On September 8, 2011, the Securities and Exchange Commission ("SEC") filed a Complaint in the matter of SEC v. Richard A. Finger, Jr. and Black Diamond Securities LLC (WD Washington, 11-cv-0147, September 8, 2011).
NOTE: The allegations contained in the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty in a court of law.
Black Diamond Securities LLC is a registered broker-dealer. Starting in February 2011, Black Diamond opened approximately 40 accounts for 25 customers (with initiating deposits of about $4.9 million), many of these customers were relatives and friends of CEO Richard A. Finger, Jr. These customers had previously maintained accounts with Finger at brokerage firms where he had been previously registered. It was anticipated that Finger would manage these accounts.
Richard A. Finger, Jr., age 32, Bellevue, Washington, has been the CEO and majority owner of Black Diamond since February 2011. Finger was a registered representative with several broker-dealers from 2001 to 2010.
The SEC Complaint alleges that from February through August 2011, the subject customer accounts had granted Finger trading authority (which he fully exercised) and, as a result, approximately $1.9 million in losses were sustained from Finger's trading in securities - often rapid trading of index options. During the same period, the accounts paid roughly $2.1 million in commissions to Black Diamond. The Complaint claims that of the nearly $5 million in initial account funding, only about $500,000 remains.
In furtherance of the alleged scheme, Finger and Black Diamond are accused of concealing the trading losses and commissions from the customers through the use of doctored account statements, which generally depicted falsely higher account balances, lower commissions, and lower trading activity and losses.
The Complaint alleges that in 18 subject accounts, Black Diamond provided statements in May through July 2011, that falsely represented total cash balances of $7,083,660.74; whereas, the SEC calculated only $307,480.98.
The Complaint offers the illustration of an elderly relative of Finger, who purportedly instructed Finger to conservatively invest about $1,000,000 that he had deposited in his Black Diamond account beginning June 2011.
By the end of July, the Complaint alleges that Finger had entered about $19 million in purchases and over $18.7 million in sales of index options, resulting in $560,000 in commission charges - the referenced transactions were often multiple daily buys and sells for the same security, sometimes within minutes. For example, in June, Finger allegedly entered over 320 trades.
The July account statement (mailed to the customer on August 3, 2011) claimed a cash balance of $796,234.53, but, the SEC alleges that the actual balance was only $62.00. Finger purportedly admitted to his elderly relative in mid-August that he had created false account statements with inflated balances.
In addition to allegedly misleading his customers, Finger is also accused of attempting to hide his conduct from Black Diamond's clearing broker, which, around April and June 2011, asked Black Diamond to document its customers' awareness and approval of trading that generated significant trading losses coupled with high commissions. In response, Finger provided to the clearing firm letters with forged customer signatures.
The Complaint charges that of the $2.1 million in commissions generated since February 2011 by Black Diamond, about $1.1 million was transferred to Finger's own customer account, with about $870,000 subsequently transferred to his personal bank account. Purportedly, these commissions helped finance what the SEC describes as Finger's lavish lifestyle, which included a $2 million home and luxury automobiles.
The SEC has asked the Court for the following relief: