The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

March 31, 2021





http://www.brokeandbroker.com/5774/finra-arbitration-racism/
Fourteen-year veteran New York Life employee Ketler Bosse was the company's first African-American District Agent. Following his 2016 termination, he filed a federal Complaint against various New York Life entities asserting discrimination, retaliation, and civil rights violations. NY Life moved to force the case into FINRA arbitration. The District Court declined to remand the matter to arbitration; however, on appeal, the 1Cir reversed and remanded.

Tae Hung Kang a/k/a "Kevin Kang" pled guilty in the United States District Court for the Eastern District of New York to conspiring to commit securities fraud in connection with a scheme involving foreign exchange trading that targeted members of the Korean-American community. Kang agreed to pay restitution in the amount of $835,058.32.  As alleged in part in the DOJ Release:

[K]ang enticed investors to invest their money into stock issued by his company, Safety Capital Management, Inc. ("Safety Capital"), which did business as FOREXNPOWER.  The investors were told their investments would be pooled by Kang and others to conduct foreign exchange trading, or to expand the FOREXNPOWER business.  Kang falsely promised investors outsized returns at minimal risk.  Ultimately, nearly all of the money that was invested in Safety Capital stock was misappropriated by Kang and his co-conspirators.  Kang used some of the money stolen from clients to pay for advertisements targeting additional investors and promoting FOREXNPOWER's outsized trading returns based on a algorithmic trading method that did not actually exist.  Kang's co-defendant John Won is awaiting trial.

Former Princeton Resident Charged in Connection with Multimillion-Dollar Schemes Involving Securities Fraud, Credit Card Fraud, and Business E-Mail Compromise Fraud (DOJ Release)
https://www.justice.gov/usao-nj/pr/former-princeton-resident-charged-connection-multimillion-dollar-schemes-involving
In a Complaint filed in the United States District Court for the District of New Jersey
https://www.justice.gov/usao-nj/press-release/file/1381421/download, Ford Graham was charged with two counts of wire fraud, one count of conspiracy to commit wire fraud, one count of securities fraud, three counts of aggravated identity theft, and one count of engaging in unlawful money transactions. As alleged in part in the DOJ Release:

From December 2012 to September 2013, Graham represented himself as the owner, chief executive, chairman, manager, and principal member of dozens of corporate entities purporting to do business under an umbrella organization, Vulcan Capital Corp. (Vulcan). Graham held himself out as a highly successful financier who had vast experience sponsoring complex energy and natural resource projects and other investment deals. In connection with one such investment that Graham and a Vulcan entity sponsored, one victim (Victim-1) invested more than $2 million with Graham, relying on Graham's misrepresentations and omissions regarding the investment. The investigation revealed that Graham misappropriated substantial amounts of Victim-1's investment money and used it for his own personal benefit and enrichment - including international vacations, private school tuition for his children, and other personal amenities - instead of the investment purpose that Graham had marketed. Graham caused multiple victims to lose more than $2.6 million.

Graham also participated in a scheme to defraud merchant processing institutions through fraudulent credit card transactions. From December 2017 to February 2018, Graham used at least one payment processing platform to process fraudulent charges on stolen credit card numbers that he obtained. After the payment processing platform credited Graham's account with the payments requested, Graham quickly transferred or caused to be transferred the fraudulently obtained money to other accounts before the victim institutions could act. When requested by the victim payment processing company to provide supporting documentation, Graham submitted false documentation, including fabricated invoices and credit card authorization forms, fabricated e-mails, forged signatures, altered bank statements, and other false and fraudulent information. This scheme resulted in tens of thousands of dollars of losses and the misappropriation of multiple victims' personal identification information.

From February 2017 to June 2018, Graham conspired with others to defraud victim institutions and individuals of millions of dollars through a business email compromise scheme. Members of the conspiracy sent fraudulent e-mail communications to victims who were scheduled to make substantial outgoing wire transfers to third parties. These fraudulent e-mails created the appearance that they had been sent by the intended third-party recipients of the scheduled payments when, in fact, they were sent by members of the conspiracy. The fraudulent emails requested the victims to reroute the scheduled payments to different bank accounts, which Graham and his conspirators controlled. In one instance, a fraudulent email successfully induced one victim unknowingly to reroute a payment of more than $650,000 to a bank account that Graham controlled. Upon receiving the funds, Graham transferred or caused to be transferred substantial portions of those funds to other accounts that he controlled, and which he used and intended to use for his own personal benefit. Graham and his conspirators attempted to defraud multiple victims of at least $6 million.

