FINRA’s Office of Hearing Officers recently rendered a decision on an issue of first impression in Dep’t of Enforcement v. NYPPEX, LLC, et al., (Disc. Proc. No. 2019064813801). Enforcement charged FINRA member firm, NYPPEX, LLC, its former CEO, Laurence Allen, and its CCO, Michael Schunk, with numerous violations of FINRA rules. The charges stemmed from Respondents’ conduct in the wake of a temporary restraining order issued by a New York state court against Allen. Among other things, the order, obtained at the behest of the Office of the Attorney General for the State of New York (“NYAG”), enjoined Allen from engaging in securities fraud and violating New York’s securities laws. Enforcement took the position that the TRO rendered Allen statutorily disqualified from continued association with a FINRA member firm. Allen could have remained associated with the Firm if it applied for, and received, FINRA’s permission pursuant to FINRA Rule 9520. Allen’s supervisor, Schunk, however, purportedly let Allen continue as an associated person at NYPPEX for over a year without seeking a waiver from FINRA.

FINRA’s disciplinary proceeding was triggered by the ex parte TRO. After a two-year investigation, in December 2018, the NYAG commenced an action under Article 23-A of New York’s General Business Law, known as the Martin Act, against Allen and certain others. The NYAG applied on an ex parte basis for preliminary injunctive relief against Allen, NYPPEX Holdings, and others under Section 354 of New York’s General Business Law. The NYAG stated that a preliminary injunction was warranted because of the allegations of fraud and fraudulent practices by Allen and his refusal to produce documents or appear for testimony. In December 2018, the Supreme Court of the State of New York granted the NYAG the relief it sought and issued the TRO without hearing from Allen or NYPPEX. Allan was served with the Order in January 2019 and Schunk learned about it that month as well.

On December 4, 2019, the NYAG filed a complaint in the New York Supreme Court against NYPPEX, Allen and others (Index No. 452378/2019). In February 2020, the New York Supreme Court concluded a five-day hearing and issued a preliminary injunction prohibiting Allen and NYPPEX from, among other things, violating the Martin Act and from “facilitating, allowing or participating in the purchase, sale or transfer of any limited partnership interest in [the fund].” At this point in time, NYPPEX filed an MC-400 Application seeking permission for NYPPEX to remain associated with a disqualified person, Allen. FINRA Enforcement, however, argued that Allen became statutorily disqualified when the TRO was issued in 2018, more than a year before NYPPEX filed the MC-400 Application.

A person is deemed disqualified from continued association with a FINRA member firm if, among other things, such person “is enjoined from any action, conduct, or practice” specified in Section 15(b)(4)(C) of the Exchange Act. That section, in turn, includes a situation in which a person “is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from . . . engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.”

Once a member becomes aware that one of its associated persons is subject to a disqualification, the member is obligated to report the event to FINRA. The firm must amend the individual’s Form U4 within 10 days of learning of a statutory disqualifying event. The member firm then must either file a Form U5 terminating the individual’s association or file an MC-400 Application seeking to sponsor the association of the disqualified person. If the member firm neither terminates the individual nor submits an MC-400 Application, the member is ineligible to continue in FINRA membership.

In the case of NYPPEX and Allen, the respondents argued that the TRO did not cause Allen to be statutorily disqualified and they claimed that they relied on both in house and outside counsel in coming to that conclusion. Among other things, Respondents argued that the TRO did not subject Allen to statutory disqualification because it was issued ex parte and Allen had no “notice and opportunity to be heard.” The OHO noted that “[w]hether an ex parte temporary restraining order triggers a statutory disqualification appears to be an issue of first impression.” The OHO, however, had little difficulty in finding that the TRO was indeed an injunction that triggered statutory disqualification. The decision notes that nothing in the language of the Exchange Act requires notice and opportunity to be heard before an event is disqualifying. The OHO concluded, “[i]n sum, there is no basis to conclude that Congress meant to exclude an ex parte temporary restraining order from the operative provision.”

Finally, the OHO also rejected any advice-of-counsel defense because, “[r]eliance on advice of counsel is not relevant to liability if scienter is not an element of the violation.” The decision noted, however, that even when reliance on advice of counsel is not relevant to liability it may be considered as a possible mitigation of sanctions. In the present case, however, there seems to be little mitigation of the sanctions imposed. NYPPEX was expelled from FINRA membership, Allen was barred from the securities industry, and Schunk was fined $120,000, barred from acting in any principal or supervisory capacity and suspended from the industry three and a half years.

Similar to Enforcement, the NYAG likewise prevailed at trial. The New York Supreme Court found Allen and NYPPEX liable for assorted false and misleading statements and ordered disgorgement of nearly $7 million.

Herskovits PLLC has a nationwide practice defending investigations and litigation brought by FINRA and other regulators. Feel free to call us for a consultation at (212) 897-5410.

We are all painfully aware of the recent volatility in the markets, which has not gone unnoticed by the SEC. On March 14, 2022, the Staff of the Division of Trading and Markets stated that “broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements.” We shall see whether Wall Street acts upon the SEC’s guidance, and whether investors are caught flat-footed by stepped-up maintenance margin requirements.

Regulatory and Contractual Requirements

The regulatory requirements for margin are set forth in FINRA Rule 4210. Although the rule is lengthy, and incorporates other rules including Federal Reserve Board Regulation T, the essence of the rule allows a broker-dealer to lend a customer up to 50% of the total purchase price of an eligible stock. A margin call may be issued if the margin account falls beneath the maintenance margin requirements (generally 25% of the current market value of the securities in the account) or if the margin account falls below the firm’s “house” maintenance margin requirements (which can be substantially higher than 25%). Brokerage firms can, and often do, upwardly adjust “house” maintenance margin requirements if the firm has risk concerns relating to outstanding margin loans. Most margin account agreements specifically permit broker-dealers to increase maintenance margin requirements at the sole discretion of the firm. In light of the SEC’s recent guidance, it seems likely that broker-dealers will act upon its contractual rights and demand enlarged collateral from customers to protect its margin loans.

More Volatility Expected

A primary gauge of stock market volatility is the CBOE Volatility Index (VIX). The VIX volatility index measures how much volatility professional investors think the S&P 500 will experience over the coming month. The VIX index tracks volatility by analyzing trading in S&P 500 options. As a general proposition, a VIX index of 12 or lower is a period of low volatility and a VIX index of 20 or higher is abnormally high volatility. Currently, the VIX index currently sits at 31.04, which is approximately double where it sat in early January 2022.

Increase in FINRA Arbitration Claims?

Undoubtedly, any sizable increase maintenance margin requirements will trigger margin calls. That, coupled with abnormal market volatility, is a recipe for increased FINRA arbitration claims. Investors will point fingers at brokerage firms over suitability and brokerage firms will point fingers at investors for any unsecured debit balances.

Herskovits PLLC has a nationwide practice defending and prosecuting claims in FINRA arbitration. Feel free to call us for a consultation at (212) 897-5410.

It has long been clear that the SEC opposes 12b-1 fees, the fees that funds use to compensate investment advisors for their sales and marketing efforts. For the past two decades, the SEC has embarked upon various attempts to repeal Rule 12b-1 or render it meaningless. The SEC, however, has never been able to build the political will to amend or repeal Rule 12b-1 and it remains the law.

