Securities Industry Commentator by Bill Singer Esq

TD Ameritrade Customer Sues Over Alleged Wrongful Margin Sell-Out (BrokeAndBroker.com Blog)

 

FINRA Sued in the Wrong Place At the Wrong Time Affirms Federal Circuit Court (BrokeAndBroker.com Blog)

 

FINRA and Citigroup Global Markets Not SHO Enough (BrokeAndBroker.com Blog)

 

Federal Court Denies Reconsideration of FINRA Referral Letter Cited In Federal Insider Trading Appeal (BrokeAndBroker.com Blog)

 

CFPB Orders Wells Fargo to Pay $3.7 Billion for Widespread Mismanagement of Auto Loans, Mortgages, and Deposit Accounts / Company repeatedly misapplied loan payments, wrongfully foreclosed on homes and illegally repossessed vehicles, incorrectly assessed fees and interest, charged surprise overdraft fees, along with other illegal activity affecting over 16 million consumer accounts (CFPB Release)

 

 

United States Attorney Announces Extradition Of FTX Founder Samuel Bankman-Fried To The United States And Guilty Pleas Of Former CEO Of Alameda Research And Former Chief Technology Officer Of FTX (DOJ Release)

 

Statement of U.S. Attorney Damian Williams on U.S. v. Samuel Bankman-Fried, Caroline Ellison, and Gary Wang

 

East Rochester Man Pleads Guilty to Defrauding Elderly Woman of Over $83,000 (DOJ Release)

 

Former Rochester Man Going To Prison For More Than 20 Years For His Role In Ponzi And COVID-19 Fraud Schemes (DOJ Release)

 

Two Biotech CEOs Charged in Securities Fraud Schemes (DOJ Release)

 

Honeywell UOP to Pay Over $160 Million to Resolve Foreign Bribery Investigations in U.S. and Brazil (DOJ Release)

 

Chandler Man Sentenced to 33 Months for Defrauding Investors (DOJ Release)

 

U.S. Attorney Announces Arrest Of Lamor Whitehead For Fraud, Extortion, And False Statements (DOJ Release)

SEC Approves the 2023 Public Company Accounting Oversight Board Budget and Accounting Support Fee (SEC Release)

 

PCAOB’s Ballooning Budget by SEC Commissioner Hester M. Peirce

 

Ian Freeman Convicted On All Counts Relating To Bitcoin Money Laundering Scheme (DOJ Release)

 

SEC Obtains Judgment Against Individual in Multi-Million Dollar Securities Offering Fraud (SEC Release)

 

SEC Charges Caroline Ellison and Gary Wang with Defrauding Investors in Crypto Asset Trading Platform FTX (SEC Release)

 

SEC Obtains Final Judgments Against Individual and Entity in Multi-Million Dollar International Fraud Scheme (SEC Release)

 

SEC Charges Issuer, CEO, and Former CTO for $2.6 Million Unregistered Crypto Asset Securities Offering (SEC Release)

 

SEC Wins $10.2 Million Judgment Against Unregistered Penny Stock Dealer (SEC Release)

 

SEC Charges Financial Services Professional and Associate in $47 Million Front-Running Scheme (SEC Release)

 

SEC Charges Florida Media Company and CEO in Offering Fraud (SEC Release)

 

SEC Charges Former CEO of Biotech Company CytoDyn with Fraud, Insider Trading / Research Firm CEO Who Interacted with FDA on Company’s Behalf Also Charged (SEC Release)

 

SEC Charges Honeywell with Bribery Schemes in Algeria and Brazil (SEC Release)

SEC Charges Undisclosed Control Person and His Alter-Ego Entity in Penny Stock Scheme (SEC Release)

 

SEC Awards Over $29 Million and $8 Million Whistleblower Award to Claimant

Order Determining Whistleblower Award Claims

 

CFTC Charges Alameda CEO and Alameda and FTX Co-Founder with Fraud in Action Against Sam Bankman-Fried and his Companies / Caroline Ellison and Gary Wang Acknowledge Liability (CFTC Release)

 

Federal Court Orders California Precious Metals Firm and Its Owners to Pay $38 Million for Commodity Fraud and Registration Violations (CFTC Release)

CFTC Orders Minnesota Futures Commission Merchant to Pay $6.5 Million for Anti-Money Laundering, Risk Management, Recordkeeping, and Supervision Violations (CFTC Release)

 

Statement of Commissioner Kristin N. Johnson Regarding The Importance of Futures Commission Merchants’ Compliance and The Need to Heighten the Consequences of Failing to Comply

 

Concurring Statement of Commissioner Goldsmith Romero on the Importance of Protecting Commodity Markets Against Excessive Speculation in CFTC v. Commodity Broker CHS Hedging

 

FINRA Fines and Suspends Goldman Sachs Rep For Creating Fictitious Documents/E-mails
In the Matter of [REDACTED], Respondent (FINRA AWC)

FINRA Censures and Fines Wells Fargo Securities for Overstating Trade Volume
In the Matter of Wells Fargo Securities, LLC, Respondent (FINRA AWC)

Joseph Gunnar & Co. Hit With About $1.55 Million FINRA Arbitration Award In Commissions Dispute

In the Matter of the Arbitration Between William Lawrence Barkow, Claimant, v. Joseph Gunnar & Co. LLC Joseph Anthony Alagna Stephan A. Stein, Respondents (FINRA Arbitration Award)

The Public Company Accounting Oversight Board (“PCAOB”) is requesting $349.5 million for its 2023 budget and a $329.4 million accounting support fee to fund it.[1] Sarbanes-Oxley gave the Securities and Exchange Commission (“SEC”) responsibility for approving the PCAOB’s budget, and the associated accounting support fee levied on companies and SEC-registered broker-dealers to fund the budget.[2] I cannot support the PCAOB’s 2023 budget and accounting support fee, which—continuing the PCAOB’s budget expansion—are substantially higher than the 2022 numbers and may facilitate mission-creep at the PCAOB.

 

Because the PCAOB budget is nonpublic, it is insulated from public accountability. A summary published by the PCAOB,[3] however, provides us a sense of some trends:

 

• The 2023 budget is $349.5 million, 12.6% higher than last year’s $310.3 million.
• The 2023 accounting support fee of $329.4 million is 10.6% higher than 2022’s $297.9 million accounting support fee, 21.9% higher than 2020’s $270.2 million accounting support fee, and 40% higher than 2018’s $235.3 million accounting support fee.[4]
• Budgeted personnel costs for 2023 are approximately $27 million higher than 2022 personnel costs (an 11.9% increase) and $46.5 million higher than 2020 personnel costs (a 22% increase). The 2023 budget also includes funding for 926 employees, an almost 15% increase from the 807 actual employees as of the PCAOB’s latest annual report.[5] While the types of professionals the PCAOB needs are in high demand, the PCAOB offers employees a high degree of flexibility, attractive salaries, and a compelling mission.[6]
• Budgeted non-personnel costs for 2023 are $33.8 million higher than in 2018, a 58.7% increase. While increased travel costs and inflation in general likely account for some of this change, the increase over five years is nevertheless notable.

