The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

December 1, 2021












http://www.brokeandbroker.com/6192/finra-arbitration-dental/
There are times -- too many -- when FINRA's version of alternative dispute resolution seems little more than a cash register. What the public should expect from FINRA's version of mandatory customer arbitration is some minimal amount of disclosure replete with content and context so as to make a given case intelligible. If all the parties desire enhanced confidentiality, that's fine, but at least note that choice in an Award. In most FINRA arbitration cases, the presentation of the underlying facts raises more questions than answers, and the pronouncement of the Award often raises more doubts than explanations. See a recent FINRA public customer Award for an example.

https://www.justice.gov/usao-ndga/pr/georgia-inmate-sentenced-running-multi-million-dollar-fraud-scheme-state-prison
Damon Thomas Young a/k/a Morgan Sylvia, 39, pled guilty in the United States District Court for the Northern District of Georgia to wire fraud and aggravated identityf theft, and he was sentenced to seven years in prison plus three years supervised release, and, further, ordered to pay $30,000 in restitution. In light of the fact that Young is presently serving a 20-year prison sentence in the state of Georgia, the federal court ordered that five of the seven years of federal prison run consecutively with the state sentence. As alleged in part in the DOJ Release:

[S]ince 2010, Damon Thomas Young has been an inmate with the Georgia Department of Corrections, incarcerated first at Georgia State Prison in Reidsville, Georgia, and then at Hays State Prison in Trion, Georgia.  Young is serving a 20-year state sentence for aggravated assault on a police officer and a 10-year sentence for violation of the Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act.  Young also has prior convictions for theft by taking, impersonating a public officer, arson, forgery, burglary and arson, and theft by deception.  His maximum possible release date from state prison is June 16, 2030.

While serving his state prison sentence, in 2019, Young used a contraband cell phone to defraud, or attempt to defraud, multiple heavy equipment dealers out of equipment worth millions of dollars.  Using the alias Morgan Sylvia and pretending to be a purchasing officer with AbbVie, a real biopharmaceutical company, Young ordered heavy construction equipment that he had delivered in and around Ranger, Georgia, where he and his family lived.  He then put the equipment up for sale to buyers on Craigslist.

To carry out his fraud, Young called heavy equipment dealers, posed as Morgan Sylvia, a fictitious purchasing officer, and stated that he wanted to order some heavy construction equipment.  Using the Sylvia alias, Young misrepresented that AbbVie needed the equipment because it was building a facility in Ranger.  He ordered heavy equipment, such as wheel loaders, skid steer loaders, an excavator, a horizontal grinder, and dump trucks.  Young communicated with the equipment dealers by phone, text, and email from prison.  He fraudulently completed credit applications, purchase orders, sales contracts, and insurance documents and emailed them to the dealers as part of the scheme.  He also emailed a fraudulent AbbVie corporate resolution document, purportedly signed by actual corporate officers of the company, but in truth he had forged the signatures on the document. 

As part of his scheme, Young fraudulently ordered equipment worth over $2.8 million from six different equipment dealers.  Most of the dealers caught the fraud before shipment, but Young was successful in acquiring four pieces of equipment worth over $500,000.  He sold some of the stolen equipment online and used the proceeds to purchase two Chevrolet work trucks.  The Gordon County Sheriff's Office has since recovered all of the stolen equipment that was shipped.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-93685; Whistleblower Award Proc. File No. 2022-19)
https://www.sec.gov/rules/other/2021/34-93685.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award to a Claimant in the amount of over $175,000. The Commission ordered that CRS' recommendations be approved. The Order asserts that the SEC considered the [Ed: footnote omitted]:

[(1)] the significance of information provided to the Commission; (2) the assistance provided in the Covered Actions; (3) the law enforcement interests in deterring violations by granting awards; (4) participation in internal compliance systems; (5) culpability; (6) unreasonable reporting delay; and (7) interference with internal compliance and reporting systems. Here, Claimant performed calculations and otherwise assembled information that provided important insights about the company's conduct that was not otherwise apparent. However, while Claimant's information played a role in the Commission staff's decision to open an investigation, the Commission received several other tips from multiple other sources that also contributed to the staff's decision to open an investigation. Further, after submitting the tip, Claimant had no communication with Commission staff responsible for the investigation and provided no additional information or assistance.