The SEC’s latest attack on 12b-1 is a classic example of rule-making by enforcement. On February 12, 2018, the SEC issued a press release announcing its new Share Class Selection Disclosure Initiative (SCSD Initiative). The SCSD Initiative relies on Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”) which imposes a fiduciary duty on investment advisers to act in their clients’ best interests, including an affirmative duty to disclose all conflicts of interest. When an adviser receives 12b-1 fees from a mutual fund it presents a possible conflict of interest if a less expensive share class is available. Prior to the SCSD Initiative, the industry standard was to disclose this conflict of interest in a straight forward manner.

The SCSD Initiative and subsequent guidance put out through FAQs has effectively amended 12b-1 by requiring disclosure of:

• “The fact that different share classes are available”;

• “The fact that the adviser has financial interests in the choice of share classes that conflict with the interests of his clients”;

• “Whether there are any limitations on the availability of share classes to clients that result from the business of the adviser or the service providers that the adviser uses”;

• “Whether an adviser’s practices with regard to recommending share classes differs when it makes an initial recommendation to invest in a fund as compared to: (a) when it makes recommendations regarding whether to convert to another share class; or (b) when it makes recommendations to buy additional shares of the fund”;

• “The circumstances under which the adviser recommends share classes with different fee structures and the factors that the adviser considers in making recommendations to clients”; and

• “Whether the adviser has a practice of offsetting or rebating some or all of the additional costs to which a client is subject (such as 12b-1 fees and/or sales charges), the impact of such offsets or rebates, and whether that practice differs depending on the class of client, advice, or transaction.”

Under the SCSD Initiative, the Enforcement Division recommended standardized, “favorable” settlement terms to investment advisers that self-reported failure to disclose conflicts of interest associated with the receipt of 12b-1 fees to advisory clients when a lower-cost share class of the same mutual fund was available. Enforcement Division also required self-reporting advisers to disgorge fees to the allegedly harmed clients, but did not impose a civil monetary penalty. The press release also warned that the SEC expected to recommend stronger sanctions against any investment advisers that failed to self-report. As the Co-Director of Enforcement put it: “we promise that if we find [an adviser] later we will punish [it] more severely.” S. Garmhausen, SEC to Advisors: Don’t Test Us, Barron’s (Mar. 2, 2018).

The SCSD Initiative was an extremely useful weapon in the SEC’s war on 12b-1 fees. Within a year, 79 investment advisers self-reported their disclosure “violations,” entered into settlements with the SEC, and refunded more than $125 million. To date, 95 firms have reached settlements and disgorged roughly $140 million.

The Initiative expired after 120 days—and that is when the Commission started to deliver on its promise to punish the holdouts more severely. Since the SCSD Initiative deadline for self-reporting passed in September 2019, the SEC has issued orders against two firms that were eligible to self-report pursuant to the initiative, but failed to do so. See Mid Atlantic Financial Management Inc. (ordered to pay $1,027,002 in disgorgement and prejudgment interest and a $300,000 civil penalty) and BPU Investment Management Inc. (ordered to pay $692,107 in disgorgement and prejudgment interest and a $235,000 civil penalty). In April 2020, the SEC announced that it had reached settlement with three firms that represented the last of the SCSD Initiative self-reporting advisers. Going forward, even firms that self-report insufficient 12b-1 disclosures should expect the SEC to demand disgorgement of those fees as well as a substantial civil monetary payment.

Herskovits PLLC has a nationwide practice defending against SEC investigations and adversarial proceedings. Feel free to call us at (212) 897-5410 for a consultation.

On March 18, 2020, FINRA barred FA James Daughtry for his refusal to appear for an on-the-record interview, which is akin to a deposition. Daughtry consented to the bar from the securities industry by executing the Letter of Acceptance, Waiver and Consent (AWC) in Department of Enforcement v. James Blake Daughtry, Matter No. 2020065293201.

Background According to BrokerCheck, Daughtry entered the securities industry in 1999. He registered with Kestra Investment Services, LLC in February 2015 and remained with Kestra until his termination in March 2020. James Daughtry worked from a branch located in Dothan, Alabama.

FINRA’s Investigation

According to the AWC, “on February 21, 2020, in connection with an investigation into potentially fraudulent and unauthorized transactions in several of Daughtry’s customers’ accounts, FINRA sent a request to Daughtry for an on-the-record interview pursuant to FINRA Rule 8210.” Apparently, Daughtry’s attorney informed FINRA of Daughtry’s refusal to appear for the OTR.

Herskovits PLLC Herskovits PLLC has decades of experience representing defrauded investors as well as securities industry participants. Our firm has handled hundreds of FINRA arbitration claims and our principal attorney is a FINRA arbitrator and former in-house counsel for an investment bank. Feel free to call us for a consultation at 212-897-5410.

In Next Financial Group, Inc. v. GMS Mine Repair and Maintenance, Inc., Case No. 3:19-cv-168 (USDC W.D. Pa.), the federal court was asked to define the term “customer” as it relates to FINRA’s Code of Arbitration Procedure. The definition of that term carries significance because “customers” can compel a member firm to participate in FINRA arbitration whereas non-customers cannot. In the case at hand, GMS Mine Repair had no account with Next Financial and received no goods or services from Next Financial itself. This case bears some significance because the court compelled arbitration even though GMS Mine Repair was nothing more than an investor in the FAs outside business activity.

Background

The case arose from a supposedly fraudulent investment scheme perpetrated by Douglas P. Simanski, a former registered representative of Next Financial Group. According to BrokerCheck, Next Financial terminated Douglas Simanski in May 2016 because “RR sold fictitious investment and converted funds for his own personal use and benefit.” Mr. Simanksi currently has 30 disclosures on his BrokerCheck report, reflecting numerous settled customer claims. On November 2, 2018, the SEC filed a complaint against Mr. Simanski alleging that Simanksi “raised over $3.9 million from approximately 27 investors by falsely representing he would invest their money in one of three ventures: (1) a ‘tax free investment’ providing a fixed return for a specific number of years; (2) one of two coal mining companies in which Simanski claimed to have an ownership interest; or (3) a rental car company.” According to BrokerCheck, the SEC ultimately barred Simanski and Simanski plead guilty to criminal charges filed by the U.S. Department of Justice.

Underlying Arbitration

In September 2019, GMS Mine Repair initiated a FINRA arbitration against Next Financial. Next Financial asked the court to enjoin the arbitration by arguing that GMS Mine Repair was not a “customer” of the firm. In particular, Next Financial argued that (i) GMS Mine Repair never had a brokerage account with Next Financial; (ii) GMS Mine Repair received no investment guidance from the firm; and (iii) Simanski’s actions were outside the scope of his employment with Next Financial (meaning, his actions concerned an outside business activity).

Despite Next Financial’s arguments, the court compelled arbitration by finding that:

“[GMS Mine Repair] is a customer of [Next Financial] because [GMS Mine Repair] purchased investment services from Simanski, an associated person of [Next Financial]. Simanski provided investment advice to [GMS Mine Repair] about a black diamond mining project, which is within [Next Financial’s] business activities because {Next Financial] is in the business of providing investment advice. It is not necessary for Simanski to be acting in his capacity as a representative of [Next Financial] when he provided investment advice to [GMS Mine Repair] for this dispute to be arbitrable … All that is required for this dispute to be arbitrable under FINRA is for Simanski’s actions to have ‘some connection’ to his business relationship with a FINRA member.”

