The current ongoing federal government shutdown adversely affects the Securities and Exchange Commission with a “very limited number of staff members available” to carry out the agency’s tasks. The SEC handles the enforcement of federal securities laws through overseeing approximately $90 trillion in annual securities trading as well as the activities of over 27,0000 registered entities and self-regulatory organizations. The SEC’s Division of Enforcement investigates into potential securities laws or regulatory violations and recommends any required action against perpetrators. Now, the SEC is reportedly operating at 5.8% and the enforcement division at 8% of capacity. In fact, the Division will take months after the shutdown ends to recover, according to the SEC’s Office of Internet Enforcement’s chief, John Stark. The constraints posed by the government shutdown come after the SEC’s outstanding enforcement and accomplishments in 2018, posted in their second annual report.

Starting with the first 2017 report, the Division assesses the performance of their fiscal year with five core principles in mind. These Division of Enforcement’s five principles are a focus on the Main Street Investor; individual accountability; keep pace with technological change; impose remedies that most effectively further enforcement goals; and continuously assess the allocation of resources. Based on their assessment, SEC’s codirectors Stephanie Avakin and Steven Peikin described the Division of Enforcement’s efforts this year as a “great success”. In evaluating their effectiveness, the Division’s assessment focuses more on the “nature, quality, and effects” of their enforcement actions, rather than just the quantitative metrics.

Nonetheless, the Division did accomplish impressive numeric feats as well despite the constraints of a hiring freeze and the Supreme Court’s 2017 decision in Kovesh v. SEC. The Division has investigated and recommended hundreds of cases alleging misconduct, leading to $794 million returned to harmed investors. Compared to the prior year, the SEC filed more enforcement actions (821) with higher numbers for stand alones (490), follow-on admin proceedings (210) and delinquent filings (121) in 2018.  The most common stand-alone enforcement actions involved securities offerings, investment advisors, and issuer reporting as well as disclosure. Despite Kovesh v. SEC limiting the window of time for collecting, the SEC ordered around $2.5 million in disgorgement and another $1.5 million in penalties.

Securities employees who decide to report covert unjust employer practices to other individuals are oftentimes taking a huge personal risk for public betterment. Without legal protection, these whistleblowers could end up facing termination, workplace harassment, and other retaliation. While various federal, state, and common laws exist to provide anonymity and other protections to whistleblowers, violations are not completely unprecedented. Perhaps unsurprisingly, some employers might still try to take illegal measures to find and persecute whistleblowers without regard for the rules. Fortunately, certain federal and state laws exist to also provide whistleblowers with justice because of the infringement of their rights.

Recently, New York state regulators ordered that Barclay PLC, as well as its New York branch, pay a $15 million fine for their “shortcomings in governance, controls and corporate culture” in handling a whistleblower matter. Barclay PLC’s chief executive officer, Jeff Staley allegedly tried to uncover the identity of an anonymous employee whistleblower. A New York Department of Financial Services probe uncovered that Barclay PLC’s handling of Staley’s situation potentially compromised its whistleblower program. As an additional caveat of the settlement, Barclays will submit a detailed written plan to ensure the implementation of the whistleblowing program as well as improve the board’s oversight going forward. Big banks, such as Barclay PLC are required to have a strong program in place to protect their employees.

The alleged violation ensued when Mr. Staley requested the head of Barclay PLC group security uncover the identity of the whistleblower author of two letters circling around the bank. The purported letters criticized Barclay PLC’s management, Mr. Staley and a newly hired employee, Tim Main. As repeated, Mr. Staley claims to have needed the identity of the letter writer to protect Tim Main from “personal attack”. The group chief compliance officer, general counsel and other bank officials had advised Mr. Staley to steer clear from his inquiries into the whistleblower. Yet, Mr. Staley claimed to have not been aware that unmasking a whistleblower was even against the law, according to news sources. Our whistleblowers find it puzzling how a highly ranked bank official could not understand nor respect the sanctity of whistleblower identity protections.

At some point in their careers, many financial professionals will find themselves in the receiving end of a subpoena from Securities and Exchange Commission, “SEC” or a Financial Industry National Regulatory Authority “FINRA” 8210 Request. The receipt of such documents signifies the regulatory or self-regulatory agencies’ request for information and/or documents in relation to an investigation of a potential securities laws violation. While the Securities and Exchange Commission will formally issue a subpoena, FINRA sends parties the equivalent inquiry letter, often referred to as an “8210 Request”. Both entities can request the receipt of a wide range of information and a high number of documents within a short amount of time. Furthermore, recipients who do choose not to respond to these critical requests honestly could ruin their careers and lives. While the SEC subpoena and FINRA 8210 request may share some similarities, there are many differences based on the powers allotted to the respective regulatory agencies.