https://www.sec.gov/litigation/litreleases/2021/lr25274.htm
In a Complaint filed in the United States District Court for Southern District of New York the https://www.sec.gov/litigation/complaints/2021/comp25274.pdf, the SEC charged Marc Demane Debih with violating the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act and Rules 10b-5 and 14e-3 thereunder. Debih consented to the entry of a judgment which will permanently enjoin him from violating the charged provisions and civil penalties. Debih pled guilty to securities fraud in a parallel criminal action. As alleged in part in the SEC Release:

[D]ebih was a central figure in two separate schemes to trade in the securities of U.S. public companies in advance of news that these companies had been targeted for acquisition. Debih allegedly received illicit tips through a network that included two London-based investment bankers and a U.S.-based investment banker, all of whom the SEC charged in October 2019. The complaint alleges that Debih traded on the tips he received from the investment bankers and that he tipped others to trade. Debih is the eighth person the SEC has charged in connection with these schemes.

https://www.justice.gov/usao-sdny/pr/cryptocurrency-trader-pleads-guilty
Jeremy Spence, a/k/a "Coin Signals" pled guilty in the United States District Court for the 
Southern District of New York to commodities fraud allegedly involving over 170 investors and $5 million in solicited investment funds. As alleged in part in the DOJ Release:     

From November 2017 through April 2019, SPENCE solicited investors in various cryptocurrency investment pools that SPENCE had created and managed (the "Funds"). SPENCE solicited investments for several Funds, the largest and most active of which were the Coin Signals Bitmex Fund, a/k/a the "CS Mex Fund," the Coin Signals Alternative Fund, a/k/a the "CS Alt Fund," and the Coin Signals Long Term Fund. Investors who wanted to participate in a Fund would transfer cryptocurrency, such as Bitcoin and Ethereum, to SPENCE in order for SPENCE to invest it. 

SPENCE solicited these investments through false representations, including that SPENCE's crypto trading had been extremely profitable when, in fact, SPENCE's trading had been consistently unprofitable.  For example, on January 28, 2018, SPENCE posted a message in an online chat group falsely claiming that his trading of investor funds over the past month had generated a return of more than 148%. As a result of this misrepresentation, investors transferred additional funds to SPENCE. In fact, over that same period of approximately one month, SPENCE's trading resulted in net losses in the accounts in which he traded investor funds.

To forestall redemptions by investors, and to continue to raise money from investors to fund his scheme, SPENCE generated fictitious account balances, which he made available to investors online. Instead of accurately reporting the trading losses SPENCE was incurring, the account balances falsely indicated to investors that they were making money by investing with SPENCE. To hide his trading losses, SPENCE used new investor funds to pay back other investors in a Ponzi-like fashion. In total, SPENCE distributed cryptocurrency worth approximately $2 million to investors substantially from funds previously deposited by other investors. 

https://www.justice.gov/usao-sdny/pr/ceo-purported-global-biomedical-company-charged-stealing-over-1-million-victim-s-money
https://www.justice.gov/usao-sdny/press-release/file/1452146/download, Norman Gray, 66, was charged with one count of wire fraud. As alleged in part in the DOJ Release:

GRAY is the CEO of the Biomedical Company, which is headquartered and incorporated in Hamden, Connecticut.  In or about August 2020, GRAY induced Victim-1 to give him $250,000, supposedly as an equity investment in the Biomedical Company.  In reality, nearly all of the $250,000 was paid out to a company with no apparent affiliation with the Biomedical Company, and Victim-1 received no equity in the Biomedical Company. In the ensuing months, GRAY further solicited a total of approximately $1,200,000 from Victim-1, representing that he would invest those funds in deals involving the procurement of PPE for two major universities in the tristate area.  GRAY represented that the necessary contracts for those deals were in place and that the risk involved with those deals was "virtually zero."  In reality, the necessary contracts did not exist, and GRAY caused substantially all of Victim-1's funds to be spent on the Biomedical Company's general operating expenses, as well as products and services having nothing to do with the Biomedical Company or the procurement of personal protective equipment, including, for example, the cash purchase of an approximately $50,000 luxury SUV. 