Takeaway

This case should serve as a warning for those supervising outside business activities. If this case is adopted in other districts, investors in an FAs outside business activity can compel arbitration even if they have no direct relationship with a brokerage firm.

Herskovits PLLC has a nationwide FINRA arbitration practice concerning investment disputes and defends individuals and brokerage firm with FINRA investigations and disciplinary matters. Feel free to call us for a consultation at 212-897-5410.

New Rule

Virginia recently added Section F to 21 VAC5-80-200 (Dishonest or Unethical Practices), which provides: “For purposes of this section, any mandatory arbitration provision in an advisory contract shall be prohibited.”

Background

On June 27, 2019, Virginia issued a proposal to amend certain regulations administered by the Virginia Division of Securities. The State Corporation Commission noted:

“[S]tate-covered investment advisors are now including boilerplate mandatory arbitration provisions in their clients’ contracts. The Division believes, as do many other states, that these “take-it-or-leave-it” clauses in client contracts is inherently unfair to investors. It is particularly unfair when an investment advisor is required by law to act in the best interests of their clients. An investment advisor should not be allowed to force clients to bring any disputes to a forum of the investment advisor’s choosing by contract.

Therefore, the Division proposes to add a new subsection F to the Dishonest or Unethical Practices section of Chapter 80 to prohibit mandatory arbitration clauses in investment advisory contracts. There is nothing to prevent the investment advisor and their client from agreeing to arbitrated disputes after negotiation and discussion between each. To require mandatory arbitration in standard investment advisor contracts is contrary to the investment advisors mandate to act in the best interest of their clients.”

NASAA’s Position

Position statements of the North American Securities Administrators Association can often be viewed as predictive of future legislation by states. On August 9, 2019, NASAA made their views clearly known in a public comment. In supporting Virginia’s proposed amendment, NASAA stated: “Forced arbitration at the demand of an investment adviser is inimical to the basic fiduciary nature of an investment advisory relationship.” NASAA also made an interesting statutory argument concerning Va. Code. Ann. § 13.1-522(F):

“Although the issue has not been extensively litigated, a mandatory arbitration provision arguably would require an investment advisory customer to lose substantive rights under the Virginia Securities Act, namely the right to pursue a claim under the Act in state court, rendering the arbitration provision per se void under Section 522(F).”

Although NASAA’s argument is clever, it does seem to run counter to Virginia’s Division of Securities’ interpretation of its own code (“There is nothing to prevent the investment advisor and their client from agreeing to arbitrated disputes after negotiation and discussion between each.”).

Herskovits PLLC has a nationwide practice representing investment advisors in regulatory investigations, arbitration and litigation. Feel free to consult with us at 212-897-5410.

Courts call a lifetime bar “the securities industry equivalent of capital punishment.” PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007). It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.

Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise. Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802. The question is, why did FINRA go after the supervisor with guns blazing?

The Applicable Rule: FINRA Rule 3110

FINRA appropriately demands that each member establish and maintain a system to supervise the activities of each associated person. Importantly, Rule 3110 requires that the supervisory system be “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” FINRA takes violations of Rule 3110 very seriously but rarely seeks a bar. According to FINRA’s Sanction Guidelines, violations of Rule 3110 would typically call for a monetary sanction of $5,000 to $77,000 and a suspension of up to 30 business days. Of course, in “egregious cases,” the Sanction Guidelines does call for suspensions of up to 2 years or even a bar.

Ok, so clearly FINRA thought Leahy’s conduct was “egregious.” The question is: why?

Underlying Facts

Interestingly, the underlying violations all occurred within a very short period of time: September 18, 2019 through October 9, 2019. During that period of time, according to FINRA, Leahy failed to reasonably supervisor an individual FINRA calls “PS.” According to FINRA, PS engaged in unauthorized trading, unauthorized use of margin, recommended excessive and unsuitable transactions, and charging excessive commissions.

According to FINRA, Leahy was aware of multiple “red flags” but failed to investigate those red flags or take action. The red flags highlighted by FINRA were:

• Leahy knew of PS from a prior firm and was aware of prior allegations of misconduct;
• Numerous customers complained to Leahy about PS’s supposed unauthorized trading;
• The broker-dealer’s clearing firm informed Leahy that it too received complaints of PS’s supposed unauthorized trading;
• A review of the trade blotter would have provided indicia of unauthorized trading;
• PS recommended inconsistent trading strategies. On the same day, PS would recommend that some customers buy “Security X” and other customers sell “Security X.”
• The firm’s trade blotter reflected a pattern of in-and-out trading by PS;
• PS was charging commissions that came near 5% or exceeded 5% (one time PS even charged a whopping commission of 11.8%).

Who is the Mysterious “PS”?

FINRA drops a hint by stating that the NJ Bureau of Securities issued a Summary Penalty and Revocation Order against PS. So, I did a little digging and here it is. Apparently, PS is Philip J. Sparacino, and Mr. Sparacino was apparently a very busy man at his old firm. According to the State of New Jersey, Sparacino engaged in a pattern of unauthorized and excessive trading starting in June 2019. And the numbers seem to support the Bureau’s allegation. From April 2019 through May 2019, Sparacino’s production totaled $24,258. However, once he inherited accounts in June 2019, his production skyrocketed to $1,452,514 from June 2019 through October 4, 2019. Incredibly, in the last 2 weeks of September 2019 alone, Sparacino generated production in excess of $450,000.

Not surprisingly, when FINRA reached out Sparacino he refused to respond to FINRA’s request for documents and information. As a result, Sparacino signed an AWC consenting to a bar.

Upshot

This case sends a warning to any supervisor who adopts the head-in-the-sand approach to supervisor. Clearly, FINRA will seek a bar when the facts warrant it.

Herskovits PLLC has a nationwide practice defending individuals and institutions with FINRA regulatory investigations. Feel free to call us for a consultation: 212-897-5410.

The head of Massachusetts’ state securities regulatory body, Secretary of the Commonwealth William F. Galvin, issued a public statement announcing an inquiry into the practices of some of the top local broker-dealers related to private placement investments.

These funding rounds of securities, which are not sold through a public offering, but rather, presented to a select group of investors, commonly involve a higher risk of fraud.

The list of companies that have already received an inquiry letter from Galvin’s office includes, among others, Arthur W. Wood, Bolton Global Capital, Advisory Group, Santander Securities, LPL, U.S. Boston Capital, and BTS Securities.

Galvin revealed that about one in six agents in these firms have disciplinary incidents on record. As often happens, the agents with a track record of repeated violations are still active, and often cater to a population of vulnerable clients, including seniors.

In line with federal watchdog agencies’ recent vow to protect seniors from bad players in the industry, the Massachusetts regulator said firms need to make sure that deals are being made, “to benefit the investor, not the broker.”

“Individuals with a history of disciplinary actions magnify the risk of unsuitable sales in connection with private placements,” Galvin added.

