Securities Industry Commentator by Bill Singer, Esq.

November 3, 2017

CFTC Orders Morgan Stanley and Co. Incorporated to Pay $350,000 Penalty for Omitting Futures and Options Data from Part 17 Large Trader Reports (CFTC Press Release, pr7638-17)  The Commodity Futures Trading Commission ("CFTC") issued an Order filing and simultaneously settling charges against  registered Futures Commission Merchant Morgan Stanley. 

The Order alleges that from 2007 through 2017, Morgan Stanley omitted mandatory futures and options data from its Part 17 Large Trader reports pertaining to the Designated Contract Markets (1) the Chicago Mercantile Exchange from at least January 2009 to September 2015; and (2) the Minneapolis Grain Exchange from 2007 to 2015. CFTC found that the omissions were the result of four distinct problems with Morgan Stanley's proprietary reporting software that omitted reportable data. 

The Order asserts that in 2016, after the first two software issues had been corrected, Morgan Stanley identified, and corrected, a third software glitch; and, thereafter, in 2017, the firm discovered and self-reported to the CFTC a further problem involving incorrect coding of active client accounts. That coding error prevented certain positions held in the cited client accounts to not be correctly aggregated and, thus, not properly reported.

CFTC asserts that in addition to the firm's prompt in-house remediation, Morgan Stanley also provided substantial cooperation to its Staff during the investigation, including proactively providing substantial and detailed information regarding the scope and duration of the deficiencies. The civil monetary penalty imposed was significantly reduced on account of this cooperation.

The CFTC Order requires Morgan Stanley to pay a $350,000 civil monetary penalty, cease and desist from further violations of the Commodity Exchange Act and applicable Regulations, and comply with certain undertakings, including continuing cooperation with the CFTC's Division of Enforcement in any investigation, civil litigation, or administrative matter related to the subject matter of this action.READ the Full Text CFTC ORDER

Manipulative Short Selling in the Biopharmaceutical Industry: Petition for Rulemaking to Require Disclosure of Short Positions (Petition submitted via Letter to SEC from Parker H. Petit, Chairman/Chief Executive Officer of MiMedx Group, Inc.)

The Securities and Exchange Commission received an intriguing 11-page Petition from a biopharmaceutical company that asserts, in part, the following motivation:

Given the current dearth of reporting and disclosure of short positions, the resulting information vacuum is manipulated by persons seeking to peddle inaccurate data and unfounded rumors (often unverifiable) in order to maximize their own financial gain at the expense of the investing public. Companies are often left defenseless in the face of well orchestrated media "distort" attacks. These practices are particularly damaging for biotech and life science companies - the favored prey of so-called "wolfpacks" engaging in "short and distort" schemes. These schemes often prove devastating to the company and its investors, and worse, deprive our society of potential advances in lifesaving technologies, resulting in costlier or fewer products and services for patients and consumers.

The Petition seeks the following SEC action:

For the above reasons, we petition the Commission to promulgate rulemaking pursuant to its authority under Sections 10 and 13(f) of the Exchange Act to set up a pilot program to require the periodic public disclosure of short-sale positions in securities of biopharmaceutical companies by investment advisers.

In our view, the appropriate disclosure of short positions would:

  • Require the periodic reporting by investment advisers ofthe name of biopharmaceutical company and the title, class, CUSIP number, aggregate amount of the number ofshort sales of each NMS security, 34 and any additional information dete1mined by the Commission; 
  • Require public disclosure of the reported information, including the investment adviser's identity and the short-sale transaction and position information for of each NMS security of a biopharmaceutical company, on no more than a two-week delayed basis; and 
  • Address the disparity between long-position and short-position reporting requirements.

Former Chief Financial Officer Of Osiris Therapeutics, Inc., Pleads Guilty To Lying To Auditors (Department of Justice Press Release)

Philip Jacoby, former chief financial officer of the publicly-traded Osiris Therapeutics, Inc. ("Osiris"), a developer and producer of regenerative medicine products, was charged by criminal information (the "Information") and pled guilty today to one count of making fraudulent statements to Osiris's auditors, which carries a maximum sentence of 20 years in prison and a maximum fine of $5 million. READ the Full Text Information

Houston Adviser Who Preyed on Elderly Clients Sentenced to 5 Years (Texas State Securities Board Press Release

After previously pleading guilty to federal mail fraud charges involving an estimated $1.9 million fraud, investment adviser Lawrence Allen DeShetler, was 
sentenced to 60 months in prison and ordered him to pay $948,058 in restitution. Defrauded investors have received back about $857,000 from DeShetler's previously seized assets. 

As is too often the tale told, the defrauded investors had a history of mainstream investments and were beguiled by DeShetler's pitch that he could make more money via his discretion of their funds. As set forth in the TSSB's Press Release:

DeShetler convinced an 83-year-old client to liquidate an existing trust account and transfer $187,699 to himself. The woman's husband had died in 2015, and in May 2016 she allowed DeShetler to stay at her home while she visited her son.

When she returned six weeks later, all her investment documents were missing. DeShetler was gone as well.

Another client, aged 64, cashed out her individual retirement account (IRA) and sent DeShetler a check for $726,985. DeShetler told her he would deposit it in a new IRA.

Instead, he deposited the full amount into a bank account over which he had sole authority. DeShetler did the same thing with money he received from four other clients.

DeShetler spent some of that money on run-of-the-mill expenses like restaurant and bar tabs, country club fees, clothes, and pool cleaning services.

He also had grander plans for his clients' money, using funds to make a down payment to begin construction on a house in Nicaragua, where he spent part of 2016.

DeShetler never saw his house completed, however. He returned to Texas in mid-2016 after local law enforcement authorities seized his bank accounts.