For many years, no matter how badly you defrauded the investing public or lied to regulators, the worst thing that would likely happen to you was some dinky regulatory fine and an industry suspension. But today, you could just as easily wind up in jail.
Remember when, back in the late 1980s and early 1990s, boiler room operators socked away millions offshore, put as much as they could into palatial (judgment-proof) Florida homesteads, and were prepared to settle with regulators if they got caught? Whenever the SEC and self-regulating organizations shut down some of these shops, a half-dozen offspring took their place. And they thought they wouldn't get caught.
Suspensions? Who cared? They cruised around the Caribbean on their yachts, visited their ski chalets and lived comfortably on their estates. Those lower on the feeding chain put away more in a few years than they expected to earn in a lifetime, and moved on to other endeavors.
However, in recent years state and federal criminal prosecutors have gotten into the business of securities regulation, and the SEC and self-regulating organizations such as the NASDR, are thrilled to have the added firepower. If nothing else, the threat of a criminal prosecutor provides more leverage. And lying can get you time.
A judge recently sentenced Jeffrey S. Honigman, a producer and a part owner of Duke & Co., to three to nine years in prison on criminal charges after he tangled with the SEC over fraud charges and then failed to pay a $300,000 disgorgement. At first, Honigman agreed to an SEC bar from the industry and the fine. He also settled a criminal complaint by pleading guilty to one count of conspiracy to commit enterprise corruption and agreeing to cooperate in the prosecution of his former colleagues.
But when he didn't pay up in full, claiming financial hardship, the SEC was not amused. Neither was the judge at his sentencing hearing, who concluded that the defendant, by not settling up, showed a lack of remorse. Citing the “suspicious” nature of Honigman's excuse for not paying (he had transferred $750,000 into his parent's account and those assets subsequently were moved to an offshore account in the Channel Islands), the judge sent him to prison.
In a more recent case, Sidney Wade Sers was sentenced to 17 years in prison for obstruction of justice, contempt of court and money laundering related to an SEC “pump-and-dump” enforcement action. Sers was also convicted of concealing $800,000 in Cayman Island bank accounts, in violation of court orders stemming from the SEC action.
To many brokers, Honigman and Sers may not seem relevant. They are high-profile federal criminal prosecutions and SEC fraud cases. For the typical retail broker, the more likely result of misbehavior is being called before the NASDR or the NYSE for an on-the-record interview. Think you can talk your way out of trouble? Keep reading.
In the recent criminal prosecution, The People of the State of New York v. Adam Cohen et al., the New York Supreme Court sentenced one defendant to up to 54 months and two others up to six months of incarceration after they were convicted of perjury for lying (and for orchestrating several reps to lie) during NASD interviews.
The firm's problems began when one of the supervisors, Stanley Cohen, who had been barred from operating in that capacity in 1973, “ran out of the office through a back exit and drove off” during a surprise visit, according to court documents. During subsequent NASD on-the-record interviews, the defendants “lied and misled examiners about Stanley Cohen's true role,” according to the document. Additionally, one defendant threatened to fire a witness and “mark up his license so no good firm would take [him] if he did not go along with it,” according to court records.
To some, lying to the regulators is a rite of passage — the way the game is played. But, with investor confidence low following the dot-bomb fiasco, Enron mess CSFB IPO scandal and the Merrill affair, the regulatory environment has changed: You can no longer count on your charm to get you out of trouble.
Bill Singer is a partner in the broker/dealer practice group at Duane Morris LLP. [email protected]