Securities Industry Commentator by Bill Singer Esq

December 29, 2017

FINRA Sanctions Citigroup Global Markets Inc. $11.5 Million for Displaying Inaccurate Research Ratings (FINRA Press Release)
The Financial Industry Regulatory Authority fined Citigroup Global Markets Inc. (CGMI) $5.5 million and required the firm to pay at least $6 million in compensation to retail customers for allegedly displaying inaccurate research ratings during a nearly five-year period, and for related supervisory violations. READ the FULL TEXT AWC Settlement.As set forth in part in the FINRA Press Release:

FINRA found that from February 2011 through December 2015, CGMI displayed to its brokers, retail customers and supervisors inaccurate research ratings for more than 1,800 equity securities -more than 38 percent of those covered by the firm. Because of errors in the electronic feed of ratings data that the firm provided to its clearing firm, the firm either displayed the wrong rating for some covered securities (e.g., "buy" instead of "sell"), displayed ratings for other securities that CGMI did not cover or failed to display ratings for securities that CGMI, in fact, rated. The firm's actual research reports, which were available to brokers, and the research ratings appearing in those reports, were not affected by these errors.  

The inaccuracies in the research ratings feed had widespread, adverse consequences. As a result of the errors, CGMI brokers solicited thousands of transactions inconsistent with the firm's actual ratings and negligently made inaccurate statements to customers about those ratings. They also solicited transactions that violated certain firm-managed portfolio guidelines, which were premised on CGMI research ratings. For example, the portfolios were prohibited from containing equity securities the firm had rated "sell." Because CGMI brokers relied on inaccurately displayed ratings, many customers' portfolios improperly included "sell"-rated securities. CGMI supervisors, relying on those same inaccurate ratings, failed to detect and prevent a substantial number of transactions that were actually inconsistent with CGMI research or portfolio guidelines. The firm also made materially inaccurate statements and omissions regarding more than 19,000 research ratings on customer account statements, sent more than 1,000 customer email alerts with inaccurate ratings, and displayed inaccurate ratings on online portals available to customers.

FINRA Arbitrator Recommends Expungement Of Three Customer Complaints ( Blog)

A sole FINRA Arbitrator tackles a thorny arbitration in which a registered person seeks the expungement of not one but three customer complaints. The resulting FINRA Arbitration Decision ends the year on a high note as it is well written, concise, and persuasive. 

In the Matter of Shervin Neman and Neman Financial, Inc. (Order on Request for Release from Federal Custody, Securities and Exchange Commission, Admin. Proc. Rul. Rel. No.. 5426; Admin. Proc. File No. 3-17699 / December 28, 2017)

Federal inmate Shervin Neman is currently incarcerated. See, United States v. Neman, 673 F. App'x 649, 652 (9th Cir. 2016) (affirming 135-month sentence), cert. denied, 137 S. Ct. 2281 (2017). SEC Administrative Law Judge Patil reports that Neman requested h,is immediate release from prison by letter dated December 20, 2017. ALJ Jason S. Patil construes the request as a Petition for a Writ of Habeas Corpus. In his Order denying the petition for want of authority, the ALJ states in pertinent part that:

"Writs of habeas corpus" ordering release from federal custody "may be granted by the Supreme Court, any justice thereof, the district courts and any circuit judge within their respective jurisdictions." 28 U.S.C. § 2241(a); accord Ledford v. United States, 297 F.3d 1378, 1381 (Fed. Cir. 2002) (affirming dismissal of habeas petition because "the habeas statute does not list the Court of Federal Claims among those courts empowered to grant a writ of habeas corpus"). No statute or rule gives me the authority to grant Neman's petition. See 5 U.S.C. §§ 556, 557 (defining the scope of administrative hearings); 17 C.F.R. § 201.111 (enumerating powers of the Securities and Exchange Commission's hearing officers). 

As was previously reported in the Securities Industry Commentator on November 21, 2017In the Matter of Shervin Neman and Neman Financial, Inc. (Initial Decision, Securities and Exchange Commission, Init. Dec. Rel. No. 1227; Admin. Proc. File No. 3-17699 / November 20, 2017)  As set forth in  the "Syllabus" of Administrative Law Judge Jason S. Patil's "Initial Decision":

Shervin Neman, through his firm Neman Financial, Inc., operated a Ponzi scheme. Neman was convicted, imprisoned, and ordered to pay millions of dollars in restitution. In a civil case, a federal district court permanently enjoined Neman and his firm from violating the federal securities laws. This initial decision imposes the further sanction of industry bars against Neman and revokes Neman Financial's registration.

A fascinating aspect of ALJ Patil's rationale is found in his consideration of whether Neman is likely to engage in future violations and if he has shown remorse for his misconduct. In pertinent part, the Initial Decision asserts:

Neman does not acknowledge that he did anything wrong. Instead, Neman maintains that all of the allegations against him and Neman Financial are false. He has exhibited "an exaggerated sense of victimization"  throughout the proceedings against him. Nov. 24, 2014, Tr. at 21, ECF No. 250 (testimony of one of Neman's actual victims); see, e.g., id. at 31 (Neman asking criminal court "what's the difference between here and Iran?"). In his answer, Neman contends that: 

1) . . . the SEC & FBI/DOJ tampered with my witnesses, 2) one of the jury members fell asleep during the IMPORTANT testimony of the FBI agent to the point that . . . jurors had to elbow him to wake him up, 3) . . . THERE WAS ABSOLUTELY NO DEFENSE FOR MY CRIMINAL TRIAL WHEN I HAVE PROOF THE PUBLIC DEFENDER PROMISED ME TO PUT ON DEFENSE & LIED TO ME . . . 

Resp. Letter of Mar. 15, 2017, at 2-3 (capitalization in original). In April 2017, Neman reiterated the preceding position, adding that "the Public Defender worked with the prosecutor to put [him] in jail." Resp. Letter of Apr. 3, 2017, at 2.

In May 2017, Neman made similar allegations, adding the allegation that all lawyers and witnesses lied:

[T]he SEC attorney SIMPLY LIED with no consequence . . . I feel that the process is rigged . . . the FBI agent lied on the stand . . . the lawyer/public defender lied to me . . . [and] the witnesses lied on the stand & to be clear ALL THE WITNESSES LIED . . . ALL MY CONSTITUTIONAL RIGHTS HAVE BEEN VIOLATED[.] 

Resp. Letter of May 15, 2017, at 1-2; see also, e.g., Nov. 24, 2014, Tr. at 32-33, ECF No. 250 ("[T]he situation that has occurred with the prosecution and my public defender, I believe that they worked together to put me in jail."). Respondents' last letter, received September 8, 2017, does not acknowledge the wrongful nature of Neman's conduct, nor does it provide any assurances against future violations. This is similar to his civil case, where the court observed that "Neman has provided no assurances against future violations. On the contrary, he committed the above-mentioned act of fraud after . . . a preliminary injunction to prevent such conduct." Ex. 7 at 20. 

But that is not all. After his criminal conviction but before sentencing, Neman gave his defense attorneys a forged bank statement and handwritten letter that purported to show that he had millions of dollars in an account with Goldman Sachs & Co. See Declaration and Exhibits in Support of Government's Opposition to Defendant's Motion for New Trial ¶¶ 8-9 ("Opp to New Trial Decl."), United States v. Neman, No. 2:13-cr-289 (C.D. Cal. June 6, 2014), ECF No. 121; id. Exs. 4-5, ECF Nos. 121-31-32; Reporter's Transcript of Motion for a New Trial, Monday, July 14, 2014, at 4-7, 11 ("July 14, 2014, Tr."), Neman, No. 2:13-cr-289 (C.D. Cal. July 21, 2014), ECF No. 125. The Goldman Sachs employee who supposedly wrote the letter has stated that Neman does not "have any funds invested at Goldman Sachs"; the bank statement is not a type of document that he has seen; the account number on the bank statement is not a Goldman Sachs number for "accounts originating in Los Angeles"; "the writing on [the letter] is not his writing"; and "the signature is not his." Opp. to New Trial Decl. Ex. 5 at 2, ECF No. 121-32. Despite this evidence, Neman insisted that he had over three million dollars in the account and was willing to repay his victims. See Nov. 24, 2014, Tr. at 23-24, ECF No. 250. He did not do so. See id. at 24, 26. The criminal court ordered a competency evaluation before sentencing because it could not "believe that a rational person would hold these positions." Nov. 24, 2014, Tr. at 44-46, 48, ECF No. 250. 

In short, Neman is either deliberately misrepresenting his past actions or is sincerely holding beliefs that are belied by the evidence. I find that, on this record, there is no recognition of wrongful conduct nor meaningful assurance against future violations.