 

The PCAOB plays a vital role in the U.S. economy. Well-audited financial statements – which the PCAOB’s oversight of auditors helps facilitate – encourage investor confidence in our capital markets. We are seeing the PCAOB’s value, for example, in connection with its work in mainland China and Hong Kong, which the PCAOB was able to do for the first time earlier this year.[7] PCAOB Chair Erica Williams explained the importance of this development:

 

This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear. . . . I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. . . . Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong. It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.[8]

 

In addition to this step forward on the international front, the PCAOB has an active standard-setting agenda, some of which is warranted, such as the PCAOB’s recent proposal to amend the Quality Control standard, which builds on a 2019 concept release.[9] The PCAOB also plans to focus on other key initiatives, such as continuing efforts to ensure “more timely issuance of inspection reports” and to “deliver useful guidance to the audit profession.”[10]

 

Despite the importance of some of the PCAOB’s recent work, other parts of its plans raise concerns. A smaller budget might assist the PCAOB in being more selective, hewing more closely to its narrow mandate, and better stewarding its resources. For example:

 

• The PCAOB should avoid reopening standards without a clear, standard-specific justification. As one commenter on the PCAOB’s draft strategic plan explained, the PCAOB should not automatically assume that interim standards “are not fully fit for purpose” or are “in need of updating.”[11] There may be “sound reasons” for not updating these standards, which “may not necessarily be out of date, irrelevant or deficient simply because they have not been revised.”[12] Instead, the PCAOB should focus its efforts on the standards that really do need updating. An overly ambitious agenda could result in insufficiently considered standards and inadequate bandwidth for sound implementation of new standards and subsequent post-implementation review. The PCAOB will struggle to manage the consequential projects on its agenda if it also pursues inconsequential changes to old standards that are working well.
• The PCAOB does not have authority to oversee issuers or broker-dealers, but it nevertheless plans to “increase transparency in settled enforcement actions by more frequently naming the issuers or broker-dealers whose audits are implicated.”[13] The PCAOB does not regulate companies or broker-dealers and so ought not call them out by name because of an auditor’s failure. Not only does this type of transparency exceed the PCAOB’s mandate, but it may lead to unwarranted doubts about the accuracy of an issuer’s or broker-dealer’s financial statements.[14]
• While an effective enforcement program helps foster audit quality, the PCAOB’s recently approved strategic plan suggests an intention to use enforcement tools when other tools might be more appropriate.[15] The strategic plan promises, for example, to pursue “violations that result from negligent conduct.”[16] As Chair Williams has noted “a single, serious wrongful act, whether reckless or negligent” can be “serious enough to put investors at risk,”[17] but an approach to oversight that relies on enforcement actions with hefty penalties and other remedies to prevent such acts from happening is unlikely to be successful. Such an approach could devolve quickly into bringing enforcement actions for minor infractions rather than “prioritiz[ing] those enforcement matters likely to have the greatest benefit for investors and most likely to deter improper conduct,” the approach embraced by the PCAOB’s superseded 2020-2024 strategic plan.[18] The PCAOB has set for itself an objective of “[i]mpos[ing] more significant penalties and other relief,”[19] which could deter well-qualified people from joining the profession and undercut audit quality.[20] The smallest firms could suffer disproportionately, diminishing competition in an industry already dominated by several large firms.

 

Conclusion

 

The ongoing ballooning of the PCAOB’s budget and associated accounting support fee is not a trivial matter. The accounting support fee adds to the cost of being a public company or an SEC-registered broker-dealer. As former SEC Commissioner Michael Piwowar explained:

 

The accounting support fee is a tax . . . assessed by a non-profit corporation under authority granted by Congress. The Commission represents the only safeguard to an otherwise unilateral ability to impose the accounting support fee tax on companies and broker-dealers. Companies and broker dealers are required, under penalty of law, to pay money to the Board for the privilege of merely existing. These costs are not ultimately borne by companies and broker-dealers, but rather their shareholders and customers.[21]

The PCAOB budget process is a clunky accountability tool, one ill-suited to assess the appropriateness of a tax that now tops $300 million. As the PCAOB’s budget and the accounting support fee continue to creep higher, a structure that would afford Congress more direct oversight of the audit regulator could enhance its efficacy and accountability.[22]

 

[1] Public Company Accounting Oversight Board 2023 Budget by Cost Category, https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/documents/fiscal_year_budgets/2023-budget.pdf?sfvrsn=1acf4860_3. Issuers will pay approximately $300.3 million of the accounting support fee, and broker-dealers will pay approximately $29.2 million. Id. at note 15.

 

[2] Sarbanes-Oxley Act § 109(b) and (d). Section 982 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act to provide the PCAOB with explicit authority to oversee auditors of broker-dealers registered with the Securities and Exchange Commission. Pub. L. No. 111-203, 124 Stat. 1376 (2010).

 

[3] Strategic Plan and Annual Budget, PCAOB, https://pcaobus.org/about/strategic-plan-budget.

 

[4] For context, inflation was roughly 7% from November 2021 through November 2022, 16% from November 2019 through November 2022, and 21% from November 2017 through November 2022. See CPI Inflation Calculator, U.S. Bureau of Labor Statistics (Last Accessed, December 20, 2022), https://www.bls.gov/data/inflation_calculator.htm.

 

[5] 2021 Annual Report at 5, PCAOB, https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/documents/annual_reports/2021-annual-report.pdf?sfvrsn=6379c829_5.

 

[6] Indeed, the PCAOB has recently successfully recruited multiple employees from the SEC.

 

[7] Fact Sheet: PCAOB Secures Complete Access to Inspect, Investigate Chinese Firms for First Time in History, PCAOB (December 15, 2022), https://pcaobus.org/news-events/news-releases/news-release-detail/fact-sheet-pcaob-secures-complete-access-to-inspect-investigate-chinese-firms-for-first-time-in-history.

 

[8] Id.

 

[9] PCAOB Proposed a New Quality Control Standard, PCAOB (November 18, 2022), https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-proposes-a-new-quality-control-standard.

 

[10] Strategic Plan 2022-2026 at 12, PCAOB., https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/documents/strategic_plans/strategic-plan-2022-2026.pdf?sfvrsn=b2ec4b6a_2/.

 

[11] Comment letter from the Institute of Chartered Accountants in England and Wales (ICAEW) at 2 (September 15, 2022), https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/08_icaew.pdf?sfvrsn=3747ccce_4.

 

[12] Id.

 

[13] Strategic Plan 2022-2026 at 13.

 

[14] See, e.g., Comment letter from Institute of Management Accounts at 3 (September 7, 2022), https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/03_ima(revised).pdf?sfvrsn=13a44e4_3 (“We do not support more frequently naming the issuer whose audits are implicated in a PCAOB enforcement action. If the registrant has done something incorrectly, this should already have been reported by it or through an SEC enforcement release. If a PCAOB enforcement action applies only to the auditor, naming the registrant may inappropriately imply bad behavior by the company and could cause investors to negatively react in error.”); Comment letter from Grant Thorton at 4-5 (September 15, 2022), https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/17_gt.pdf?sfvrsn=9f59ed63_4 (“We understand the Board’s objective of increasing transparency; however, we caution against more frequently naming the issuers or broker-dealers whose audits are implicated in enforcement actions. Unless there is a related SEC action, we are concerned that pulling an entity into the public domain in a negative light could have unintended consequences when the issue may rest solely with the sufficiency of the audit work and not with the accuracy of the financial statements.”); Comment Letter of CohnReznick at 7, https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/20_cohnreznick.pdf?sfvrsn=cbde78b8_4 (“We believe if the PCAOB more frequently names the issuers or broker-dealers whose audits are implicated, there may be unintended consequences and a negative effect on capital markets disproportionate to what is appropriate.”).

 

[15] See, e.g., Comment letter from PWC at 3 (September 15, 2022), https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/18_pwc.pdf?sfvrsn=7546ef75_4 (“[E]nforcement inquiries and investigations should be reserved for those facts and circumstances where addressing issues through the inspection process is unlikely to be sufficient. In our view, the Division of Registration and Inspections is well-placed to help identify issues and in many cases to promote appropriate change, given the nature of the interactions between the inspections teams and the firms. In addition, there may be innovative ways for the inspections program to inform staff of areas where additional guidance or changes to standards could promote more consistent understanding or execution, especially in areas that are a common or persistent source of inspection findings across firms, as well as where effective approaches to a firm’s use of technology is being observed in practice.”); Comment letter from Chamber of Commerce at 3 (September 16, 2022), https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/22_chamber.pdf?sfvrsn=d648dfea_4 (“We are concerned that the Board’s plans for a 'more assertive approach to bringing enforcement actions,’ in conjunction with other enforcement-related goals and objectives described in the Draft [Strategic Plan] may indicate an abandonment of the supervisory model.”) (citation omitted).

 

[16] Strategic Plan 2022-2026 at 13.

 

[17] Chair Erica Y. Williams, Address at the Council of Institutional Investors Fall Conference, PCAOB (Sept. 22, 2022), https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-chair-williams-delivers-remarks-at-cii-fall-conference; see also id. (“For any violation of PCAOB standards that is serious enough to put investors at risk, the excuse that 'it only happened once’ simply won’t cut it. We will not hesitate to bring cases that hinge on only a single, serious wrongful act, whether reckless or negligent.”).

 

[18] Strategic Plan 2020-2024 at 1, PCAOB, https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/documents/strategic_plans/strategic-plan-2020-2024.pdf?sfvrsn=776073d3_4.

 

[19] Strategic Plan 2022-2026 at 13.

 

[20] See, e.g., Comment Letter from ICAEW at 4 (“To stem a long-term decline in the availability of good quality public company auditors, we believe that the PCAOB and other audit regulators should shift the focus to prevention and remediation, including 'what good looks like’. Sanctions have their place, but that place is not centre-stage, and they must be proportionate.”). Comment letter from Texas Society of Certified Public Accountants at 2 (September 14, 2022), https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/about/administration/strategic-plan-comments-2022/11_txcpa.pdf?sfvrsn=a6437627_4 (“The [PCAOB’s] stated objective of imposing more significant penalties appears to be at odds with the overall strategy of improving audit quality. The PSC suggests that a more collaborative approach to improving audit quality may yield more productive results rather than fostering a litigious environment.”).

 

[21] See Commissioner Michael Piwowar, Statement at Open Meeting on 2016 PCAOB Budget, SEC (March 16, 2016), https://www.sec.gov/news/statement/piwowar-remarks-open-meeting-pcaob-031416.

 

[22] See, e.g., Commissioner Hester Peirce, Sus and Yeet, Remarks before the University of California Irvine Audit Committee Summit, SEC (October 7, 2022). https://www.sec.gov/news/statement/peirce-statement-sus-yeet-100722 (“Had Congress simply charged the SEC with regulating auditors, it could have avoided the PCAOB’s constitutional defects and consolidated related authorities in one government agency. This approach would also have diverted the considerable SEC resources that have since gone into overseeing the PCAOB, its budget, and its standard-setting, inspections, and enforcement activity to go, instead, directly into fostering audit quality. Housing the PCAOB’s functions within the SEC could be more efficient. For example, in investigating misconduct at public companies, the SEC often also looks at the auditor, which means the PCAOB generally does not. Even when not bringing a related case against a company, the SEC often brings enforcement actions against auditors rather than entrusting them to the PCAOB.”).

TD Ameritrade Customer Sues Over Alleged Wrongful Margin Sell-Out (BrokeAndBroker.com Blog)

https://www.brokeandbroker.com/6805/td-ameritrade-margin/

[F]reeman laundered over ten million dollars in proceeds of romance scams and other internet frauds by exchanging U.S. dollars for bitcoin. By failing to register his business with the Financial Crimes Enforcement Network as required by law, disabling “know your customer” features on his bitcoin kiosks, and ensuring that bitcoin customers did not tell him what they did with their bitcoin, among other things, Freeman created a business that catered to fraudsters. By charging exorbitant fees, Freeman made in excess of a million dollars.

 

Records and exhibits proved that as part of the conspiracy, Freeman and his co-conspirators opened and operated accounts at financial institutions in the names of various churches including the Shire Free Church, the Church of the Invisible Hand, the Crypto Church of New Hampshire and the NH Peace Church. Freeman instructed bitcoin customers, who were often victims of scams, to lie to the financial institutions and describe their deposits as church donations. From 2016 to 2019, he paid no taxes, and concealed his income from the Internal Revenue Service.

[H]ess partnered with co-defendant Joshua Dax Cabrera to fraudulently raise more than $12.9 million from more than 150 U.S. and foreign investors by offering unregistered securities in Medsis International, Inc. from 2015 through 2020. The complaint alleged that while offering Medsis securities, Hess and Cabrera made multiple material misrepresentations and misleading statements about Medsis to investors concerning the existence and value of contracts with customers, existing and expected revenue, and business operations. The complaint also alleged that Hess and Cabrera misrepresented to investors their personal use of investor funds.

From December 2016 to June 2018, Wells Fargo configured its systems to automatically advertise daily trading volume in numerous securities through two third-party service providers that publish such information, Bloomberg and Thomson Reuters. During this period, two distinct technological misconfigurations within the firm's systems caused Wells Fargo to overstate its executed trade volume. 

 

• From December 2016 to June 2018, an error in the firm's trade advertising software caused the firm to erroneously advertise certain options trades as equity transactions. T11is caused the firm to overstate its trading volume in equity transactions on both Bloomberg and Thomson Reuters in 4,597 instances, resulting in an overstatement of 32,935,787 shares across 901 securities. The firm stopped the 9verstatements caused by the software error by June 2018. 

 

• From June 12 to October 11, 2017, a misconfiguration of the order management system used by one of the firm's trading desks caused certain trades routed between that desk and the firm's electronic trading desk to be advertised on Bloomberg twice. This caused the firm to overstate its trading volume on Bloomberg in 5,623 instances; resulting in an overstatement of 114,888,829 shares across 3,036 securities. The firm stopped the overstatements caused by the order management system issue by October 11, 2017. 

 

Overall, during the relevant period, the firm overstated its trade volume by nearly 148,000,000 shares in over 10,000 instances.² 

 

Therefore, the firm violated FINRA Rules 5210 and 2010. 

. . .

During the period December 2016 through October 2018, Wells Fargo failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with FINRA Rule 5210. During this period, the firm conducted daily reviews of its manually advertised trade· volume, and monthly reviews of a sample of its auto-advertised trade volume. ³ The firm, however, had no defined criteria for selecting the monthly sample, or for determining how many securities or what proportion of the firm's advertised trade volume should be included in the sample. Also, to perform its monthly reviews, the firm compared its actual trading volume against its advertised trade volume as reflected in a report generated by its trade advertisement software and on the Thomson Reuters webpage. That process, however, was not reasonably designed to identify overstatements of the firm's trading volume advertised on Bloomberg which were sent to Bloomberg directly through the firm's order management system rather than through the firm's trade advertisement software. 

 

Additionally, the firm failed to perform any testing of option trades or multi-leg trades to ensure that the_ non-equity components were properly excluded from advertisement as · intended, nor did the firm test to ensure that such trades were otherwise advertised correctly. 

 

The firm revised its supervisory systems relating to trade volume advertisement in or around October 2018. 

 

Therefore, the firm violated FINRA Rules 3110 and 2010. 

 

= = =

Footnote 2: The firm stopped the overstatements caused by each of the two technological misconfigurations within a week of learning about the issues.

 

Footnote 3: In December 2017, after the firm discovered the order management system issue that caused trades routed to the firm's electronic trading desk from another desk to be advertised twice, the form implemented an additional targeted review of trades routed between the two desks. 

 

As a Wealth Management Professional for the firm’s Private Wealth Management group, [REDACTED] provided support to the group’s advisers. [REDACTED]’s responsibilities included obtaining written confirmations from customers that they had requested or authorized certain transactions or account changes. In addition, [REDACTED] was responsible for obtaining written approvals from firm supervisors for certain transactions and changes to customer accounts. [REDACTED] was tasked with submitting those materials to the firm’s operational staff, in order to process the transactions and account changes pursuant to firm procedures requiring those writings.

 

From June 2020 through December 2021, [REDACTED] created 45 fictitious documents and emails that purported to contain customer confirmations of transactions and account changes, when in fact he did not obtain such confirmations in accordance with firm policy. Additionally, [REDACTED] created 20 fictitious emails that purported to contain approvals from a firm supervisor for customer transactions and account changes, even though [REDACTED] had never sought or obtained those approvals. To create these documents, [REDACTED] often modified actual emails and documents that the firm’s supervisors and customers had previously authored or sent. [REDACTED] then submitted these fictitious documents and emails to the firm’s operational staff to process the transactions and account changes, which included, among other things, wire transfers, transfers of stock positions and changes to customers’ investment objectives. 

 

Through this conduct, Respondent violated FINRA Rule 2010. 

FINRA Sued in the Wrong Place At the Wrong Time Affirms Federal Circuit Court
(BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6806/finra-fife-2cir/

[C]orriveau knew the elderly victim maintained a checking and savings account and had at least two credit cards.  He was also aware that the victim had physical limitations.