The Secretary of the Commonwealth’s Office initiated its probe into disciplinary reports at Massachusetts broker-dealers in 2016. After looking at over 200 firms and assessing their disciplinary practices, regulators discovered that nearly one in five agents hired over a period of 30 months had at least one disciplinary incident on their records.

Shockingly, a staggering 90 percent of the agents with disclosure incidents on file had never been placed under enhanced supervision, which should have been a standard practice to minimize the risk of further violations.

As a result of its ongoing probe, the Secretary of the Commonwealth will increase its scrutiny of agents dealing in private placements, which Galvin described as, “risky investments that reward the salesperson handsomely with high commissions.”

“While my office is actively policing agent misconduct and diligently working to keep bad actors out of the commonwealth, it is necessary for the firms which employ agents with disciplinary history to closely supervise their sales activities,” the regulator commented.

Rob Herskovits is a New York based securities lawyer with a national practice focused on defending broker dealers and other financial industry participants in regulatory actions. CONNECT WITH A HERSKOVITS PLLC LAWYER

Wells Fargo will pay $480 million to resolve fraud and insider trading allegations brought in a class action in California.

According to the plaintiffs, top executives at the bank engaged in insider trading after employees were directed to create millions of accounts under customer names, without the customers’ consent.

While litigation in California state court continues, the settlement will end the federal lawsuit.

In a statement, Wells Fargo’s CEO said,

“We are pleased to reach this agreement in principle and believe that moving to put this case behind us is in the best interest of our team members, customers, investors and other stakeholders… We are making strong progress in our work to rebuild trust, and this represents another step forward.”

In 2017, Wells Fargo paid $142 million to resolve a related lawsuit. The bank has faced media scrutiny and endured significant losses in connection with this and other misconduct. Back in 2016, following a media expose about the unauthorized accounts, the bank faced $185 million in civil penalties, courtesy of the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the Los Angeles City Attorney’s Office.

When the penalties were made public, Wells Fargo’s shares experienced a 9 percent plunge. The class action that the bank just settled was actually brought by all the investors who purchased stock over a two and a half year period leading up to September 2016, when the sanctions were announced.

According to the shareholders’ complaint, Wells Fargo prided itself in securing new business from existing customers, by getting them to sign up for additional products like credit cards and retirement accounts; but in reality, many of those sign-ups were unauthorized and thus, fraudulent.

Last February, Wells Fargo’s defense fought aggressively to have the class action dismissed, to no avail. Defendants in the case include the bank’s former and current CEOs, John Stumpf and Tim Sloan, respectively, and its CFO, John Shrewsberry. At the time, the appointed judge allowed the plaintiffs to move forward with nearly all of their claims.

Originally, Wells Fargo was being charged with creating about 2.1 million fraudulent accounts, but that number rose to over 3.5 million last August when a third-party review left the bank no choice but to acknowledge that it was potentially liable for more than a million additional violations.

Initially, investigators had looked at accounts opened between mid-2011 and mid-2015. The number of “phony” accounts rose dramatically when the probe’s scope was expanded to cover a period between early 2009 and late 2016.

The Federal Reserve has mandated a growth cap for Wells Fargo, which will not be allowed to grow above $1.95 trillion until the bank clearly demonstrates that it has learned from its mistakes and will no longer put customers at risk. A difficult challenge for the scandal ridden financial institution.

Securities lawyer Rob Herskovits is New York based with a national securities-focused practice. To connect with Rob: 212.897.5410 or CONNECT ONLINE

Jehu Hand, a California-based attorney has been found guilty of securities fraud and is now awaiting sentencing. Following his trial, which took place in Boston, the defendant could be facing up to eight years in prison.

The federal jury found that Hand conspired with his two brothers to run a pump-and-dump scheme by falsifying documents. According to the evidence presented during trial, the defendant and his co-conspirators fraudulently obtained $1.5 million through the scheme.

Hand and his brothers allegedly misrepresented Greenway Technology Inc. as a company with tremendous potential, which was about to acquire lucrative gay-friendly hotels in California and Nevada.

According to its Bloomberg listing, Greenway Technology “intends to operate as Andalusian Resorts and Spas with properties located in Palm Springs, California and Las Vegas, Nevada. It focuses on providing luxury boutique hotel and resort chain catering to the various alternative lifestyles of men and women.” Greenway Technology is now defunct.

In the case of Crown Marketing LLC, the defendant misrepresented to potential investors that it owned rights to a lucrative technology in the controlled drug field.

Bloomberg states that Crown, “focuses on developing its controlled release technology (CDDT) and marketing nutraceutical products. The company intends to license CDDT to pharmaceutical companies, as well as to develop proprietary applications.”

The role of Hand in the plot to inflate the prices of Greenway and Crown shares was to falsify documents and write opinion letters with false information to be sent out to stockbrokers, misrepresenting the ownership and legitimacy of both ventures.

Hand allegedly used made-up investors to make fake stock purchases, using this and other strategies to conceal the fact that he alone controlled the companies.

Through these tactics, Hand and others managed to sell a large number of shares at inflated prices, causing massive losses to the purchasers once the stock plummeted.

The trial was a nasty affair, as Hand and one of his brothers tried to claim innocence and blame each other. Lured by the promise of a more lenient sentence, Learned Jeremiah Hand accused his brother Jehu of being the schem´s mastermind.

“When he was on the stand, did you see how, again and again, he tried to plunge the dagger in his brother’s back?” Jehu Hand´s attorney said of Learned Jeremiah during the trial. His pleading, however, did not move the 12-person jury, which found Jehu guilty after a couple of hours of deliberation.

Pump and dump schemes involve promoters trying to boost the price of a certain company´s shares by making false statements about its prospects. As soon as the stock has reached a sufficiently high price, the fraudsters dump their own (cheaply acquired) shares into the market to make sizable profits.

The way schemers get buyers for the stock is by claiming they have inside information about the prospects of a certain company, which will positively affect the stock´s pricing in time.

After the fraudsters get rid of their stock at a profit, prices plummet, and investors incur massive losses.

Rob Herskovits is a 20+ year New York securities lawyer with a national practice. Focused, along with the other Herskovits PLLC lawyers exclusively on securities law, Rob helps financial industry participants head off anticipated problems and minimize or eliminate the regulatory consequences for those targeted for enforcement action. 212.897.5410 or CONNECT ONLINE

On January 16th, a settlement was reached to create new fiduciary committees to handle a complex transition at the bankrupt Woodbridge firm, following a SEC lawsuit over a billion-dollar Ponzi scheme run by Woodbridge founder Robert Shapiro, who will now be totally excluded from the restructuring process.

Upon approval of the settlement, Judge Kevin Carey said, “As a condition for approval I require that that if any services beyond transition services are to be desired by the debtor, you need court approval with or without SEC consent.”

After Woodbridge filed for bankruptcy, Shapiro allegedly continued having access to company offices, and was paid a monthly $175,000 consulting fee. By designing a new team with no links to Shapiro to facilitate the transition, the settlement ensures decisions will now be made in the defrauded investors’ best interest.

The Workings of a Shapiro’s Elaborate Ponzi Scheme

Last December, Shapiro had been accused by the SEC of defrauding over 8,400 inadvertent investors, including a large percentage of seniors, in a $1.2 billion Ponzi scheme. Woodbridge, which operated in six states and had about 140 employees, was the main company used by Shapiro to implement the alleged fraud scheme.

