Securities Law


Decided: July 10, 2014

The Fourth Circuit affirmed the district court’s judgment as a matter of law in favor of Prosperity Mortgage, and found that Prosperity Mortgage did not violate the Maryland Finder’s Fee Act.

Appellants, Petry, borrowed money from Prosperity Mortgage, the Appellee, to purchase a house, and contended that the fees that Prosperity Mortgage charged at closing violated the Maryland Finder’s Fee Act because of the way Prosperity Mortgage operated in relation to Long & Foster Real Estate, Inc., and Wells Fargo Bank, N.A., each of which indirectly owned one-half of Prosperity Mortgage. When Appellants purchased their house, their Long & Foster real estate agent introduced them to a Prosperity Mortgage loan officer, who in turn arranged a mortgage loan that enabled them to purchase their house without a down payment. To fund the loan, Prosperity Mortgage drew on a line of credit with Wells Fargo. At closing, the Appellants paid Prosperity Mortgage the typical lending fees, and after closing, Prosperity Mortgage sold the loan to Wells Fargo.

After discovery was completed, the district court advised the parties that the fees Prosperity Mortgage charged were not “finder’s fees” within the meaning of the Maryland Finder’s Fee Act, unless the fees had been inflated so that the overcharge could be considered a disguised finder’s fee. When the Appellants acknowledged their lack of proof to meet this burden, the district court entered judgment as a matter of law in favor of the Prosperity Mortgage.

The Fourth Circuit reasoned that because Prosperity Mortgage was identified as the lender in the documents executed at closing, it was not a “mortgage broker” as the Maryland Finder’s Fee Act defines that term, and therefore was not subject to the Act’s provisions.

Full Opinion

Grace D. Faulkenberry


Decided: July 10, 2014

The Fourth Circuit held that the Defendant, Nutter, was not a “mortgage broker” under Maryland Finder’s Fee Act, Md. Code Ann. § 12-804(e), and so he could not be liable for conspiring to charge an illegal finder’s fee in a mortgage transaction.

In 2008, Marshall entered into a reverse mortgage agreement with Savings First Mortgage, LLC (Savings First). Under a prior agreement, Nutter table funded the loan between Marshall and Savings First—meaning he provided to Savings First the actual funds that it loaned to Marshall, and Savings First’s agreed to assign the note to Nutter at closing. The note between Marshall and Savings First included a prohibited “loan origination fee” and “correspondent fee.” Based on those two fees, Marshall brought a class action lawsuit against Nutter for conspiring to charge a finder’s fee on a mortgage transaction in violation of the Maryland Finder’s Fee Act.

The Court reasoned that Nutter was not liable for conspiring to violate the Maryland Finder’s Fee Act because, according to the Maryland common law of conspiracy, he was not “legally capable” of violating the Act. Nutter was not legally capable of violating the Act because the Act was silent about liability for conspiring to charge a finder’s fee. The Act only imposed liability on “a mortgage broker,” and Nutter was not a mortgage broker.

Full Opinion

James Bull Sterling


Decided: May 7, 2014

The Fourth Circuit held that a change in law to an implied private cause of action under 17 C.F.R. § 240.10b-5 (“Rule 10b-5”) was inapplicable in the context of a criminal cause of action under Rule 10b-5.

Thomas Prousalis was a securities lawyer who failed to accurately disclose his retainer agreement to the Securities and Exchange Commission (SEC) while he represented a company, Busybox, in the process of filing its initial public offering (IPO).  Prousalis admitted that he knew his acts were deceitful, violated the law, and that if he had accurately disclosed his retainer agreement to the SEC Busybox would not have been eligible to be listed on the NASDAQ.  Based on his non-disclosures, Prousalis pled guilty to multiple counts of fraud, but subsequently appealed the Rule 10b-5 criminal charges.  He was denied collateral relief under 28 U.S.C. § 2255(e), and then habeas relief under 28 U.S.C. § 2241.  On appeal, Prousalis seeks § 2241 relief on the basis that the U.S. Supreme Court “changed the substantive law such that the conduct of which” he was convicted was no longer criminal “subsequent to his direct appeal and § 2255(e) motion.”  According to Prousalis, the U.S. Supreme Court case Janus Capital Group v. First Derivative Traders changed the law so that he no longer qualified as a “maker” of false statements.  If Prousalis did not make any false statements, then he could not be guilty of directly violating Rule 10b-5.

The Court denied Prousalis’s § 2241 appeal because Janus only applied to an implied private cause of action brought under Rule 10b-5, and did not affect a criminal conviction under Rule 10b-5.  Therefore, the definition of a “maker” in Janus did not apply to Prousalis.  The Court reasoned that “context” was very important to the Janus decision.  Janus had to be construed narrowly because it dealt with a judicially created private cause of action under Rule 10b-5.  Further, the U.S. Supreme Court did not hold that their decision applied outside of the civil context.  Therefore, “judicial restraint and legislative primacy” supported a narrow reading of Janus.  On the other hand, Prousalis’s criminal charges under Rule 10b-5 did not trigger the same policies of judicial restraint and legislative primacy because Congress clearly acknowledged the judiciary’s power to sanction those who violate Rule 10b-5 with criminal penalties.  Prousalis’s actions clearly fell within the spectrum of conduct that Congress sought to prevent when it passed Rule 10b-5, and so the Court denied his appeal.

