Securities Industry Commentator by Bill Singer Esq
May 2, 2023
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DOJ RELEASES
Military impersonation scheme lands local man in prison (DOJ Release)
SEC RELEASES
SEC Denies Whistleblower Award to Claimant
Order Determining Whistleblower Award Claim
CFTC RELEASES
FINRA RELEASES
FINRA Censures and Fines International Research Securities, Inc. for Net Capital
In the Matter of International Research Securities, Inc., Respondent (FINRA AWC)
A New Twist on New Account Fraud: Detecting and Preventing ACATS Fraud (FINRA Unscripted)
5/2/2023
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SEC Alleges Son and Father-in-Law Touted Faith to Target Church Members in $20 Million Offering Fraud (SEC Release)
https://www.sec.gov/news/press-release/2023-84
In the United States District Court for the Central District of Illinois, the SEC filed a Complaint
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-84.pdf charging Brett M. Bartlett, his father-in-law Scott A. Miller, and their companies: Dynasty Toys Inc., The 7M eGroup Corp., Concept Management Company LLC, and Dynasty Inc. with violating the antifraud provisions of the federal securities laws; and, further (with the exception of 7Me) with violating the registration provisions of the Securities Act. Parallel criminal charges were filed against Bartlett, 7Me, and Dynasty Toys. As alleged in part in the SEC Release:
[F]rom at least June 2018 to May 2020, Bartlett and Miller raised funds from more than 1,000 investors nationwide by selling promissory notes, stock, and fraudulent gold contracts through their companies, Dynasty Toys Inc., The 7M eGroup Corp., Concept Management Company LLC, and Dynasty Inc. As the complaint alleges, when soliciting investors, many of them from a large church in central Illinois, Bartlett frequently invoked his Christian faith and attributed his alleged success to divine intervention to win investor trust. The complaint further alleges that, to stave off demand for cash payouts from their unsuccessful business ventures, Bartlett and Miller misled investors, made more than $11 million in Ponzi-like payments, and sent to investors $21 million in bad checks that bounced due to insufficient funds. In addition, Bartlett and Miller misappropriated more than $1.2 million for personal use, including vacations, entertainment, and payments for a luxury rental home.
“The ‘90s: Rom-coms, the Spice Girls, & MFA:” Remarks Before the Managed Funds Association by SEC Chair Gary Gensler
https://www.sec.gov/news/speech/gensler-remarks-managed-funds-association-050223
Thank you Bryan. As is customary, I’d like to note that my views are my own as SEC Chair, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.
The 1990s
The 1990s was the decade of Michael Jordan and the Chicago Bulls. The Cold War was over. It was the dawn of the internet and the Spice Girls. Seinfeld was on TV. Bill Clinton brought blue jeans and Domino’s delivery to the White House.
The 1990s also was pretty relevant for the private fund field. The Managed Funds Association was founded in 1991.
Congress passed amendments in 1996 to the securities laws that included a new exception from registration allowing private funds to have an unlimited number of qualified investors.[1]
That same 1996 law included an important provision that SEC rulemaking had to consider efficiency and competition as well as capital formation, in addition to investor protection and the public interest.
The 1990s was when I became the father of three wonderful daughters and watched great Meg Ryan and Julia Roberts rom-coms. I also had a career shift that took me to Greenwich, Conn., that fateful weekend in 1998 prior to Long-Term Capital Management’s failure.
Private Funds and the American Economy
Let’s fast forward to the 2020s. I’m not talking about Biden versus Clinton or generative AI versus the internet or Taylor Swift versus the Spice Girls. Though there may be some things on which Taylor and I agree. Instead, I’m going to focus on private funds.
Advisers now report more than $25 trillion in private fund gross asset value[2] amongst tens of thousands of funds.[3] The reported assets surpass the size of the total $23 trillion banking sector.[4] In 1998, the industry had $800 billion to $1 trillion in assets with only a few thousand funds.[5] This represented 20-25 percent of the then $4-plus trillion banking sector.[6]
The private fund industry plays an important role in each sector of the capital markets, whether it’s equity, treasury, corporate bond, mortgage, municipal, loan origination, or many other markets. It’s intertwined with the derivatives and funding markets, such as the repo and reverse repo markets. It participates in capital formation for startups to late-stage companies.
It also plays an important role for investors, such as retirement funds and endowments. Standing behind those entities are a diverse array of teachers, firefighters, municipal workers, students, and professors.
Subsequent to the 1990s, as you know, we had the 2008 financial crisis. In response, Congress gave the SEC important new authorities, including with regard to private funds.
First, Congress repealed the exception that most private fund advisers previously relied on to avoid registration, causing private fund advisers, with some narrow exceptions, to register with the SEC.[7]
Second, Congress also directed the SEC to collect information from private funds “as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the FSOC.”[8]
We take congressional mandates seriously in the context of our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The markets should work for the benefit of investors and issuers—not the other way around. I recognize we may have different clients. The MFA’s clients are your members, largely investment advisers to private funds. The SEC’s clients, though, are the American public, investors and issuers alike.
Much of the SEC’s work in updating rules is to keep up with today’s ever-changing technology and business models. We are focused on promoting fair, orderly, and efficient markets, which helps protect investors and facilitate capital formation. In that context, I’ll speak to our work to enhance market efficiency, integrity, and resiliency.
Efficiency
You probably are familiar with Alfred Winslow Jones, the father of hedge funds, who started the first fund strategy in 1949. He created the 20 percent performance fee structure. It’s said that he modeled it on Phoenician sea captains who took the same in profits.[9] By my time on Wall Street, this had led to the traditional “2 and 20” model.
Today, private fund advisers receive multiple levels and types of fees—from management to performance to portfolio company fees. That’s not to mention consulting, advisory, monitoring, servicing, transaction, and director’s fees, among others.
Average private equity fees[10] were estimated to be 1.76 percent (annual management fee) and 20.3 percent (performance fee) in 2018 and 2019. For the largest private equity firms, those fees might even be higher.[11] Average hedge fund[12] fees were estimated to be 1.4 percent (annual management fee) and 16.4 percent (performance fee) in 2020.
Taken together, those fees might add up to 3-4 percent in private equity and 2-3 percent in hedge funds per year. Fees and expenses range well into the hundreds of billions of dollars each year.
We have a number of projects across the capital markets around efficiency. Most important to this group is the private fund adviser proposal.[13]
This proposal uses the tools of transparency and market integrity to promote competition and efficiency. This ties to those 1996 reforms, in which Congress said we had a role to consider efficiency and competition in the capital markets. Congress didn’t cabin those 1996 reforms only to retail investors or one segment of our markets. They didn’t leave out so-called sophisticated investors.
The proposal’s new transparency would relate to fees, expenses, performance, and side letters.
As to market integrity, annual audits would be required. The proposal also would prohibit certain activities, such as seeking reimbursement, indemnification, exculpation, or limitation of its liability, including a breach of fiduciary duty in providing services.
Integrity and Disclosure
Congress also gave the SEC an important role promoting market integrity and disclosure to help investors, facilitate capital formation, and build trust. This lowers the cost of capital for issuers, raises returns for investors, and helps increase participation. Integrity and disclosure facilitate what can be the best of capital markets and guard against the worst.
At the SEC, we have a number of projects focused on market integrity and disclosure. I’m going to focus on five, all of which relate to Dodd-Frank mandates and authorities.
Dodd-Frank mandated two rulemakings to bring greater transparency around securities lending[14] and short positions.[15] Thus, we have proposals that would reduce information asymmetries between borrowers and sellers in the securities-lending market[16] and make aggregate data about large short positions available to the public.[17]
Further, we have three outstanding proposals authorized in Dodd-Frank related to investment advisers’ custody of client assets, beneficial ownership, and large positions in security-based swaps.
In the wake of Bernie Madoff, Congress gave the SEC updated authorities that investment advisers should safeguard client assets over which they have custody.[18] Thus, we proposed a safeguarding rule, updating our prior custody rule.[19] In particular, Congress gave us authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities. Further, investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide, which helps protect assets should the adviser or custodian go bankrupt.