The Woodbridge Group of Cos. LLC marketed securities promising annual yields as high as 8 percent. Payments were supposed to come from interest paid by borrowers to a Woodbridge affiliate. However, the interest paid by a modest number of actual borrowers was nowhere near enough to pay off Shapiro’s vast network of sales agents.

According to the SEC complaint,

“Despite receiving over $1 billion in investor funds, Shapiro and his companies only generated approximately $13.7 million in interest income from truly unaffiliated third-party borrowers… Without real revenue to pay the monies due to investors, Shapiro resorted to fraud, using new investor money to pay the returns owed to existing investors.”

About $400 million of the funds “invested” by Woodbridge clients came from Individual Retirement Accounts.

Besides paying off early investors with money from new investors, Shapiro allegedly used some of the fraudulently obtained funds to maintain a luxurious lifestyle. According to the lawsuit, the defendant and his family,

“lived in the lap of luxury and spent exorbitant amounts of investor money in alarming fashion, on items such as luxury automobiles, jewelry, country club memberships, fine wine and chartering private planes… The effect of Shapiro and his companies’ actions will leave investors with substantial losses, as they are owed at least $961 million in principal.”

The fraud was first exposed on December 1st, 2017, when Shapiro lacked the funds to pay dividends and interest to investors for the first time, and Woodbridge filed for bankruptcy. The SEC promptly issued several subpoenas seeking internal communications between Shapiro and senior management at Woodbridge. But the company failed to submit the documents.

According to the text of the SEC complaint, none other than Shapiro is responsible for the fraud and all its consequences: “Shapiro, as the sole person in control of the corporate defendants, not only made material misrepresentations and omissions to investors, but also signed falsified documents, controlled the company’s bank accounts, made Ponzi payments to investors, paid significant sales commissions to unregistered sales agents, and misappropriated investor funds for his own personal enjoyment and the enjoyment of his family.”

According to the SEC, Shapiro, a California native, used several sham companies that were actually controlled by him to pose as “third-party borrowers” who were portrayed to investors as paying Woodbridge affiliates between 11 and 15 percent of interest on loans. Investors were also told Woodbridge was making a profit from buying, renovating, and selling real estate.

“Virtually none” of the hundreds of agents used by Woodbridge to find investors through media ads, seminars, and other marketing methods, were registered with regulatory agencies according to the SEC. The sales agents received over $64 million in commissions.

The Hollywood Star Real Estate Connection

Woodbridge was not the only company that went down when Shapiro’s Ponzi scheme was exposed. The luxury brokerage firm Mercer Vine, which brokered the sale of star properties in Los Angeles, has been named as a relief defendant in the lawsuit. Shapiro was Mercer Vine’s financier, and the company was shut down soon after allegations of his fraudulent scheme became public.

Mercer Vine rose to notoriety after just two years of operation, listing 8-figure homes that formerly belonged to the likes of Marilyn Monroe, Aaron Spelling, and Sonny & Cher. The company listed some of Hollywood priciest properties at $90 million and even $200 million, in the case of a mansion formerly owned by Spelling.

A consultant who maintained a professional relationship with Mercer Vine has commented that the company’s employees “were trying to build something that was legitimate, and they got duped.” Reportedly, all agents who were employed by Mercer Vine have sought work at other firms following the Ponzi-scheme scandal.

Shapiro’s wife, Jeri, who was VP at Woodbridge for several years, has also been named as a relief defendant in the lawsuit. The complaint alleges she owns assets, including real estate, purchased with proceeds from the scheme, i.e. investor funds.

A spokesperson for Shapiro told reporters that the defendant is “cooperating with the bankruptcy to protect the assets held for the benefit of Woodbridge’s stakeholders,” and “denies any allegation of wrongdoing.”

Is the SEC targeting your business based on a Ponzi allegation or a civil RICO charge? At Herskovits PLLC we work solely on investment, SEC, FINRA, and other securities based cases. Call Us at 212.897.5410 to learn your options or Connect Online.

In line with its expressed intent to increase its oversight over the cryptocurrency market, the Commodity Futures Trading Commission has filed three related fraud suits in a single week.

The third lawsuit targets the creators of “My Big Coin,” who allegedly used $6 million dollars received from buyers to pay off early investors and shop for luxury items. The allegations caused the freezing of all assets belonging to the creators of the supposed next-big-cryptocurrency.

The Nevada-based company, My Big Coin Pay Inc.; was founded by Randall Crater. The suit, filed in January, also named one of its salesmen, Mark Gillespie. According to the allegations, between 2014 and mid-2017, the defendants defrauded 28 investors out of six million dollars.

There is nothing wrong with creating cryptocurrency and marketing it. But My Big Coin advertised its product as being accepted as widely as a Mastercard, gold-backed, and coveted in markets worldwide. In fact, according to the CFTC, My Big Coin wasn´t traded on any established exchanges and its prices were a mere fabrication.

Crater was not shy at marketing My Big Coin; he promoted it with YouTube videos and poor quality press releases, targeting perhaps a cash-thirsty, yet little-informed audience. Crater´s predictions that the price of My Big Coin would skyrocket were enough to convince some unwitting investors, including several based in Massachusetts.

The proceeds of My Big Coin sales were allegedly used by Crater´s family members to purchase real estate, collectible art, and other luxury items. Over half a million dollars were withdrawn from banks and ATMs. Several relatives of Crater were also mentioned in the suit.

In its complaint, the CFTC referred to My Big Coin´s promised results as “illusory,” and to the whole business as a “Ponzi scheme.”

The suit will likely have a sobering effect on a largely unregulated market. The CFTC´s Enforcement Chief, James McDonald, made this all the more clear in a statement:

“The CFTC is actively policing the virtual currency markets and will vigorously enforce the anti-fraud provisions of the Commodity Exchange Act… In addition to harming customers, fraud in connection with virtual currencies inhibits potentially market-enhancing developments in this area.”

Bitcoin´s price can rise astronomically; most spectacularly, it recently went from $1,000 to $11,000 over a short period of time. This attracts a lot of attention, and it can often inspire fraudsters to try to “make it big” with a made-up cryptocurrency marketed as “the next Bitcoin.”

But now the CFTC is watching.

The first time the Commission filed a cryptocurrency fraud suit was in September, 2017. Since then, the regulator´s quest for increasing oversight has only escalated, and it will, no doubt, continue to do so.

If you are facing a CFTC cryptocurrency action, it is important to act fast and prepare your defense – early intervention can make all the difference. However, if you are already embroiled in a CFTC battle, we can also help. The Herskovits PLLC team focuses exclusively on securities law defense and our cryptocurrency team is tracking the rules, the interpretations, and the realities for clients nationwide. Call now to learn your rights and options. 212.897.5410 or CONNECT ONLINE

According to former Securities and Exchange Commission Chair Mary Jo White, the SEC insufficient examination of registered investment advisors is a “disaster waiting to happen.”

Without adequate oversight, misconduct at small advisory firms could be building up for years. While FINRA and state regulators vet half of all registered broker-dealers annually, the SEC only manages to examine 12% of RIAs every year.

Speaking at the Practicing Law Institute in New York, White expressed her concern about the SEC’s failing oversight of the independent space. “It’s a real problem that keeps me up at night,” she commented.

