Securities Industry Commentator by Bill Singer Esq

Appellate Court Affirms $11.5 Million in Damages and Costs in Employment Defamation Case (BrokeAndBroker.com Blog)

Joliet Financial Advisor Indicted on Federal Fraud Charges for Allegedly Swindling Clients Out of Nearly $800,000 (DOJ Release)

Federal Reserve Board announces termination of enforcement action with The Goldman Sachs Group, Inc. and Goldman Sachs & Co. LLC (Federal Reserve Release)

SEC Charges Mother and Son with Insider Trading (SEC Release)

SEC Obtains Final Judgment Against Analyst Charged with Aiding & Abetting New York Pension Fund Pay-To-Play Scheme (SEC Release)

SEC Charges Oilfield Services Company and Former CEO With Failing to Disclose Executive Perks and Stock Pledges (SEC Release)

Israeli Securities Trader Sentenced To 30 Months In Prison For Role In International Insider Trading Scheme (DOJ Release)

Superseding Indictments Charge Three Bank Employees and Eight Others in Alleged Counterfeit Checks and Bank Fraud Schemes (DOJ Release)

Former Memphis Attorney Sentenced in Scheme to Defraud Clients (DOJ Release)

SEC Awards Over $6.3 Million and $1.3 Million To Whistleblower Claimants

Order Determining Whistleblower Award Claims

SEC Awards About $2.4 Million To Two Whistleblower Claimants

Order Determining Whistleblower Award Claims

SEC Awards About $240,000 and $195,000 To Two Whistleblower Claimants

Order Determining Whistleblower Award Claims 

SEC Awards About $400,000 To Whistleblower

Order Determining Whistleblower Award Claims

CFTC  Awards About $1 Million To Two Whistleblowers (Or So They Say)

Order Determining Whistleblower Award Claims

FINRA Censures and Fines StoneX for Customer Limit Order Violations

In the Matter of StoneX Financial Inc., f/k/a INTL FCStone Financial Inc. (FINRA AWC)

FINRA Sanctions WestPark and CEO for Promissory Note Violations

In the Matter of WestPark Capital, Inc. and Richard A. Rappaport (FINRA AWC)

Sound of Silence From A FINRA Arbitration That Says Nothing About Anything Despite Awarding $650,000 (BrokeAndBroker.com Blog)

[M]olo worked as a licensed financial advisor in the Joliet branch of a national financial services firm.  From 2018 to earlier this year, Molo falsely represented to clients that their investments with him would be income-producing and tax-free, and that they would receive regular, periodic interest payments, the charges allege.  In reality, Molo did not intend to invest client funds and instead misappropriated their money to pay for personal expenses, including Cadillac XT5 and GMC Yukon sport-utility vehicles, mortgage payments for himself and family members, home remodeling and construction costs, lottery tickets, travel and shopping expenses, and cash payments to family members, the indictment states.

As a result of the scheme, Molo caused at least three clients to suffer losses totaling $778,000, the indictment states.

[C]ohen, a retired school teacher, purchased shares of The Trade Desk on the basis of material, non-public information she obtained from her son in advance of the company's positive second-quarter earnings report. Rotter allegedly obtained The Trade Desk's advance earnings information in the summer of 2018 through his job at an outside public relations firm for The Trade Desk. According to the complaint, Rotter violated confidentiality agreements that prohibited him from using or disclosing The Trade Desk's financial information and made a series of phone calls to his mother prior to the announcement. Cohen allegedly purchased $86,000 worth of shares of The Trade Desk following the phone calls with her son and sold them shortly after the company's share price increased 37% following the public announcement of the earnings results, netting $45,646.03 in illicit profits.