In 1968, Congress mandated that large shareholders of public companies disclose information that helps the public understand their ability to influence or control that company. Beneficial owners of more than 5 percent of a public company’s equity securities who have control intent have 10 days to report ownership.[20] Today, markets move dramatically faster. Congress in Dodd-Frank gave the SEC authority to shorten this deadline;[21] thus, we proposed to cut it in half to five days.[22]
Lastly, after the 2008 crisis, Congress granted the SEC broad authority with regard to security-based swaps, including credit default swaps, which played a leading role in that crisis.[23] A critical part of Long-Term Capital Management’s risk-taking was in total return swaps, another form of security-based swaps. Given this history, Dodd-Frank authorities, and not to mention what happened in Archegos, I supported the Commission’s proposed rules to a) require prompt disclosure of large security-based swap positions and b) strengthen investor protection in security-based swaps.[24]
Resiliency
Let’s turn back to the 1990s for a moment. With my youngest daughter, Isabel, then a year old, on my lap, Secretary Rubin was calling.[25] He had just been discussing Long-Term Capital Management with Federal Reserve Chair Alan Greenspan.
After visiting the fund that weekend, I told Secretary Rubin it would be unlikely the fund would last past the upcoming Wednesday.
Though I shared with him estimates of the first-order losses of direct counterparties, I said at best it only would be a guess as to the possible systemic effect across the financial markets and into the economy. The fund had about $1.2 trillion in derivatives, booked in the Cayman Islands, on a $100-plus billion balance sheet, with only about $4-$5 billion of net asset value.[26]
Subsequently, I was asked to staff the President’s Working Group review. We found the event “highlighted the risks of excessive leverage, and the possibility that problems at one financial institution could potentially pose risks to the financial system as a whole.”[27]
History is replete with times when tremors in one corner of the financial system or at one financial institution spill out into the broader economy. When this happens, the American public—bystanders to the highways of finance—inevitably gets hurt. Investors and issuers inevitably get hurt.
Lest we forget that 10 years later, eight million Americans lost their jobs, millions of families lost their homes, and small businesses across the country folded as a result of the financial crisis of 2008.
In Dodd-Frank, Congress put in place new requirements regarding registration and reporting of private fund advisers.
Since the SEC put in place Form PF 12 years ago, a lot has changed. We have two proposals to update it. One is related to current reporting, and tomorrow we have calendared to consider its adoption.[28] Working with the Commodity Futures Trading Commission, the second proposal, among other things, would expand the reporting requirements for large hedge fund advisers on their large funds.[29]
Lastly, I’ll note we have important projects about the efficiency and resiliency of the Treasury market. Private funds have significant investments in this $24 trillion market.[30] These projects include registering and regulating Treasury dealers[31] and platforms,[32] as well as facilitating greater clearing of treasuries in both cash and funding markets.[33]
These projects are important, in part, because hedge funds can create risks for financial stability through the use of leverage and through counterparty exposures.[34] Hedge fund exposures to repurchase agreements, reverse repurchase agreements, and Treasury securities have increased in recent years. Moreover, in the last few years, many hedge funds are receiving repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied.[35]
Conclusion
So much has changed since the 1990s. My daughters are grown up. The technology of today makes the technology of that time seem quaint. Though I still do enjoy Sleepless in Seattle and Notting Hill.
The projects I have discussed are designed to update the rules of the road for private funds to meet today’s times and ensure these intermediaries, too, work for investors and issuers alike.
[1] Pub. L 104–290.
[2] Based on Form ADV filings through March 31, 2023. Represents sum of Registered Investment Adviser GAV and Exempt Reporting Adviser GAV, less estimated overlap.
[3] Based on Form ADV filings, registered investment advisers report more than 50,000 private funds and exempt reporting advisers report more than 40,000 funds. Form ADV filings may reflect double-counting or other forms of overlap between reported private funds.
[4] See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States” (April 28, 2023), available at https://www.federalreserve.gov/releases/h8/current/default.htm. Total assets of approximately $22.9 trillion as of April 19, 2023 (Table 2, Line 33).
[5] See President’s Working Group on Financial Markets, “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management” (April 28, 1999), available at https://www.cftc.gov/sites/default/files/tm/tmhedgefundreport.htm.