https://www.sec.gov/litigation/litreleases/2021/lr25061.htm
In a Complaint filed in the United States District Court for the Western District of Missouri
https://www.sec.gov/litigation/complaints/2021/comp25061.pdf, the SEC charged Douglas E. Elstun with violating the antifraud provisions of Sections 206(1) and 206(2) of the Advisers Act, or in the alternative, aiding and abetting Crossroads Financial Management, Inc's violations of Sections 206(1) and 206(2); further, Elstun was charged with aiding and abetting CFM's violations of the record-keeping, custody, cash solicitation, and compliance provisions of Sections 204(a) and 206(4) of the Advisers Act and Rules 204-2(a)(10), 206(4)-2, 206(4)-3, and 206(4)-7 thereunder. The SEC Release alleges in part that:

[F]rom 2015 through 2018, Elstun fraudulently overcharged his advisory clients by charging undisclosed fees, including higher advisory fees than clients had agreed to pay, and by applying the advisory fee to non-advisory assets, including bank account balances, equity in homes and other real estate, and the value of vehicles, thereby increasing the fees charged to those accounts. The complaint alleges that Elstun also misled advisory clients about his trading in high risk, daily leveraged and/or inverse exchange-traded funds (ETFs) by failing to disclose the substantial risks of buying and holding these products, and by inaccurately representing that the products functioned as "insurance" or a "hedge" for their portfolios when his trading strategy for these products actually created significant risk for clients. The complaint further alleges that Elstun made unsuitable and risky investments in daily leveraged and/or inverse ETFs that were inconsistent with Elstun's clients' investment objectives and risk tolerances. As alleged in the complaint, as a result of Elstun's ETF trading, those clients lost millions.

Former COO of Plastics Manufacturer Sentenced in Fraud Case (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25062.htm
Former Lucent Polymers, Inc. Chief Operating Officer Jason Jimerson pled guilty in the United States District Court for the Southern District of Indiana to two counts of securities fraud, one count of money laundering, and one count of making false statements to federal agents, and he was sentenced to 24 months in prison plus two years of supervised release, and ordered to pay a $10,000 fine. An SEC Complaint (stayed pending the resolution of the criminal matter) charged Jimerson and Lucent's former Chief Executive Officer Kevin Kuhnash with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

The SEC previously charged Jimerson for his alleged role in a scheme to conceal that Lucent's core business model was a sham in connection with the company's acquisition by another manufacturer in 2013. According to the SEC's complaint, Lucent routinely lied to its customers and falsified its certifications of test data to show that its products complied with customer specifications, including in important areas such as fire-retardant measures. Jimerson allegedly hid Lucent's fraudulent practices, made misrepresentations to the company that acquired Lucent, and continued the fraud, including by lying to the Commission's staff, even after the sale of that company.

FINRA Fines and Suspends Rep for Borrowing From Ill Customer
In the Matter of Keith Holcomb, Respondent (FINRA AWC 2019061870301)
https://www.finra.org/sites/default/files/fda_documents/2019061870301
%20Keith%20Holcomb%20CRD%206227200%20AWC%20jlg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Keith Holcomb submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Keith Holcomb was first registered in March 2015 and from September 2015 to June 2017, he was registered with MML Investors Services, LLC. The AWC alleges that Holcomb "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Holcomb violated FINRA Rules 3240 and 2010; and the self regulator imposed upon him a $7,500 fine and a six-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Holcomb became Customer P's broker of record in early 2015, after her previous broker left the firm. By the end of 2016, Holcomb understood that Customer P was not financially secure and suffered from serious health problems. Nevertheless, between November 2016 and June 2017, when Holcomb left MMLIS, Holcomb borrowed at least $31,420 from Customer P. To date, he has only repaid $1,007. Customer P was not a member of Holcomb's immediate family, and Holcomb never notified or sought preapproval from MMLIS before borrowing from her as required. 

In the Matter of Cambridge Investment Research, Inc., Respondent (FINRA AWC 2018056443801)
https://www.finra.org/sites/default/files/fda_documents/2018056443801
%20Cambridge%20Investment%20Research%2C%20Inc.
%20CRD%2039543%20AWC%20jlg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Cambridge Investment Research, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Cambridge has been a FINRA member firm since 1995 with 4,400 registered representatives at 2,500 offices. The AWC alleges that Cambridge "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Cambridge violated FINRA Rules 3110 and 2010; and the self regulator imposed upon the firm a Censure, a $400,000 fine, $3,134,354.82 in restitution, and required a certification of the implementation of policies, procedures, and internal controls. The "Overview" portion of AWC alleges that:

Cambridge failed to reasonably supervise representatives' recommendations of an alternative mutual fund-the LJM Preservation & Growth Fund (LJM).1 Cambridge permitted the sale of LJM on its platform without conducting reasonable due diligence and without a sufficient understanding of its risks and features, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options. Cambridge also lacked a reasonable supervisory system to review representatives' LJM recommendations. Cambridge representatives sold more than $18 million in LJM to customers. LJM's value dropped 80% during an extreme volatility event in February 2018 and the fund ultimately liquidated and closed, resulting in millions of dollars in losses for Cambridge's customers. By virtue of the foregoing, Cambridge violated NASD Rule 3010 and FINRA Rules 3110 and 2010. . . .
= = = = =
Footnote 1: Ticker symbols were LJMIX, LJMCX and LJMAX

https://www.finra.org/sites/default/files/fda_documents/2019061765001
%20Securities%20America%2C%20Inc.%20CRD%2010205%20AWC%20jlg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Securities America, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Securities America, Inc. has been a FINRA member firm since 1981 with 4,200 registered representatives at 2,400 offices. The AWC alleges that Securities America "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Securities America violated FINRA Rules 3110 and 2010; and the self regulator imposed upon the firm a Censure, a $10,000 fine, $235,979.77 in restitution, and required a certification of the implementation of policies, procedures, and internal controls. The "Overview" portion of AWC alleges that:

Between August 17, 2016, and February 8, 2018, SAI failed to reasonably supervise representatives' recommendations of an alternative mutual fund-the LJM Preservation & Growth Fund (LJM).1 SAI permitted the sale of LJM on its platform without conducting reasonable due diligence and without a sufficient understanding of its risks and features, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options. SAI also lacked a reasonable supervisory system to  review representatives' LJM recommendations. SAI representatives sold more than $616,000 in LJM to thirty-three customers. LJM's value dropped 80% during an extreme volatility event in February 2018 and the fund ultimately liquidated and closed, resulting in hundreds of thousands in losses for SAI's customers. By virtue of the foregoing, SAI violated FINRA Rules 3110 and 2010.
= = = = =
Footnote 1: Ticker symbols were LJMIX, LJMCX and LJMAX. 

Bill Singer's Comment: I note with approval that the above Securities America AWC was not signed by sitting FINRA Board of Governor James D. Nagengast, as was the case in the recent AWC noted below:

http://www.brokeandbroker.com/5714/finra-securities-america/
BrokeAndBroker.com Blog publisher, Bill Singer, is no fan of Wall Street's version of self regulation, as spearheaded by the Financial Industry Regulatory Authority ("FINRA"). At best, FINRA comes off as a glorified trade group on steroids; at worst, as a lap dog for its larger member firms. Pointedly, the industry's small fry -- the mom-and-pop brokerages and their hundreds of thousands of associated persons -- never quite seem to get the mercy, the benefit of the doubt, or the concessions that seem afforded to the industry's big fish. In today's featured FINRA regulatory settlement, it could be that FINRA has pulled its punches because of Covid. It could be that what's a "relevant" prior disciplinary history is open to broad interpretation. Maybe FINRA got it right and Bill is being overly sensitive. So . . . why don't you take a smell and see if you would eat this sushi?

Unfortunately, FINRA only seems to have attended to one regulatory miscue by having Securities America's "Interim Chief Compliance Officer" Dori Hammond execute the most recent AWC instead of Governor Nagengast. Still a troubling issue in the recent AWC is FINRA's assertion that the firm has no relevant disciplinary history. In response to that assertion, I re-post the extract from the March 2, 2021, BrokeAndBroker.com Blog cited above:

A Matter of Relevance

The 2021 AWC asserts that Securities America "does not have any relevant disciplinary history." 

Really? 

No relevant prior disciplinary history at all? 

And by what FINRA guidelines was that determination made? 

52 Final Regulatory Events on BrokerCheck

As of March 2, 2021, FINRA's online BrokerCheck discloses that Securities America has 52 "Final" regulatory events. Of those 52 final regulatory events, the oldest goes back to 1992 and the most recent (other than the 2021 AWC cited in this article) is In the Matter of Securities America, Inc., Respondent (FINRA AWC 2016048243101 / September 7, 2018) (the "Securities America 2018 AWC")
https://www.finra.org/sites/default/files/fda_documents/2016048243101
%20Securities%20America%2C%20Inc.%20CRD%2010205
%20AWC%20va%20%282019-1563443361036%29.pdfdated

In the Securities America 2018 AWC, FINRA imposed upon Securities America a Censure and $175,000. As set forth in the 2018 AWC's "Overview":

Between August 4, 2014 and January 28, 2016 (the "Relevant Period"), SAl failed to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that representatives' recommendations of variable annuities complied with applicable securities laws and regulations and FINRA Rules. As a result, SAI violated FINRA Rules 2330(d), and (e), NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on and after December 1, 2014) and FINRA Rule 2010.  

