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On October 13, 2015, the Financial Industry Regulatory Authority (“FINRA”) announced that Santander Securities LLC (“Santander Securities”) has to pay approximately $6.4 million in fines for supervisory related violations surrounding the sale of Puerto Rican Municipal Bonds (“PRMBs”) to Puerto Rican customers.  Historically, PRMBs generated steady income and provided significant tax advantages for Puerto Rican residents, as the PRMBs are exempt from federal, state, and local taxes, as well as Puerto Rico’s estate tax.  However, on December 13, 2012, Moody’s downgraded Puerto Rican General Obligation Bonds and any related debt to ‘Baa3,’ reflecting the plummeting Puerto Rican economy, and establishing a risk level for PRMBs that barely surpassed that of junk-bonds.

Pursuant to FINRA’s Letter of Acceptance, Waiver and Consent (“AWC”), Santander Securities failed “to have a reasonably designed supervisory system and procedures relating to sales of [PRMBs] to Puerto Rico customers.”  The AWC further states that, “Santander [Securities’] systems and procedures were inadequate because … they did not require the [f]irm to review or assess that its proprietary product risk-classification tool took into account the unique changed risks of investing in PRMBs.” The AWC also states that, “although Santander [Securities] had certain reports to identify concentration levels and margin activity in customer accounts, [Santander Securities] did not have adequate systems and procedures in place to monitor for the appropriate use of margin in connection with the purchase of PRMBs or to monitor for potentially over-concentrated positions in PRMBS and Puerto Rico Closed-End Funds.”  FINRA also concluded that, from October 2010 through April 2014, “Santander [Securities] failed to have adequate systems and procedures governing transactions in Puerto Rico employee brokerage accounts.  While [Santander Securities] had a policy requiring the pre-approval of employee trades, its systems were not designed to detect transactions effected between employee brokerage accounts and the accounts of [Santander Securities’] customers. As a result, [Santander Securities] was unable to adequately monitor for potential conflicts of interest where customer orders were filled through positions in Puerto Rico employee brokerage accounts.”

As a result of their supervisory failures, FINRA imposed a censure on Santander Securities, and ordered them to pay a fine of $2 million, and restitution of approximately $4.3 million.  Pursuant to the AWC, Santander Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, and further agreed to review all of its current written policies and procedures.  Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “[t]his is a strong reminder to firms that they must focus on customers’ exposure to market risks and suitability, particularly in those markets like Puerto Rico that present unique risks and challenges.”

On September 30, 2015, the Securities and Exchange Commission (“SEC”) filed a Complaint in the United States District Court for the Central District of Illinois (the “Complaint”), charging the former CEO, President and Chairman of the Board, David P. Godwin, and the former CFO, Anthony G. Roth, of ContinuityX Solutions Inc. (“ContinuityX Solutions”) with fraud and other securities law violations.  ContinuityX Solutions is based in Metamora, Illinois, and is a publicly traded company that provides computer and telecommunication services, including networked computer server space.

The Complaint alleges that David P. Godwin and Anthony G. Roth violated Sections 17(a)(1), (2) and (3) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, Rules 13a-14 and 13b2-1 of the Exchange Act, and sets forth other charges of aiding and abetting in the violation of the aforementioned rules.  Specifically, the Complaint alleges that, from April 2011 to September 2012, David P. Godwin and Anthony G. Roth filed, on behalf of ContinuityX Solutions, “periodic reports with the SEC disclosing purported revenues of $27.2 million.”  The Complaint further alleges that David P. Godwin and Anthony G. Roth used “straw buyers and forged contract documents” to effectuate the fraud and that “99% of that claimed revenue came from fraudulent and fictitious sales.”  According to the Complaint, David P. Godwin and Anthony G. Roth were both enriched by using these falsified filings in connection with a private offering of ContinuityX Solutions bonds, with David P. Godwin receiving $1.3 million in compensation and Anthony G. Roth receiving $351,800 in compensation and $456,098 in profits from sales of the bond offering.

The Complaint, in its prayer for relief, requests that David P. Godwin and Anthony G. Roth be permanently restrained and enjoined from further violating the aforementioned rules, and “disgorge ill-gotten gains received as a result of the conduct alleged herein, plus pre-judgment interest thereon.”  The Complaint further requests that David P. Godwin and Anthony G. Roth “reimburse ContinuityX for the bonuses, other incentive-based and equity based compensation, and profits from the sale of ContinuityX’s securities they realized or perceived.”  Lastly, the Complaint requests that David P. Godwin and Anthony G. Roth be barred from serving as officers or directors of any public company.

On September 15, 2015, FINRA announced that, as a result of recent focus on broker migration between risky brokerage firms and a 2014 on-site examination of Global Arena Capital Corp. (“Global Arena”), it has barred the former President of Global Arena, Barbara Desiderio, as well as David Awad, a.k.a. David Bennett, James Torres, Peter Snetzko, Alex Wildermuth, and Michael Tannen, all of whom were registered representatives, in all their capacities.  Further, FINRA has barred two former Global Arena Principals, Kevin Hagan and Richard Bohack, in their principal capacities for supervisory failures, and imposed a fine against Hagan of $15,000.  FINRA also sanctioned two (2) former registered representatives, Niaz Elmazi, a.k.a. Nick Morrisey, and Andrew Marzec, pursuant to a summary proceeding, for failing to cooperate with the investigation by failing to respond to requests for information.  Elmazi was also permanently barred from the industry in all capacities, and Marzec was suspended.  Furthermore, FINRA cancelled Global Arena’s FINRA membership in July 2015. According to each registered representative’s Letter of Acceptance, Waiver and Consent (“AWC”), FINRA charged the Global Arena registered representatives with various violations of Section 10(b) of the Securities and Exchange Act of 1934 and FINRA Rules 2010, 2111, 2020, 3110, and 8210, including misleading sales pitches, high pressure sales tactics regarding junk bonds and other securities, customer account churning and unsuitable recommendations.

Awad, Torres, Snetzko, Wildermuth, Tannen, Elmazi, and Marzec had all transferred from HFP Capital Markets LLC (“HFP”) – a brokerage firm that FINRA had previously barred from the industry, to a Global Arena branch office that was specifically opened to employ them in October 2013.  FINRA notes that, “[Global Arena’s] de facto owner and three other former Global Arena brokers had been barred for fraud in a separate FINRA action related to HFP in July 2015.”  FINRA revealed that the Global Arena branch office’s business model was similar to the questionable one run by HFP, in that both cold-called customers, including senior citizens, and “made solicited recommendations of securities.”

FINRA’s Executive Vice President of Regulatory Operations, Susan Axelrod, stated, “FINRA carefully monitors broker migration particularly with respect to brokers that move in groups from an expelled or high-risk firm to other securities firms, based on a variety of risk factors.  FINRA will continue to leverage this data to expedite sales practice examinations and enforcement investigations to rid the industry of individuals who prey on vulnerable investors.”

On September 8, 2015, Lax & Neville LLP, a leading national securities arbitration law firm, won a FINRA arbitration award on behalf of a trader, Gontran de Quillacq, against HSBC Securities (USA) Inc. (“HSBC”) for, among other things, the payment of compensation, including severance, expungement of his Form U-5, interest, attorneys’ fees and costs.  An experienced three (3) person Arbitration Panel rendered a six figure arbitration award in compensatory damages, including interest at the rate of 9% per annum from October 2, 2012, the date of Mr. de Quillacq’s termination, until the award is paid in full.  The Arbitration Panel also ordered HSBC to pay Mr. de Quillacq’s attorneys’ fees in the amount of $20,000, his costs in the amount of $3,510, and assessed all FINRA hearing fees to HSBC, in the amount of $9,000.  The Arbitration Panel also found that HSBC’s reason for terminating Mr. de Quillacq’s employment was unfounded and false, and recommended the expungement of the Termination Explanation from Section 3 of Mr. de Quillacq’s (CRD # 5116610) Form U-5 filed by HSBC on November 1, 2012 and maintained by the Central Registration Depository (“CRD”).  Specifically, the Arbitration Panel in the FINRA Award stated that, “The Termination Explanation shall be replaced with the following: ‘Gontran [d]e Quillacq was unjustly terminated based on his supervisor’s failure to supervise, inadequate trading system, and an error of another employee, which was not attributable to Gontran [d]e Quillacq.’”  In essence, Mr. de Quillacq was vindicated from being a scapegoat and was exonerated of any alleged wrongdoing.   To view this Award, Gontran de Quillacq v. HSBC Securities (USA) Inc. – FINRA # 13-02861, click here.    

To discuss this arbitration award, please contact Barry R. Lax, Esq. or Sandra P. Lahens, Esq. at (212) 696-1999.   Also, please contact our firm if you believe you have been unjustly terminated or if you believe your Form U-5 contains false and misleading information.

