The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

October 29, 2021

Frustrated Former Merrill Lynch Employee Could Not Be Promoted But Maybe Could Have But the Firm Says It Didn't Have To (BrokeAndBroker.com Blog)

SEC Charges Newport Beach Company and its Principals with Operating a $13.5 Million Ponzi-Like Scheme (SEC Release)


Bergen County Investment Advisor Arrested for Stealing Millions from Clients (DOJ Release)

SEC Charges Financial Adviser With Stealing Investor Funds to Pay Off Credit Cards, Buy Gold Coins (SEC Release)


http://www.brokeandbroker.com/6135/finra-merrill-promotion/
In a recent employment dispute, Merrill Lynch argued that although they had intended to promote an employee, they could not have promoted the employee, but that they had the right to decide not to promote him even if they couldn't; but, regardless of what the firm could not do and also had the right to not do, Merrill had a reasonable basis for not promoting him and made an effort to report on his Form U5 why they didn't promote him. And folks wonder why there's so much litigation on Wall Street.

https://www.sec.gov/news/press-release/2021-221
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-221.pdf, the SEC charged BNZ and its co-founders/co-managers Brett Barber and Louis Zimmerle with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, violating the registration provisions of Sections 5(a) and (c) of the Securities Act; and, as to Barber and Zimmerle, violating the broker-dealer registration provisions of Section 15(a) of the Exchange Act. Further, the Complaint charges Barber and Zimmerle as control persons of BNZ under Section 20(a) of the Exchange Act. As alleged in part in the SEC Release:

[S]ince June 2019, BNZ, Barber, and Zimmerle have raised $13.5 million from retail investors by telling them BNZ was in the business of making investments in real estate and alternative investments and promising to pay investors significant returns, generally 10% per year. The complaint alleges that the defendants used only $6.4 million of the $13.5 million raised from investors to invest in real estate and alternative investments, and those investments generated just $300,000 in profits. According to the complaint, despite generating minimal profits, the defendants paid investors returns of at least $1.7 million using funds raised from other investors in Ponzi-like fashion, and transferred over $1.6 million to Barber through his company, Guaranteed Income Solutions Inc., and over $700,000 to Zimmerle. According to the complaint, the defendants made false and misleading statements to investors regarding, among other things, the source of the payment of the investor returns.  In addition, Barber allegedly misled investors by touting his education in finance and his investment experience without also disclosing that he had been barred by the Financial Industry Regulatory Authority from affiliating with any member firm.

https://www.sec.gov/news/press-release/2021-219
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2021/34-93458.pdf, the Fixed Income Clearing Corporation ("FICC" -- a wholly-owned subsidiary of The Depository Trust & Clearing Corporation) agreed to a Censure and an $8 million penalty, and to cease and desist from future violations of the charged provisions; further, FICC agreed to retain an independent compliance consultant to assess its compliance efforts. As alleged in part in the SEC Release:

[FICC] acts as the sole registered clearing agency for transactions in U.S. government securities.  FICC substitutes itself for both sides of every transaction that it clears, guaranteeing those transactions and making itself the buyer for every seller and the seller for every buyer.  A failure by FICC to manage risk could result in significant costs not only to FICC and its participants, but also to other market participants or the broader U.S. financial system. 

The SEC's order finds that between April 2017 and November 2018, FICC failed to comply with rules requiring it to have reasonably designed policies and procedures for holding sufficient qualifying liquid resources to meet the financial obligations created by the potential failure of a large participant.  According to the order, FICC did not conduct required analysis of the reliability of its liquidity arrangements, and it failed to conduct required due diligence of its liquidity providers.  The SEC's order also finds that in 2015 and 2016, FICC failed to adhere to rules requiring it to have reasonably designed policies and procedures for maintaining and periodically reviewing its margin coverage.  According to the order, FICC failed to correct two erroneous assumptions that inflated its coverage even though both errors had been flagged as deficiencies by the SEC's Division of Examinations.

https://www.justice.gov/usao-nj/pr/bergen-county-investment-advisor-arrested-stealing-millions-clients
-and-
https://www.sec.gov/news/press-release/2021-217

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/1445176/download, Kenneth A. Welsh was charged with four counts of wire fraud and one count of investment advisor fraud. As alleged in part in the DOJ Release:

From July 2017 through March 2021, Welsh, while serving in his capacity as an investment advisor employed by a large brokerage firm, misappropriated at least $2.86 million from five clients. Welsh, who had been entrusted to manage client funds responsibly, instead perpetrated a scheme to defraud the five clients by diverting money from their brokerage accounts to accounts under his control. Welsh then used the unlawfully obtained money to fund his gambling and to purchase high-end, luxury items for himself.

https://www.sec.gov/litigation/complaints/2021/comp-pr2021-217.pdf, the SEC charged Welsh with violations of the antifraud provisions of the federal securities laws.  As alleged in part in the SEC Release:

[W]elsh, a former financial adviser at a large financial institution's branch in Fairfield, New Jersey, misappropriated at least $2.86 million from the accounts of multiple clients and customers, some of whom were senior citizens.