After a virtual bench trial held in July 2020, Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York, found Paulsen liable on all counts. In an October 2020 order, the court found that, from early 2014 until February 2016, Navnoor S. Kang was the Fund's Director of Fixed Income, with investment responsibility for approximately $50 billion of the Fund's assets. Kang used his position at the Fund to solicit and receive improper entertainment from Paulsen and Deborah D. Kelley, a registered representative at the broker-dealer. In exchange, Kang directed a significant amount of state business to the broker-dealer, generating sizable commissions. The court found that although Kang told Paulsen and Kelley that the Fund had very strict rules that prohibited him from accepting anything from Paulsen, Paulsen and Kelley spent thousands of dollars entertaining Kang and his girlfriend. Paulsen and Kelley then sought reimbursement of those expenses from the broker-dealer, and submited false expense reports which concealed the fact they had entertained Kang on the trip. Later, when the broker-dealer discovered inconsistencies in the expense reports and began an internal investigation, Paulsen and Kelley conspired to lie, and did lie, to the broker-dealer's internal investigators. The court concluded that Paulsen lied because he understood that Kang and Kelley were engaged in an illegal quid pro quo relationship.

The SEC previously obtained final judgments against Kang, Kelley, and another individual in connection with this conduct.

The SEC's order finds that ProPetro violated reporting, books and records, internal accounting controls, and proxy provisions of the federal securities laws, and that Redman violated proxy provisions and negligence-based antifraud provisions. Redman also caused ProPetro's reporting and books and records violations. Without admitting or denying the SEC's findings, ProPetro and Redman agreed to cease-and-desist from further violations, and Redman agreed to pay a $195,046 penalty. The order notes ProPetro's significant cooperation with the agency's investigation as well as its extensive remedial efforts, which included hiring an entirely new management team with significant public company experience, hiring additional finance department personnel, installing several new directors, and developing new controls, policies, and procedures concerning perks.

DOV MALNIK and his business partner and codefendant Tomer Feingold, both Israeli citizens, were securities traders who traded in their own names and managed various companies and investment funds.  From at least 2013 through 2017, MALNIK participated in a large-scale, international insider trading ring.  Through the scheme, MALNIK received material, nonpublic information ("MNPI") concerning acquisitions and potential acquisitions of publicly traded companies from a securities trader who resided in Switzerland ("CC-1").  MALNIK knew that this MNPI was obtained by CC-1 directly and indirectly from individuals who were insiders at publicly traded companies and investment banks.  These insiders breached their fiduciary duties and shared MNPI with others, including CC-1, in exchange for compensation, who in turn shared that information with MALNIK.  MALNIK used that information to place timely, profitable securities trades resulting in millions of dollars of profits.

Throughout the conspiracy, MALNIK, Feingold, the investment bank insiders, CC-1, and others involved in this scheme, took numerous steps to conceal their unlawful enterprise, including through the use of encrypted messaging applications and multiple unregistered "burner" cellphones to communicate with each other.  MALNIK also attempted to avoid detection by engaging in securities trading through numerous offshore corporate entities.  For example, in 2011, MALNIK incorporated a British Virgin Islands entity based in Geneva, Switzerland, and subsequently opened trading and/or bank accounts in that shell company's name.  During the insider trading scheme, MALNIK's offshore companies traded in the stocks of companies about which MALNIK had received MNPI - often with multiple of those companies trading in the same stock and on the same days.

MALNIK also used these entities to transfer a portion of the profits of his and Feingold's illegal insider trading to CC-1, as per MALNIK's agreement with CC-1.  At first, MALNIK instructed his bank to send the funds to an account at a financial institution in Switzerland that agreed to hold the funds for the benefit of CC-1.  After a short time, however, MALNIK's bank questioned the purpose of the transactions and requested justification for the transfer of funds.  Accordingly, in order to deceive the banks, MALNIK, Feingold, and CC-1 agreed that CC-1 would issue fake invoices for consulting services to MALNIK and Feingold's various offshore entities.  The offshore entities would then send the funds to CC-1's account pursuant to the fake invoices.

To date, this investigation has also resulted in the conviction of other individuals who were involved in this global insider trading scheme, including investment banker Bryan Cohen, who pled guilty on January 7, 2020, to illegally passing MNPI related to his bank's corporate clients, and entrepreneur and pharmaceutical company executive Telemaque Lavidas, who was convicted on January 15, 2020, of illegally passing MNPI related to Ariad Pharmaceuticals, Inc.

[F]our defendants allegedly participated in one scheme that defrauded banks for approximately one year beginning in April 2020. Seven individuals allegedly participated in an unrelated scheme that defrauded banks for approximately 14 months beginning in January 2020.