[6] See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States” (April 23, 1999), available at https://www.federalreserve.gov/releases/h8/19990423/.
[7] See Securities and Exchange Commission final rule (June 22, 2011), available at https://www.sec.gov/rules/final/2011/ia-3221.pdf; 15 U.S.C. 80b-3(l); 15 U.S.C. 80b-3(m)
[8] 15 U.S.C. 80b-4(b).
[9] See Sebastian Mallaby, “Learning to Love Hedge Funds” (June 11, 2010), available at https://www.wsj.com/articles/SB10001424052748703302604575294983666012928.
[10] Average private equity fees in 2018 and 2019 estimated at 1.76 percent (annual management fee) and 20.3 percent (performance fee).See Ashley DeLuce and Pete Keliuotis, “How to Navigate Private Equity Fees and Terms” (October 7, 2020), available at https://www.callan.com/uploads/2020/12/2841fa9a3ea9dd4dddf6f4daefe1cec4/callan-institute-private-equity-fees-terms-study-webinar.pdf.
[11] SeeLudovic Phalippou, “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory” (July 15, 2020) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820.
[12] Average hedge fund fees in 2020 estimated at 1.4 percent (annual management fee) and 16.4 percent (performance fee) available at https://www.cnbc.com/2021/06/28/two-and-twenty-is-long-dead-hedge-fund-fees-fall-further-below-one-time-industry-standard.html (citing HRF Microstructure Hedge Fund Industry Report Year End 2020).
[13] SeeSecurities and Exchange Commission, “SEC Proposes to Enhance Private Fund Investor Protection” (Feb. 9, 2022), available at https://www.sec.gov/news/press-release/2022-19.
[14] Pub. L. 111-203, 984(b), 124 Stat. 1376 (2010).
[15] Pub. L. 111-203, 929X, 124 Stat. 1376, 1870 (2010).
[16] See Securities and Exchange Commission, “SEC Proposes Rule to Provide Transparency in the Securities Lending Market” (Nov. 18, 2021), available at https://www.sec.gov/news/press-release/2021-239.
[17] See Securities and Exchange Commission, “SEC Proposes Short Sale Disclosure Rule, Order Marking Requirement, and CAT Amendments” (Feb. 25, 2022), available at https://www.sec.gov/news/press-release/2022-32.
[18] Pub. L. No. 111-203, 411, 124 Stat. 1376 (2010).
[19] See Securities and Exchange Commission, “SEC Proposes Enhanced Safeguarding Rule for Registered Investment Advisers” (Feb. 15, 2023), available at https://www.sec.gov/news/press-release/2023-30.
[20] Section 13(d)(1) of the Exchange Act was enacted by the 90th Congress in 1968 through the approval of Senate Bill 510.
[21] Pub. L. 111-203, 124 Stat. 1900 929R (a)(1)(A) (2010).
[22] See Securities and Exchange Commission, “SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting” (Feb. 10, 2022), available at https://www.sec.gov/news/press-release/2022-22.
[23] Pub. L. 111–203, 761- 774, 124 Stat. 1376, 1754-1802 (2010).
[24] See Securities and Exchange Commission, “SEC Proposes Rules to Prevent Fraud in Connection With Security-Based Swaps Transactions, to Prevent Undue Influence over CCOs and to Require Reporting of Large Security-Based Swap Positions” (Dec. 15, 2021), available at https://www.sec.gov/news/press-release/2021-259.
[25] See Roger Lowenstein, “When Genius Failed: The Rise and Fall of Long-Term Capital Management” (Random House, Oct. 9, 2000).
[26] See President's Working Group on Financial Markets, “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management” (April 28, 1999), available at https://www.cftc.gov/sites/default/files/tm/tmhedgefundreport.htm.
[27] Ibid.
[28] See Securities and Exchange Commission, “Sunshine Act Notice” (April 26, 2023), available at https://www.sec.gov/os/sunshine-act-notices/sunshine-act-notice-open-050323.
[29] See Securities and Exchange Commission, “SEC Proposes to Enhance Private Fund Reporting” (Aug. 10, 2022), available at https://www.sec.gov/news/press-release/2022-141.