As part of his scheme to fraudulently solicit funds from Victim-1, and as a means of dispelling Victim-1's concern that an investment with GRAY would require Victim-1 to forego the purchase of a home, GRAY offered Victim-1 a mortgage from the "Tranctus Group." GRAY claimed that "Tranctus Group" was a boutique mortgage company of which he was the sole investor. GRAY directed Victim-1 to his supposed mortgage broker "Benjamin Mabry."  In fact, "Benjamin Mabry" was a false persona invented by GRAY, and GRAY registered the internet domain associated with the "Tranctus Group" on the very same day that Victim-1 received a purported mortgage commitment letter from "Mabry."  Ultimately, Victim-1 received no return on Victim-1's investments, GRAY refused to return Victim-1's money to Victim-1, and the purported "Tranctus Group" mortgage failed to materialize.    

https://www.justice.gov/usao-edmi/pr/international-hacking-group-members-sentenced-sim-hijacking-conspiracy-resulted-theft
Garrett Endicott, 22, a sixth member of an international hacking group known to its members as "The Community" pled guilty in the United States District Court for the Eastern District of Michigan ; and he was sentenced to 10 months in prison and ordered to pay $1212,5469.37 in restitution. As such, Endicott is now the final Defendant to be sentenced from the 2019 Indictment. As alleged in part in the DOJ Release:

"SIM Hijacking" or "SIM Swapping" is an identity theft technique that exploits a common cyber-security weakness-mobile phone numbers. This tactic enabled The Community to gain control of victims' mobile phone number, resulting in the victims' phone calls and short message service (SMS) messages being routed to devices controlled by The Community. SIM Hijacking was often facilitated by bribing an employee of a mobile phone provider. Other times, SIM Hijacking was accomplished by a member of The Community contacting a mobile phone provider's customer service-posing as the victim-and requesting that the victim's phone number be swapped to a SIM card (and thus a mobile device) controlled by The Community.

Members of The Community engaged in Sim Hijacking to steal cryptocurrency from victims across the country, including California, Missouri, Michigan, Utah, Texas, New York and Illinois.  Cryptocurrencies, also known as virtual currencies or digital currencies, are online media of exchange. The most famous of these is Bitcoin. Like traditional currency, they act as a store of value and can be exchanged for goods and services. They can also be exchanged for dollars.

Once "The Community" had control of a victim's phone number, the phone number was leveraged as a gateway to gain control of online accounts such as a victim's email, cloud storage, and-ultimately-cryptocurrency exchange accounts. The Community would use their control of victims' phone numbers to reset passwords on online accounts and/or request two-factor authentication (2FA) codes that allowed them to bypass security measures. 

In total, The Community's scheme resulted the theft of tens of millions of dollars' worth of cryptocurrency. Individual victims lost cryptocurrency valued, at the time of theft, ranging from under $2,000 to over $5 million. The sentenced defendants were involved in total thefts ranging from approximately $50,000 to over $9 million.

The following defendants have been previously sentenced in the Eastern District of Michigan, all after pleading guilty:

Ricky Handschumacher, 28, of Pasco Country, Florida, was sentenced to 48 months in prison and ordered to pay restitution in the amount of $7,681,570.03.

Colton Jurisic, 22, of Dubuque, Iowa was sentenced to 42 months in prison and ordered to pay restitution in the amount of $9,517,129.29.

Reyad Gafar Abbas, 22, of Charleston, South Carolina, was sentenced to 24 months in prison and ordered to pay restitution in the amount of $310,791.90

Two defendants charged in the indictment were previously sentenced in other courts.  Conor Freeman, 22, of Dublin, Ireland, pleaded guilty to parallel charges in Ireland and was sentenced to three years in prison by an Irish court. Ryan Stevenson, 29, of West Haven, Connecticut, pleaded guilty and was sentenced to probation in the District of Connecticut. Both of these defendants were also ordered to pay restitution. 