Full Opinion

James Bull Sterling

United States v. Simmons, No. 12-4469

Decided: December 11, 2013

The Fourth Circuit affirmed Keith Simmons’s (Simmons) convictions for securities fraud and wire fraud, but reversed his conviction for two counts of money laundering because the transactions underlying these latter convictions constituted essential expenses of Simmons’s fraudulent endeavor.  The Fourth Circuit therefore affirmed the decision of the United States District Court for Western District of North Carolina in part, reversed the decision in part, vacated Simmons’s sentence, and remanded the case.

Simmons operated a Ponzi scheme called Black Diamond Capital Solutions (Black Diamond) from April 2007 to December 2009.  He promised investors that, inter alia, he would invest their money in a foreign currency exchange, and that the investors could withdraw their investments at will after an initial ninety-day period.  Because numerous investors received returns from Black Diamond when they withdrew money after the ninety-day period, they sent Simmons even more money.  In reality, however, Simmons simply used deposits from subsequent investors to pay “returns” to earlier ones; furthermore, instead of investing in a foreign currency exchange, he used investments for his own purposes.  Simmons’s Ponzi scheme eventually unraveled.  The FBI raided his offices in December 2009, and Simmons confessed to the fraud.  A jury subsequently convicted Simmons on one count of securities fraud, one count of wire fraud, and two counts of money laundering; both of the money laundering convictions arose from payments Simmons made to Black Diamond investors.  Simmons challenged his convictions for money laundering on appeal, arguing that his payments to the investors did not involve the “proceeds” of fraud under 18 U.S.C. § 1956(a)(1)(A)(i).  He relied on United States v. Santos, 553 U.S. 507, in which a Supreme Court plurality held that the term proceeds only covers the profits of criminal endeavors—thus excluding the essential “crime-related expenses” of the underlying crime from the scope of the money laundering statute.

The Fourth Circuit noted that, though Congress effectively overruled Santos by amending the money laundering statute and defining proceeds to include “gross receipts,” 18 U.S.C. § 1956(c)(9), Congress’s amendment “was not enacted at the time of the conduct giving rise to Simmons’s money-laundering convictions”; thus, the court was bound by the Santos framework rather than Congress’s expanded definition.  Applying Santos, the Fourth Circuit found that Simmons’s payments to Black Diamond investors were essential to the operation of his fraudulent scheme.  The court noted that the victims who received the payments underlying Simmons’s money laundering charges “testified to the critical importance of those payments in fostering the (misplaced) confidence necessary to perpetuate fraud”; that Simmons’s scheme unraveled after he ceased making payments to investors; that the Government treated the payments as essential to the fraud throughout its prosecution; that payments to early investors “are understood to constitute essential features of Ponzi schemes”; that the Ninth Circuit reached the same conclusion in a similar case, United States v. Van Alstyne, 584 F.3d 803; and that, during the Congressional deliberations surrounding the congressional amendment of the money laundering statute, a Senate Report noted that payments from Ponzi schemes did not constitute money laundering under existing statute.

Full Opinion

– Stephen Sutherland

United States v. Abdulwahab, No. 11-5093

Decided: April 29, 2013

Adley H. Abdulwahab appealed his conviction and sentence for several crimes related to a fraudulent investment scheme. The Fourth Circuit reversed Abdulwahab’s conviction for money laundering, but affirmed the conviction on all other counts.

Abdulwahab’s conviction stemmed from a fraudulent investment scheme where Abdulwahab and two co-conspirators sold interests in life insurance polices through their company A&O. Abdulwahab joined A&O in 2005 as the main salesperson for the fraudulent securities, and with his co-conspirators, misrepresented numerous critical facts about the company and misappropriated in excess of one-hundred million dollars, personally receiving in excess of eight million dollars. In addition, Abdulwahab misrepresented several important facts about his past on documents relating to the sale of securities, including falsely stating that he held an economics degree from Louisiana State University and failing to disclose a 2004 guilty plea for the felony forgery of a commercial instrument. In late 2006, state regulators began to investigate A&O under suspicion that it was selling unregistered securities. To shield the company from investigation, A&O undertook a sham sale to a company partially owned by Abdulwahab. In 2010, Abdulwahab was convicted of: (1) money laundering, (2) conspiracy to commit money laundering, (3) mail fraud, (4) conspiracy to commit mail fraud, and (5) securities fraud. The court sentenced Abdulwahab to 720 months imprisonment. Abdulwahab appealed all convictions and the length of the sentence.

