Securities Industry Commentator by Bill Singer Esq

Tulare County Man Arrested for Over $8 M Fraud that Purported to Turn Cow Manure into Renewable Energy (DOJ Release)

SEC Charges Former Wells Fargo Executives for Misleading Investors About Key Performance Metric (SEC Release)

After shaking down Bain for evidence, DOJ files suit to stop Visa purchase of Plaid, a nightmarish turn of events for the $5.3-billion dream deal (RIABiz by Brooke Southall)

Michigan and New Jersey Men Admit Participating in $10 Million Multi-State Bank Fraud

Staff Bulletin: Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities (SEC Bulletin)

In the Matter of Daniel Suster (SEC Opinion)

Identities of SEC Whistleblower and Respondent Bank Outed
(BrokeAndBroker.com Blog)

Federal Court Dismisses Challenge to Six Year Old FINRA AWC (BrokeAndBroker.com Blog)

The Saad Saga Returns to Federal Court (BrokeAndBroker.com Blog)

[S]ince at least March 2014, Brewer acted primarily through his now defunct, Tulare-based company called CH4 Power to steal at least $8,750,000 from investors. He purported to build anaerobic digesters on dairies in Fresno, Kern, Kings, and Tulare counties and elsewhere in California and Idaho.

The digesters were supposed to convert cow manure into renewable energy in the form of methane natural gas. The natural gas, in turn, could be sold to generate revenue and returns for investors. But Brewer never actually built or even began construction on the digesters. Instead, he used the investors' money to make various personal expenditures, which included his personal residence, new vehicles, and a property in Montana.

According to the SEC's complaint against Tolstedt, from mid-2014 through mid-2016, Tolstedt publicly described and endorsed Wells Fargo's "cross-sell metric" as a means of measuring Wells Fargo's financial success despite the fact that this metric was inflated by accounts and services that were unused, unneeded, or unauthorized. The complaint further alleges that Tolstedt signed misleading sub-certifications as to the accuracy of Wells Fargo's public disclosures when she knew or was reckless in not knowing that statements in those disclosures regarding Wells Fargo's cross-sell metric were materially false and misleading.

The SEC's order against Stumpf finds that in 2015 and 2016 he signed and certified statements filed with the Commission, which he should have known were misleading, regarding both Wells Fargo's Community Bank cross-sell strategy and its reported metric. According to the order, Stumpf failed to assure the accuracy of his certifications after being put on notice that Wells Fargo was misleading the public about the cross-sell metric.

From 2018 through April 2020, Sharif, Abbas, and others conspired to defraud several major banks and electronic merchant processors. They established bank accounts associated with sham entities that had no legitimate purpose, and issued checks payable to other shell companies associated with the criminal organization, knowing that the payor accounts had insufficient funds. The conspirators would also conduct fraudulent credit card and debit card transactions between shell companies to credit payee accounts and overdraw payor accounts. The defendants also used these shell companies to execute temporary refund credits, commonly referred to as "charge-backs," to checking accounts associated with the criminal organization, where no prior legitimate transaction had occurred. 

Members of the criminal organization withdrew the "existing" funds (through ATMs or bank tellers) that banks and merchant processors had credited to the payee bank accounts at the time of the fraudulent transaction. Because the conspirators withdrew the credited funds from the payee accounts before the banks could recognize the fraudulent transactions, the banks and merchant processors were left with substantial losses.

During its investigation, law enforcement identified approximately 200 bank accounts and 75 merchant credit card processing accounts used to facilitate the conspiracy's fraudulent schemes. Sharif, Ali, and other conspirators' unlawful activities attempted to cause a $10 million loss on financial institutions and did in fact caused a loss of approximately $3.5 million.

This bulletin highlights for broker-dealers various risks arising from illicit activities associated with transactions in low-priced securities through omnibus accounts, particularly transactions effected on behalf of omnibus accounts maintained for foreign financial institutions. These risks are heightened when the identities of a foreign financial institution's underlying customer and/or the ultimate beneficial owner of the funds and securities are unknown to a broker-dealer because of the omnibus account structure. 