The Securities and Exchange Commission is a federal government regulatory agency entrusted to develop national regulations and enforce federal laws. Upon reasonable suspicion of securities laws violations, the SEC can issue a subpoena to anyone. Meanwhile, FINRA is not an official government entity, but rather the security industry’s self-regulated membership organization. FINRA has the authority to request documents, information, and testimony from those under its’ jurisdiction in a FINRA 8210 letter. Both the SEC and FINRA run a similar on-the-record “OTR” interview, with the option of an attorney present in the event of a testimony request. However, the SEC offers more response flexibility, protections under the Fifth Amendment and investigation information access in comparison with FINRA.

In the face of a potential securities law violation, the SEC will often send subpoenas to the targets as well as any potential witnesses with information. A SEC subpoena can demand documents (duces tecum) or oral testimony (ad testifcandum) without including context. The SEC can start an investigation by presenting their suspicions in a formal order of investigation. Chiefly, a former SEC Enforcement attorney, John Reed Stalk alleges that there is a  “low standard” of cause needed for approved subpoena issuance. The formal order of investigation mainly contains information regarding the scope and possible subjects of the investigation. Subpoenaed parties and their attorneys can request the order.

Malecki Law continues to follow a petition filed in the National Company Law Tribunal (NCLT) in Mumbai, India concerning the takeover of a US litigation data-management firm, Xcellence Inc. (operating under the brand Xact Data Discovery, XDD USA) by a private equity firm, JLL Partners Fund VII, L.P. For background on the case, read “A Cautionary Tale for both Private Equity Investors and Portfolio Companies”. The National Company Law Tribunal (NCLT) is a quasi-judicial forum in India, which adjudicates corporate stakeholder disputes and has all the powers of an Indian civil court.

The legal dispute involves Dominic Thomas Karipaparambil (Dominic Thomas), the 49% shareholder of Xact Data Discovery India Private Limited (XDD India), on one side and on the other side, XDD USA, XDD India, XDD USA’s India-based subsidiary, JLL Partners Fund VII, L.P. (JLL Partners), JLL XDD Holdings LLC. (JLL XDD), an entity owned by JLL, the directors of XDD India.  The directors of XDD India include the president and CEO of XDD USA, Mr. Robert Polus and surprisingly the Indian arm of the global accounting firm Deloitte Touche Tohmatsu Limited (Deloitte).

XDD USA was originally formed in 1994 under a different name and operates 17 offices across the United States. XDD India was formed in 2007, by Robert Polus and Dominic Thomas and operates two locations in India. It appears that at some later date, Robert Polus transferred his stake in XDD India to XDD USA, making XDD India a subsidiary of XDD USA. This structure is not atypical from the trend of U.S. data management companies seeking to cut costs by looking overseas for cheaper labor. In this instance, it hypothetically permits a company like XDD USA to offer cut-rate corporate and legal services through its Indian subsidiary, which provides e-discovery and other document review services at a lower cost than what traditional law firms in the U.S. would charge.  In early 2018, the private equity firm JLL Partners announced it had reached a deal to acquire XDD USA from its previous owner and manager, Clearview Capital.

Former President and CEO of a luxury real estate development company in White Plains pled guilty to federal charges after allegedly orchestrating a 58-million-dollar Ponzi Scheme. Last week, Michael D’Alessio pled guilty to one count of wire fraud and one count of concealing assets from a bankruptcy court following his arrest in August. Michael D’Alessio reportedly solicited investor funds for investments in luxury real estate development projects in Westchester, Manhattan and the Hamptons for years. In return for their money, investors were promised monthly interest payments and shares in the properties. Instead, Michael D’Alessio funneled investor money into multiple shell companies to repurpose at his leisure in a Ponzi-like fashion.

Michael D’ Alessio allegedly misappropriated investor funds that should have been used for investments in real estate through his company from 2015 until April 2018. Michael D’Alessio’s former company, Michael Paul Enterprises reportedly specialized in the design, construction, and management of commercial as well as residential real estate. As part of the alleged Ponzi-scheme, investors were offered shares in real estate properties with guaranteed monthly interest payments and profits. Our attorneys specializing in Ponzi Schemes know that any promises of guaranteed returns should usually raise a red flag.

In addition to the suspicious promises, our investment fraud attorneys find that Michael Alessio’s alleged behavior is indicative of your typical Ponzi Scheme perpetrator. In Ponzi schemes, a perpetrator solicits new investor money to pay falsified returns to existing investors. It is alleged that Michael D’Alessio created a limited liability company for each new property to offer shares. Michael D’ Alessio did not keep investor money within the appropriate companies as expected. Rather, Michael D’Alessio reallocated investors’ individual property’s money to cover shortages in separate ones as well as pay his personal expenses. For instance, Michael D’Alessio used investor money to pay off significant gambling debts.