During her keynote speech, the former SEC Chair also referred to how dwindling budgets impact the agency: “The greatest impact on enforcement of the securities laws will be brought about by budget cuts [at the SEC and the Justice Department].”

The White House is currently proposing a 4% cut to the Department of Justice’s budget.

White, who served as Chair of the SEC during Obama’s second term, said that in spite of budget constraints, her staff had prepared a proposal to hire an independent third party with enough resources to vet RIAs. White’s successor, Jay Clayton, has completely disregarded the plan.

The abandoned proposal did not involve FINRA, an entity that has been looking to expand its authority to the independent space. For Clayton, White’s plan is “not a bad idea, but it’s not front of my mind right now.” A couple of months ago, Clayton said in a speech that he could bring the RIAs annual examination rate to 15%. In spite of the meager progress this would represent, he appeared to be satisfied: “I’m comfortable we’re making progress in that space.”

With this slow progress, it is easy to presume that some brokers may be choosing the path of the RIA simply to benefit from its lax regulatory environment. Naturally, this is bad news for investors.

As FINRA executive Susan Axelrod recently put it during a conference,“Why would you want to be examined frequently and have personal activity questionnaires [from FINRA] when you can sit back for 10 years [without being examined]?”

The RIAs under the SEC’s jurisdiction are indeed examined once per decade on average, while broker-dealers regulated by FINRA are examined at least once every two years.

In her speech, White said she viewed Clayton’s reform initiatives positively. The design of a uniform fiduciary standard for brokers and FAs appears to be a concern shared by both.

In this respect, perhaps Clayton will succeed where White failed. “I’m very pleased to see Chairman Clayton embracing this, and I know that he appreciates the difficulties. He is soliciting fresh comment and really wrestling with how to do that,” White concluded.

At a recent Securities Enforcement Forum in Washington DC, Stephanie Avakian, co-director of the SEC’s Division of Enforcement, discussed the agency’s future priorities.

Avakian emphasized that the mission of the Enforcement Division, to protect investors, will remain unchanged, but she announced a slight shift in focus areas and resource allocation.

The Division of Enforcement official referred to retail investors as the “most vulnerable market participants,” and confirmed that the SEC will continue to focus on:

• Retail investors,
• Cyber-related issues,
• Misconduct by industry professionals and companies, financial fraud, disclosure issues relating to public companies, and insider trading.

After identifying these three focus areas, the top SEC official referred to the key role of data analytics in identifying threats to retail investors. “There are all sorts of ways to use technology to slice and dice data and apply analytics to look for all kinds of problems – by product, by investor type, by location, by sales or trading practice, by fee, you name it,” she explained.

For some analysts, the SEC’s explicit focus on protecting retail investors is a clear shift from the Obama era’s relentless pursuit of corrupt Wall Street heavyweights.

Avakian referred directly to the question whether a focus on retail implies allocating “fewer resources to financial fraud or policing Wall Street.”

In response to that interpretation, Avakian said, “The premise that there is a trade-off between ‘Wall Street’ and ‘Main Street’ enforcement is a false one,” emphasizing the SEC’s efforts to address misconduct by “institutions of all sizes.”

In terms of protecting retail investors, the SEC believes it can do much more than merely shielding them from “Ponzi schemes and microcap or offering fraud,” expanding the fraud category to include the following problems:

• Steering customers to mutual fund share classes with higher fees,
• Abuses in wrap-fee accounts,
• Investors buying and holding high risk products like inverse exchange-traded funds (ETFs) for long-term investment, including in retirement accounts,
• Failure to disclose fees, mark-ups, and other similar factors with a negative impact on returns,
• Churning and excessive trading that generate large commissions.

Avakian also classified cyber-related misconduct into three different types of violations:

1. Hacking to obtain nonpublic data to trade in advance of an announcement/event or to manipulate the market,
2. Using hacked brokerage accounts to conduct manipulative trading.
3. Using social media posts and other electronic publications to disseminate false information in order to manipulate stock prices

The SEC’s cyber unit will continue to focus on this type of cyber threats. Avakian also warned the industry about the potential consequences of cyber-related disclosure failures.

In the new scenario, cyber risks and cyber-security issues must be appropriately disclosed in SEC filings in order to avoid enforcement actions.

“We recognize this is a complex area, subject to significant judgment, and we are not looking to second-guess reasonable, good faith disclosure decisions,” Avakian clarified.

It remains to be seen how the SEC’s Retail Strategy Task Force will transform the SEC’s high goals into systematic action, and how effective the Cyber Unit will be in protecting investors from an increasingly complex array of cyber risks.

Financial professionals and industry firms now have more enforcement risks to anticipate. If you are an SEC enforcement target or simply need an analysis of policies and procedures, proactivity is the smart move. Talk to a Herskovits PLLC experienced securities lawyer to learn your rights and exposure. 212.897.5410

The North American Securities Administrators Association (NASAA) has just released its yearly Enforcement Report. Although NASAA is an international association of all state, provincial and territorial securities regulators in the United States, Canada, and Mexico, the annual report is focused on US jurisdictions.

According to data included in the document, there were more enforcement actions against registered members than against non-registered individuals in 2016.

2,017 (or 46%) of the 4,341 investigations conducted by state regulators in the securities industry resulted in enforcement actions. Resulting fines amounted to $682 million, while $231 million were returned to investors. The combined total between fines and restitutions, surpassing $900 million, constitutes a 5-year high.

In 2015, there were more investigations, restitutions to investors were higher ($538 million), and fines were lower (a total of $230 million). The decrease in restitutions can be attributed to the shrinking of investor losses in the bull market economy. The last report included information from 50 jurisdictions, whereas the previous one comprised 52.

Upon the release of the latest report, NASAA President Joseph P. Borg commented, “State securities regulators continue to serve a critical role in protecting investors and holding securities law violators responsible for the damage they cause to individual investors as well as to the integrity of our capital markets.”

Of the 2,017 enforcement actions conducted in 2016, 620 were brought against registered firms and individuals and 604 hit unregistered firms and individuals. The number of investment adviser firms and individuals investigated rose by 30% when compared to the previous year. NASAA’s experts linked the increase to “heightened state interest in individuals and firms who have transitioned from broker-dealer registration to investment adviser registration in recent years.”

According to NASAA Enforcement Section Chair Keith Woodwell, “NASAA members have stepped up efforts to identify and sanction bad actors within the securities industry in order to protect investors and maintain their confidence in the securities markets.”

State securities regulators’ intent to protect investors was affirmed through the withdrawal of 2,843 licenses in 2016, with 657 other licenses revoked, suspended, denied, or conditioned.

NASAA attributed much of its enforcement success to coordination with other state and federal regulators, and emphasized its focus on protecting senior investors. The enforcement actions carried out by state regulators in 2016 involved over 1,000 senior victims, who were primarily defrauded through unregistered securities offerings.

Besides renovating its commitment to protect senior investors, NASAA vowed to counter the threats associated with binary options, cryptocurrency trading, and other emerging financial technologies.

Binary options refer to a bet on the value of an asset only minutes or hours after the option has changed hands. NASAA reported 36 investigations involving binary options across the US last year.

