Securities Industry Commentator by Bill Singer Esq

February 7, 2018

Sixth Circuit Vacates Talman Harris Judgment and Remands. United States of America, Plaintiff/Appellee, v. Talman Harris, Defendant/Appellant (Opinion, United States Court of Appeals for the Sixth Circuit, No. 17-3087, 15-CR-00335-2 / February 5, 2018)
From 2007 to 2014, Talman Harris was a registered stockbroker. The Financial Industry Regulatory Authority ("FINRA") investigated Harris' and others' activities involving, in part, wire transfers from certain organizations allegedly controlled by Zirk de Maison and their relationship with Zirk Engelbrecht. Allegedly, Harris and another individual (Durand) decided to tell FINRA investigators, in part, that their deposits of the proceeds of the cited wire transfers had resulted from selling expensive watches. After Harris was arrested, he allegedly called and texted Durand on multiple occasions, instructing him to stick with their story: "Remember, we sold watches." Durand later admitted that the watch story was false. In September 2016, a federal jury convicted Talman Harris of one count of conspiracy to commit securities fraud or wire fraud, one count of obstruction of justice, and three counts of wire fraud, for which the district court sentenced him to 63 months' imprisonment, a five-year term of supervised release, a $500 special assessment, and $843,423.91 in restitution. As set forth in the "Syllabus" to United States of America, Plaintiff/Appellee, v. Talman Harris, Defendant/Appellant (Opinion, United States Court of Appeals for the Sixth Circuit, No. 17-3087, 15-CR-00335-2 / February 5, 2018) :

[T]alman Harris appeals his criminal convictions and sentences, arguing that the district court erred by: (1) barring Harris from impeaching a government witness; (2) admitting government summary evidence; (3) giving an inaccurate jury instruction with regard to a stockbroker's fiduciary duties; and (4) failing to investigate potential extraneous influence on a juror.

Because the district court abused its discretion by not allowing Harris to introduce a prior inconsistent statement for impeachment purposes, we reverse Harris's conviction for obstruction of justice and remand for a new trial on that count. The district court did not, however, err in admitting the summary exhibits and in rendering the fiduciary-duty jury instruction, so we affirm the district court's rulings on Harris's second and third assignments of error. Finally, because Harris presented a colorable claim of extraneous influence on a juror, we conclude that the district court abused its discretion by failing to hold an evidentiary hearing pursuant to Remmer v. United States, 347 U.S. 227 (1954), or by denying defense counsel's request to question the juror and his friend. Thus, we vacate the judgment of the district court and remand for a Remmer hearing. 

Testimony on Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission (Testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs by SEC Chair Clayton) READ THE FULL TEXT TESTIMONY In pertinent parts, SEC Chair Clayton testified that:

It appears that many of the U.S.-based cryptocurrency trading platforms have elected to be regulated as money-transmission services.  Traditionally, from an oversight perspective, these predominantly state-regulated payment services have not been subject to direct oversight by the SEC or the CFTC. Traditionally, from a function perspective, these money transfer services have not quoted prices or offered other services akin to securities, commodities and currency exchanges. In short, the currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind. As Chairman Giancarlo and I stated recently, we are open to exploring with Congress, as well as with our federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate. We also are supportive of regulatory and policy efforts to bring clarity and fairness to this space.

. . .

While there are cryptocurrencies that, at least as currently designed, promoted and used, do not appear to be securities, simply calling something a "currency" or a currency-based product does not mean that it is not a security. To this point I would note that many products labeled as cryptocurrencies or related assets are increasingly being promoted as investment opportunities that rely on the efforts of others, with their utility as an efficient medium for commercial exchange being a distinct secondary characteristic. As discussed in more detail below, if a cryptocurrency, or a product with its value tied to one or more cryptocurrencies, is a security, its promoters cannot make offers or sales unless they comply with the registration and other requirements under our federal securities laws.[10] 

In this regard, the SEC is monitoring the cryptocurrency-related activities of the market participants it regulates, including brokers, dealers, investment advisers and trading platforms. Brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies (including on margin) or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.[11]  As I have stated previously, these market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.

