While the lack of a regulatory framework certainly makes it harder to recover fraudulent cryptocurrency losses than for traditional securities, falling victim to a cryptocurrency scam when investing through a broker or large firm regulated by FINRA or the SEC makes it easier.
This coming January, a federal court in New York’s Southern District is scheduled to sentence former Wells Fargo broker James Seijas up to twenty years in prison for his alleged role in facilitating a $30 million-plus Ponzi scheme. Meanwhile, Seijas’ former firm, Wells Fargo Advisors, has been named in a Florida civil lawsuit brought by 73 affected investors who allege that the firm failed to supervise Mr. Seijas and failed to investigate his business dealings in Q3I LP, a cryptocurrency hedge fund that Mr. Seijas partly owned. The fund was falsely marketed to investors with inflated returns from a cryptocurrency in which the investor money solicited was never even invested in. While approximately $10 million was invested, most of the remainder was allegedly spent elsewhere on lavish cars, yachts, jewelry, and real estate, including a multi-million-dollar Florida home purchased by Mr. Seijas.
As is often the case when Ponzi schemes collapse, the investor money is typically already spent. Fortunately in Ponzi cases that involve large financial firms like Wells Fargo, investors still have legal recourse to sue the employing firms, which have a duty under the securities laws to supervise the activities of their registered employees not only within the firm, but also to disclose and supervise their business activity conducted outside of and away from the firm. According to Mr. Seijas’ BrokerCheck Report, Wells Fargo had not even disclosed Seijas’ outside business activity at Q3I to FINRA, which the plaintiffs in the civil action claim would have uncovered the scheme had Wells Fargo investigated or “done any minimal compliance review.”
In Ponzi matters like the above, financial firms cannot simply disclaim liability by claiming ignorance of fraudulent schemes perpetrated by their employees. The Financial Industry Regulatory Authority’s (FINRA’s) Supervision Rule, Rule 3110, requires member firms like Wells Fargo to “establish and maintain a system to supervise the activities of each associated person [i.e., Mr. Seijas] that is reasonably designed to achieve compliance with applicable securities laws and regulations,” including monitoring the communications and activities at the firm’s main office, but equally at all smaller satellite and branch offices. The Securities and Exchange Commission (SEC) has long taken a similar position with the advisory firms it regulates, as noted in SEC Staff Legal Bulletin No. 17, Remote Office Supervision. Given that the majority of money lost in a Ponzi scheme is almost never recovered, it is important that retail investors victimized by such schemes understand that firms with supervisory duties cannot simply disclaim liability based on ignorance, but rather have an affirmative duty and burden to prove that proper supervision was in place: “the burden falls to a firm to implement effective procedures, staffing, and to provide sufficient resources and a system of follow-up and review to determine that any responsibility to supervise is being diligently exercised.” Dept. of Enforcement v. Magellan Securities, Inc. and Terry M. Laymon, NASD Disciplinary Proceeding No. C3B010016 (December 30, 2002).
These supervisory rules are necessary and intended for investor protection. When a Ponzi scheme is uncovered, victims are often in shock and do not know where to turn. They may contact the former firm and hear sympathy, but firms rarely own up and reimburse victims. Last month, for instance, Malecki Law filed a $2.5 million suit on behalf of investors who were victimized by alleged Ponzi schemer Philip Incorvia, naming not Mr. Incorvia or his estate, but rather the brokerage firm, Henley & Company LLC, which employed Mr. Incorvia and allegedly failed to properly supervise his activity in the Ponzi investment product, Jefferson Resources Inc., which was openly marketed and sold out of a Henley branch office. Like with Mr. Seijas and Q3I, the investors’ complaint against Henley reveals that that Mr. Incorvia’s dealings with Jefferson were not disclosed to FINRA on Mr. Incorvia’s BrokerCheck Report, yet the firm, Henley, allegedly knew about Mr. Incorvia’s dealings in Jefferson Resources – even reporting the relationship in an advisory filing to the SEC – but still failed to investigate or properly inquire into his related activities. Meanwhile, Henley appears to be steering inquiring victims calling into the firm away from the notion that Henley had any supervisory responsibility, instead, allegedly giving victims false hope that their money will be recovered from the estate of the late Ponzi-schemer. It further appears that the firm, through recent correspondence sent to its customers, is trying to trap affected investors into making false statements about their knowledge of how their funds were managed at Henley.
Given the above, Ponzi scheme victims should know that there are legal remedies to recovering their lost investment dollars from financial firms with supervisory obligations. For over twenty years, Malecki Law’s New York securities attorneys have successfully recovered millions of dollars in Ponzi cases where the investor sued the firm, not the schemer who may be either insolvent, in prison, or, deceased (as is the case with Mr. Incorvia). In 2021, Malecki Law recovered millions of dollars for Latin American investors victimized in a $155 million scheme by Biscayne Capital and its recently indicted corporate officers. In 2018, the firm similarly recovered over $4 million for investors victimized in the Hector May Ponzi scheme. Prior to that, Malecki Law also represented over 120 victims from the Bronx, New York, recovering over $7.4 million in losses from the Robert Van Zandt Ponzi scheme. If you are an investor with Henley & Company or Wells Fargo, and believe you lost money in the fraudulent schemes carried out either by Mr. Incorvia or Mr. Seijas, call us for a free consultation.