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Galvin Charges BD With Making Short-Term Trades to Boost Commissions: Enforcement

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Secretary of State William Galvin, Massachusetts’ top securities regulator, charged a California-based broker-dealer and its agent with engaging in improper trading practices to the detriment of investors.

Peter Cunningham of Los Angeles is alleged to have recommended his customers — 30% of whom were Massachusetts investors — to buy and then sell Unit Investment Trusts before their maturity date, resulting in losses for investors and increasing commissions for Cunningham and his employer, StockCross Financial Services, Inc.

“The facts of this case are a textbook example of how financial conflicts pervert the investor’s right to unbiased advice. This is why it is so important that the SEC adopt a true fiduciary standard and put aside its current ineffective rule proposal,” Galvin said in a statement.

Cunningham and StockCross reaped at least $750,000 in commissions from short-term UIT trades made from Massachusetts residents’ accounts alone. StockCross is also charged with failure to reasonably supervise its agent.

Unknown to his customers, Cunningham was deeply in debt, having had his wages garnished by court orders, and being served with at least two foreclosure notices on his home.

The complaint states that in at least one case, Cunningham convinced an investor to buy units in a UIT by making fraudulent representations regarding the value of securities in the investor’s account. In particular, according to the complaint, Cunningham disregarded the stated financial needs of an 81-year-old widow while providing misinformation to entice her to purchase units in a UIT.

According to the complaint, StockCross hired Cunningham in 2002, despite the fact that he had been terminated by his previous employer as a result of multiple customer complaints and owed more than $100,000 in two civil lawsuits. StockCross did not place Cunningham on heightened supervision until 15 years after he was hired, and even during the period of heightened supervision, StockCross failed to reasonably supervise Cunningham’s short-term UIT trading, the complaint states.

Cunningham currently has 13 disclosures on his BrokerCheck record, starting in 2000 and going up to this recent charge from the Massachusetts Securities Division.

The complaint seeks an order to cease and desist, censure, restitution to fairly compensate investors, an administrative fine, revocation for Cunningham, and a requirement that StockCross hire an independent compliance consultant to review its supervisory procedures.

Pyramid Scheme Targeted Latinos

A promoter of a pyramid scheme targeting Latino communities agreed to transfer assets valued at more than $1 million in a related bankruptcy proceeding and admit his role in the scheme to settle charges brought by the Securities and Exchange Commission against him and nine other defendants.

The final judgment forbids Santiago De la Rosa from participating in a multi-level marketing scheme that solely or primarily derives its revenue from the recruitment of others.

The judgment also orders De la Rosa to pay $1,092,013 in disgorgement and prejudgment interest, but that is deemed satisfied by an order requiring De la Rosa to transfer certain assets valued at $992,013 and pay $100,000 to settle an adversary action in a related bankruptcy case.

In settling the SEC’s charges, De la Rosa admitted that he was a promoter of TelexFree, appearing at public events to recruit for TelexFree and in promotional videos that were posted on YouTube.

The SEC has previously obtained final judgments by consent against TelexFree’s co-owner and president and its CFOits international sales directora promoter of the pyramid scheme, and another promoter, who also was ordered to jail for civil contemptarising from his repeated violations of court orders.

SEC Charges 3 Unregistered Sales Agent for Improperly Soliciting Investments

The SEC charged three individuals in two separate enforcement actions for improperly soliciting investments in oil and gas ventures.

The SEC filed a civil injunctive action against Chad Anthony Lewis, a Kentucky resident, for unlawfully acting as an unregistered broker and selling unregistered investments in two oil and gas companies based in Texas.

The SEC’s complaint against Lewis alleges that Lewis illegally solicited and raised money from investors for Aegis Oil, LLC and 7S Oil & Gas, LLC.

The SEC also filed a civil injunctive action against two other sales agents – Alexander Charles White and Paul Douglas Vandivier – for also unlawfully acting as unregistered brokers and selling unregistered investments in Aegis Oil, LLC and 7S Oil & Gas, LLC.

Both of these companies offered and sold unregistered securities in the form of “joint venture units” in oil and gas development projects located in Texas.