[30] For example, Qualifying Hedge Funds (a subset of all private funds) report $1.5 trillion in gross notional exposure to U.S. Treasury securities as of 2022Q3. See Securities and Exchange Commission, “Private Funds Statistics: Third Calendar Quarter 2022” (April 6, 2023), at Table 46, available at https://www.sec.gov/files/investment/private-funds-statistics-2022-q3-accessible.pdf.
[31] See Securities and Exchange Commission, “SEC Proposes Rules to Include Certain Significant Market Participants as ‘Dealers’ or ‘Government Securities Dealers’” (March 28, 2022), available at https://www.sec.gov/news/press-release/2022-54.
[32] See Securities and Exchange Commission, “SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS” (Jan. 26, 2022) available at https://www.sec.gov/news/press-release/2022-10
[33] https://www.sec.gov/news/press-release/2022-162. See also “SEC Reopens Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and Provides Supplemental Information” (April 14, 2023), available at https://www.sec.gov/news/press-release/2023-77.
[34] See Gary Gensler, “Prepared Remarks Before the Financial Stability Oversight Council: Annual Report” (Dec. 16, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-fsoc-annual-report-121622. See also Department of the Treasury, “Financial Stability Oversight Council Releases 2022 Annual Report” (Dec. 16, 2022), available at https://home.treasury.gov/news/press-releases/jy1171.
[35]As a 2021 G30 report put it, “In principle, if all repos were centrally cleared, the minimum margin requirements established by FICC would apply marketwide, which would stop competitive pressures from driving haircuts down (sometimes to zero), which reportedly has been the case in recent years.” See Group of 30 Working Group on Treasury Market Liquidity, “U.S. Treasury Markets: Steps Toward Increased Resilience” (2021), available at https://group30.org/publications/detail/4950. In addition, as a 2021 Federal Reserve Board report said, “Most of hedge fund repo is transacted bilaterally, with only 13.7% of the repo centrally cleared.” See Federal Reserve Board Division of Research & Statistics and Monetary Affairs, “Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis” (April 2021), available at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf.
FINRA Fines and Suspends Rep for Trading in Deceased Customer's Account
In the Matter of Shahab S. TagnaviDinani, Respondent (FINRA AWC 2022073991601)
https://www.finra.org/sites/default/files/fda_documents/2022073991601
%20Shahab%20S.%20TagnaviDinani%20CRD%20%202503652%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, Shahab S. TagnaviDinani submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Shahab S. TagnaviDinani was first registered in 1994 with Park Avenue Securities LLC. In accordance with the terms of the AWC, FINRA imposed upon TagnaviDinani a $5,000 fine, $1,998.77 in disgorgement plus interest, and a 45-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:
Customer A maintained a non-discretionary account at Park Avenue Securities, with TagnaviDinani as her registered representative. Customer A was the only person with authority to authorize transactions in the account. Customer A died on January 17, 2021, which TagnaviDinani learned the following day. Between Customer A's death in January 2021 and November 2021, TagnaviDinani placed 48 unauthorized buy and sell orders in the account. TagnaviDinani discussed several of the trades with surviving members of Customer A's family, but those individuals did not have trading authorization over the account. TagnaviDinani received $1,998.77 in commissions from the unauthorized
trades.
Therefore, Respondent violated FINRA Rule 2010.
FINRA Censures and Fines International Research Securities, Inc. for Net Capital
In the Matter of International Research Securities, Inc., Respondent (FINRA AWC 2022075288901)
https://www.finra.org/sites/default/files/fda_documents/2022075288901
%20International%20Research%20Securities%2C%20Inc.%20CRD%2019532%20AWC%20vr.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, International Research Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that International Research Securities, Inc.has been a FINRA member firm since 1987 with 10 registered representatives. In accordance with the terms of the AWC, FINRA imposed upon International Research Securities, Inc. a Censure and $10,000 fine. As alleged in part in the "Overview" portion of the AWC:
Between April 22, 2022, and September 30, 2022, International Research Securities conducted a securities business while failing to maintain the required minimum net capital. As a result, the firm violated §15(c) of the Securities Exchange Act of 1934,
Exchange Act Rule 15c3-1, and FINRA Rules 4110 and 2010. Between April and August 2022, the firm also failed to maintain books and records reflecting an accurate computation of its aggregate indebtedness, required minimum net capital, and excess net capital, and it filed with FINRA an inaccurate Financial and Operational Combined Uniform Single (FOCUS) report. In addition, the firm filed late and inaccurate net capital-related notices with the SEC and FINRA between April and December 2022. As a result, International Research Securities violated Exchange Act § 17(a), Exchange Act Rules 17a-3, 17a-5, and 17a-11, and FINRA Rules 4511 and 2010.