Finally, financial products that are linked to underlying digital assets, including cryptocurrencies, may be structured as securities products subject to the federal securities laws even if the underlying cryptocurrencies are not themselves securities. Market participants have requested Commission approval for new products and services of this type that are focused on retail investors, including cryptocurrency-linked ETFs. While we appreciate the importance of continuing innovation in our retail fund space, there are a number of issues that need to be examined and resolved before we permit ETFs and other retail investor-oriented funds to invest in cryptocurrencies in a manner consistent with their obligations under the federal securities laws. These include issues around liquidity, valuation and custody of the funds' holdings, as well as creation, redemption and arbitrage in the ETF space.

. . .

The Commission previously urged market professionals, including securities lawyers, accountants and consultants, to read closely an investigative report it released. On July 25, 2017, the Commission issued a Report of Investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934[13] regarding an ICO of DAO Tokens.[14]  In the Report, the Commission considered the particular facts and circumstances presented by the offer and sale of DAO Tokens and concluded that DAO Tokens were securities based on longstanding legal principles, and therefore that offers and sales of the DAO Tokens were subject to the federal securities laws. The Report also explained that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption from registration applies, and that platforms that provide for trading in such securities must register with the SEC as national securities exchanges or operate pursuant to an exemption from such registration. 

The Commission's message to issuers and market professionals in this space was clear: those who would use distributed ledger technology to raise capital or engage in securities transactions must take appropriate steps to ensure compliance with the federal securities laws. The Report and subsequent statements also explain that the use of such technology does not mean that an offering is necessarily problematic under those laws. The registration process itself, or exemptions from registration, are available for offerings employing these novel methods. 

. . .

Thank you for the opportunity to testify before you today and for your support of the Commission and its workforce. I stand ready to work with Congress on these issues and look forward to answering your questions. 

Written Testimony of CFTC Chair Giancarlo before the Senate Banking Committee  READ THE FULL TEXT TESTIMONY 
In pertinent parts, CFTC Chair Giancarlo testified [Ed: footnotes omitted]:

The CFTC has been straightforward in asserting its area of statutory jurisdiction concerning virtual currencies derivatives. As early as 2014, former CFTC Chairman Timothy Massad discussed virtual currencies and potential CFTC oversight under the Commodity Exchange Act (CEA). And as noted above, in 2015, the CFTC found virtual currencies to be a commodity. In that year, the agency took enforcement action to prohibit wash trading and prearranged trades on a virtual currency derivatives platform. In 2016, the CFTC took action against a Bitcoin futures exchange operating in the U.S. that failed to register with the agency.Last year, the CFTC issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context. The agency also issued warnings about valuations and volatility in spot virtual currency markets and launched an unprecedented consumer education effort (detailed in Section IV herein).

. . .

After the launch of Bitcoin futures, some criticism was directed at the self-certification process from a few market participants. Some questioned why the Commission did not hold public hearings prior to launch. However, it is the function of the futures exchanges and futures clearinghouses - and not CFTC staff - to solicit and address stakeholder concerns in new product self-certifications. The CFTC staff's focus was on how the futures contracts and cash settlement indices are designed to bar manipulation and the appropriate level of contract margining to meet CEA and Commission regulations. 

Interested parties, especially clearing members, should indeed have an opportunity to raise appropriate concerns for consideration by regulated platforms proposing virtual currency derivatives and DCOs considering clearing new virtual currency products. That is why CFTC staff has added an additional element to the Review and Compliance Checklist for virtual currency product self-certifications. That is, requesting DCMs and SEFs to disclose to CFTC staff what steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and FCMs. Further, CFTC staff will take a close look at DCO governance around the clearing of new virtual currency products and formulate recommendations for possible further action. 

The CFTC's response to the self-certification of Bitcoin futures has been a balanced one. It has resulted in the world's first federally regulated Bitcoin futures market. Had it even been possible, blocking self-certification would not have stopped the rise of Bitcoin or other virtual currencies. Instead, it would have ensured that virtual currency spot markets continue to operate without effective and data-enabled federal regulatory surveillance for fraud and manipulation. It would have prevented the development of a regulated derivatives market that allowed participants to take "short" positions that challenged the 2017 rise of Bitcoin prices.

. . .

