Securities Industry Commentator by Bill Singer Esq

December 19, 2017

BREAKING NEWS: City of Providence et al., Plaintiffs/Appellants, v. BATS Global Markets, Inc., et al, Defendants/Appellees (Opinion, United States Court of Appeals For the Second Circuit, No. 15‐3057-CV; December 19, 2017.
For background, read: "SEC Amicus Brief Raises Uncomfortable Questions About SRO Immunity" ( Blog
December 1, 2016)

As set forth in the Syllabus to the 2Cir Opinion:

Before: WALKER, CABRANES, AND LOHIER, Circuit Judges.

We consider in this class action whether plaintiffs have sufficiently pled that several national securities exchanges engaged in manipulative or deceptive conduct in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b‐5, 17 C.F.R. § 240.10b‐5. The lead plaintiffs, institutional investors who traded on the defendant stock exchanges during the class period, allege that the exchanges misled  them about certain products and services that the exchanges sold to  high‐frequency trading firms, which purportedly created a two‐tiered system that favored those firms at the plaintiffs' expense.  We  conclude that we have subject matter jurisdiction over this case, the  defendant exchanges are not entitled to absolute immunity, and the district court erred in dismissing the complaint under Federal Rule of Civil Procedure 12(b)(6).  We therefore VACATE the district court's judgment entered in favor of the defendants‐appellees and REMAND for proceedings consistent with this opinion.  

Judge LOHIER concurs in the judgment and in the opinion of the Court and files a separate concurring opinion.

As set forth in the "Background" section of the Opinion:

The lead plaintiffs filed this class action for securities fraud against seven national securities exchanges (collectively, "the exchanges"), including BATS Global Markets, Inc., the Chicago Stock  Exchange Inc., the Nasdaq Stock Market, LLC, and the New York Stock Exchange LLC ("NYSE"). The exchanges are all registered with the SEC as self‐regulatory organizations ("SROs")-non‐ governmental entities that function both as regulators and regulated entities.  As regulated entities, they are subject to SEC oversight and must comply with the securities laws as well as the exchanges' own rules; and as regulators, they are delegated the authority by the SEC to oversee and discipline their member broker‐dealers.  See 15 U.S.C. 13 § 78c(a)(26); id. § 78f(b)(1); see also S. Rep. No. 94‐75 (1975), reprinted in 14 1975 U.S.C.C.A.N. 179, 1975 WL 12347, at *23. 

The complaint alleges that the defendant exchanges manipulated market activity in their capacities as regulated entities,  in violation of § 10(b) and Rule 10b‐5.  In particular, plaintiffs contend  that the exchanges developed products and services that give HFT  firms trading advantages over non‐HFT firms and the investing public, sold those products and services at prices that ordinary investors could not afford, and failed to publicly disclose the full or cumulative effects that the products and services have on the market.  

Consider this important finding and how it chips away at the immunity doctrine cited by the exchanges and self-regulatory organizations:

When an exchange engages in conduct to operate its own 4 market that is distinct from its oversight role, it is acting as a regulated entity -- not a regulator.  Although the latter warrants immunity, the former does not.   Accordingly, we conclude that the exchanges, in providing these challenged products and services, did not "effectively stand in the shoes of the SEC" and therefore are not entitled to the same protections of immunity that would otherwise be  afforded to the SEC.  DL Capital Grp., 409 F.3d at 95 (internal quotation marks and alteration omitted).

Page 24 of the 2Cir Opinion

As to the sufficiency of Plaintiffs' pleading, 2Cir finds that:

The plaintiffs therefore have sufficiently pled that the exchanges created a fraudulent scheme that benefited HFT firms and the exchanges, sold the products and services at rates that only the HFT firms could afford, and failed to fully disclose to the investing public how those products and services could be used on their trading platforms.  They allege that, in doing so, the exchanges used the HFT firms to generate hundreds of millions of dollars in fees and established a system that, unbeknownst to the plaintiffs, catered to the HFT firms at the expense of individual and institutional traders. We think that such allegations sufficiently plead that the exchanges committed manipulative acts and participated in a fraudulent scheme in violation of the Exchange Act and Rule 10b‐5.  See Fezzani, 716 F.3d 13 at 26.