Restricted Firms / FINRA Adopts Amendments to FINRA Rule 8312 to
Release Information on BrokerCheck Relating to Designation as a Restricted Firm / Effective Date: June 1, 2023 (FINRA Regulatory Notice 23-07)
https://www.finra.org/sites/default/files/2023-05/Regulatory-Notice-23-07.pdf
The FINRA Regulatory Notice states in part that [Ed: footnote omitted]:
[T]o enhance the investor-protection benefits of Rule 4111, FINRA has amended Rule 8312 (FINRA BrokerCheck Disclosure) to release information on BrokerCheck as to whether a particular member firm or former member firm is currently designated as a Restricted Firm pursuant to Rules 4111 and 9561. Releasing this information will alert investors to research more carefully the background of the firm. It also will create additional incentives for firms with a significant history of misconduct to change behaviors and activities to reduce risk.
Information that a firm is a Restricted Firm will display on BrokerCheck on a firm’s summary and detailed BrokerCheck reports while that firm is designated as a Restricted Firm.
A New Twist on New Account Fraud: Detecting and Preventing ACATS Fraud (FINRA Unscripted)
https://www.finra.org/media-center/finra-unscripted/new-account-fraud-preventing-acats
A conversation about FINRA Regulatory Notices 23-06 and 22-21 with FINRA Staff:
- Chris Hunter, Principal Analyst with Risk Monitoring,
- Emily Kahn, Principal Intelligence Specialist with the Financial Intelligence Unit, and
- Lindsey Barnett, Senior Principal Investigator with the Special Investigations Unit
= = =
5/1/2023
Former Financial Advisor Sentenced for Scheme to Steal Funds from Elderly Bank Customers (DOJ Release)
https://www.justice.gov/usao-edca/pr/former-financial-advisor-sentenced-scheme-steal-funds-elderly-bank-customers
In the United States District Court for the Eastern District of California, Tyler Rigsbee, 33, pled guilty to one count of aggravated identity theft; and he was sentenced to two years in prison and ordered to pay $158,960 in restitution. As alleged in part in the DOJ Release:
[F]rom 2016 to 2021, Rigsbee worked as a FINRA-registered financial advisor at a major bank in Sacramento. During his employment, Rigsbee targeted elderly bank customers and stole $158,960 from these victims’ accounts.
Rigsbee stole $113,160 from one elderly victim’s account by using the name and identity of the account beneficiary to fraudulently transfer the funds into another account that Rigsbee had set up and controlled in the beneficiary’s name. Rigsbee next stole $45,800 from the account of a second elderly victim by transferring funds in incremental amounts into a separate account that Rigsbee had set up and controlled in the victim’s name. Rigsbee then pocketed the money by transferring these funds into his own personal bank account.
Toward the end of his scheme, Rigsbee attempted to conceal his theft by stealing $16,700 from a third elderly customer’s account and attempting to funnel that money into the second victim’s account to partially replace what he previously stole. However, this transaction was flagged, and the funds were reverted.
Californian convicted of fraudulently passing over $1M in counterfeit savings bonds at South Texas banks (DOJ Release)
https://www.justice.gov/usao-sdtx/pr/californian-convicted-fraudulently-passing-over-1m-counterfeit-savings-bonds-south
In the United States Southern District of Texas, Daniel Alan Lewis pled guilty to passing counterfeit U.S. savings bonds. As alleged in part in the DOJ Release:
Daniel Alan Lewis and others conspired to create counterfeit U.S. Series I savings bonds. They then passed them at financial institutions using other people’s identities and split the proceeds.