On appeal, Abdulwahab first argued that the district court erred in denying his motion for acquittal relating to the money laundering conviction. The Fourth Circuit agreed, finding that certain counts of money laundering were barred by the “merger problem” identified by the Supreme Court in United States v. Santos. A conviction for money laundering may be based only on the “proceeds” of the illegal activity, which the Fourth Circuit defined as the “net profits” of the fraudulent scheme. Thus, certain expenses and payments made to carry out the fraud, while serving as evidence of the fraud, do not constitute money laundering because they are not “net profits.” In particular, the Fourth Circuit held that district court erred in determining that commission payments to sales agents were “proceeds,” finding instead that they were part of the “essential expenses” of the illegal activity. Since the Fourth Circuit reversed the money laundering conviction, and the error was not harmless, the court remanded Abdulwahab’s case for resentencing.

Second, Abdulwahab argued that his conviction for conspiracy to commit money laundering also suffers from the same “merger problem” as the substantive money laundering conviction. The Fourth Circuit, reviewing for plain error, rejected his argument. The court found that Abdulwahab’s sham sale of A&O provided sufficient evidence for a rational jury to conclude that the transactions were intended to promote the continuation of the fraudulent investment scheme. Furthermore, there was no “merger problem” because the payments Abdulwahab received from the sham sale were not included in the “essential expenses” of the scheme, but rather were part of the general plan of deception to defraud investors.

Third, Abdulwahab argued that the district court erred in denying his motion for acquittal regarding the convictions for mail fraud, conspiracy to commit mail fraud, and securities fraud because the evidence was insufficient for a jury to conclude that he knew of and intended to participate in a scheme to defraud. The Fourth circuit disagreed, citing the numerous misrepresentations Abdulwahab made to investors personally. In addition, Abdulwahab’s extensive participation in the sham sale provided evidence that was “well beyond what was necessary to support his convictions.”

Finally, Abdulwahab argued that the district court erred in holding him responsible at sentencing for losses of funds that were invested with A&O before he became an equity partner. The Fourth Circuit disagreed, finding that the Abdulwahab became a part of the conspiracy when he joined the company as a salesperson and agreed to make false representations to induce investors to invest their money with A&O. The court emphasized that as a salesperson, Abdulwahab knew that investor funds were being procured by fraud and in concert with his co-conspirators to continue the scheme.

Full Opinion

– Wesley B. Lambert

Waterford Investment Services, Inc. v. Bosco, No. 11-2103

Decided: June 21, 2012

In this declaratory judgment action, the Fourth Circuit held that a securities brokerage firm was subject to arbitrate the claims of certain investors who alleged that their financial advisor, a person indirectly under the control of the firm, had committed misrepresentations and failed to perform “due diligence” in connection with several securities investments.

This litigation arose when members of the Bosco family (collectively “Investors”) filed arbitration claims against their financial advisor George Gilbert, Gilbert’s former investment firm Community Bankers Securities, LLC (“CBS”), and Gilbert’s current firm Waterford Investment Services, Inc (“Waterford”).  The claims were filed with the Financial Industry Regulatory Authority (“FINRA”), of which both CBS and Waterford were registered as members.  Waterford instituted the instant action by seeking a declaratory judgment in the U.S. District Court for the Eastern District of Virginia that it was not obligated to arbitrate the Investors’ FINRA claims and an injunction to prevent the arbitration proceedings from commencing.  The district court, adopting a magistrate’s report in full, concluded that Waterford must arbitrate the Investors’ claims because, pursuant to FINRA rules, Gilbert was an “associated person” of Waterford.

On appeal, the Fourth Circuit reviewed the district court’s ruling de novo.  The court first pointed out that under the FINRA Code of Arbitration Procedure for Customer Disputes, an investment customer can compel arbitration of a dispute with a FINRA member if the dispute “arises in connection with the business activities of the member or the associated person.”  According to the court, there was no question that the Investors were the customers of Gilbert; however, the dispositive issue was whether Gilbert was an “associated person” of Waterford during the period when the alleged improper advice was given.  At that time, Gilbert was employed by CBS—not Waterford—but both companies were owned by the same majority shareholder and were operated by a group of overlapping officers, directors, and employees.  In addition, the two companies shared office space and resources, and when CBS ceased its operations in 2009, many CBS representatives, including Gilbert, were transferred to Waterford.

After providing this background information, the court framed the issue as a novel one:  “[w]hether a person who is not in a contractual relationship with a member firm nevertheless can be an ‘associated person’ of that firm for purposes of FINRA arbitration.”  The court determined that the “associated person” definition did not require the exercise of actual control by the member firm over the person, but rather, all that was necessary was the firm’s “potential power to influence the person.”  Because of the extensive overlap in key personnel and office resources between CBS and Waterford, the court found that Waterford had the requisite power to control Gilbert’s business activities, thus making Gilbert a person associated with Waterford.  Therefore, the court rejected Waterford’s action for declaratory and injunctive relief, holding that Waterford was compelled to arbitrate the Investors’ claims.

Full Opinion

-John C. Bruton, III