PIABA: NON-ATTORNEY REPRESENTATIVES ARE REAL AND GROWING "MENACE TO INVESTORS" IN FINRA ARBITRATION / NAR Firms Found to Include Individual Who Pled Guilty in Insurance Scheme and Brokers Barred from Industry; Unwary Investors Have None of the Protections of Dealing with Attorneys and Often Recover Little of Lost Funds.  (PIABA Press Release) READ FULL TEXT PIABA NAR REPORT 
As set forth in the preamble to the PIABA Press Release:

Investors who are forced to rely on arbitration to deal with problem stockbrokers and brokerage firms need to think twice before they hire "non-attorney representatives" (NARs) to handle their cases, according to a major new report from the Public Investors Arbitration Bar Association (PIABA). In addition to often paltry single digit recovery levels for their clients, NAR firms have attracted a substantial number of individuals with checkered pasts, including stockbrokers barred for life from the securities industry and, in one case, an individual who pled guilty to his role in a million-dollar jewelry swindle. The PIABA report concludes that FINRA should eliminate the role of NARs in all but narrow circumstances.

Titled "A Menace to Investors: Non-Attorney Representatives in FINRA Arbitration" (available at, the report concludes: "Non-attorney representatives often do not maintain malpractice insurance, have no ethical code or constraints like attorneys do, and do not face potential sanctions from any regulatory or licensing body like a state bar association. Essentially, this system exposes the investor who was victimized by his or her broker to potential further victimization, with little chance of recovering damages caused by an unscrupulous or negligent NAR."

Three Major New York Diagnostic Testing Facility Owners Charged for Their Roles in Alleged Multi-Million Dollar Health Care Fraud Scheme (DOJ Press Release) Tea Kaganovich and Ramazi Mitaishvili ( the co-owners of Sophisticated Imaging, East Coast Diagnostics, East Shore Diagnostics, East West Management and RM Global) and  Syora Iskanderova aka Samira Sanders (the owner of Global Testing, Liberty Mobile Imaging, Liberty Mobile Testing, Med Tech Services and Scanwell Diagnostics) were each indicted on one count of health care fraud, two counts of making false claims to a federal agency, one count of conspiracy to pay health care kickbacks, two counts of paying health care kickbacks and four counts of money laundering.  Kaganovich and Mitaishvili were also charged with one count of conspiracy to defraud the United States by obstructing the lawful functions of the IRS.  Iskanderova was also charged with two counts of making false statements to federal agents.  As set forth in part in the DOJ Press Release:

According to the indictment, beginning in approximately January 2014 and continuing through at least December 2016, Kaganovich, Mitaishvili and Iskanderova executed a scheme in which they submitted fraudulent claims to Medicare, Medicaid managed care plans and other health care benefit programs for diagnostic testing services.  As part of the scheme, the defendants allegedly paid kickbacks for the referral of beneficiaries who submitted themselves to diagnostic testing and other purported medical services.  The indictment also alleges that the beneficiaries themselves received kickbacks as part of the scheme.  The defendants allegedly submitted and caused to be submitted claims to Medicare, Medicaid managed care plans and other health care benefit programs for services that misrepresented which diagnostic testing company purportedly performed the services.  The indictment further alleges that the defendants disguised their illicit payments by moving the proceeds of this illegal activity through shell companies and engaged in financial transactions greater than $10,000 involving the proceeds of unlawful activity.  Kaganovich and Mitaishviliare are alleged to have falsely reported to the IRS that the illegal payments made to co-conspirators were legitimate business expenses, which caused relevant tax forms to falsely under-report business income and claim deductions.  In addition, the indictment alleges that Iskanderova, on two separate occasions, lied to federal agents about her role in the alleged fraud scheme. 

A Little Bit Of FINRA Hypocrisy For $20,000 ( Blog) The laws of physics don't always apply to the regulation of Wall Street. Sometimes, things appear out of thin air and exist but then suddenly don't but then, just as mystifying, return to our realm of existence . . . or do they? The one constant throughout this metaphysical setting is that the Financial Industry Regulatory Authority stands ready to impose fines. In a recent regulatory settlement, FINRA seems to suggest that one of its small member firms had written supervisory procedures but, then again, didn't, or, perhaps put another way, maybe those procedures existed but were never fully compliant, but, on the other hand, those procedures were compliant when first approved but lapsed into non-compliance, but, oddly, it's not clear as to when things when from compliant to non-compliant but, hey, a $20,000 fine should stop you from asking more questions. Welcome to the world of hypocrisy. 

SEC Obtains Final Judgment Against Former Boiler Room Operator (SEC Litigation Release) The SEC obtained a judgment in Securities and Exchange Commission v. Jason A. Wallace, (16-CV-01788 ; C.D. Cal.) , permanently enjoining Jason A. Wallace, barring him from participating in any offering of a penny stock, and ordering him to pay $512,048.80 in disgorgement and prejudgment interest plus a $434,887.07 civil penalty. The SEC Litigation Release characterizes Wallace as a "former boiler room operator charged with participating in a fraudulent scheme to artificially inflate the per share price of penny stocks. Also read: "SEC Charges Former Boiler Room Operator Jason A. Wallace with Participating in a Fraudulent Pump-And-Dump Scheme"