Securities Industry Commentator by Bill Singer Esq

May 14, 2019
Van-Seyla Mork pled guilty in the United States District Court for the Northern District of California to one count of wire fraud and one count of money laundering in connection with his role in a refund fraud scheme against Apple, Inc. As set forth in part in the DOJ Release:

[M]ork admitted that he initiated fraudulent complaints to Apple's customer service department, each complaint alleging, on behalf of Apple customers, that a purchased Apple product had not been mailed to an Apple customer as it should have been, but that instead only an empty Apple box had been mailed to the Apple customer's mailing address.  Mork further admitted that at the time he submitted these complaints, he knew these assertions were false and that Apple had, in fact, mailed the purchased products to the individual purchasers.  Through this fraudulent scheme, Mork admitted that he caused Apple to issue $1,000,000 in refunds for undelivered Apple products that had, in fact, been delivered.  Moreover, Mork admitted that he transferred the proceeds of this fraudulent scheme through various bank accounts with the intent of concealing the nature and location of these wire-fraud proceeds.  

Apple, Inc., Petitioner, v. Robert Pepper, et al.(Opinion, United States Supreme Court, No. 17-204, 587 U.S. ___ (2019)
In an Opinion by Kavanaugh, J. in which Ginsburg, Bryere, Sotomayor, and Kagan joined; and Gorsuch, J. joined in dissent by Roberts, C.J., Thomas, and Alito, the Supreme Court affirmed the United States Court of Appeals for the Ninth Circuit. As set forth in the "Syllabus":

Apple Inc. sells iPhone applications, or apps, directly to iPhone owners through its App Store -- he only place where iPhone owners may lawfully buy apps. Most of those apps are created by independent developers under contracts with Apple. Apple charges the developers a $99 annual membership fee, allows them to set the retail price of the apps, and charges a 30% commission on every app sale. Respondents, four iPhone owners, sued Apple, alleging that the company has unlawfully monopolized the aftermarket for iPhone apps. Apple moved to dismiss, arguing that the iPhone owners could not sue because they were not direct purchasers from Apple under Illinois Brick Co. v. Illinois, 431 U. S. 720. The District Court agreed, but the Ninth Circuit reversed, concluding that the iPhone owners were direct purchasers because they purchased apps directly from Apple. 

Held: Under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization. Pp. 4-14. (a) This straightforward conclusion follows from the text of the antitrust laws and from this Court's precedent. Section 4 of the Clayton Act provides that "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue." 15 U. S. C. §15(a). That broad text readily covers consumers who purchase goods or services at higher-than-competitive prices from an allegedly monopolistic retailer. Applying §4, this Court has consistently stated that "the immediate buyers from the alleged antitrust violators" may maintain a suit against the antitrust violators, Kansas v. UtiliCorp United Inc., 497 U. S. 199, 207, but has ruled that indirect purchasers who are two or more steps removed from the violator in a distribution chain may not sue. Unlike the consumer in Illinois Brick, the iPhone owners here are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain. The absence of an intermediary in the distribution chain between Apple and the consumer is dispositive. Pp. 4-7.

(b) Apple argues that Illinois Brick allows consumers to sue only the party who sets the retail price, whether or not the party sells the good or service directly to the complaining party. But that theory suffers from three main problems. First, it contradicts statutory text and precedent by requiring the Court to rewrite the rationale of Illinois Brick and to gut its longstanding bright-line rule. Any ambiguity in Illinois Brick should be resolved in the direction of the statutory text, which states that "any person" injured by an antitrust violation may sue to recover damages. Second, Apple's theory is not persuasive economically or legally. It would draw an arbitrary and unprincipled line among retailers based on their financial arrangements with their manufacturers or suppliers. And it would permit a consumer to sue a monopolistic retailer when the retailer set the retail price by marking up the price it had paid the manufacturer or supplier for the good or service but not when the manufacturer or supplier set the retail price and the retailer took a commission on each sale. Third, Apple's theory would provide a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so as to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement. Pp. 7-11. 

(c) Contrary to Apple's argument, the three Illinois Brick rationales for adopting the direct-purchaser rule cut strongly in respondents' favor. First, Apple posits that allowing only the upstream app developers-and not the downstream consumers-to sue Apple would mean more effective antitrust enforcement. But that makes little sense, and it would directly contradict the longstanding goal of effective private enforcement and consumer protection in antitrust cases. Second, Apple warns that calculating the damages in successful consumer antitrust suits against monopolistic retailers might be complicated. But Illinois Brick is not a get-out-of-court-free card for monopolistic retailers to play any time that a damages calculation might be complicated. Third, Apple claims that allowing consumers to sue will result in "conflicting claims to a common fund-the amount of the alleged overcharge." Illinois Brick, 431 U. S., at 737. But this is not a case where multiple parties at different levels of a distribution chain are trying to recover the same passed-through overcharge initially levied by the manufacturer at the top of the chain, cf. id., at 726-727. Pp. 11-14. 