 

Between March 2019 and July 2021, Corriveau used the victim’s credit cards to make unauthorized purchases totaling at least $83,628.69.  He spent over $30,000 alone at a firearms store to purchase firearms and ammunition.  Corriveau also used the victim’s credit cards to purchase goods from retailers such as Dick’s Sporting Goods, Target, Home Depot, Bob’s Discount Furniture, Wayfair, Etsy, and Amazon.  Records from those companies showed the name, delivery address, e-mail address, and phone number associated with the purchases belonged to Corriveau.  During a search of Corriveau’s home, police found some of the goods Corriveau bought using the victim’s credit cards.

 

To facilitate the scheme, Corriveau used the victim’s personal identifying information, including the victim’s Social Security number, maiden name, and date of birth, to add himself as an authorized user on the victim’s credit card account.  Corriveau had a credit card in his name but under the victim’s account mailed to his address.  Corriveau was able to access the victim’s bank accounts and used the victim’s funds to make payments on his credit card purchases.

[B]etween 2019 and 2022, Ellison, at the direction of Bankman-Fried, furthered the scheme by manipulating the price of FTT, an FTX-issued exchange crypto security token, by purchasing large quantities on the open market to prop up its price. FTT served as collateral for undisclosed loans by FTX of its customers’ assets to Alameda, a crypto hedge fund owned by Wang and Bankman-Fried and run by Ellison. The complaint alleges that, by manipulating the price of FTT, Bankman-Fried and Ellison caused the valuation of Alameda’s FTT holdings to be inflated, which in turn caused the value of collateral on Alameda’s balance sheet to be overstated, and misled investors about FTX’s risk exposure.

 

In addition, the complaint alleges that, from at least May 2019 until November 2022, Bankman-Fried raised billions of dollars from investors by falsely touting FTX as a safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets and by telling investors that Alameda was just another customer with no special privileges; meanwhile, Bankman-Fried and Wang improperly diverted FTX customer assets to Alameda. The complaint alleges that Ellison and Wang knew or should have known that such statements were false and misleading. 

 

The complaint also alleges that Ellison and Wang were active participants in the scheme to deceive FTX’s investors and engaged in conduct that was critical to its success. The complaint alleges that Wang created FTX’s software code that allowed Alameda to divert FTX customer funds, and Ellison used misappropriated FTX customer funds for Alameda’s trading activity. The complaint further alleges that, even as it became clear that Alameda and FTX could not make customers whole, Bankman-Fried, with the knowledge of Ellison and Wang, directed hundreds of millions of dollars more in FTX customer funds to Alameda.

 

[W]ang created features in the code underlying the FTX trading platform that allowed Alameda to maintain an essentially unlimited line of credit on FTX. As further alleged, at Bankman-Fried’s direction, FTX executives including Wang created other exceptions to FTX’s standard processes that allowed Alameda to have an unfair advantage when transacting on the platform, including quicker execution times and an exemption from the platform’s distinctive auto-liquidation risk management process. These critical code features and structural exceptions allowed Alameda to secretly and recklessly siphon FTX customer assets from the FTX platform. 

 

The amended complaint further charges that, beginning in October 2021, Ellison was co-Chief Executive Officer (CEO) of Alameda, and later sole CEO and, along with Bankman-Fried and others, Ellison directed Alameda to use billions of dollars of FTX funds, including FTX customer funds, to trade on other digital asset exchanges and to fund a variety of high-risk digital asset industry investments. As further alleged, Ellison made deceptive public statements in her capacity as Alameda’s CEO, including statements about the supposed separation between the operations of Alameda and FTX, in order to facilitate and perpetuate the fraudulent scheme.  

 

. . .

 

The initial complaint and the amended complaint allege that from at least May 2019 through November 11, 2022, Bankman-Fried controlled both FTX.com, a centralized digital asset derivative trading platform, and Alameda, a trading firm that operated as a primary market maker on FTX. As charged, FTX promoted itself as “the safest and easiest way to buy and sell crypto” and represented that customers’ assets, including both fiat and digital assets including bitcoin and ether, were held in “custody” by FTX and segregated from FTX’s own assets. To the contrary, FTX customer assets were routinely accepted and held by Alameda and commingled with Alameda’s funds. Bankman-Fried, Ellison, and Wang engaged in a fraudulent scheme to misappropriate FTX customer assets for use by Alameda and by FTX and Alameda executives, including luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments. The amended complaint further alleges that, at Bankman-Fried’s direction, FTX employees including Wang created features in the FTX code that favored Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including an “allow negative flag” and effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX. These features were not disclosed to the public. 

 

According to the SEC's complaint filed in October 2018, Knox and Wintercap helped microcap securities holders evade federal securities laws that restrict sales by large shareholders. The complaint charged that Knox and Wintercap helped sellers conceal their stock ownership and provided anonymous access to brokerage accounts to sell the shares on the U.S. markets. In a parallel criminal action brought by the U.S. Attorney's Office for the District of Massachusetts, a federal grand jury in Massachusetts indicted Knox on one count of securities fraud and one count of conspiracy to commit securities fraud. Knox pled guilty in January 2020. His sentencing remains pending.

 

The SEC's complaint also charged Michael Gastauer for aiding and abetting the fraud by establishing several U.S. corporations and allowing Knox to use their bank accounts to disburse the proceeds of his illegal stock sales. The complaint named as relief defendants two family members of Gastauer and a U.K. entity Gastauer controlled. After the SEC filed the case, the court entered a preliminary injunction and continued an asset freeze against Knox, Gastauer, and the entities they used in the scheme. In March and June 2022, the court entered final judgments against Gastauer and against various entities he controlled, imposing injunctions against them and ordering them to pay over $30 million in disgorgement and civil penalties. In October 2022, the court entered a final judgment against relief defendant Raimund Gastauer, ordering him to pay $3,920,144 in disgorgement and prejudgment interest. Raimund Gastauer's appeal of that judgment remains pending. And in December 2022, the SEC filed a motion to dismiss its claims against relief defendant Shamal International FZE.

 

The final judgments against Knox and Wintercap SA permanently enjoin them from violating the antifraud and registration provisions of Sections 5 and 17(a) of the Securities Act of 1933, from violating the antifraud provisions and broker registration provisions of Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and from participating in any offering of penny stock. The final judgments also find Knox and Wintercap SA jointly and severally liable for over $6 million in disgorgement and prejudgment interest and deem those sums satisfied by payment of previously frozen assets in the amount of $891,235 and the orders of forfeiture in Knox's criminal case totaling approximately $11 million.

According to the SEC's complaint against Thor and Chin, between March and May 2018, the defendants offered and sold crypto assets designated as "Thor Tokens" to the general public for the purpose of funding Thor's business, which was to develop a software platform for "gig" economy workers and companies. As alleged, Thor and Chin marketed the Thor Tokens as an investment opportunity by promoting the potential increase in value of the tokens and claiming that the tokens would be made available on crypto asset trading platforms. According to the complaint, at the time of the offering, no development work had yet occurred on the Thor platform, and there was no other place to use Thor Tokens. The complaint further alleges that the offers and sales of Thor Tokens, which raised approximately $2.6 million in cash and crypto assets from investors, were not registered with the SEC and did not qualify for any exemption from registration.

 

The SEC's complaint, filed in the U.S. District Court for the Northern District of California, charges Thor and Chin with violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act of 1933 ("Securities Act"). The SEC seeks injunctive relief, the return of allegedly ill-gotten gains plus prejudgment interest, and civil penalties.

 

The SEC filed a second complaint alleging that Moravec also engaged in the unregistered offer and sale of Thor Tokens in violation of Sections 5(a) and (c) of the Securities Act. Moravec has agreed to settle with the SEC and to the entry of a judgment against him imposing permanent and conduct-based injunctions, including a prohibition for a period of three years from participating in any offering of a crypto asset security; ordering him to disgorge $407,103 plus prejudgment interest of $72,209.45; and imposing a civil penalty of $95,000. The settlement is subject to court approval.

[K]eener failed to register as a securities dealer with the SEC, or to associate with a registered dealer, when he bought and sold billions of newly issued shares of penny stock from at least January 2015 through January 2018. Keener obtained the shares directly from issuers after converting debt securities known as convertible notes. By failing to register, Keener avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records.

 

The court previously granted summary judgment to the Commission. On January 21, 2022, the court ruled that Keener met the statutory definition of dealer because he operated a regular business of buying and selling securities for his own account. The court found that his failure to register as a dealer, or associate with a registered dealer, violated the dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934.

As found in the order, between July 16, 2011 and August 31, 2021, the defendants operated a retail over-the-counter trading platform, known as “Atlas,” which allowed customers to speculate on precious metals price movements, with Monex acting as the counterparty to every transaction. During the relevant period, the defendants executed thousands of leveraged trades with retail customers, all of which were required to be executed on a regulated exchange, but were not, as found by the court in an earlier order.

 

The order also finds the majority of these trades resulted in losses for Monex’s customers and the defendants engaged in fraud in the solicitation of customers. Specifically, Monex touted the importance of precious metals as a hedge against economic uncertainty. Monex’s solicitations highlighted profits, claiming that precious metals offer “outstanding price appreciation” and “outstanding profit potential.” Monex trained its sales representatives to pitch leveraged trading with descriptions of the possibility of “30-40% net gains,” “annualized rate of return of 20% or more” and “unlimited upside potential” according to the order. Monex also trained its sales force to gain customers’ trust in order to make sales. In addition, Monex incentivized its sales staff to push customers into leveraged trading with increased commissions and bonuses, the order finds. 

 

Monex never disclosed that the majority of its customers lost money, according to the order. As a result, Monex’s claims about the profitability of leveraged trading of precious metals were misleading. Moreover, Monex’s customers who expected to make profits from such trading instead lost money, the order finds. The order further finds that Louis and Michael Carabini controlled Monex and are liable for its illegal activities.

The Consumer Financial Protection Bureau (Bureau) has identified the following violations of law at Wells Fargo Bank, N.A. (Respondent): (i) with respect to auto loan servicing, Respondent incorrectly applied loan payments, erroneously imposed certain fees and charges, incorrectly repossessed customers' vehicles, and failed to refund certain unearned fees on debt cancellation products; (ii) with respect to home mortgage servicing, Respondent incorrectly denied mortgage loan modifications to certain qualified borrowers; and (iii) with respect to consumer deposit accounts, Respondent improperly froze or closed customer accounts, improperly charged certain overdraft fees, and did not always waive monthly account service fees consistent with its disclosures. Since 2020, Respondent has accelerated corrective actions and remediation, including to address these violations. Under §§ 1053 and 1055 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5563, 5565, the Bureau issues this Consent Order.

The Ponzi Scheme

 

Between January 2011 and June 2018, Parris conspired with co-defendant Perry Santillo and others to obtain money through an investment fraud, commonly known as a Ponzi scheme. Specifically, in 2007, Parris and Santillo, as equal partners, formed a business known as Lucian Development in Rochester. Prior to approximately July 2007, Lucian Development raised millions of dollars from investors in Rochester, and elsewhere, by soliciting investments for City Capital Corporation, a business operated by Ephren Taylor. In July 2007, Parris and Santillo were advised by Ephren Taylor that their investors’ money had been lost. In response, in August 2007, Parris and Santillo agreed to acquire the assets and debts of City Capital Corporation. The acquisition proved financially ruinous, with the amount of the acquired debt far exceeding the value of the acquired assets. Taylor was later prosecuted and convicted of operating a Ponzi scheme.

 

Subsequently, Parris and Santillo chose not to disclose the truth to investors that their money, entrusted to Lucian Development for investment in City Capital Corporation, was gone. Instead, Parris and Santillo continued to solicit ever-increasing amounts of money from new investors in an unsuccessful attempt to recoup the losses. In order to find potential investors to solicit and defraud, Parris and Santillo purchased businesses from established investment advisors or brokers who were looking to exit their businesses. Between approximately 2008 and September 2017, Parris and Santillo, using money obtained from prior investors, purchased the businesses of at least 15 investment advisors or brokers, located in Tennessee, Ohio, Minnesota, Nevada, California (five businesses), Florida, South Carolina (two businesses), Texas, Pennsylvania, Maryland and Indiana.

 

The investment offerings pitched by Parris and Santillo consisted principally of unsecured promissory notes and preferred stock issued by various entities controlled by Parris and Santillo. Potential investors were offered an apparent array of investment options to create the illusion of a diversified investment portfolio. Those investment options included products issued by purported issuers such as First Nationle Solutions (FNS), Percipience Global Corporation, United RL Capital Services, Boyles America, Middlebury Development Corporation and NexMedical Solutions, among others. None of these issuers had substantial bona fide business operations or used investor money in the manner and for the purposes represented to investors. To the extent that an issuer may have had some minor legitimate business activities, it was not profitable, and insufficient revenues were generated to pay investors any returns (let alone return the principal amounts of their investments).

 

Over the years, to keep the Ponzi scheme from being detected, a substantial portion of incoming new investor monies were depleted by making promised interest and other payments to earlier investors. Most of the rest of incoming investor money was used by Parris, Santillo and other co-conspirators to finance lavish lifestyles of the conspirators, their families and associates; to expand the scheme by purchasing investment advisor/brokerage businesses to obtain access to fresh investors; and to pay operating expenses – salaries for a sales force and administrative staff, office rents and related expenses, housing for employees, and interest on loans – all of which were used to keep the scheme going and maintain a façade of legitimate business operations.

 

Very little investor money was deployed in productive investments, and when so deployed, the investments yielded meager income and were not profitable, or failed altogether. The Ponzi scheme was headquartered and based out of locations in Rochester, with a number of satellite offices around the country. Administrative and banking functions were largely performed out of Rochester. The conspiracy employed a variety of salespeople, including Parris and Santillo, who traveled around the country to meet with and solicit new investors.

 

Between January 2012 and June 19, 2018, Parris and Santillo obtained at least $115.5 million from approximately 1,000 investors. By the time the scheme collapsed in late-2017/early 2018, Parris and Santillo, doing business through an array of corporate entities, had returned approximately $44.8 million to investors as part of their scheme, but continued to owe investors approximately $70.7 million in principal.

 

Among the Rochester area victims of the Ponzi scheme were the following:

 

•    A resident of Webster, New York, who held a total asset value of $94,341.89 with a fictitious company known as First Nationle Solutions (FNS), which, as of Dec. 31, 2017, was in fact worthless or close to worthless; and

•    A resident of Victor, New York, and his wife, who invested approximately $221,758.67 with FNS and Middlebury Development. The couple received three payments of $2,500 but lost approximately $214,258.67.

 

Parris and Santillo controlled hundreds of different business bank accounts opened under numerous different business names at various financial institutions, including but not limited to Bank of America, Citizens Bank, Genesee Regional Bank and ESL Federal Credit Union. Santillo and Parris directed and authorized the transactions that occurred in the accounts, including deposits, withdrawals, check writing and funds transfers. The various bank accounts were used to transfer money from one account to another. Incoming investor money was routinely transferred through several accounts before the funds were finally spent on whatever purpose Parris and/or Santillo authorized. By moving investors’ funds through various accounts in various entity names, Parris and Santillo were able to conceal and obscure the fact that new investor money was being used to repay earlier investors, finance the operations of the Ponzi scheme, and fund their lifestyles.

 

Santillo was previously convicted and sentenced to serve 210 months in prison.

 

The COVID-19 Fraud Scheme

 

Parris also pleaded guilty in a case originally charged in the U.S. District Court for the District of Columbia to defrauding the U.S. Department of Veterans’ Affairs (VA), as well as at least eight other victim companies, in a scheme involving personal protection equipment (PPE). Between February and April 10, 2020, the defendant, as the owner and operator of Encore Health Group, a company based in Atlanta, that purported to broker medical equipment, offered to sell scarce PPE, including 3M-brand N95 respirator masks, to various medical supply companies and governmental entities. In these proposals, Parris knowingly misrepresented his access to, and ability to obtain and deliver on time, vast quantities of 3M N95 masks and other PPE. The defendant falsely represented that he was able to obtain 3M N95 masks directly from authorized sources in the United States, when in fact, he had no ready access to 3M factories or 3M N95 masks or other PPE, no proven source of supply, and no track record of procuring and delivering such items.

