The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

June 15, 2022














https://www.brokeandbroker.com/6495/regulate-or-aggrieved/
In 2007, NASD Regulation and the New York Stock Exchange combined and morphed into the Financial Industry Regulatory Authority ("FINRA"). Rather than continue as an "association" from the progenitor National Association of Securities Dealers ("NASD"), the progeny called itself an "Authority," as if it is somewhat quasi-governmental and is thus eligible for certain special privileges. As a practical matter, FINRA members are effectively not members of the Authority, nor are they members of a national securities association. In some respects, the members are being relegated to the dustbin of history. 

https://www.sec.gov/litigation/litreleases/2022/lr25421.htm
The United States District Court for the District of Massachusetts entered Final Judgments against 16 defendants and 10 relief defendants, all base in China. As alleged in part in the SEC Release:

On October 15, 2019, the SEC charged eighteen traders in the scheme. The SEC's complaint alleged that the traders manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices. For example, according to the SEC's complaint, the traders used multiple accounts to place several small sell orders to drive down a stock's price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the complaint alleged, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices. On November 12, 2019, the court entered a preliminary injunction and continued an asset freeze against all defendants and relief defendants. On December 23, 2019, the SEC amended the complaint to add two defendants and eight additional relief defendants to those originally charged.

On June 9, 2022, the Court granted the SEC's motion for default judgment against sixteen defendants: Shuang Chen, Wenwen Du, Lirong Gao, Jing Guan, Tonghui Jia, Xuejie Jia, Honglei Shi, Lujun Sun, Huailong Wang, Jiadong Wang, Jiafeng Wang, Linlin Wu, Lin Xing, Yong Yang, Jiancheng Zhao, and Forrest (HK) Co., Limited, permanently enjoining each from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Court also determined that all of these defendants are jointly and severally liable for disgorgement of ill-gotten gains of $35,603,447 plus $5,989,769 in prejudgment interest thereon, and each must pay a civil penalty of $2,000,000. Also on June 9, 2022, the Court granted the SEC's motion for default judgment against relief defendants Weiguo Guan, Jingquan Liu, Rishan Liu, Weigang Yang, Jingru Zhai, Song Geng, Qinghua Ren, Jixiang Teng, Xiangjia Yang, and Xiuchun Zhang, ordering disgorgement individually in amounts ranging from $3,505 to $533,713, plus prejudgment interest, for a total of $1,512,333.

Previously, in September 2021, the SEC secured a judgment by consent against trader defendant Xiaosong Wang, who agreed to be permanently enjoined from violating the antifraud provisions of Section 17(a) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder, with disgorgement, prejudgment interest, and a civil penalty to be determined by the court at a later date. The SEC also continues to pursue fraud charges against trader defendant Jiali Wang.

https://www.justice.gov/opa/pr/former-earthwater-cfo-and-others-plead-guilty-fraud-charges-related-high-yield-investment
Harley E. "Buddy" Barnes III, 63, (former Chief Financial Officer of EarthWater Limited) pled guilty in the United States District Court for the Northern District of Texas to conspiracy, fraud, and money laundering charges; also, Joe Edward Duchinsky, 67, pled guilty to conspiracy to commit mail and wire fraud. As alleged in part in the DOJ Release:

[I]n or about 2013 and continuing through or about May 2019, Barnes, as CFO of EarthWater, and Duchinsky, as a salesperson of EarthWater stock, participated in a fraudulent scheme to convince individuals in the United States, the United Kingdom, and Canada to invest in EarthWater under the false pretense that their investment would increase substantially in value in the immediate future. In connection with the scheme, Barnes, Duchinsky, and their co-conspirators made materially false and fraudulent misrepresentations to investors that the majority of investor funds would be used to support EarthWater's operations. In fact, the funds were used to pay undisclosed, excessive commissions to Duchinsky and others for selling EarthWater stock on Barnes's behalf. Barnes, Duchinsky, and their co-conspirators knew that the proceeds of EarthWater stock sales were not invested in EarthWater as described to victim investors, but rather paid out to Barnes, Duchinsky, and their co-conspirators and others for their personal benefit. Barnes also engaged in money laundering involving investor funds obtained as part of the scheme.