Allegations of mismanagement, oppression, and accounting disputes are the common accusations when conflicts arise between private equity funds and shareholders of companies being added to private equity portfolios. These disputes are increasingly being complicated by private equity deals involving companies with offshored entities that have local shareholders in the offshored country. Companies outsourcing via the creation of new foreign entities is not a new phenomenon. However, the activities outsourced to developing countries has shifted from traditional manufacturing and assembly to include more companies in the information technology sectors and even legal processes. Increased offshoring via the creation of satellite entities and the proliferation of private equity deals has increasingly led to instances of local citizen shareholders and partners of the offshored entity being ousted and/or squeezed out of deals.

The global digitization trend has led to an explosion of offshored entities of US companies in India. Fittingly, India has found itself cluttered with western private equity firms in search of potential portfolio companies. Becoming the investee of a private equity deal is generally a positive event for a company and its shareholders. However, it appears that Indian shareholders of these offshored entities can find themselves left out and private equity firms having to engage in unproductive litigation in Indian courts.

Recently, a petition for oppression and mismanagement has been filed in India by Mr. Dominic Thomas Karipaparambil, against, Xcellence Inc. (“XDD USA”), operating under the brand Xact Data Discovery, a US-based provider of eDiscovery, data management and managed review services. The parties to the dispute also include XDD USA’s offshored entity Xact Data Discovery India Private Limited (“XDD India”); JLL Partners Fund VII, L.P. (“JLL Partners”), a US-based private equity firm; and others. Court records show Mr. Karipaparambil, to be the 49% Indian shareholder of XDD India. Additionally, from the records it appears that Mr. Karipaparambil, may have also been the Managing Director of XDD India. Mr. Karipaparambil’s name also appears as the original subscriber to the charter documents of XDD India with Mr. Robert Polus (President & CEO of XDD USA). It seems that Mr. Karipaparambil, Mr. Polus and XDD USA, may have set up XDD India as a joint venture arrangement in the ratio of 51 (Mr. Polus): 49 (Mr. Karipaparambil). At some stage, into the venture, XDD USA seems to have acquired 51% in XDD India from Mr. Polus. US press releases show that JLL Partners acquired ‘Xact Data Discovery’ (XDD USA), shares from Clearview Capital LLC (“Clearview”) in late December 2017 – early January 2018. Past press releases also show that Clearview, another private equity investor, had acquired XDD USA in January 2015.

Brokerage firms may sometimes use reporting inaccurate negative information on a departing securities employees’ U-5 records as their “weapon” to keep their customers, according to a Bloomberg article. FINRA records and broker experiences show that brokerage firms occasionally include inaccurate information when filing a Form U-5. While financial advisors and brokers can file an arbitration to have employers remove the erroneous information from their record, many take no action. Securities employment attorneys are unsurprised given that broker and financial advisor cases against the employer, tend to favor big brokerage firms heavily. Financial professionals fear the high cost, time loss, and difficulty getting expungement in a FINRA arbitration.

Brokerage firms provide information regarding an existing employee’s termination in a document entitled, Uniform Termination Notice for Securities Industry Registration Notice – Form U-5. Within 30 days of the broker’s termination, the brokerage dealer must file a Form U-5 with the Financial Industry Regulatory Authority pursuant to Article V, Section 3 of the FINRA by-laws. A Form U-5 seeks information pertaining to the circumstances around a respective broker’s termination from the firm. Brokerage firms are obligated to provide accurate, and timely information as well as file any changes on the U5, according to FINRA’s Regulatory Notice 10-39.

It is important to contact a FINRA securities attorney when you first realize that you may be terminated or when you are terminated, to act fast. While a Form U-5 is not “negotiable,” a broker can provide information to the firm to change the firm’s mind on the facts, as well as tell them facts that they may not know. It is worthwhile to try doing so before the filing, as after the filing firms are hesitant to change a U-5 as regulatory agencies could start asking questions regarding the reasoning. No firm wants FINRA regulatory to come knocking on their door.

FINRA barred financial advisor Dawn Bennet, from Chevy Chase, Maryland was reportedly convicted for misappropriating client funds in a multimillion-dollar Ponzi Scheme that targeted elderly and financially unsophisticated investors. A Ponzi Scheme is a type of investment fraud that solicits investor money for non-existing investments. Between, December 2014 and July 2017, Ms. Bennett allegedly raised 20 million dollars from 46 investors through the unregistered offer of securities in her retail sports apparel business, DJB Holdings LLC, (“DJ Bennet”).  This past Wednesday, a jury convicted Ms. Bennett on all 17 federal charges including securities fraud, wire fraud, and bank fraud, according to the United States Attorney’s Office, District of Maryland. Ms. Bennet’s alleged Ponzi Scheme received heavy media attention after the FBI found evidence suggesting that she casted “hoodoo” spells intended to silence SEC investigators.