 

For example, in March 2021, Parris offered to sell the VA 125 million 3M N95 masks at a cost of $6.45 per mask. In this process, the defendant attempted to obtain an upfront payment of $3.075 million from the VA, even though he knew at the time that he had no access to the promised masks or present ability to deliver the promised masks.

 

As part of his guilty plea, Parris admitted that, in addition to attempting to defraud the VA, he actually obtained upfront payments totaling approximately $7.4 million from at least eight clients for 3M N95 masks that he knew he had no access to or present ability to obtain or deliver on time. Parris also admitted that the proceeds of the scheme totaled approximately $6,218,525. In total, Parris sought orders in excess of $65 million for the non-existent PPE equipment.

allegedly engaged in a conspiracy to defraud investors through false and misleading representations and material omissions relating to CytoDyn’s development of leronlimab, a monoclonal antibody investigational drug also known as PRO 140, as a potential treatment for human immunodeficiency virus (HIV). Pourhassan and Kazempour allegedly deceived investors about the timeline and status of CytoDyn’s regulatory submissions to the U.S. Food and Drug Administration (FDA) to artificially inflate and maintain the price of CytoDyn’s stock and attract new investors, and for their personal benefit, including by selling their personal shares of CytoDyn stock.

 

Pourhassan was CytoDyn’s president and CEO at the time of the alleged fraud. Kazempour is the co-founder, president, and CEO of Amarex Clinical Research LLC (Amarex), a private company with offices in Germantown, Maryland, that managed CytoDyn’s clinical trials, and was CytoDyn’s regulatory agent in interactions with the FDA. Kazempour also served on CytoDyn’s Disclosure Committee, which was responsible for reviewing and approving CytoDyn’s periodic filings with the U.S. Securities and Exchange Commission.

. . .

The indictment alleges that Pourhassan and Kazempour made and caused CytoDyn to make materially false and misleading representations about the timelines by which CytoDyn and Amarex would complete and submit CytoDyn’s biologics license application (BLA) for leronlimab’s treatment of HIV to the FDA. In April 2020, after CytoDyn and Amarex repeatedly missed publicized timelines, Pourhassan allegedly directed Kazempour and Amarex to submit the BLA – even if it was incomplete – so that Pourhassan and CytoDyn could announce to investors that the BLA had been submitted. Pourhassan and Kazempour allegedly knew that the FDA would refuse to review an incomplete BLA.

 

After Kazempour and Amarex allegedly submitted the incomplete BLA at Pourhassan’s direction, Pourhassan and CytoDyn misrepresented in a press release that a “complete” BLA had been submitted to the FDA when, in truth and in fact, it had not. Pourhassan then allegedly sold millions of dollars’ worth of CytoDyn stock based on material non-public information, including information about the fact that the BLA was, in truth and in fact, incomplete when submitted.

. . .

The indictment also alleges that Pourhassan made, and caused CytoDyn to make, materially false and misleading representations about CytoDyn’s investigation and development of leronlimab as a potential treatment for COVID-19, including the results and significance of clinical trials and the status of CytoDyn’s regulatory submissions to the FDA. Pourhassan allegedly knew that, in truth and in fact, leronlimab’s clinical studies failed to achieve the results necessary to obtain any form of FDA approval for use as a treatment for COVID-19 and the results CytoDyn publicly touted were neither statistically significant nor scientifically sound. 

[P]ourhassan repeatedly issued press releases exaggerating CytoDyn’s progress with regard to leronlimab, an antibody that was administered to patients in clinical trials to treat various diseases. The complaint alleges that, in an April 2020 press release, CytoDyn falsely announced that the company had submitted a completed Biologics License Application to the U.S. Food and Drug Administration—a key milestone that caused the company’s stock price to increase. As set forth in the complaint, the FDA submission was woefully inadequate, and the FDA alerted the company of those deficiencies within days; however, Pourhassan did not alert shareholders to this information. In the meantime, Pourhassan allegedly sold approximately $15.8 million worth of CytoDyn stock based on the false information, netting profits of more than $4.7 million.

 

The SEC’s complaint further alleges that Kazem Kazempour, CEO of a contract research organization that interfaced with the FDA on CytoDyn’s behalf, signed off on the incomplete application and subsequently sold more than $420,000 of CytoDyn stock.

[Since] at least September 2016, Billimek would inform Williams of the asset management firm's market-moving trades prior to their execution. As the complaint alleges, on the same day, Williams would trade in the same securities prior to Billimek's employer or while multiple large orders were being placed by the employer. Williams would close his positions after the price of the security moved as expected. This alleged front-running scheme resulted in proceeds of more than $47 million. The SEC staff analyzed trading using the Consolidated Audit Trail (CAT) database to uncover William's allegedly fraudulent trading and to identify how he profited by repeatedly front-running large trades by Billimek's employer.

[O]i2Go Media Technologies, Inc., and Anthony Michael Hernandez, its CEO, sold securities in a Regulation A Offering despite not qualifying for an exemption from registration and raised approximately $1,317,000 from at least 750 investors. Oi2Go and Hernandez also allegedly made false and misleading claims in TV commercials and in materials posted on a website aimed at prospective investors regarding Oi2Go’s current ability to stream media content. The TV commercials allegedly instructed viewers to call a number to invest and the phones were answered by individuals acting as unregistered brokers. The complaint alleges that Oi2Go and Hernandez aided and abetted these individuals and associated entities in acting as unregistered brokers. In addition, the SEC’s complaint alleges that Hernandez misappropriated at least $456,000 in investor funds and used those funds to pay personal expenses such as travel, meals and jewelry.

[F]rom January 2017 through December 2020, one of CHS Hedging’s customers (Customer A) owned and controlled a ranching company and other related businesses, and engaged in speculative trading that sustained millions of dollars in losses in the ranching company’s account at CHS Hedging. Customer A and the ranching company made net margin payments of more than $147 million to CHS Hedging over the course of those four years. According to the order, CHS Hedging accepted the margin payments from Customer A without adequately investigating the source of Customer A’s funds or reporting Customer A’s transactions in a Suspicious Activity Report to the Department of the Treasury. 

 

The order finds that Customer A’s trading losses were facilitated by CHS Hedging’s failure to impose and enforce appropriate trading limits on his account. The trading limits CHS Hedging imposed on Customer A’s account were inconsistent with Customer A’s financial resources and hedging needs. Customer A frequently exceeded his trading limits. CHS Hedging, at times, raised those limits, which allowed Customer A to continue his speculative trading and sustain more losses.

 

Moreover, the order finds that CHS Hedging failed to maintain certain required records for pre-trade communications and failed to produce certain required records promptly or in the form requested by CFTC staff.

. . .

 

Related Filings

 

The Division of Enforcement charged Cody Easterday and Easterday Ranches with fraud and other violations of the Commodity Exchange Act (CEA) and regulations in Case No. 4:21-cv-5050, currently pending in the U.S. District Court for the Eastern District of Washington. [See CFTC Press Release No. 8372-21]

 

Cody Easterday pled guilty to criminal charges arising from the aforementioned scheme and was sentenced to 11 years in prison. 

Today, the Commodity Futures Trading Commission (Commission or CFTC) issued a complaint and settlement order involving CHS Hedging, LLC (CHS), a registered futures commission merchant (FCM).  The order details many egregious violations, including CHS’s failure to comply with basic recordkeeping and supervisory obligations.

 

In the wake of the terrorist attacks on September 11th, Congress strengthened U.S. banking law. Section 5318(h) of the Bank Secrecy Act (BSA), for example, requires “financial institutions” to establish anti-money laundering (AML) programs and specifies that these programs must contain minimum standards and compliance requirements.  Under the statute and our regulations, FCMs are subject to AML obligations.  FCMs must implement reasonable procedures to verify the identity of any person seeking to open an account, to maintain records of the information used to verify the identity of transacting persons and to determine whether they appear on any lists of known or suspected terrorists or terrorist organizations.  CHS ignored obvious red flags and failed to implement fundamental risk controls required by banking laws and Commission regulations, leading to the systemic failures outlined in the Commission's order.