These NASAA numbers show increasing regulatory enforcement. If you or your firm are a target for action, talk to an experienced securities lawyer right away as the regulators are already at work preparing a case against you and there are some defense options open if you act quickly. Call Herskovits PLLC – we focus exclusively on securities law. 212.897.5410 or CONNECT ONLINE

The SEC has accused two former Alexander Capital LP brokers, William Gennity and Rocco Roveccio of engaging in unlawful trading and deception that caused their customers to lose hundreds of thousands of dollars, while they earned a comparable amount in fees.

Gennity and Roveccio both worked at Alexander Capital from mid 2012 till October 2014.

They apparently have a long history of disciplinary action in the securities industry. In 2016, Gennity reached a settlement to resolve allegations of unauthorized trading and in 2014, he reached another settlement over churning and unsuitability. Roveccio has reached settlements over allegations of unauthorized trading and suitability in 2002, unauthorized trading in 2006, and a FINRA customer arbitration in 2013.

During their time at NYC’s Alexander Capital, Gennity and Roveccio allegedly violated the antifraud provisions of the federal securities laws. According to the SEC’s complaint, they recommended to customers:

“A pattern of high cost, in-and-out trading without any reasonable basis to believe that their recommendations were suitable for anyone. These recommendations resulted in losses for the customers and ill-gotten gains for Gennity and Roveccio.”

Allegedly, the brokers knowingly disregarded their customers’ “financial needs, investment objectives and circumstances.” The SEC also claimed Gennity and Roveccio “made material misrepresentations and omissions to customers… churned customer,” and “engaged in unauthorized trading.”

The SEC claims that Gennity and Roveccio had a habit of recommending customers to rapidly buy and sell stock, without any reason to believe this would be profitable for them. The brokers allegedly concealed information from customers about transaction costs, such as commissions, markups, fees, and margin interest, thus misrepresenting the true scope of the potential gains involved.

From these allegedly fraudulent activities, Gennity earned $280,000 in commissions and Roveccio received $206,000. Their customers’ losses amounted to a total of $683,038.

Registered representatives have a duty to have a reasonable basis for recommendations that they make to their customers. Among other rules and regulations, Gennity and Rovaccio allegedly violated Section 17(a) of the Securities Act of 1933, which states that,

“It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement (as defined in section 3(a)(78) of the Securities Exchange Act) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly

1. to employ any device, scheme, or artifice to defraud, or
2. to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
3. to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”

The SEC is currently seeking disgorgement of Gennity and Rovaccio’s “ill-gotten gains” (plus interest) as well as civil monetary penalties. If the SEC’s claims are proven to be true, the brokers will likely pay handsomely for their mistakes.

This story may be a cautionary tale for brokers, as it is an example of the SEC’s relentless pursuit of brokers who incur this type of violations. “We have no tolerance for unscrupulous brokers, and our examiners and enforcement investigators are working together to proactively catch insidious practices before they spread and impact even more customer accounts,” SEC NY Director, Andrew M. Calamari, has commented.

If the SEC targets you or your firm for unsuitability, misrprepresentation, churning or other charges call an experienced securities lawyer quickly as a proactive immediate defense can often minimize the damage to your career or finances. At HerskovitsLaw PLLC, securities law is all we do. Connect at 212.897.5410 or ONLINE.

FINRA announced it has just fined C.L. King & Associates $750,000. According to the Regulatory Authority´s decision, the broker-dealer has negligently made “material misrepresentations and omissions to issuers in connection with the firm’s redemptions of debt securities on behalf of a hedge fund customer.”

This was allegedly done in connection with the hedge fund customer´s scheme to profit from the death of terminally ill individuals.

A FINRA hearing panel also found that the Albany-based broker dealer and its Anti-Money Laundering Compliance Officer failed to “implement a reasonable AML program and failed to adequately respond to red flags related to the liquidation of billions of shares of penny stocks indicative of potentially suspicious activity by two customers.”

C.L. King´s alleged “death put” scheme involved a hedge fund manager´s opening of joint accounts at the firm with individuals who were terminally ill “as joint tenants with rights of survivorship.” The accounts were used to purchase corporate debt securities containing a death put. This meant that if a joint tenant passed away, the hedge fund manager was able to redeem the full principal amount of the investments from issuers.

To lure terminally ill individuals, referred by a hospice, to open the joint accounts. The hedge fund offered a $10,000 incentive. As per FINRA rules, the firm must disclose the terms of the joint account agreements to issuers, but no such disclosures were made. As a result, FINRA did not only fine C.L. King, it also censured the broker-dealer on account of its dealings with one hedge fund manager in particular, Donald Lathen, of Eden Arc Capital Management LLC.

The FINRA panel explained in its decision that C.L. King misrepresented Lathen as a joint owner of the accounts in question, “because, by surrendering their rights to the accounts they opened with Lathen in the participant agreements, participants were not beneficial owners of the accounts under New York law.”

Besides, the Securities Act mandates that issuers must receive copies of participant agreements, which C.L. King failed to provide.

“Enforcement contends that the existence of the participant agreements … would have had a material effect on issuers’ decisions whether or not to honor Eden Arc’s redemption requests,” the FINRA panel stated.

The SEC had only recently dismissed fraud accusations against Lathen over the same misconduct.

The Commission believed the hedge fund manager had incurred no violation, but rather, exploited a regulatory loophole. For the acting SEC Judge, Lathen had no intent to defraud issuers. Through the alleged scheme, Lathen made between $7.5 million and $9.5 million, according to the SEC Judge.

One of the most salient aspects of the case is the fact that SEC found no punishable conduct on the part of the hedge fund manager, who made the largest profits, while FINRA did condemn the broker-dealer´s actions.

It is safe to assume that sound legal advice might have shielded C.L. King from FINRA fines and censure.

If your firm is targeted by the SEC call us at the first moment as some proactive defense options are available that can, in an array of circumstances, settle your problem before formal proceedings are initiated. At Herskovits PLLC we focus only on securities law defense – nationwide. Call Us 212.897.5410 or Connect Online

Once in a while, regulators and courts take actions that have no precedent, but which may influence justice over time. That is the case of a recent ruling from a Florida federal judge, who ordered a defendant to disclose that he had “violated commodity laws” whenever he writes or speaks about commodity trading in the future.

The U.S. Commodity Futures Trading Commission announced the ruling in a statement, perhaps in the hope that it might serve to deter potential fraudsters.

The defendant, Anthony J. Klatch II, had been arrested several times since 2011, charged with running a kind of Ponzi scheme, and ordered to pay back $13 million in various civil proceedings. In 2012, for example he was convicted in connection with a $2.3 million investment scam.

While he was out of custody, between April 2014 and September 2015, he managed to run a number of schemes that put him under the radar of the Commodity Futures Trading Commission, which sued him, his company, and partner-in-crime Lindsey Heim.

The CFTC maintains that Klatch reunited with Heim shortly after being released from custody. Together, they set up an ACM, misrepresenting themselves as high-earning traders. To entice investors, Klatch created an alias, “Larry J. Heim,” whom he endowed with a series of degrees from respected institutions, such as Harvard University.

The novelty of the case was that besides seeking civil penalties and injunctions, the CFTC decided to ask the judge to order Klatch to include a detailed list of his past violations whenever he posts online, publishes an article, or gives a speech in any way related to commodities.

The text Klatch is to append to any written or spoken statement includes the following statements,

“I have violated the Commodity Exchange Act and CFTC regulations… After being sued by the CFTC in federal courts in New York and Florida, I have been collectively ordered to pay $13,476,225 in restitution to victims of my illegal conduct. I have also been ordered to pay $1,845,008 in civil monetary penalties for my illegal conduct.”

The required disclosures also include a detailed list of Klatch’s violations of commodity laws. According to a spokesperson from the CFTC, there is no record of such a confessional “affirmative disclosure” requirement being imposed on traders found guilty of similar wrongdoing.

Klatch represented himself in legal proceedings. A choice that may explain why he ended up with a kind of “Scarlet Letter” sewn on his lapel for as long as he continues to work as a trader. Klatch’s mother had once told a reporter that her son had a genius IQ. Klatch himself once described himself in a letter as a “brain surgeon of the market.” It is doubtful that his alleged genius will help him persuade new investors in the light of the compromising disclosures that will be a mandatory addition to his usual sales pitch.

If you are in the securities industry and facing possible legal action, you should speak with an experienced securities lawyer to learn your options. While you might be the best in your industry, at Herskovits PLLC securities law firm, we’re among the best and most experienced in ours. Call Us at 212.897.5410 or Online

Ironridge Global Partners LLC has agreed to pay $4.4 million in disgorgement to settle claims that it incurred violations of the Exchange Act when its subsidiary Ironridge Global IV distributed billions of microcap shares without being a registered broker.

According to the SEC order, Ironridge violated Section 15(a) of the Exchange Act, which “prohibits a broker or dealer to effect transactions in any security without registering with the Commission,” and Section 20(b) of the Exchange Act, which “makes it unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the Exchange Act or any rule or regulation thereunder through or by means of any other person.”

The San Francisco-based firm’s subsidiary, Ironridge Global IV, sold shares of 28 microcap issuers, typically driving down share prices while increasing the number of shares received, through a price protection formula which locked in discounts regardless of stock price shifts.

In some cases, more shares were issued whenever stock prices fell.

For firms like Ironbridge, this can be a way of securing profits without incurring almost any risk. However, the SEC’s main objection with the behavior is that Global IV is not a registered firm.

In agreeing to the terms of the settlement neither Ironbridge nor Global IV have made any admission of guilt. The disgorgement included in the agreement relates to fees charged to microcap issuers, which SEC claims were similar to typical broker-dealer fees.

According to the SEC order, “Global IV’s operation as an unregistered dealer in securities by engaging in serial underwriting activity, providing related investment advice, and receiving and selling billions of shares in connection with self-described financing services for domestic microcap stock companies (“microcap issuers”) explicitly designed to utilize the registration exemption contained in Section 3(a)(10) of the Securities Act of 1933.”

“As part of its business model, Ironridge designed and openly promoted a liabilities for equity or LIFE financing program, through which Ironridge arranged to have Global IV purchase outstanding claims from microcap issuers’ creditors and then settle those claims through Section 3(a)(10) exchanges. Under the resulting settlements, Global IV received steeply discounted shares, which Global IV subsequently sold at the direction of Ironridge’s principals,” the SEC order explains.

By enabling issuers to release shares without registering them with the commission, Ironbridge’s LIFE financing program allowed it to receive and sell nearly “5.5 billion shares of the issuers’ common stock,” which led to net profits of about $22 million.

Section 3(a)(10) of the Securities Act of 1933 exempts securities issued in exchange for “bona fide outstanding claims” in court-approved transactions. Ironbridge’s subsidiary used litigation to generate unrestricted stock which would then be sold by Global IV.

Ironbridge tried to contest the SEC’s claims, alleging, among other things, that the case violated its right to a jury trial, but its various attempts were unsuccessful, and the firm will now have to pay the multi-million dollar disgorgement to resolve the Commission’s allegations.

If you or your firm are targeted for SEC action involving complex financial industry matters, the experienced securities lawyers at Herskovits PLLC can help. We are exclusively securities and financial industry focused. Call Now to learn and protect your rights. 212.897.5410 or EMAIL

Over the course of 2016, FINRA expelled 24 firms from membership and fined offenders for a total of $176 million. The largest fine amounted to $25 million, paid by MetLife Securities over negligent misrepresentations and omissions in connection with variable annuity replacements.

A total of $27,9 million from monetary sanctions corresponded to customer restitutions. In the MetLife case, this amounted to $5 million.

On average, FINRA fined 31 offenders per month. There were many serial offenders, with 46 firms fined more than once throughout the year and 11 firms fined more than four times.

Mid-year Review 2017

During the first six months of 2017, FINRA fined 181 firms, averaging 30 a month, which shows little variation from last year. The total of fines handed out over that period was $132.8 million. If the trend persists, fines this year could be significantly larger than in 2016.

The number of firms expelled was 14, also not very different from a similar period last year. The average fine, however, rose to $733,800 in the first half of 2017; a 61% increase from the 2016 average.

Enforcement Priorities

FINRA continues to uphold similar priorities as in 2016, but there are some new additions.

For example, a focus on protecting investors from brokers with a less-than-stellar track record. FINRA will look very close into how firms hire such brokers and into the efficiency of their inspection programs and supervisory systems. “There could not be a more important place for us to spend our time and resources,” FINRA sources commented during a recent panel in DC.

Anti-money laundering (AML) will remain a focus, and the reporting of suspicious activity will become central to compliance with FINRA rules.

Another focus the Regulatory Authority has made very clear through both its communications strategy and the implementation of new rules is the protection of elder investors. Firms dealing with this type of customers need to pay close attention to the recent amendment to Rule 4512 and new Rule 2165.

Adequate and compliant record-keeping is also a focus, and we have seen recent and severe disciplinary action over this particular issue. For example, the $2 million fines to State Street Global Markets and Acorns Securities over improper filing of customer records.

FINRA has also been increasingly interested on cracking down on compliance officers who fail to guarantee adherence to regulations.

In late July, FINRA announced the creation of a centralized enforcement office.

The move will bring together two enforcement teams within the organization, “one handling disciplinary actions related to trading-based matters found through Market Regulation’s surveillance and examination programs, and the other handling cases referred from other regulatory oversight divisions including Member Regulation, Corporate Financing, the Office of Fraud Detection and Market Intelligence, and Advertising Regulation,” according to a press release.

“A vigorous and effective enforcement program is central to FINRA’s mission of protecting investors and promoting market integrity. After careful study, we have determined that this new structure will better enable this critical program to achieve those important goals in the years to come,” FINRA’s CEO Robert Cook has commented.

As analysts expected Trump’s agenda of rolling back regulations like Dodd-Frank to reduce the number of FINRA and SEC examinations, we can see that the first half of 2017 has shown no significant reduction in FINRA probes or fines.

Firms and individual brokers must do their due diligence to ensure they are in full compliance with FINRA rules. Advice from a seasoned securities lawyer is the key to staying on the right side of the law.

At risk of a FINRA enforcement inquiry or action? Connect with an experienced Securities Lawyer at Herskovits PLLC early on – we defend individuals and financial firms in securities regulatory actions. Act quickly for a proactive defense. Call Us at 212.897.5410 or Connect Online