Dawn Bennett (CRD#1567051) worked as a FINRA registered broker and investment adviser before getting barred by the self-regulatory agency, according to her BrokerCheck records. Within her 28 years in the securities industry, Dawn Bennett was registered with Wheat, First Securities, Inc. (03/1987-08/1996), Legg Mason Wood Walker, Inc. (08/1996-02/2006), CitiGroup Global Markets Inc. (02/2006), Royal Alliance Associates, Inc. (02/2006-10/2009), and Western International Securities, Inc. (10/2009-12/2015).  FINRA barred Ms. Bennett from the industry after failing to show up to an administrative hearing.

The Securities and Exchange Commission also charged Dawn Bennett for violating federal securities laws in connection with her alleged Ponzi Scheme. A SEC amended complaint filed last year also lists her business’ CFO, Bradley Mascho, from Frederick, Maryland in addition to Dawn Bennett and her entity DBJ Holdings, LLC. A few months ago, Mr. Mascho pled guilty to charges in a plea bargain that capped his maximum prison term at ten years.

Yesterday, a Financial Industry Regulatory Authority (FINRA) arbitration panel in New Jersey, FINRA Case No. 03-08177, handed down a decisive award in favor of a trader, who was also a Series 7 registered broker.  The trader was sued by a retail investor relating to his recommendation of a municipal bond nearly fifteen years ago.  The arbitration was first filed with the National Association of Securities Dealers in November of 2003, which predates the entity’s merger with the enforcement and arbitration arm of the New York Stock Exchange to form FINRA.  The matter, which started in arbitration, winding its way in and out of the New Jersey courts, was the oldest and longest running case in FINRA’s history.  As argued before the arbitration panel by the broker’s attorney, Jenice L. Malecki, “this case was nearly old enough to drive and only three years away from being allowed to vote.”

In addition to dismissing the investors’ claims in their entirety, the arbitration panel made the rare, and ultimately just, decision to award the trader $47,831.01 in attorneys’ fees based on the panel’s finding of “malicious prosecution” by the claimant investors.  The panel further recommended expungement of the complaint from the broker’s registration records, as maintained by the Central Registration Depository (CRD), finding the investors’ allegations to be without merit and false.  The case was in and out of arbitration and court numerous times over the years, contributing to its length.

According to the award, the Claimants in this case, in connection with their single purchase of municipal bonds, had alleged damages against the Respondent trader “in excess of $500,000.00 but not less than $1,000,000.000, the exact amount to be proven at the hearing.”  However, as the panel determined, the investors had suffered no losses at all but in fact, received interest and turned a profit:

A former Wells Fargo registered representative in Daytona, Ohio is facing charges by the Securities and Exchange Commission for defrauding investors out of over a million dollars in a fraudulent scheme that targeted seniors. The SEC filed a complaint against John Gregory Schmidt with the United States District Court for the Southern District of Ohio on Tuesday. Allegedly, Mr. Schmidt made unauthorized sales and withdrawals from variable annuities to use the proceeds for covering shortfalls in other customer accounts. While Mr. Schmidt allegedly received over $230,000 in commissions, his customers were unaware of the transactions. When the scheme unraveled, it is reported that involved investors discovered that the account balances provided by their trusted financial adviser were false. Our investor fraud attorneys are currently investigating into customer claims against Mr. Schmidt.

The SEC complaint alleges that John Gregory Schmidt sold securities from seven of his investors and transferred proceeds to other customer accounts. Most of the securities were variable annuities that required letters of authorization, which Mr. Schmidt is alleged to have forged without client consent. Instead of notifying certain clients of their dwindling account balances, Mr. Schmidt allegedly sent false account statements and permitted excessive withdrawals. Unbeknownst to the client with account shortfalls, it is charged that the received money was illegally retrieved from other customer accounts. The SEC claims that Mr. Schmidt’s misrepresentations violate federal securities laws, including Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.

It is important to note that John Gregory Schmidt’s alleged fraudulent actions appear to have targeted some of the most vulnerable people in society. Mr. Schmidt, who is 65 years old, ran a fraudulent scheme that targeted elderly victims not too far off from his age, according to the complaint. Several of his reported victims were suffering from medical conditions such as Alzheimer’s and other forms of dementia. Tragically, at least five of the defrauded investors have passed away and will never be able to see justice served.