According to the SEC, Lewis, who helped train a network of sales agents that unlawfully solicited investments for Aegis and 7S, directly solicited at least one investor, who purchased investments in both Aegis and 7S. Lewis was paid transaction-based compensation in the form of a sales commission of 2% on all investor proceeds raised through the offerings. He also received commissions ranging from 20% to 31% from the proceeds of the investments he sold to one investor. In total, Lewis received about $374,000 in commission payments from the Aegis offerings and $250,700 from the 7S offerings.

Without admitting or denying the SEC’s allegations, Lewis consented to the entry of a judgment, ordering him to pay disgorgement plus prejudgment interest and a civil penalty, in amounts to be determined by the court at a later date upon motion by the SEC.

Meanwhile, according to the SEC’s complaint against White and Vandivier, White managed a marketing team that solicited investors for Aegis and 7S. White and his sales team made cold calls to potential investors using investor contact lists. In return, White was paid transaction-based compensation in the form of a 35% sales commission for each investor his team brought on in the Aegis offering and a 28% to 35% commission for each investor in the 7S offering. In total, White received commission payments of about $6.84 million from the Aegis offerings and $229,000 from the 7S offerings. White paid out a portion of those proceeds to his sales team.

The SEC’s complaint also alleges that Vandivier managed a sales team that solicited investors for the offerings through his now defunct company, Aegis Marketing, Inc. Vandivier received commission totaling about $870,000 from the Aegis offerings, a portion of which he paid out to his sales team, and $23,000 from the 7S offerings.

The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against White and Vandivier.

Fixed Income Trader Tried to Avoid Brokerage Firm’s Inventory Limits

The SEC charged Salvadore Palermo, a trader formerly employed by J.P. Turner & Company, with entering fictitious sales of market-linked certificates of deposit (MLCDs) in order to avoid J.P. Turner’s inventory limitations for the fixed income products.

According to the complaint, Palermo paid above-market prices to acquire MLCDs from J.P. Turner brokerage customers, and then held the MLCDs in J.P. Turner’s inventory.

To avoid J.P. Turner’s inventory limitations, Palermo entered dozens of fictitious trades over a seven-month period, beginning in August 2014. Palermo entered the sham sales in order to give the impression that the MLCDs had been sold from J.P. Turner’s inventory , knowing the named counterparty never agreed to buy the MLCDs and that each trade would ultimately be cancelled.

As a result of these sham transactions, J.P. Turner kept inaccurate trade blotters, showed incorrect asset and revenue account balances, and filed inaccurate Financial and Operational Combined Uniform Single Reports for each month between August 2014 and February 2015.

The SEC’s complaint seeks a permanent injunction, civil penalties and other relief.

CFTC Charges Futures Broker With Fraud

The Commodity Futures Trading Commission issued an order filing and simultaneously settling charges against a commodities trader for engaging in a fraudulent trading scheme involving unauthorized trades in cattle, crude oil and wheat futures contracts.

Mayer was a commodities trader at a registered Commodity Trading Advisor and Introducing Broker

The CFTC order requires Christian Robert Mayer to pay a $100,000 civil monetary penalty and imposes permanent trading and registration bans on him. The order also requires Mayer to cease and desist from further violations of the Commodity Exchange Act, as charged.

According to the CFTC, Mayer, who was a commodities trader at a registered Commodity Trading Advisor and Introducing Broker, conducted unauthorized futures trading in customers’ accounts, and then transferred the profitable unauthorized trades from those accounts to his personal trading account while leaving losing trades in the customers’ accounts.

Mayer then logged on to the online portal of the Futures Commission Merchant which carried all the accounts, accessed the transfer section of the portal, and fraudulently indicated that the reason for the trade transfer request was that he had placed the trade in the wrong account.

When the broker Mayer worked for discovered these unauthorized trades and transfers, it promptly issued checks to the defrauded customers totaling $105,090 to reimburse them for Mayer’s fraudulent conduct.

These checks represented the amount of the losing trades that Mayer left in their trading accounts, plus the profitable trades that Mayer improperly transferred from the customers’ accounts to his personal trading account.  These amounts came from money paid by Mayer to the broker for purposes of reimbursing the defrauded customers.

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