Bill Singer's Comment: Ya think that someone at DOJ might just let us know as to what charge Endicott actually pled guilty to?  Sure -- the original Indictment charges conspiracy to commit wire fraud, wire fraud, and aggravate identity theft, but, what's charged in an Indictment and what's pled to in a subsequent Plea Agreement aren't always the same. 

https://www.justice.gov/usao-edny/pr/individual-who-portrayed-himself-experienced-stock-trader-pleads-guilty-defrauding
Gonzalo Ortiz pled guilty in the United States District court for the Eastern District of New York to investment adviser fraud. As alleged in part in the DOJ Release:

Between approximately April 2015 and May 2017, Ortiz falsely represented himself to an investor (the "Victim") as a successful investment adviser who had made profits for other individuals by trading stocks on their behalf.  Ortiz convinced the Victim to allow him to invest the Victim's money, promising significant returns.  Based on those misrepresentations, the Victim made successive investments with Ortiz over a period of years.  During this time, Ortiz falsely told the Victim that the investments were profitable and sent the Victim a false account statement to support these claims.  In reality, Ortiz made poor trading decisions that resulted in the loss of a portion of the Victim's money, and also stole some of the Victim's money for himself, siphoning off portions of the investments to pay for personal expenses including clothing, food and car payments.  Ortiz controlled nearly $600,000 of the Victim's money, stole approximately $224,500 for himself and lost a significant amount of the Victim's money to unprofitable trades. 

https://www.finra.org/sites/default/files/fda_documents/2020068312201
%20Robert%20Anthony%20Guidicipietro%20CRD%201588069%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,Robert Anthony Guidicipietro submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Robert Anthony Guidicipietro was first registered in 1991, and from December 2018 through January 2020, he was registered with Arive Capital Markets. The "Background" portion of the AWC asserts in part that [Ed: footnotes omitted]:

In 2000, Guidicipietro accepted an Offer of Settlement from the National Association of Securities Dealers (NASD) pursuant to which he was fined $40,000, suspended from association with any NASD member in any capacity for 18 months, ordered to requalify as a General Securities Representative before acting again in that capacity, and required to pay four customers $70,000 in restitution. The settlement included charges that he engaged in unauthorized transactions, failed to execute customer sell orders or failed to follow customer instructions related to their accounts, directly or indirectly caused customer account documentation to be falsified, and failed to respond to NASD requests for information or testified untruthfully. In 1997, the Missouri Secretary of State issued a cease and desist order alleging that Guidicipietro and others engaged in unauthorized transactions, failed to execute sell orders, and engaged in fraud.

In accordance with the terms of the AWC, FINRA imposed upon Guidicipietro a $5,000 fine, a four-month suspension from associating with any FINRA member in all capacities, and $35,219.74 in restitution. The AWC asserts in part that:

Between January 2019 and November 2019, while he was registered through Arive, Guidicipietro engaged in excessive and unsuitable trading, including the use of margin, in the account of Customer A. Customer A is a retired supervisor at New York's Metropolitan Transit Authority and was 78 years old when he opened his account at Arive. Customer A had limited investment knowledge and considered himself a conservative investor. 

During the relevant period, Guidicipietro recommended that Customer A place 56 trades-all on margin-in his account, and Customer A accepted Guidicipietro's recommendations. Collectively, the trades that Guidicipietro recommended caused Customer A to pay $35,219.74 in commissions and fees and resulted in a cost-to-equity ratio of more than 34 percent-meaning the customer's investments had to grow by more than 34 percent just to break even. Although Customer A's account had an average month-end equity of approximately $140,000, Guidicipietro recommended purchases with a total principal value of approximately $1,120,000, which resulted in a turnover rate in the account of over 8. As a result of Guidicipietro's unsuitable recommendations, Customer A realized a loss of approximately $35,000. 