In addition, according to court documents, Beth Ellen DeGroot, 62, of Plano, Texas, EarthWater's former President, pleaded guilty in a separate action on May 17 to conspiring with Barnes. After the company's bank accounts were frozen, DeGroot conspired with Barnes to fraudulently direct EarthWater's payroll processor to continue to pay Barnes and DeGroot's paychecks even though the company's operations had ceased, and it had insufficient funds to cover payroll. DeGroot also submitted a fraudulent mortgage loan application using pay stubs fraudulently obtained from the payroll processor. When DeGroot learned about the government's ongoing investigation, she attempted to obstruct the investigation by falsifying a document she produced to a federal grand jury and by making a false statement to a federal agent.

Barnes pleaded guilty to one count of conspiracy to commit mail fraud and wire fraud, 10 counts of mail fraud, 10 counts of wire fraud, and one count of money laundering. He is scheduled to be sentenced on Sept. 28. Duchinsky pleaded guilty to one count of conspiracy to commit mail and wire fraud. He is scheduled to be sentenced at a later time. DeGroot pleaded guilty to one count of conspiracy to commit wire fraud and is scheduled to be sentenced on Sept. 14. Barnes faces up to 10 years in prison for the money laundering count and up to 20 years in prison for each of the other counts. Duchinsky and DeGroot each face up to 20 years in prison. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

Five other defendants have also pleaded guilty in the Northern District of Texas for their roles in the EarthWater high-yield investment fraud scheme, including EarthWater's CEO, Cengiz Jan Comu, 61, of Dallas, Texas; EarthWater's Chief Operating Officer, John Mervyn Price, 66, of Dallas, Texas; Donald Andrew Rothman, 74, of Coral Springs, Florida; Richard Laurence Kadish, 61, of Miami, Florida; and Richard Lawrence Green, 71, of Deerfield Beach, Florida. These five defendants are scheduled to be sentenced on Sept. 7.

Three other defendants are awaiting trial on charges set forth in a superseding indictment filed on Nov. 6, 2019, in the Northern District of Texas. The trial is scheduled to begin on Oct. 3. An indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

https://www.justice.gov/opa/pr/former-chairman-and-managing-partner-energy-company-pleads-guilty-15-million-ponzi-scheme
Joey Stanton Dodson pled guilty in the United States District Court for the Northern District of California to one count of wire fraud. As alleged in part in the DOJ Release, between November 2012 and May 2015, Dodson defrauded investors:

while serving as the executive chairman and managing partner of Citadel Energy Partners. In his role, Dodson had certain responsibilities for three limited partnerships, Fort Berthold Water Partners L.P., Citadel Watford City Disposal Partners L.P., and H20 Partners L.P., which included raising funds for the limited partnerships, controlling their bank accounts, and disseminating their financial information to investors. As part of the scheme, Dodson made materially false and misleading representations and omissions to prospective and existing investors regarding his receipt of compensation, the intended use of investor funds, and the status of a potential acquisition of the limited partnerships by a private-equity firm, among other things. 

After inducing investors to deposit their funds, Dodson pooled the funds from the limited partnerships and conducted multiple transfers between Citadel-related accounts that helped him divert investor funds for his own benefit and conceal his actions. In total, Dodson fraudulently raised over $15.6 million from 51 investors and misappropriated $1.3 million in investor funds, which he used to repay investors in an unrelated investment he operated under an entity known as Duke Equity and to pay other personal expenses. After Dodson's misappropriation was discovered, the limited partnerships were placed into bankruptcy and the investors suffered a total loss of their investments.        

In Complaints filed in the United States District Court for the Western District of New York, the SEC charged: 

The SEC Release further alleges in part that:

[I]n 2019 the defendants misled investors with bond offering documents that included outdated financial statements for the Rochester City School District and did not indicate that the district was experiencing financial distress due to overspending on teacher salaries. Sewell was allegedly aware that the district was facing at least a $25 million budget shortfall, but he misled a credit rating agency regarding the magnitude of the expected shortfall. The SEC alleges that Brooks-Harris and Ganci were also aware of the Rochester City School District's increased financial distress, including overspending on teacher salaries, yet they made no effort to inquire further about the District's financial condition prior to the bond offering, nor did they inform investors of the risks that the overspending posed to the district's finances. In September 2019, 42 days after the offering, the district's auditors revealed that the district had overspent its budget by nearly $30 million, resulting in a downgrade of the city's debt rating and requiring the intervention of the state of New York.

The SEC's complaint also alleges that CMA, Ganci and Tortora failed to disclose to nearly 200 municipal clients that CMA had material conflicts of interest arising from its compensation arrangements. In many cases, CMA, Ganci and Tortora falsely stated that CMA had no undisclosed material conflicts of interest.