On September 8, 2015, the Securities and Exchange Commission (“SEC”) charged Ross Shapiro, Michael Gramins, and Tyler Peters with violating Section 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5 and Sections 17(a) of the Securities Act of 1933.  The SEC alleges Ross Shapiro, Michael Gramins, and Tyler Peters defrauded customers by misrepresenting the bids and offers provided to Nomura Securities International, the brokerage firm who had employed them, for residential mortgage-backed securities (“RMBS”).  Ross Shapiro, Michael Gramins, and Tyler Peters also misrepresented the prices at which Nomura Securities International bought and sold RMBS, as well as the spreads earned by intermediating RMBS trading.  Ross Shapiro, Michael Gramins, and Tyler Peters were able to execute such deception because the RMBS market was not transparent and the pricing information was difficult to determine.  Ross Shapiro, Michael Gramins, and Tyler Peters also invented fictitious third-party sellers and offers for bonds that were already owned by Nomura Securities International.  In addition to their own unlawful conduct, Ross Shapiro, Michael Gramins, and Tyler Peters also encouraged junior traders at the firm to act in concert with them.

As a result of Ross Shapiro’s, Michael Gramins’, and Tyler Peters’ actions, the SEC alleges that Nomura Securities International generated at least $5 million in revenue and an additional $2 million in profits.  Further, during the period of wrongdoing, and due to the perceived success of Ross Shapiro, Michael Gramins, and Tyler Peters, Nomura Securities International paid total compensation of $13.3 million to Ross Shapiro, $5.8 million to Michael Gramins, and $2.9 million to Tyler Peters.

The SEC has also entered into Deferred Prosecution Agreements with three other individuals who have cooperated with the investigation and provided critical evidence that would have been unavailable to the SEC’s enforcement team.

A FINRA arbitration panel ordered UBS Financial Services Incorporated of Puerto Rico and UBS Financial Services Inc. (collectively “UBS”) to pay a group of former investor clients approximately $3 million related to the sale of closed-end funds consisting of Puerto Rico municipal bonds.  Specifically, the claimants asserted the following causes of action against UBS: fraud; breach of fiduciary duty (including violation of Regulation 6078 issued under the Uniform Securities Act of Puerto Rico); negligence; breach of contract; negligent misrepresentation and omission; unsuitability; overconcentration; control person liability; alter ego liability; and failure to supervise under federal securities laws, the Uniform Securities Act of Puerto Rico, Puerto Rican law and FINRA rules. The causes of action related to the claimants’ investments in UBS Puerto Rico proprietary closed-end funds and other Puerto Rican municipal bonds, and the use of these investments as collateral to borrow funds through lines of credit.

Several members of the group of claimants who filed the FINRA arbitration settled their claims prior to the FINRA panel’s decision, according to the FINRA award.  To those investors who did not settle, the FINRA arbitrators specifically ordered UBS to pay compensatory damages in the amount of approximately $2.4 million, plus $55,000 in costs and $479,000 in attorneys’ fees.  The FINRA arbitration panel also assessed the total hearing session fees of $21,600 to UBS.

According to media reports and the various lawsuits filed against UBS by investors in Puerto Rico, UBS recommended that its clients invest in highly leveraged, risky closed-end bond funds that were heavily invested in Puerto Rican municipal debt, such as the Tax Free Puerto Rico Fund II. These closed-end bond funds had a leverage ratio of approximately 50%, which means that for every dollar of customer assets the fund holds, it has approximately another dollar of assets bought with borrowed money.  To compound the riskiness of these investments, UBS brokers encouraged its clients to borrow money on margin or through the use of credit lines to invest in the funds, which in effect doubled the leverage and increased the riskiness of the investments. The value of these risky, highly leveraged closed-end bond funds managed by UBS have declined in value by approximately 50% or more, resulting in substantial losses to investors.   Many lawsuits have already been filed against UBS, and according to UBS’s most recent earnings report and media outlets, the firm is facing investor/customer claims totaling more than $1.1 billion.

On August 6, 2015, the Financial Industry Regulatory Authority (“FINRA”) announced that Rasheed (Richard) Adams (“Adams”), a former broker at Caldwell International Securities Corporation (“CISC”), was barred from the financial services industry for various violations of the securities laws, including, but not limited to, excessive trading and churning in his clients’ accounts and his failure to amend his Form U4 to disclose unsatisfied judgments and liens.

According to the FINRA Letter of Acceptance, Waiver and Consent, Adams first became associated with CISC in June 2011 when his firm, Adams Wealth Management, Inc., became an Office of Supervisory Jurisdiction for CISC. From July 1, 2013 to June 30, 2014, Adams excessively traded and churned two of his clients’ accounts, resulting in losses of approximately $37,000 and commissions of approximately $57,000. Adams’ trading was inconsistent with his clients’ investment objectives and risk tolerance, and was a clear breach of his fiduciary duty. In the course of their investigation, FINRA requested documents and information from Adams on multiple occasions; however, Adams refused to comply and told FINRA that he would not provide the documents and information at any time, in violation of FINRA rules.