Guidicipietro recommended securities transactions in Customer A's account that were excessive and unsuitable given the customer's investment profile. Therefore, Guidicipietro violated FINRA Rules 2111 and 2010.

https://www.finra.org/sites/default/files/fda_documents/2019061329901
%20Ian%20E.%20James%20CRD%202602300%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, Ian E. James submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Ian E. James was first registered in 1995, and from July 2014 to May 2020, he was registered with Investacorp, Inc. In accordance with the terms of the AWC, FINRA imposed upon James a $10,000 fine and a two-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

On or about July 14, 2015, James became aware that the IRS had filed a $59,997.08 tax lien against him. Subsequently, on February 12, 2016, James inaccurately stated on the annual compliance questionnaire he submitted to Investacorp that he had "made all necessary amendments to [his] Form U4, where required by FINRA [i]ncluding but not limited to, any information related to . . liens," even though he had not done so. James belatedly disclosed this lien on his Form U4 on November 3, 2016, after FINRA inquired with the firm about it in October 2016. 

Therefore, James violated FINRA Rules 1122 and 2010 and Article V, Section 2(c) of FINRA's By-Laws.  

. . .

During April and May 2018, through an entity he owned (the Entity), James made a capital contribution to a medical marijuana company (the Company), in the form of a promissory note, in exchange for a partial ownership interest in the Company. James also formed and became the managing member of a new limited liability company to engage in operational activity for the Company. James expected to serve as the Company's chief financial officer, and he expected to obtain compensation in that capacity and in connection with his ownership interest in the Company, pending the submission of certain applications to the Louisiana Department of Agriculture and Forestry. However, subsequently during May 2018, James, through the Entity, filed a lawsuit that alleged, among other things, that the Company and its founder breached agreements that James had executed, such that James could not obtain future profits he had anticipated. 

James received a monetary settlement in connection with his lawsuit. James engaged in these activities without providing prior written notice to his firm. 

Therefore, James violated FINRA Rules 3270 and 2010.

https://www.finra.org/sites/default/files/fda_documents/2020065035202
%20Pasquale%20James%20Rappa%20CRD%205901386%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, Pasquale James Rappa submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Pasquale James Rappa was first registered in 2011, and from December 2016 to September 2019, he was registered with First Standard Financial Company LLC. In accordance with the terms of the AWC, FINRA imposed upon Rappa a $5,000 fine, a two-month suspension from associating with any FINRA member in all Principal-only capacities, and an undertaking that he complete 20 hours of continuing education concerning supervisory responsibilities. The AWC asserts in part that:

Between March 2018 and May 2019, Rappa became aware of red flags that the Representative was recommending excessive and unsuitable securities transactions in the accounts of three customers, including the following: 
  • Rappa's review of the daily trade blotter alerted him to the fact that the Representative engaged in frequent, short-term trades in the three affected accounts, including multiple same-day sales and purchases. 

  • Rappa learned through his review of the daily trade blotter that the Representative also engaged in frequent "round-trip" trading (i.e., the purchasing and selling of the same security)-in one of his customer's accounts, this occurred 41 times.

  • All three accounts appeared on the firm's monthly "Actively Traded Accounts" list, which compiled a list of accounts based upon the high number of transactions and high commissions charged to the accounts, but did not list the accounts' turnover or cost-to-equity ratios. 

Pursuant to the firm's WSPs, Rappa was required to contact the customers who had "Actively Traded Accounts." One of the Representative's customers complained twice to Rappa about the activity in his account. On the first occasion, he complained that his account should not be on margin. On the second occasion, he expressed concern to Rappa about losses in and high commissions charged to his account. 

Rappa failed to reasonably investigate these red flags or take appropriate action in response. When Rappa discussed the three accounts that appeared on the firm's list of Actively Traded Accounts with the Representative, he accepted at face value the Representative's explanations that the customers understood and desired an aggressive trading strategy. When Rappa spoke with the affected customers, Rappa failed to ask the customers whether they wanted aggressive trading as the representatives claimed. Rappa also failed to take any steps to investigate the complaints set forth above. Rappa likewise failed to take other appropriate action to address the Representative's excessive and unsuitable trading. 

As a result, Rappa failed to detect that the Representative was making excessive and unsuitable recommendations to the three affected customers, two of whom were senior investors. Had he reasonably investigated the red flags, Rappa would have learned that, between March 2018 and May 2019, the Representative excessively traded the accounts of three customers, resulting in annualized turnover rates and annualized cost-to-equity ratios that far exceeded the typical benchmarks for excessive trading. 

By failing to reasonably supervise the Representative, Rappa violated FINRA Rules 3110 and 2010. 

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