Without admitting or denying any findings, Sewell agreed to a court order prohibiting him from future violations of the antifraud provisions and from participating in future municipal securities offerings, and to pay a $25,000 penalty. 

Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/ia-6049.pdf, Energy Capital Partners Management LP ("ECP") consented to the entry of the SEC Order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and 206(4)-8; and ECP agreed to a cease-and-desist Order, Censure, and a $1 million penalty. As alleged in part in the SEC Release:

According to the SEC's order, ECP led an investment consortium to acquire the stock of a public company in what is referred to as a take-private transaction. In connection with this transaction, which closed in March 2018, ECP agreed that third-party co-investors would not have to bear expenses related to a credit facility used to finance the transaction. As a result, the SEC's order found that ECP allocated a disproportionate share of these expenses to a private equity fund it advised without disclosure. The SEC's order found that, under the fund's organizational documents, these expenses should have either been disclosed or not allocated in this manner.

https://www.sec.gov/litigation/litreleases/2022/lr25420.htm
In a Complaint filed in the United States District Court for the Northern District of Georgia
https://www.sec.gov/litigation/complaints/2022/comp25420.pdf, the SEC charged Michael Mooney, Britt Wright, and Penny Flippen with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Additionally, the Complaint charges the Defendants with aiding and abetting previously charged violations of the federal securities laws by John J. Woods, Livingston Group Asset Management Company d/b/a Southport Capital, and Horizon Private Equity, III, LLC. As alleged in part in the SEC Release:

[M]any of the defendants' clients were elderly and inexperienced investors who communicated that they wanted safe investment opportunities for their assets, a large percentage of which were earmarked for retirement. Nevertheless, the defendants, who each received undisclosed compensation from Horizon, recommended that their clients invest in the fund based solely on Woods' unsubstantiated claims about Horizon's investment objectives, source of returns, and operations. The defendants also allegedly ignored significant red flags, such as Woods instructing the defendants not to use their Southport email addresses when communicating about Horizon. The complaint also states that the defendants falsely told their clients that Horizon would use the funds they invested to purchase safe investments; that Horizon would pay them a guaranteed rate of return; and that they could get their principal back without penalty. In reality, Horizon earned very few profits from investments, and investor proceeds were used primarily to make principal and interest payments to earlier Horizon investors and to fund Woods' personal projects, such as his purchase of a minor league baseball team.

SEC Charges Weiss Asset Management with Short Selling Violations (SEC Release)
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/news/press-release/2022-106, Weiss Asset Management LP agreed to cease and desist from violating Rule 105 and agreed to disgorge profits of $6,508,793 and to pay interest of $190,211 and a penalty of $200,000.  As alleged in part in the SEC Release:

The SEC's order finds that, on seven occasions between December 2020 and February 2021, Weiss Asset Management violated Rule 105, which prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security through the offering, absent an exception. The rule applies regardless of the trader's intent and promotes offering prices that are set by natural forces of supply and demand rather than potentially manipulative activity.

According to the order, Weiss Asset Management's violations occurred because it repeatedly miscalculated the restricted period and dismissed a number of red flags raised by its internal controls that suggested possible violations of Rule 105. The order finds that Weiss Asset Management improperly benefited by participating in offerings covered by Rule 105, resulting in ill-gotten gains totaling over $6.5 million. The order also highlights the significant remedial efforts undertaken by Weiss Asset Management and the cooperation it provided in the investigation, including self-reporting the violations to the staff after conducting a review of its trading records, segregating the ill-gotten profits, and updating and revising its compliance and training efforts.

SEC Charges Tar Sands Mining Company and Former Executives with Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25419.htm
In a Complaint filed in the United States District Court for the Central District of California
https://www.sec.gov/litigation/complaints/2022/comp34-95089.pdf, the SEC charged Petroteq Energy, Inc.'s former Chief Financial Officer Mark Korb with violations of the Securities Act Section 17(a)(3) and Exchange Act Section 13(b)(5) and Rules 13a-14 and 13b2-1 thereunder; and that he aided and abetted Petroteq's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a) thereunder. In addition to the CDCA Complaint, the SEC issued an Order charging Petroteq, Korb, and former Petroteq Chairm Aleksandr Blyumkin for their roles in making materially false and misleading disclosures in the company's SEC filings. As assserted in part in the SEC Release:

Petroteq is a publicly traded company engaged in developing tar sands mining and processing technology. An administrative order entered by the SEC against Petroteq and Blyumkin finds that, from September 2017 to May 2019, Petroteq raised $7.39 million through an unregistered offering of stock. Petroteq filed with the SEC Form D notices signed by Blyumkin that represented that Petroteq would not pay commissions in connection with the offering and that its officers or directors would not receive offering proceeds. The SEC's order finds, however, that Petroteq paid commissions totaling $2.89 million to two individuals retained to conduct the offering. The SEC's order further finds that Blyumkin personally received $68,623 of the offering proceeds.

