for violations that resulted in the improper reporting of quarterly earnings per share (EPS) that met or exceeded analyst consensus estimates.  The actions are the first arising from investigations generated by the Division of Enforcement's EPS Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.

The SEC's order against Interface Inc., a Georgia-based modular carpet manufacturer, finds that in multiple quarters in 2015 and 2016, the company made unsupported, manual accounting adjustments that were not compliant with GAAP.  These adjustments were often made when Interface's internal forecasts indicated that the company would likely fall short of analyst consensus EPS estimates.  The order finds that the adjustments boosted the company's income, making it possible for Interface to consistently report earnings that met or exceeded consensus estimates.  According to the order, Interface's former Controller and Chief Accounting Officer Gregory J. Bauer directed the unsupported adjustments, including those made to management bonus accruals and stock-based compensation accounts.  The order also finds that Interface's former CFO Patrick C. Lynch caused Bauer to direct some of the unsupported entries. 

The SEC's order against Fulton Financial Corporation, a Pennsylvania-based financial services company, finds that the company inaccurately presented its financial performance in late 2016 and early 2017.  During two quarters in which Fulton was on track to meet or beat analyst consensus EPS estimates, the order finds that Fulton's public filings included a valuation allowance for its mortgage servicing rights that was at odds with the valuation methodology described in the same filings.  The order finds that in mid-2017 Fulton belatedly reversed the valuation allowance, increasing its EPS by a penny in a quarter when it otherwise would have fallen short of consensus estimates.  As set forth in the order, Fulton's disclosures created the misleading appearance of consistent earnings across multiple reporting periods. 

[I]n a report filed on April 29, 2019, LCA and Lindner falsely stated that the firm had no financial condition that was reasonably likely to impair its ability to meet contractual obligations to clients. As alleged, at the time of the filing LCA was heavily leveraged and increasingly unable to meet its basic operating expenses. The complaint further alleges that in May 2018, after an SEC examination by the Office of Compliance, Inspections and Examinations, staff sent a letter to LCA outlining certain compliance deficiencies. According to the complaint, from August 2018 to December 2019, LCA and Lindner failed to implement and enforce the policies and procedures the firm adopted in response to the letter.

The Securities and Exchange Commission is proposing amendments to Regulation ATS under the Securities Exchange Act of 1934 ("Exchange Act") for alternative trading systems ("ATSs"). The Commission is proposing to amend Regulation ATS for ATSs that trade government securities as defined under Section 3(a)(42) of the Exchange Act ("government securities") or repurchase and reverse repurchase agreements on government securities ("Government Securities ATSs") to: eliminate the exemption from compliance with Regulation ATS for an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities, and registers as a broker-dealer or is a bank; require the filing of public Form ATS-G, which would require a Government Securities ATS to disclose information about its manner of operations and the ATSrelated activities of the registered broker-dealer or government securities broker or government securities dealer that operates the ATS and its affiliates; require, among other things, public posting of certain Form ATS-G filings and to provide a process for the Commission to review Form ATS-G filings and, after notice and opportunity for hearing, declare Form ATS-G filings ineffective; and apply the fair access rule under Rule 301(b)(5) of Regulation ATS to Government Securities ATSs that meet certain volume thresholds in U.S. Treasury Securities or in a debt security issued or guaranteed by a U.S. executive agency, as defined in 5 U.S.C. 105, or government-sponsored enterprise, as defined in 2 U.S.C. 622(8) ("Agency Securities"). The Commission is also proposing changes to correct and modernize Regulation ATS, Form ATS, Form ATS-N, and Form ATS-R. In addition, the Commission is proposing to amend Regulation Systems Compliance and Integrity to apply it to ATSs that meet certain volume thresholds in U.S. Treasury Securities or Agency Securities. Finally, the Commission is issuing a concept release on the regulatory framework for electronic platforms that trade corporate debt and municipal securities.

[B]etween January 2013 and January 2016, Donino placed multiple orders in the Chicago Board of Trade soybean futures, Commodity Exchange (COMEX) gold futures, and New York Mercantile Exchange crude oil futures markets with the intent to cancel the orders before execution. Donino's trading pattern involved placing a small order, typically for 10 or fewer contracts on one side of the market that he wanted to get filled (genuine order), and then placing a larger order that he intended to cancel (spoof order), typically for five times as many contracts as the genuine order. Generally, Donino quickly canceled the spoof order after placing it, and often after his genuine order was filled.