Specifically, the complaint alleges that from January 2016 to January 2021, Welsh transferred funds from his clients' and customers' accounts to pay off balances in credit card accounts held in the names of his wife and parents. Welsh also allegedly caused checks to be fraudulently drawn on his clients' and customers' accounts. The complaint alleges that Welsh made at least 137 fraudulent transactions and used the stolen funds to purchase gold coins and other precious metals, buy luxury goods, and make electronic fund transfers to himself.

SEC Awards About $24,000 to Whistleblower
Order Determining Whistleblower Award Claims ('34 Act Release No. 34-93440; Whistleblower Award Proc. File No. 2022-9)
https://www.sec.gov/rules/other/2021/34-93440.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of about $24,000 to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that:

[C]laimant provided substantial assistance to an investigation by meeting in person with Commission staff, providing documents, and identifying potential witnesses, which enabled the Commission to bring an emergency action and significantly contributed to the success of the Covered Action. 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-93441; Whistleblower Award Proc. File No. 2022-10)
https://www.sec.gov/rules/other/2021/34-93441.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of about $750,000 to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that:

[C]laimant alerted the Commission to the on-going conduct, prompting the opening of the investigation, and thereafter provided substantial, ongoing assistance, including participating in multiple voluntary interviews with Commission staff, identifying key witnesses, providing helpful documents, and explaining complex issues, which saved significant Commission staff time and resources.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-93441; Whistleblower Award Proc. File No. 2022-11)
https://www.sec.gov/rules/other/2021/34-93465.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of over $2 million o Claimant in connection with a Related Action -- the Claimant had previously received an Award in connection with the SEC Covered Action. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[Claimant] voluntarily provided the same original information to the DOJ and
the Commission, and that information led to the successful enforcement of the Related Action. REDACTIONS Claimant provided information that prompted the opening of
the DOJ and SEC investigations, and Claimant provided extensive, ongoing assistance in the investigations. 

https://www.finra.org/sites/default/files/fda_documents/2017055447502
%20Ronald%20L.%20Whittingham%20CRD%204175525%20AWC%20sl.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, Ronald L. Whittingham submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Ronald L. Whittingham was first registered in 2000 and by 2016, he was registered with LPL Financial LLC, where he remained until March 2019. In accordance with the terms of the AWC, FINRA imposed upon Whittingham a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC:

Between August 2016 and December 2016, Whittingham falsified 22 VA replacement disclosure forms, which he submitted to LPL. On each form, Whittingham stated, falsely, that gaining a stepped-up death benefit was one of the reasons that the VA exchange was suitable for the customer. In fact, as Whittingham knew, each VA that was to be replaced had a stepped-up death benefit that, unbeknownst to LPL, was removed at Whittingham's recommendation immediately prior to the time he recommended the VA exchange. Whittingham recommended to his customers that the death benefits be removed from the existing VAs in order to make his recommended exchanges look to LPL as though they were more advantageous to the customer than they were, even though each of the 22 VA replacement disclosure forms identified other, accurate reasons why each exchange was suitable for the customer. 

By falsifying 22 VA replacement forms, Whittingham violated FINRA Rule 2010. In addition, Whittingham violated FINRA Rules 4511 and 2010 by causing LPL to maintain inaccurate books and records. 

http://www.brokeandbroker.com/6134/td-solicitation-arbitration/
Another day and another dispute on Wall Street between a former employer and a former employee. As TD Ameritrade saw it, scorched earth was the way to go. The firm asked for every damn form of damages you can imagine plus injunctions up the wazoo. In the end, we got the smell of napalm in the morning, but by night, the parties reached a settlement and stipulated to a FINRA Arbitration Award. All of which may explain why the FINRA broker-dealer model is a smokin' mess when it comes to employment disputes.

http://www.brokeandbroker.com/6133/finra-tod-arbitration/
Indeed, the dead tend to keep secrets. Among the more disquieting silences are those involving brokerage accounts that were supposed to have Transfer on Death ("TOD") beneficiaries but, for one reason or another, those designations didn't get made, or, if they did, the paperwork wasn't executed. Thus, we are left with the often-voiced promises by a now-deceased accountholder to transfer his holdings to Jane or Joe or Jack or Jill but, oh my, there's no executed authorization in place. Which often leads to charges that the deceased made it very, very clear to her stockbroker that the TODs were to be put in place, which prompts much finger-pointing and that leads to the blame game, which is often the last step before the lawsuit. 

http://www.brokeandbroker.com/6132/finra-ubs-yes/
In poker and arbitration there is the game within the game. There's the bluff. There's misdirection. There's tactical betting. There's strategic betting. There's knowing when to hold. And when to fold. All of which may not make much of a difference if you're dealt a crapola hand. In a recent FINRA arbitration, former UBS customers sought $10 million in damages based upon allegations about the firm's options program. Ante up.

http://www.brokeandbroker.com/6122/finra-equitable-awc/
FINRA censured and fined Equitable Advisors, LLC after the firm had settled a customer arbitration via an agreement in which the customer agreed to "not oppose, object to, or otherwise interfere with" any expungement motion. Although such a pre-conditioned settlement runs afoul of FINRA's rules, the regulator conceded that the offensive language was not inserted by Equitable and had inadvertently slipped by the firm's oversight. Which begs lots of questions for which there are no answers provided by FINRA.

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