Additionally, the SEC's order finds that Petroteq's SEC filings failed to disclose the related party nature of multiple transactions, including the company's payment of $23.8 million in cash and stock in January 2019 for rights to mine tar sands in Utah. The SEC's order finds that the companies from which Petroteq purchased these rights were "related persons" because they and their affiliates controlled large blocks of Petroteq stock. The SEC contends that these companies acquired the rights shortly before selling them to Petroteq, giving the seller just $275,000 in cash and an option to buy up to 20 million of their Petroteq shares. The SEC's order further finds that of the $1.8 million in cash that Petroteq paid for the rights, $1.39 million went back to Petroteq and $479,500 went to Blyumkin in round-trip transactions. None of these facts was disclosed in Petroteq's filings, according to the SEC.

As the SEC's order further finds, the rights are subject to various undisclosed risks, contingencies, and costs that may prevent Petroteq from ever exercising the rights. Yet Petroteq's filings on Form 10-K for 2019, 2020, and 2021 valued the rights at the full purchase price of $23.8 million.

The SEC's order also finds that Blyumkin directed undisclosed transfers of over $3 million of Petroteq funds to himself, his companies, his relatives, and his former domestic partner, thereby receiving financial benefits from Petroteq exceeding his compensation as described in Petroteq's SEC filings.

To resolve the SEC's charges, Petroteq and Blyumkin consented, without admitting or denying the SEC's findings, to the entry of the SEC order, which finds that:

  • Petroteq violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder; imposes a cease-and-desist order and remedial undertakings; and orders it to pay a $1 million civil penalty; and
     
  • Blyumkin violated Sections 5(a), 5(c), and 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and caused Petroteq's violations of Securities Act Sections 5(a), 5(c), and 17(a), and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder; imposes a cease-and-desist order; bars him from serving as an officer or director of a public company; orders him to pay a $450,000 civil penalty; and orders further proceedings to determine what disgorgement and prejudgment interest should be ordered against him.
In the Matter of Ramiro Luis Colon, Respondent (FINRA AWC 202006627580)
https://www.finra.org/sites/default/files/fda_documents/2020066275801
%20Ramiro%20Luis%20Colon%20III%20CRD%201868710%20AWC%20gg.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, Ramiro Luis Colon submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Ramiro Luis Colon was first registered in 1998, and by 2006, he was registered with UBS Financial Services, Inc. In accordance with the terms of the AWC, FINRA imposed upon Colon a $5,000 fine and a 30-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

At all times during the relevant period, UBS's written supervisory procedures provided that electronic business communications could only be transmitted through firm sponsored and authorized systems in order to facilitate the firm's preservation and supervision of such communications. Colon did not have authorization to communicate with any customer through WhatsApp Messenger, and UBS did not preserve or capture any such communications. From September 2018 through April 2020, however, Colon exchanged hundreds of communications with a customer on WhatsApp Messenger about securities-related business. 

Through this conduct, Colon violated FINRA Rules 4511 and 2010. 

   In a FINRA Arbitration Statement of Claim filed in October 2020, associated person Claimant Cabrera asserted defamation; tortious interference with prospective economic advantage; and unjust enrichment/quantum meruit in connection with information placed by Respondent Wells Fargo on his Form U5 upon the termination of employment. Claimant Cabrera sought over $4 million in compensatory damages, over $4 million in punitive damages, attorneys' fees, and the expungement of the his Central Registration Depository record ("CRD"). Respondent Wells Fargo generally denied the allegations and asserted affirmative defenses.
   In response to Claimant's March 25, 2022, Motion for Sanctions, which Respondent opposed, the Panel ruled:

The Panel heard Claimant's Motion for Sanctions as a preliminary matter prior to the hearing on the merits of Claimant's petition for expungement of his Amended U5 and his defamation claim. Claimant represented that all issues had been resolved, except Respondent's failure to comply with the Panel's Discovery Order compelling the production of information responsive to Information Requests 10 and 11. These requests sought the production of records and information, maintained in Respondent's compliance department, identifying all financial advisors who Wells Fargo prohibited from placing clients in Advisor and Customer Choice accounts, with or without approval. Respondent represented that Wells Fargo could not comply with the Order because the records sought were not maintained by its Compliance department. The Panel reserved a ruling on the motion, pending the conclusion of the formal hearing. After full consideration of the parties' arguments and the Panel's discovery Order, Claimant's Motion for Sanctions is granted, and the Panel finds it appropriate to draw an adverse inference in the favor of Claimant that he was unfairly denied the opportunity to invest his clients in Respondent's Asset Advisor and Customer Choice accounts. 

   The FINRA Arbitration Panel found Respondent Wells Fargo liable to and ordered the firm to pay to Claimant Cabrera $75,000 in compensatory damages, $4,393.50 in attorneys' fees, $750 in filing fees, and recommended the expungement of two occurrences from Cabrera's CRD based upon a finding that they were defamatory.

https://www.brokeandbroker.com/6494/finra-jpm-zoom/
Way back in 2019, former J. P. Morgan Securities customers filed a FINRA Arbitration Statement of Claim against the brokerage firm seeking about half a million dollars in damages. You remember 2019, that was just before the Covid pandemic. Of course, once the pandemic got under way, the customers found their case in limbo and, go figure, but, gee, JPMS just didn't seem in all that much of a rush to expedite things by videoconferenced hearings. 

From Stephen A. Kohn, Candidate for 2022 FINRA Small Firm Governor:

THE BULLIES ARE OUT TO GET US . . . And they're doing a good job of it!

I've been in this business for a long, long time; just under four decades. With the exception of a few months at a wire-house, I've always been a small firm guy. And, in all that time, one would think things would change, get better, or at least, stay the same.  But the mantra has NEVER changed, "GET RID OF THE SMALL FIRMS."

And, between the large firms, FINRA and the SEC, the bullies are unrelenting and keep whittling away at our sisters and brothers.

So, where are we? The small firm community is on its death bed.  Biased regulators are trying to engineer us out of existence through overblown rulebooks and biased regulation.  Given that FINRA is a membership organization, one would have hoped for some energetic opposition to the inevitable decline of some of the 90% of FINRA's membership -- look it up, the so-called FINRA Small Firms account for 90%-plus, and dwindling of the total number of member firms.  Where is the voice of the FINRA Board of Governors?  Sadly, it is a whisper if anything at all.  The Board seems beholding to the anti-Small Firm agenda of large firms, FINRA and the SEC.  Almost no Governor appears to have the inclination or the guts to take a stand that offers some relief to the little guys.

I have served you before and now, I need to get back on the Board of Governors, to again be your voice and to finish my work.

I am asking for your petition.  Get me on the ballot in this upcoming BOG election.

I make no promises to change what's been done.

My goal is to stop things from getting worse!

Please click the PandaDoc link below and sign my petition, get me on the ballot and back on the BOG to work for our common survival. 


Let me be your voice.

Stephen Kohn 
(303) 880-4304  Cell Phone

Stephen Kohn has been employed in the financial services industry since 1984. In 1996, he founded FINRA member firm Stephen A. Kohn & Associates, Ltd. ("SAKL")  On January 2, 2020, he passed ownership of SAKL to DMK Advisor Group, Inc. ("DMK"), still a small, Independent broker/dealer, catering to the needs of forty-one independent representatives and their clients, with office locations in five states, registered in forty-one and Puerto Rico.  
 
Stephen holds Series 7, 24, 53, 63, 72, 73, 79 and 99 registrations. He has the honor of having been elected to the FINRA Board of Governors in 2017, representing the Small Broker/Dealer Community.  He was also twice elected to the National Adjudicatory Council ("NAC") in 2009 and 2014. He serves as an Industry Arbitrator and has been elected to the District 3 Committee. 
 
Stephen graduated from C.W. Post College in 1964 with a BA degree. He has the distinction of having served in the United States Coast Guard.
 
Well known to those in the NASD and now FINRA small-firm community as a passionate and persistent advocate for small broker/dealers, who comprise more than 90% of FINRA membership, Stephen continues to speak out on behalf of his industry constituents and colleagues. He intends to remain active in the FINRA reform movement and urges all like-minded industry participants to reach out to him in full confidence concerning any and all matters.  

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