[F]rom at least December 2015 until the present, Ramos fraudulently solicited individuals across the country by using online advertisements and aliases to further his ongoing scheme, incorporating COVID-19 into his solicitations earlier this year. He falsely represented himself as a highly successful and experienced binary options and forex trader who could profit from the coronavirus even while stock prices were falling. Ramos offered to pool funds sent to him by participants to trade binary options and forex, but instead simply misappropriated the money. As alleged, Ramos has no U.S.-based binary options or forex trading accounts. 

The complaint further alleges that, despite receiving a cease and desist letter from the Texas State Securities Board related to these fraudulent solicitations, Ramos continued to solicit participants and engage in his fraudulent scheme. 

[I]n December 2017, Division of Enforcement staff sent a subpoena to Citibank in connection with an ongoing investigation for, among other things, audio recordings of certain Citibank traders on a particular day. On February 9, 2018, Citibank communicated to Division staff that a hold notice had been issued to Citibank staff and confirmed that responsive audio recordings would be preserved. Relying on this information, Division staff agreed to Citibank's request that it be permitted to prioritize production of electronic communications and defer production of the requested audio recordings until a later date. On October 30, 2018, Division staff requested that Citibank produce the responsive audio recordings.

On December 3, 2018, Citibank notified Division staff that it had deleted the responsive recordings roughly three weeks earlier due to a design flaw in its audio preservation system. As a result, the system deleted more than 2.77 million audio files for 982 users, including recordings that were responsive to the December 2017 subpoena and which Citibank had assured Division staff were being preserved.          

The audio preservation system had what one Citibank employee described in a 2014 memo to senior management as a "design flaw." As the employee described it, if the system was not configured correctly, there was a "ticking time bomb effect" that could-and here did-lead to the automatic deletion of audio recordings. Despite being on notice of the problem as of 2014, Citibank did not take timely and appropriate steps to mitigate the risk of the system's design flaw. Citibank further did not maintain adequate internal controls with respect to its preservation of audio and thus failed to diligently supervise matters related to its business as a CFTC registrant.

According to the order, because all of the Citi entities relied on Citibank to operate and maintain the audio preservation system to record and preserve not only Citibank's own audio, but also the audio of its affiliated North American swap dealers, all of the Citi entities violated CFTC Regulation 166.3 by failing to diligently supervise the operation of the audio preservation system.

In January and February 2017, in anticipation of joining another FINRA member firm, Jeppson improperly removed from Merrill Lynch his customers' nonpublic personal information, without the Firm's or the customers' knowledge or consent. Specifically, Jeppson sent 161 unencrypted emails from his Merrill Lynch email account to his personal email account containing his customers' nonpublic personal information that he received from Merrill Lynch as part of his employment with the firm as a registered representative. Jeppson retained this information after the termination of his association with Merrill Lynch, during which time he was not entitled to possess the information. All 161 emails contained information protected by Regulation S-P. Of these, 146 emails attached Quarterly Performance Reports that stated "SENSITIVE CLIENT INFORMATION INSIDE" on the cover page and included detailed financial information for each customer, such as total performance summary, asset allocation, account list (with partial account numbers), and relative performance. Fifteen emails included other information protected by Regulation S-P, such as account value, rate of return, and asset allocation. In addition, Jeppson sent an unencrypted chart of information concerning 182 clients to his personal email address that included the clients' assets and the commissions generated from each client. This information also fell within the scope of Regulation S-P. At all relevant times, Merrill Lynch maintained policies and procedures that required its registered representatives to only use customers' nonpublic information in their capacity as representatives. Merrill Lynch's written supervisory procedures further prohibited registered representatives from sending confidential client information to a personal email address and also prohibited the sending of such information without an appropriate level of encryption or other approved security measures.

Between June and August 2018, Staudinger deposited six checks, totaling $3,250, issued from from his closed accounts into two of his personal bank accounts. Staudinger knew or should have known that the bank accounts from which he wrote the checks lacked sufficient funds to cover the checks. Before the checks were returned for insufficient funds, Staudinger made cash withdrawals from the accounts into which the checks had been deposited, often on the same day the check was deposited. Staudinger's conduct caused him to maintain negative balances in his personal bank accounts and to accrue overdraft and returned check fees in those accounts. Staudinger paid off the negative balances and partially paid off fees through periodic deposits during the relevant period and a $900 deposit in September 2018.

• Securities Industry Commentator
• Bill Singer