846 F. 3d 313, affirmed.

As set forth in part in the Dissent:

More than 40 years ago, in Illinois Brick Co. v. Illinois, 431 U. S. 720 (1977), this Court held that an antitrust plaintiff can't sue a defendant for overcharging someone else who might (or might not) have passed on all (or some) of the overcharge to him. Illinois Brick held that these convoluted "pass on" theories of damages violate traditional principles of proximate causation and that the right plaintiff to bring suit is the one on whom the overcharge immediately and surely fell. Yet today the Court lets a pass-on case proceed. It does so by recasting Illinois Brick as a rule forbidding only suits where the plaintiff does not contract directly with the defendant. This replaces a rule of proximate cause and economic reality with an easily manipulated and formalistic rule of contractual privity. That's not how antitrust law is supposed to work, and it's an uncharitable way of treating a precedent which- whatever its flaws-is far more sensible than the rule the Court installs in its place.
In a recent regulatory settlement, FINRA barred a former registered representative, who had become a nonregistered, associated person. Yeah, a nonregistered, associated person. And that nonregistered, associated person respondent somehow managed to get involved with the solicitation and execution of 866 securities transactions involving 15 different non-traditional ETFs with at least 47 customers. 

San Fernando Valley Con Man Pleads Guilty in Multi-Million Dollar Real Estate Fraud Scheme that Targeted Vulnerable Homeowners (DOJ Release)
Michael "Mickey" Henschel pled guilty to mail fraud in the United States District Court for the Central District of California. Henschel and co-conspirators Camerino "Mino" Islas, Claudia "Jessica" Islas, Juan Carlos Velasquez, Eugene "Gene" Fulmer, Shara Surabi, and Lidia Alvarez pled guilty to a scheme that used fraudulent deeds to generate over $17 million in profits and caused homeowners (many of whom were elderly) to suffer approximately $10 million in losses when they lost title to their homes. and when they were defrauded into giving Henschel and his co-conspirators money as part of the scam. Henschel's fraudulent conduct also caused losses to mortgage lenders and purchasers of foreclosed properties. Pursuant to his plea, Henschel agreed to forfeit money and property that represent proceeds of the fraudulent scheme, including more than $100,000 in cash seized from a bank account and various residential properties in the San Fernando Valley, Glendale and Pasadena. As set forth in part in the DOJ Release:

In relation to the first aspect of the scheme, Henschel and his co-conspirators identified distressed homeowners who were in default on mortgages or were experiencing financial troubles, even though some had large amounts of equity in their properties. These homeowners were falsely told that Henschel was a sophisticated real estate investor and attorney who would purchase their properties on fair market terms, or he could help protect the homes from creditors. Henschel and the others promised distressed homeowners that they could refinance mortgages or restructure real estate holdings to insulate the properties from creditors, and that Henschel and other co-conspirators could manage the properties on an ongoing basis. 

Henschel and the others convinced homeowners to sign fraudulent documents that were recorded on the titles to their homes. In some cases, these fraudulent filings were used to steal properties outright. In other cases, the conspirators exploited the fraudulent filings by initiating foreclosure proceedings and demanding money from homeowners before the properties could be sold. Henschel and his co-conspirators also leveraged the high cost of bringing and defending civil actions to extort settlement payments from homeowners, relying on the fact that it would often be less expensive for homeowners to pay money than to fight them in court.

In the foreclosure rescue part of the scheme, Henschel and his co-conspirators used fraudulent filings to charge homeowners fees to delay foreclosure and eviction actions. Henschel and the others had homeowners sign fraudulent deeds that transferred interests to debtors in bankruptcy cases - but the bankruptcies were fraudulent and used solely as part of the fraudulent scheme, not as part of any genuine effort to restructure or eliminate debts. Many of the fraudulent bankruptcies were filed in the names of fictional people and entities, and some involved stolen identities. Henschel and his co-conspirators sent fake deeds and fraudulent bankruptcy petitions to trustees to stop foreclosure sales, and they delayed evictions in a similar way, mainly by sending bogus documents to various county sheriff's offices. 

FINRA Member Firm Sanctioned for Conditioning Customer Settlements on Expungements. In the Matter of Oriental Financial Services Corp, Respondent (FINRA AWC 2018059633801)
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Oriental Financial Services Corp submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Oriental Financial Services Corp has been a FINRA member firm since 1993, and does business from 7 branch offices via 39 registered representative. The AWC asserts that "Oriental does not have any relevant formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization, or any state securities regulator." In accordance with the terms of the AWC, FINRA deemed that Oriental Financial Services Corp had engaged in conduct that violated FINRA Rules 2081: Prohibited Conditions Relating to Expungement of Customer Dispute and 2010, and imposed upon the firm a Censure and $20,000 fine. As set forth in part in the AWC:

Since FINRA Rule 2081 became effective, Oriental has entered into approximately 85 settlement agreements with customers. 83 of the approximately 85 settlement agreements did not contain language conditioning settlement on expungement. However, two of the settlement agreements, prepared in August and September 2015, respectively, required as a term and condition of the settlements that the customers consent to Oriental's and the relevant registered representatives' requests for expungement of the customers' claims from the CRD System. Those agreements were prepared by the Firm's outside counsel, reviewed by in-house counsel for the Firm's parent company and by the Firm's compliance department, and ultimately were signed by the Firm. Yet, through inadvertence, the Firm failed to detect the violative language in the two agreements.