In addition to these charges, Adams also allegedly violated FINRA’s by-laws that require associated persons to update their Forms U4 such that they are “current at all times.” Adams was aware of, and did not disclose, twelve (12) unsatisfied judgments and liens on his Form U4, which was in effect from 2010 through 2014. Despite having received a notice from FINRA, Adams still did not update his Form U4 until December 3, 2013, the day prior to his testimony before FINRA. Adams’ actions demonstrated a willful violation of FINRA rules and securities law.

On July 27, 2015, the Department of Justice (“DOJ”) revealed that eight individuals were indicted in a National Football League (“NFL”)-related securities fraud scheme that victimized elderly investors. According to the DOJ, the eight individuals allegedly raised over $2.7 million by persuading investors to acquire stocks in two companies, Thought Development Inc. (“TDI”) and Virgin Gaming, by misrepresenting or omitting crucial information about these investments to their clients. As a result, the defendants were charged with conspiracy to commit mail and wire fraud.

According to the DOJ release, the first company, TDI, claimed that it had developed a device which could produce clear, visible green laser lines on football fields. The purpose of the technology was to shorten the time that it takes for officials to determine first downs in order to maximize advertising time during broadcasts of games. Investors were told that an initial public offering in TDI was expected in the near future and that their money would be invested into the technology. However, the IPO was not imminent, and at least half of the money was kept by the defendants or transferred to sales agents through hidden fees and commissions.

Similarly, securities for Virgin Gaming were also allegedly sold by the defendants through unscrupulous means and used to pay undisclosed fees and commissions. The defendants persuaded investors to purchase stocks of a company that produced a service for online tournaments, fantasy sports leagues and competitive gaming. Sales agents misled their investors into purchasing these stocks in one of two ways. Agents lied to investors by informing them that they were buying Virgin Gaming stock when, in reality, they were not. To others, sales agents misrepresented that investors would acquire the right to purchase Virgin Gaming stock through their investments and that investors’ shares would be converted into Virgin Gaming shares prior to an initial public offering. However, this was a blatant lie, as there was never an option to buy Virgin Gaming stocks in the first place.

On July 16, 2015, the Securities and Exchange Commission (“SEC”) charged Paul Lee Moore, a purported investment adviser, and Coast Capital Management, his purported investment advisory firm, with stealing nearly $2 million from investors and running a Ponzi scheme.

According to the SEC release, Paul Lee Moore and Coast Capital Management allegedly raised $2.6 million from investors. However, Moore used the money to pay for his personal expenses, such as his travels, retail goods, and the use of pornographic websites, rather than properly investing the investors’ funds. With the $625,000 that was left, Moore conducted a Ponzi scheme, paying back earlier clients with money received from his newer clients. Moore also lied about his education and previous employment experience and created fraudulent account statements, which contained securities that he did not acquire, in order to defraud his investors. When Moore’s clients showed these fake account statements to others around them, including family, friends and business associates, they, too, became clients under Moore and Coast Capital Management and victims of the Ponzi scheme.

Michele W. Layne, Director of the SEC’s Los Angeles Regional Office, said, “As alleged in our complaint, Moore betrayed his clients, brazenly stole nearly $2 million for his own activities and conducted a Ponzi scheme with the remaining funds.” Therefore, as stated in the release, the SEC is currently seeking a permanent injunction, return of the illegally-obtained money, prejudgment interest, and penalty.

On July 14, 2015, the Securities and Exchange Commission (“SEC”) charged 34 defendants for their alleged involvement in fraudulent schemes to manipulate microcap stock trading.  The list of defendants includes six firms that allegedly acted as unregistered broker-dealers to investors whose goals were to keep their ownership of stock hidden and to manipulate the trading of microcap securities.  Owners, employees, customers, stock promoters, and microcap issuers were among the defendants who were charged for fraud and manipulative trading, in addition to other violations of the law.

According to the SEC release, one alleged scheme involves Costa Rica-based Moneyline Brokers (“Moneyline”) and its founder, Harold Bailey “B.J.” Gallison II (“Gallison II”).  The Complaint states that Gallison II acted as a broker for customers who performed “pump and dump” schemes, which artificially increased the price of a stock to allow customers to sell and make a profit.  In addition, Moneyline and some of its employees accepted transfers of microcap stocks from these customers and reissued stock certificates under Moneyline’s name for the sole purpose of keeping the identities of the stock owners hidden.  Other alleged schemes in the SEC lawsuit include those of Carl H. Kruse Sr. and Carl H. Kruse Jr. of Miami and Canada-based mining company, Everock, Inc., which involve the artificial inflation of stock prices.  According to the SEC release, these two schemes obtained estimated profits of $2.3 million and over $2.5 million, respectively.

Andrew M. Calamari, Director of the SEC’s New York Regional Office, said, “This case demonstrates the Commission’s resolve to relentlessly pursue the villains behind these microcap fraud schemes wherever in the world they may be hiding.”