As part of his plea, Lewis further admitted that in November and December 2021, he passed numerous counterfeit savings bonds at banks in both the Houston and Brownsville areas.
U.S. District Judge Fernando Rodriguez Jr. accepted the plea and set sentencing for Aug. 10. At that time, Lewis faces up to 20 years in federal prison and a possible $250,000 maximum fine.
Military impersonation scheme lands local man in prison (DOJ Release)
https://www.justice.gov/usao-sdtx/pr/military-impersonation-scheme-lands-local-man-prison
In the United States District Court for the Southern District of Texas, Ganiyu Abayomi Jimoh, 30, pled guilty to conspiracy to commit mail fraud; and he was sentenced to 36 months in prison plus three years of supervised release, and ordered to pay $405,427.80 in restitution. As alleged in part in the DOJ Release:
[A]t the hearing, the court heard additional evidence including that at least one of the victims was an 84-year-old man who was defrauded of money by an online “girlfriend” and how $13,500 of his losses were deposited into accounts Jimoh opened.
In 2019, Jimoh began working with co-conspirators pretending to be U.S. military soldiers deployed to Afghanistan. They would solicit victims wishing to assist soldiers stationed overseas and persuaded them to contribute monies toward non-existent real estate deals.
As part of his plea, Jimoh admitted to using counterfeit passports to open bank accounts to receive funds from the victims for his personal benefit.
SEC Charges Florida Trader with Microcap Stock Manipulation Scheme and Obtains Final Judgment (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25703.htm
Without admitting or denying the charges in an SEC Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2023/comp25703.pdf, Carlos Eduardo, Reyes Alvarez consented to the entry of a Final Judgment that permanently enjoins him from future violations of Section 17(a) of the Securities Act and Sections 9(a)(1), 9(a)(2), and 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Final Judgment orders Reyes to pay disgorgement of $368,045, prejudgment interest of $76,843, and a civil penalty of $160,000; and, further, prohibits Reyes from acting as an officer or director of a public company, and prohibits Reyes from participating in any offering of penny stocks; and, additionally, enjoins him from engaging in, or deriving compensation from, specified activities related to inducing the purchase or sale of securities, unless those securities are listed on a national securities exchange and satisfy specified capitalization requirements.As alleged in part in the SEC Release:
[F]rom about November 2017 and through at least April 2019, Reyes acquired large positions in thinly-traded over-the-counter stocks and then generated investor interest in these stocks through fraudulent means, most often by causing the issuance of press releases that had not been authorized by the companies. In connection with at least four companies, Reyes also allegedly engaged in wash trading to create the appearance of an active market and raise the company's stock price. The complaint further alleges that Reyes's fraudulent activity increased the prices of the securities he targeted and that he profited from these schemes by selling the securities at the inflated prices. As a result of these schemes, Reyes profited by $368,045.
SEC Denies Whistleblower Award to Claimant
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97408; Whistleblower Award Proc. File No. 2023-54)
https://www.sec.gov/rules/other/2023/34-97408.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:
The Response contends that the Commission launched and went forward with its investigation based on Claimant alerting the Commission staff via the Newspaper article of the Company’s continued violations. Furthermore, Claimant contends that it was not necessary to provide the same document that formed the basis for the Newspaper article to the Commission because the SEC launched and went forward with its investigation based on Claimant alerting the Commission staff of Company’s continued violations and not due to any particular document. As discussed above, Claimant’s argument that he/she prompted the opening of the investigation by being the source of the information published in the Newspaper article is without merit because the Commission staff was aware of the information in the Newspaper article from other sources. The declaration from the Enforcement staff, which we credit, explains that Enforcement staff did not open the investigation based on specific information contained in the Newspaper article or any other press article; rather it was news media attention following the Redacted Speech concerning Redacted that caused the opening of the investigation. Accordingly, Claimant’s information did not cause the opening of the investigation.
FINRA Censure and Fines Madison Avenue Securities Over Mutual Fund Sales Charges.