 

Where conduct is characterized by such pervasiveness, we must aim to calibrate penalties and remedial undertakings accordingly.  In instances where previous consequences have failed to effectively deliver the message, a more aggressive approach may be justified.  Over the last twenty years, CHS has acquired a lengthy record of repeated violations.  The Commission must begin to think carefully about additional approaches to deter this type of misconduct, particularly in contexts where the conduct is repeated in so many instances over so many years.  Let’s ensure that penalties and remediation measures effectively deter repeat offenders.

 

I continue to be a strong proponent for strengthening rules pertaining to registered market participants.  A sharp focus on these rules is especially important where intermediaries perform a central role in properly functioning derivatives markets.  It is also critical to begin to think carefully about how we import these important rules and regulations in contexts where the market structure evolves away from reliance on traditional intermediaries.

 

As I previously noted in other market contexts, recordkeeping rules are essential to the Commission’s oversight of market participants and the integrity of the derivatives markets.  CHS flouted these fundamental principles in its many failures to preserve transaction records.  Preserving records enables regulators to conduct surveillance and bring enforcement actions when appropriate—reducing fraud and market manipulation, protecting investors, and ultimately engendering authentic trust in our markets, which are preeminent globally.  Accordingly, I continue to promote enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for futures commission merchants and other market participants that handle customer funds.

 

As a sponsor of the Commission’s Market Risk Advisory Committee, I am deeply thoughtful about ensuring the Commission continues to focus on systemic risks that threaten the stability of the derivatives markets, which begins with ensuring that each market participant adheres to the established, well-tailored, fundamental rules.  I commend the diligent work of our Enforcement team, including Ashley J. Burden, Joseph Patrick, Ben Sedrish, Allison V. Passman, Scott R. Williamson, and Robert Howell, for their efforts in this matter.

One of the Commission’s core functions is to ensure that derivatives markets have integrity and that there is no market manipulation and excess speculation that can artificially increase prices.  This function is particularly important since the pandemic, when families have faced hard choices at the grocery store given increased costs of food.  In order to prevent excessive speculation, the Commission requires limits on trader positions—limits set by exchanges, and enforced against market participants.  Brokers (referred to as futures commission merchants (FCMs)) serve as critical gatekeepers in preventing excessive speculation.

 

I support the Commission bringing an enforcement action against commodity broker and CFTC-registered FCM CHS Hedging, Inc. (CHS) for failing to implement anti-money laundering requirements and failing to prevent excess speculation (including during the pandemic) by Cody Easterday.  Chief Judge Bastian recently sentenced Easterday to 11 years in prison, saying that the case involves “the biggest theft or fraud I’ve seen in my career—and the biggest I ever hope to see.”[1]  Easterday was a rancher who defrauded Tysons Food, Inc. and another company out of more than $244 million by charging them for approximately 265,000 head of cattle that did not exist (a.k.a. “ghost cattle”).[2]

 

In 2021, the CFTC charged Easterday and Easterday Ranches, Inc. for fraud, making false statement to an exchange, and violating exchange-set position limits.[3]  Easterday accumulated more than $200 million in losses over a 10-year period from speculative trading in the cattle futures markets.[4]  Easterday devised the ghost cattle fraud scheme to generate money to cover margin calls on his millions in losses.[5]  The CFTC also charged him with defrauding the Chicago Mercantile Exchange (“CME”) in 2017 and 2018 to avoid disciplinary actions after exceeding position limits on cattle markets, and with violating position limits.[6]

 

Easterday’s commodity broker CHS was in a position to stop violations of position limits, and stop or significantly reduce the fraud, but CHS violated its duties and the law.  During the relevant period, Easterday made net margin payments of more than $147 million to CHS.  CHS accepted these payments despite knowing that the financial statements that CHS requested from Easterday showed no cash or cash equivalents, substantially no short-term assets in excess of liabilities, negative or break-even cash flow, and drawn down credit lines.  Some of the margin payments exceeded Easterday’s entire net annual operating income.  CHS did not investigate the source of the funds, implement an adequate anti-money laundering program or implement risk-based trading limits on Easterday.  CHS disabled trading limits for Easterday, and even raised limits.  CHS provided Easterday with direct market access, but intentionally circumvented automatic pre-trade order screening on his account, allowing him to routinely exceed trading limits.

 

CHS ignored many red flags, including an independent audit that found that CHS should cease relying on the “type of customers it services, or the length of customer relationships to detect, investigate and report suspicious transactions that might constitute money laundering violations.”  CHS failed to act on the auditor’s recommendation.  CHS also failed to maintain pre-September 2019 communications between its salesperson and Easterday.

 

I applaud the CFTC enforcement staff for bringing this case against a key gatekeeper who failed to uphold its regulatory responsibilities and in so failing, violated the law.  Unfortunately, this is not the first time that CHS has failed to follow laws and rules to uphold it regulatory responsibility.

 

CHS is a recidivist.  There have been 22 enforcement actions by exchanges and the CFTC brought against CHS.  Many of these involved failures related to record-keeping and reporting, including position reporting.  In 2016, the Commission brought a $1 million enforcement action against CHS for 13 years of misreporting fixed cash positions, which are related to position limits.[7]

 

While I support the Commission bringing an enforcement action against CHS Hedging, I do not support bringing this action as presented to the Commission because it does not bring sufficient accountability for or transparency to the harm caused by the broker’s illegal conduct.  The complaint should identify Easterday’s criminal and civil violations of the law.  The Commission should bring a very strong enforcement action against this broker—not one that does not fully describe the full scope and impact of the harm that could have been stopped or minimized had CHS legally executed its duties as a FCM, and harm that flowed.  Providing the identity of Easterday and the multiple federal actions against him would provide significant transparency into real harm involved in this case.  I see no valid reason to not reveal his identity or spare CHS of the consequences of its illegal actions—reputational or otherwise.

 

A key part of the CFTC’s mission is to promote market integrity and enforce our anti-money laundering requirements to promote market integrity.  When one of our registrants violates these requirements for a favored customer, particularly in the face of compelling evidence of suspicious activity by that customer concerning the source of funds, we need to send a stronger message than what we are doing in this case.

 

I also do not support this settlement because it does not send a strong enough deterrent message.  While a penalty of $6.5 million is significant for CHS based on its size, I cannot support the settlement without requiring the defendant to admit to its illegal actions.  Requiring defendant admissions in CFTC enforcement actions serves the critical public interest goals of federal law enforcement programs—justice, accountability, and deterrence.[8]  I recently proposed the Heightened Enforcement Accountability and Transparency test (HEAT Test) to assist the Commission in assessing whether specific cases demand heightened justice for victims, heightened accountability, and heightened deterrence that would accompany defendant admissions.  This would include cases with one or more of the following factors:

 

• Egregious conduct;
• The presence of a criminal scheme;
• Significant harm or risks of harm to investors and/or market participants;
• Significant harm or risks of harm to market integrity;
• A recidivist defendant;
• Obstruction, lying or concealment, in an investigation/examination by the CFTC, other federal authority on the same conduct, or a self-regulatory organization; and/or
• The need to send a pronounced message about particular conduct or practices.

 

Several of those factors exist in this case.  CHS is a recidivist.  There was significant harm to the market and market participants that flowed from CHS’s violations.  There is a significant need for the CFTC to send a pronounced message about an FCM violating CFTC requirements to prevent excessive speculative trading, including during the pandemic.  I issued a statement that the CFTC must ensure that excessive speculation does not distort and worsen existing challenges in commodities markets.[9]  Out of concern that families and businesses may pay artificially increased prices for commodities, I called for the CFTC to conduct deep dive studies into market manipulation and excessive speculation in commodities markets.  As an FCM, CHS violated its legal responsibilities to prevent excessive speculation and to implement an anti-money laundering program, something they should admit for full accountability, transparency and deterrence.

 

[1] Eastern District of Washington | Tri-Cities Rancher Sentenced to Eleven Years in Federal Prison and Ordered to Pay $244 Million in Restitution for “Ghost Cattle” Fraud | United States Department of Justice.

 

[2] See Id.

 

[3] CFTC Charges Washington State Rancher and Feedyard with $233 Million Phantom Cattle Fraud Scheme | CFTC.

 

[4] See Id.

 

[5] See Id.

 

[6] See Id.

 

[7] In re CHS, Inc., CFTC No. 16-07, 2016 WL 913367 (Mar. 9, 2016) (consent order).

 

[8] Commissioner Christy Goldsmith Romero, Statement of Commissioner Christy Goldsmith Romero: Proposal for Heightened Enforcement Accountability and Transparency in Settlements | CFTC (September 19, 2022).

 

[9] See Opening Statement of Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee, Opening Statement of Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee | CFTC (September 20, 2022).

 

Respondent Joseph Gunnar & Co. LLC shall pay Claimant 75% of an amount derived in a method consistent with Claimant’s calculations of other damages at the hearing, within thirty days of any and all liquidity events (as the terms was used by all parties at the hearing sessions) for transactions involving Prosper Marketplace, Virgin Hyperloop I, and Zocdoc. 

[B]etween 2010 and 2014, Honeywell UOP conspired to offer an approximately $4 million bribe to a then-high-ranking executive of Petróleo Brasileiro S.A (Petrobras) in Brazil. Specifically, Honeywell UOP offered the bribe to secure improper advantages in order to obtain and retain business from Petrobras in connection with Honeywell UOP’s efforts to win an approximately $425 million contract from Petrobras to design and build an oil refinery called Premium.

. . .

According to court documents, in order to effectuate the bribery scheme, Honeywell UOP entered into an agency agreement with a sales agent for the purpose of funding and paying the $4 million bribe to the high-ranking Petrobras executive. In exchange for the bribe, and after obtaining business advantages, including inside information and secret assistance, from the Petrobras executive, Honeywell UOP won the contract. Honeywell UOP earned approximately $105.5 million in profits from the corruptly obtained business. 

. . .

Pursuant to the DPA, Honeywell UOP will pay a criminal penalty of approximately $79 million. The department has agreed to credit up to approximately $39.6 million of that criminal penalty against amounts the company has agreed to pay to authorities in Brazil in connection with related proceedings to resolve an investigation by the Controladoria-Geral da União (CGU), the Ministério Público Federal (MPF), and the Advocacia-Geral de União (Attorney General’s Office). In addition, Honeywell UOP will pay approximately $81 million in disgorgement and prejudgment interest as part of the resolution of a parallel investigation by the SEC. 

. . .

As part of the DPA, Honeywell UOP has agreed to continue to cooperate with the department in any ongoing or future criminal investigations relating to this conduct. In addition, under the agreement, Honeywell UOP and its parent company, Honeywell International Inc., agreed to continue to enhance its compliance program and provide reports to the department regarding the implementation of compliance measures for the term of the DPA.

 

The department reached this resolution with Honeywell UOP based on a number of factors, including, among others, the nature and seriousness of the offense. Honeywell UOP received full credit for its cooperation with the department’s investigation, which included, among other things, (i) proactively disclosing certain evidence of which the department was previously unaware; (ii) providing information obtained through its internal investigation, which allowed the department to preserve and obtain evidence as part of its own independent investigation; (iii) making detailed presentations to the department; (iv) voluntarily facilitating interviews of employees; and (v) collecting and producing voluminous relevant documents and translations to the department, including documents located outside the United States. The company promptly engaged in extensive remedial measures including, among other things, terminating and disciplining certain employees involved in the misconduct and strengthening its compliance program. In light of these considerations, the criminal penalty calculated under the U.S. Sentencing Guidelines reflects a 25% reduction off the bottom of the applicable guidelines fine range. 

The SEC’s order finds that Honeywell, a U.S.-based global manufacturer of aerospace, building technologies, and automation products, engaged in a bribery scheme involving intermediaries and employees of its U.S. subsidiary to obtain business from the Brazil state-owned entity Petrobras. Specifically, the order finds that, in 2010, Honeywell offered at least $4 million in bribes to a high-ranking Brazilian government official in connection with the bidding process at Petrobras. The SEC’s order also finds that, in 2011, employees and agents of Honeywell’s Belgian subsidiary paid more than $75,000 in bribes to an Algerian government official to obtain and retain business with the Algerian state-owned entity Sonatrach.

One of McHatton’s co-defendants at trial, Robert Sproat, 60, of Mesa, Arizona, was previously sentenced to 30 months in prison. Prior to trial, a third co-defendant, Robert Moss, 56, of Gilbert, Arizona, pleaded guilty to his involvement in the scheme and was sentenced to 30 months in prison.

 

Evidence presented at trial demonstrated that, between 2012 and 2014, McHatton, Sproat, and Moss used a religious charitable organization as a front to entice victims to invest over $1.2 million. Several of the victims targeted in the scheme were elderly. McHatton, Sproat, and Moss fraudulently promoted investments in the recovery of low alpha lead from Central America, gold from the Philippines, and diamonds from Africa, though none of the items were ever produced. McHatton, Sproat, and Moss used large portions of the investment funds for their own personal use. The victims never received a return on investments other than minimal “interest” payments derived from other victims’ money.

LAMOR WHITEHEAD, who leads a church in Brooklyn, New York, has engaged in a  course of conduct in which he sought money and other things of value from victims on the basis of either threats or false promises that the victims’ investments would benefit the victims financially.  First, WHITEHEAD induced one of his parishioners to invest approximately $90,000 of her retirement savings with him but instead spent the investment on luxury goods and other personal purposes.  Second, WHITEHEAD extorted a businessman for $5,000, then attempted to convince the same businessman to lend him $500,000 and give him a stake in certain real estate transactions in return for favorable actions from the New York City government, which WHITEHEAD knew he could not obtain.  In addition, when speaking with FBI agents who were executing a search warrant, WHITEHEAD falsely claimed that he had no cellphones other than the phone he was carrying when, in fact, WHITEHEAD owned a second phone, which he regularly used to communicate — including to send a text message describing it as “my other phone” shortly after telling the agents he had no other phones.

[B]etween approximately February 2018 and July 2018, Kistler and his alter-ego entity, NOBS, engaged in a fraudulent scheme to take control of Williamsville, a dormant microcap shell company, and deceitfully pump up the purported value of the company and its shares in order to "flip" the company and/or its shares for a profit. According to the complaint, to carry out the scheme, Kistler made false and misleading statements to OTC Markets Group, the Financial Industry Regulatory Authority ("FINRA"), and Williamsville's transfer agent.  Kistler also allegedly made false and misleading statements to the public through Williamsville's public filings. In addition, according to the complaint, Kistler engaged in manipulative purchases of Williamsville stock in order to give the appearance of bona fide market activity in the stock.  As alleged in the complaint, Kistler and NOBS benefited from this scheme.  Specifically, Kistler, through NOBS, received $50,000 for brokering the sale of Williamsville, and NOBS received 100 million Williamsville shares.  Kistler also received $32,500 to engage in manipulative purchases of Williamsville's stock.

[While Claimant, an outsider to the company, did not first submit the information to the company, Claimant made persistent efforts to bring the conduct to the attention of the Commission as well as the company. Further, the principal objective of Rule 21F-4(c)(3) – to encourage internal reporting, thereby allowing a company the opportunity to address the conduct – was satisfied here. Quickly after Claimant submitted the email to the company, the company opened an internal investigation, hired outside counsel to conduct the investigation, and reported the allegations to the Commission. It would be in the public interest and consistent with the protection of investors to waive the first requirement of Rule 21F-4(c)(3) as to Claimant’s award application for both the Covered Action and the Related Action.

 

In applying the facts under Rules 21F-6(a) and (b), we find the recommended award percentages to be appropriate. Claimant’s initial anonymous tip to the company was the initial source of the company’s internal investigation, as well as both the Commission’s and Other Agency’s investigations. Claimant submitted multiple anonymous tips to both the company and the Commission throughout the course of the investigations. The resulting Covered and Related Actions, however, addressed misconduct broader than that reported in Claimant’s tips and a large percentage of the monetary sanctions ordered against the company related to conduct other than the violations alleged by Claimant. Further, Claimant’s level of contribution to the Covered Action was higher than to the Related Action, as Claimant’s specific allegations were not included as part of the charges in the action brought by the Other Agency. 

• Securities Industry Commentator
• Bill Singer