This is an update of a "Street Sweeper" column that originally ran on September 9, 2011.
On September 8, 2011, the Securities and Exchange Commission ("SEC") filed aComplaint 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:
On September 8, 2011, Finger was charged with wire fraud involving 10 clients who lost about $7 million. Finger faced up to 20 years in prison. The SEC continues to pursue civil penalties.
On November 21, 2011, Finger pleaded guilty to the one count of wire fraud and admitted to defrauding at least ten clients of some $7 million. Finger transferred hundreds of thousands of dollars from the victimized brokerage accounts to his own personal checking account as large commissions to pay for his own credit card bills, food, and entertainment as well as business expenses such as payroll, fees, and taxes. As is typical in these cases, Finger was leading a lavish lifestyle-leasing a $71,000 Escalade and a $13,000 Ducati motorcycle with the purloined funds.
Prosecutors had agreed to recommend a sentence of 78 months in prison.
Finger's criminal fraud started when he was working for a Seattle brokerage firm and continued into 2011, at which time he was operating his own firm. One victim had placed nearly $700,000 with Finger for investments and from the fall of 2009 through 2010, Finger assured the client that the investments were growing steadily. In fact, the account had sustained significant losses. Once entrenched at his own brokerage firm, Finger covered up his crimes by providing this client with phony statements showing his account was worth more than $1.2 million, when, in fact, the balance had shrunk below $5,500. Adding insult to injury, no only did Finger rack up massive trading losses but he also charged large commissions to ten accounts.
In the situation of a second client who had invested $1 million with Finger in early June 2011, that account had dwindled by the end of July 2011 to less thatn $160,000 following losing trades and $400,000 in commission charges. This second client and nine others received emails from Finger that included attachments of false statements that appeared to be bona fide clearing firm.
SIDE BAR: FINRA online regulatory records as of April 13, 2012, disclose that prior to becoming registered in February 2011 at Black Diamond Securities, LLC., Finger was registered at First Washington Corporation from March 2008, and prior to that with Morgan Stanley & Co. from April 2007.
On April 13, 2012, Finger was sentenced in U.S. District Court in Seattle to 54 months in prison, three years of supervised release, and a restitution figure expected to exceed $7 million for wire fraud. In a particularly poignant moment, sentencing Judge Ricardo S. Martinez asked him, "You had to know the potential impact this would have on all the people who trusted you with their savings. What did you see when you looked in the mirror?"