In the Matter of Madison Avenue Securities, LLC, Respondent (FINRA AWC 2019061187802)
https://www.finra.org/sites/default/files/fda_documents/2019061187802
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%20CRD%2023224%20AWC%20lp.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, Madison Avenue Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Madison Avenue Securities, LLC, has been a FINRA member firm since 1988 with over 240 registered representatives at 98 branches. As asserted in part in the "Background" portion of the AWC [Ed: footnotes omitted]:
In May 2022, Madison Avenue agreed to a settlement with the Securities and Exchange Commission regarding allegations that the firm (1) breached its fiduciary duty by failing to provide full and fair disclosures regarding conflicts of interest associated with its receipt of third-party compensation based on advisory client investments; (2) breached its duty to seek best execution by causing advisory clients to invest in share classes of mutual funds when share classes of the same funds were available to clients that
presented a more favorable value for these clients; (3) breached its duty of care by failing to undertake an analysis to determine whether the particular mutual fund share classes and money market funds it recommended were in the best interests of its advisory clients; and (4) failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these breaches of the firm’s duties. The firm agreed to pay a $150,000 fine, disgorgement of $579,523.76 and prejudgment interest of $73,649.93, and to an undertaking.
In accordance with the terms of the AWC, FINRA imposed upon Madison Avenue a Censure, $50,000 fine, and $63,296 in restitution. and an undertaking to certify compliance with the cited issues. As alleged in part in the "Overview" portion of the AWC:
From January 2016 through December 2018, Madison Avenue's registered representatives had two options for the purchase of mutual funds: they could buy via direct application to the mutual fund company, or they could purchase the mutual funds for the customer's brokerage account at Madison Avenue through an electronic order entry system offered by Madison Avenue's clearing firm. For direct application business, the firm required its representatives to prepare and submit a customer-signed application, which included a "breakpoint worksheet." The reviewing principal then used these documents to assess whether there were any available sales charge discounts.
For mutual fund purchases made through the electronic order entry system, the firm relied on its representatives to ensure that customers received the appropriate breakpoints and received annual certifications from its representatives acknowledging their responsibility in this regard. The firm did not require use of the application form and breakpoint worksheet, and representatives did not otherwise memorialize the customer information needed to assess potential sales charge discounts. Instead, from January 2016 to February 2018, principals manually reviewed mutual fund transactions submitted through the electronic order entry system the day after the transaction. This process was called a "T-plus-1" review. From February 2018 through December 2018, the firm used an electronic trade monitoring program for the firm' suitability review of transactions entered into the electronic order entry system, along with a principal's review of the trade monitoring program's surveillance alerts, including for "Fund Family Diversification."
Neither the T-plus-1 or surveillance alert review process allowed for reasonable review of the suitability of customers' purchases of mutual funds in multiple different mutual fund families, either simultaneously or sequentially, resulting in missed sales charge discounts. Neither process included a review of customers' mutual funds holdings purchased away from the firm that could have been used to achieve sales charge discounts through a right of accumulation.
From January 1, 2016 through December 2018, 12 firm customer households, identified in Attachment A, purchased mutual funds in multiple different mutual fund families, either simultaneously or sequentially, in transactions submitted through the electronic order entry system. These customers' sales charges would have been reduced had they purchased mutual funds all within one mutual fund family, rather than among several fund families.
In addition to the customers identified in Attachment A, in June 2018 another firm customer simultaneously purchased six mutual funds in five different mutual fund families at the recommendation of a firm registered representative in transactions submitted via the firm's electronic order entry system. At the time, the customer already held mutual funds away from the firm. Although the strategy involved highly-rated funds, the customer's sales charges would have been reduced if he had purchased mutual funds in one mutual fund family, and reduced even further if he had invested in the mutual fund family of the funds he held away from the firm.4
Since December 2018, the firm has revised its supervisory system, including WSPs, regarding mutual fund supervision, including further describing the T-plus-1 and surveillance alert review processes for mutual fund transactions.
Therefore, Respondent violated FINRA Rules 3110 and 2010 by failing to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to supervise mutual fund transactions that the firm’s representatives effected through the electronic order entry system to confirm the suitability of the transactions regarding potential available sales charge discounts.