In one of the schemes, an indictment unsealed on Thursday alleges that Terrance Richardson, 30, of Providence, obtained and stole checks and bank account information belonging to businesses and individuals, and used the information to create counterfeit checks. The indictment alleges that Richardson gained the assistance of Machaela Farias, 26, of Providence, an employee at Santander Bank, to facilitate the deposit of the counterfeit checks.

It is further alleged that as part of the scheme, Richardson and others obtained debit card information of individuals who agreed to be compensated for allowing counterfeit checks to be deposited into their bank accounts. Once the checks were deposited, Richardson, Farias, Johanna Arias, 33, of Providence, Jordan Robertson, 24, of Providence, and others, quickly withdrew the funds from the accounts. The indictment alleges that members of the conspiracy deposited at least $165,154 in counterfeit checks and withdrew at least $89,453 in cash.

The indictment charges Richardson, Farias, Arias, and Robertson with conspiracy to commit bank fraud and 14 counts of bank fraud. Additionally, Richardson is charged with aggravated identity theft.

In an unrelated matter, an indictment unsealed on November 15, 2021, alleges that Richard Koboi, 26, of Providence, Maximillan Mwah, 38, and Godgift Rosler, 33, of Pawtucket, obtained and stole checks and bank account information belonging to small businesses and individuals. It is alleged that some of the account information and checks were accessed and provided by Savonnah Briggs, 26, and Isha-Lee Savage, 23, of Providence, while working at Citizens Bank and Santander Bank respectively. The information was allegedly used to create counterfeit checks that Koboi, Mwah, and others deposited into the bank accounts of individuals that were paid in exchange for their agreement to allow their bank accounts to be used. Nearly$70,000 in counterfeit checks was deposited into the accounts. The indictment alleges that Koboi, Mwah, Junior Richards, 24, of Pawtucket, Darren Maenza, 27, of Pawtucket, and others made rapid withdrawals, cash transfers, and debit card purchases from the accounts.

[B]etween 2007 and March 2013, Skouteris engaged in a scheme to defraud his clients by settling cases without notifying them and forging their endorsements on settlement checks made jointly payable to him and the client. Skouteris then deposited the checks to bank accounts he maintained at TrustOne Bank.

[(i)] both Claimant 1 and Claimant 2 provided new information during an existing investigation, alerting Commission staff to alleged Redacted schemes occurring in different geographic areas; (ii) while both Claimants' information was important to the success of the Covered Action, Claimant 1's information was more significant as Commission staff was able to corroborate all of Claimant1's information and the majority of the relief ordered in the case was based on the conduct alleged by Claimant 1; (iii) both Claimants provided substantial, ongoing assistance that conserved significant Commission time and resources; (iv) Claimant 1 reported the concerns internally prior to reporting to the Commission; and (v) Claimant 1 reported to the Commission expeditiously while Claimant 2 waited a period of approximately 16 months before reporting to the Commission.

Further, as to the Related Action, we find that the proposed *** % award to Claimant 1 is appropriate. Claimant 1 provided the same information to the Other Agencies, which commenced an investigation based on Claimant 1's information and brought charges in the Related Action based on the same conduct alleged by Claimant 1 that formed the factual basis for part of the Covered Action. We find that the contributions made by Claimant 1 to the Covered Action are similar to Claimant 1's contributions to the success of the Related Action, and, therefore, it is appropriate that Claimant 1 receive a *** % award percentage in the Related Action. 

The record demonstrates that Claimant 1 voluntarily provided original information to the Commission that led to the successful enforcement of the Covered Action. Accordingly, Claimant 1 qualifies for a whistleblower award. Applying the award criteria as specified in Rule 21F-6 of the Exchange Act based on the specific facts and circumstances here, as well as our review of Claimant 1's response to the Preliminary Determinations, we find that an award of Redacted percent ( *** %) is appropriate. Claimant 1's information caused the staff to open the investigation that led to the Covered Action, and Claimant 1 provided significant assistance to Commission staff during the investigation by providing documents and making himself/herself available for interviews. Claimant 1 also provided additional assistance as the investigation progressed, including key pieces of evidence that allowed the staff to complete the investigation more quickly. 