This bulletin also reminds broker-dealers of their existing obligations under the Bank Secrecy Act ("BSA"), Rule 17a-8 under the Exchange Act, Section 5 of the Securities Act of 1933 ("Securities Act") and FINRA rules, and considerations relating to the application of these obligations in the context of effecting low-priced securities transactions through omnibus accounts maintained for foreign financial institutions. In the Staff's view, sufficiently discharging existing anti-money laundering ("AML") obligations under the BSA requires broker-dealers to consider, among other things, the risks associated with the multiple layers of accounts through which transactions in these types of securities may have been routed.  Specifically, in order to sufficiently manage the heightened risks that can be associated with low-priced securities transactions effected through omnibus accounts maintained for foreign financial institutions, a broker-dealer should consider whether it is appropriate to obtain information regarding the relevant characteristics of ultimate beneficial owners of the funds and securities (e.g., the registration status of the ultimate beneficial owner, or whether it is an entity or an individual), including their identities when the risk warrants such inquiry. Where the broker-dealer determines that the risks posed cannot be appropriately managed through the results of such inquiries or other risk mitigation measures, the Staff believes that broker-dealers should consider (1) refusing to open or closing the omnibus account, (2) restricting or rejecting transactions in low-priced securities effected on behalf of the customers of the foreign financial institution through such accounts, and (3) filing a Suspicious Activity Report ("SAR") as appropriate. 

Key Takeaways:

• Low-priced securities transactions in omnibus accounts maintained for foreign financial institutions can pose a particularly high risk of illicit activities, including fraud, money laundering, and unregistered securities offerings.
• Nominee accounts and multiple foreign financial intermediaries can be used to obscure the identities of persons engaging in illicit activities.
• Layers of anonymity and concealment can facilitate violations of the federal securities laws, such as non-exempt unregistered securities offerings, fraudulent stock promotion and manipulative trading, as well as other illicit activities.
• Specific AML due diligence and reporting obligations apply to omnibus relationships with foreign financial institutions regardless of whether the ultimate beneficial owner of the funds and securities held in the account is a broker-dealer's "customer" for customer identification programs ("CIP") and CDD purposes or a "beneficial owner" for CDD purposes.[11] For example, a broker-dealer must file a SAR on a suspicious transaction, whether or not the ultimate beneficial owner who requested the transaction is considered the broker-dealer's customer.
• A broker-dealer's inability to obtain information regarding the ultimate beneficial owners of funds and securities held in an omnibus account engaging in transactions that are considered higher risk (such as low-priced securities transactions) significantly increases the AML and other legal and compliance risks of the foreign omnibus account associated with those transactions.

The OIP alleged that, from approximately 2010 to 2017, Suster engaged in the business of effecting transactions in securities for the accounts of others by working as an unregistered broker and participated in offerings of penny stocks. The OIP also alleged that, on March 19, 2018, Suster pleaded guilty to one count of conspiracy to commit mail and wire fraud in violation of 18 U.S.C. § 1349. The OIP alleged further that the count to which Suster pleaded guilty charged, among other things, that Suster defrauded investors and obtained money and property by means of materially false and misleading statements in connection with the penny stock sales, raising approximately $15 million from more than 150 investors.

According to the OIP, investors were falsely told that the companies involved were profitable and safe, that their funds would be used for working capital and to pay for sales and marketing expenses, and that no commissions or fees would be charged to them.7 Instead, investor funds were used to start new ventures, to pay new investors "dividends," and to pay Suster and his co-conspirators undisclosed commissions and fees. Suster was sentenced to 30 months in prison and ordered to pay $321,638.77 in restitution.  

[S]uster's conduct was egregious and recurrent. Over an extended period, he participated in a criminal scheme to defraud over 150 individuals. During this period, Suster and his coconspirators repeatedly lied to investors to get them to invest in various penny stocks. They stated falsely that the companies were a "safe" and "profitable" investment where "you won't lose money," that investor funds would be used for sales and marketing, working capital and general corporate purposes, and that no commissions or fees would be charged to investors. Suster also lied to some investors by telling them that he was a successful investor in the companies and that his investments made him a significant profit. These activities, which raised approximately $15 million, resulted in Suster pleading guilty to felony conspiracy to commit mail and wire fraud and to be sentenced to 30 months in prison. 

• Securities Industry Commentator
• Bill Singer