How could the failed supervisory system cited in the Securities America 2018 AWC not be a prior, relevant issue for disclosure in the Securities America 2021 AWC?  

I admit that the Securities America 2018 AWC involved recommendations of variable annuities and the 2021 AWC involved the onboarding of new reps BUT the underlying failure was that Securities America did not maintain and enforce a supervisory system satisfactory to FINRA -- that's not my conclusion but, to the contrary, the allegations of FINRA in both the 2018 and the 2021 AWCs. Notably, both AWCs alleged violations of the same FINRA Rule 2010. 

You may argue that in the Securities America 2021 AWC, the issue was that Securities America "caused the other broker-dealers to violate Regulation S-P" and that then triggered the Rule 2010 violation. In contrast, you could point out that the Securities America 2018 AWC involved a failure of supervision, which triggered the Rule 2010 violation. Argue that distinction all you want. You won't convince me. The core issue in the 2021 AWC is NOT what went on at the third-party vendor but whether Securities America had an obligation to monitor -- to supervise -- that outside party's conduct and to maintain reasonable oversight of its onboarding process. 

As I often note, FINRA has a very odd sense of what is and what isn't a prior "relevant" disciplinary history. See, for example: "For FINRA, Relevant Is A Large Gray Pachyderm" (BrokeAndBroker.com Blog /  September 9, 2020)  http://www.brokeandbroker.com/5401/finra-relevant-wells-fargo/

FINRA Censures, Fines Respondents Over CMO Supervision
In the Matter of American Independent Securities Group, LLC, Ryan Carlson, and Nicholas Cioffi, Respondents (FINRA AWC 2018060267902)
https://www.finra.org/sites/default/files/fda_documents/2018060267902
%20American%20Independent%20Securities%20Group
%2C%20LLC%20CRD%20135288%2C
%20Ryan%20Carlson%20CRD%204209072%2C
%20Nicholas%20Cioffi%20CRD%201090646%20AWC%20jlg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, American Independent Securities Group, LLC ("AISG"), Ryan Carlson, and Nicholas Cioffi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that:
  • AISG has been a FINRA member firm since 2005 with 56 registered representatives at 46 offices;
  • Carlson was first registered in 2000 and was registered with AISG in 2005 and has been that firm's Chief Compliance Officer since 2007; and
  • Cioffi was registered in 1984 and was registered with AISG from 2011 through February 2021.
The AWC alleges that Respondents "do not have any relevant disciplinary history." The "Overview" portion of the AWC asserts [Ed: footnote omitted]:

From October 2014 through April 2017, AISG and Carlson failed to (a) establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with applicable rules relating to sales of collateralized mortgage obligations (CMOs); (b) take reasonable action to ensure that Cioffi-the principal to whom Carlson had delegated responsibility for supervising Representative A and his CMO recommendations-was properly executing that responsibility; (c) reasonably respond to red flags indicating that Representative A's CMO recommendations were unsuitable; and (d) reasonably supervise discretionary trading and accounts held by senior investors. As a result, AISG and Carlson violated FINRA Rules 3110 and 2010 and NASD Rules 3010 and 2510(c).

During the same period, Cioffi failed to reasonably supervise Representative A and to reasonably respond to red flags of unsuitable CMO recommendations. As a result, Cioffi violated FINRA Rules 3110 and 2010 and NASD Rule 3010. 

In accordance with the terms of the AWC, FINRA imposed the following sanctions:
  • AISG: Censure and $275,000 in partial restitution;
  • Carlson: $10,000 fine, 60-calendar-day suspension from association with any FINRA member firm in an Principal capacity, and an undertaking to attend and complete 20 hours of continuing education concerning supervisory responsibilities; and
  • Cioffi: 45-calendar-day suspension from association with any FINRA member firm in an Principal capacity
The Great FINRA Hand Sanitizer Caper!!! (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5773/finra-awc-hand-sanitizer/
In the midst of a pandemic, FINRA got out its hammer and its tongs, and went after a Respondent, who had decided not to invest in a company and prepared to engage in a business that never materialized. Sort of like pretending that we launched a satellite into orbit despite the fact that the rocket exploded on the launching pad. I'm sure that you and I will both sleep safer tonight knowing that Wall Street's self-regulatory-organization is so vigilant and walking the industry beat. 

http://www.brokeandbroker.com/5761/finra-undisclosed-settlement/
In a recent FINRA regulatory settlement, we got a stockbroker who goofed. We got a customer, who paid a price for the stockbroker's goof. In the spirit of let's just move on and put this behind us, the stockbroker dug into his pocket, came out with a wad of cash, tried to settle with the customer, and -- hey, you look like a smart person, if I'm writing about it, ya think things worked out for the best?

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