We decline to accept the contentions raised in Claimant 1's response to the Preliminary Determinations. As discussed below, the record demonstrates that Claimant 2 is eligible for an award, and a *** % award to Claimant 1 is appropriate given the relative value of each of the Claimants' contributions.

. . .

[B]ecause Claimant 2's information was of substantially less value than that of Claimant 1, whose information alerted staff to the violations, we believe that a significantly lower award of ** % is warranted here. 

[C]laimant 1 alerted Commission staff to alleged fraudulent conduct that, in part, prompted staff to open an investigation. Claimant 1 met in person with Commission staff, as well as representatives from the Other Agency, and provided additional information following that meeting. Claimant 2 also met with Commission staff, along with representatives from the Other Agency, and provided new, detailed and highly valuable information early in the investigation that was instrumental in assisting the staff to develop its theory of liability. Redacted 

Further, we find that it is appropriate that Claimant 1 and Claimant 2 receive an equal percentage in connection with the Covered Action because of their comparable contributions to the success of the Covered Action. With respect to the Related Action, we agree with the CRS's recommendation that Claimant 1 receive a higher award, as Claimant 1's information and assistance played a more significant role in the success of the Related Action as compared to the information and assistance provided by Claimant 2. 

[(1)] Claimant's information alerted Enforcement staff to the potential wrongdoing, which, in part, prompted Enforcement staff to open the investigation; (2) Claimant provided significant ongoing assistance to Enforcement staff during the investigation that saved Commission time and resources; (3) there are high law enforcement interests here as money was returned to harmed investors; (4) Claimant's information and cooperation helped the Commission to shut down an ongoing Ponzilike scheme preying on retail investors and obtain emergency relief in the action. 

Against these positive factors, we also believe that Claimant's award percentage should be reduced for culpability. While Claimant was not charged in the matter, the record reflects that Claimant became aware of  Redacted

We also recognize there are several mitigating factors, including that Claimant  Redacted were harmed investors, that Claimant was unaware of certain fraudulent aspects of the investment scheme, and took some steps to help remediate the harm, including Redacted

Redacted Accordingly, we believe that a award strikes the appropriate balance between Claimant's significant contributions to the success of the Covered Action and Redacted Redacted Redacted Redacted Redacted Claimant's level of culpability.

On February 1, 2017, FINRA accepted an AWC in which StoneX consented to findings that between July 1, 2015 and September 31, 2015, it failed to immediately display customer limit orders in violation of FINRA Rule 6460, violated FINRA Rules 5320 and 2010, and failed to establish written supervisory procedures (WSPs) reasonably designed to achieve compliance with FINRA Rules 6460 and 5320, in violation of FINRA Rule 3110 and 2010. In that matter, StoneX also consented to a sanction consisting of a censure, a fine of $42,500, and undertaking to revise its WSPs. INTL FCStone Financial Inc., No. 20150475920-01 (AWC Feb. 1, 2017). 

During 3Q2017 and 2Q2018, StoneX operated a trading desk where traders were required to handle some order flow manually, outside of automated systems, resulting in delays in the handling of certain OTC orders. As a result, StoneX failed to fully and immediately display, route, execute, or cancel 27 out of 35 (77%) of sampled customer limit orders, 14 of which were cancel/replace orders. These 14 cancel/replace orders were 100% of the cancel/replace orders in the sample. Therefore, Respondent violated FINRA Rules 6460 and 2010.

. . . 

From July 2017 through June 2018, StoneX failed to reasonably supervise for compliance with FINRA Rule 6460. Although the firm utilized exception reports to identify limit orders that were displayed more than 30 seconds after the order became eligible, the exception reports failed to capture cancel/replace orders. Therefore, Respondent violated FINRA Rules 3110(a) and 2010. 

. . .

From July 2017 through June 2018, StoneX failed to establish written procedures reasonably designed to achieve compliance with FINRA Rule 6460. While the firm's procedures required a supervisory review of orders for compliance with FINRA Rule 6460, the firm's written procedures failed to provide reasonable guidance and instructions to supervisors as to how to conduct such reviews. Therefore, Respondent violated FINRA Rules 3110(b) and 2010. 

• Securities Industry Commentator
• Bill Singer