Yet, while DLT promises enormous benefits to commercial firms and charities, it also promises assistance to financial market regulators in meeting their mission to oversee healthy markets and mitigate financial risk. What a difference it would have made on the eve of the financial crisis in 2008 if regulators had access to the real-time trading ledgers of large Wall Street banks, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios. I have previously speculated that, if regulators in 2008 could have viewed a real-time distributed ledger (or a series of aggregated ledgers across asset classes) and, perhaps, been able to utilize modern cognitive computing capabilities, they may have been able to recognize anomalies in market-wide trading activity and diverging counterparty exposures indicating heightened risk of bank failure. Such transparency may not, by itself, have saved Lehman Brothers from bankruptcy, but it certainly would have allowed for far prompter, better informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued. 

He's Back!!! SEC Denies Second Stay Request By Bruce Zipper. ( Blog)
In the Matter of the Application of Bruce Zipper for Review of Action Taken by FINRA, (Order  Denying Second Motion for Stay, Securities and Exchange Commission, '34 Act Rel. No. 82633; Admin. Proc. File No. 3-17963 / February 5, 2018), Zipper has again asked for a stay pending his appeal of FINRA action denying him permission to continue to associate with a FINRA member firm despite his statutory disqualification.

Effective February 5, 2018, FINRA Rule 2165: Financial Exploitation of Specified Adults.
FINRA member firms may now place temporary holds on disbursements of funds or securities when there is a reasonable belief of financial exploitation. Firms now required to make reasonable efforts to obtain contact information for a "trusted contact." READ the FINRA Notice to Members 17-11 (March 2017)

SEC Bars Lawyer Involved With Brogdon Bond Offerings. In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, John T. Lynch, Jr. submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of John T. Lynch, Jr., Respondent (Order Making Findings And Imposing Remedial Sanctions) '34 Act Rel. No. 82634; Invest. Co. Act Rel. No. 33001; Admin. Proc. File No. 3-17902 / February 6, 2018). 
Pursuant to the terms of the SEC Order, Respondent Lynch was barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; with the right to apply for reentry after one (1) year to the appropriate self-regulatory-organization, or if there is none, to the Commission. As set forth in the "Summary" portion of the SEC Order:

1. From at least June 2010 to December 2013 (the "Relevant Period"), Lynch served as an investment banker and underwriter's counsel for Lawson Financial Corporation ("LFC") in connection with underwriting of 12 fraudulent conduit municipal bond offerings for the benefit of Christopher Brogdon ("Brogdon"), which raised millions of dollars for Brogdon's healthcare-related projects throughout the Southeastern and Midwestern United States (collectively, the "Brogdon Bond Offerings"). 

2. In the Brogdon Bond Offerings, which were unrated, the proceeds from the sale of the bonds were to be used to undertake a particular project-the construction, acquisition, or renovation of a facility-for the benefit of a borrower controlled by Brogdon, and the borrower would undertake to provide certain continuing disclosures. 

3. In connection with the Brogdon Bond Offerings, Brogdon rarely caused the borrower to provide to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system ("EMMA") the annual financial information for the borrower required by the related continuing disclosure undertaking. Nevertheless, Brogdon, through Brogdon-controlled borrowers, represented in bond offering documents that the Brogdon controlled borrower for such bond offering had not failed to comply with any prior municipal securities continuing disclosure undertaking. These representations were false and misleading because they did not provide any information to investors regarding the history of persistent and material breaches by Brogdon-controlled borrowers to comply with municipal securities continuing disclosure requirements and failed to provide investors with material facts they would need to know in order to evaluate the likelihood that a particular Brogdon-controlled borrower would comply with its continuing disclosure undertaking. 

4. Lynch conducted only a cursory inquiry into the information provided by Brogdon, his representatives, and other parties to the financing despite being aware of numerous red flags. This lack of due diligence deprived both initial purchasers and buyers and sellers in secondary market transactions of material information related to the offerings and allowed Brogdon to perpetuate his fraud. 

5. Lynch also failed to obtain a written continuing disclosure undertaking from Brogdon for an April 2013 offering as required under Exchange Act Rule 15c2-12(b)(5)(i), despite the representation that one exists in that offering's official statement. 

6. Lynch was listed as underwriter's counsel in the official statements of the Brogdon Bond Offerings and received compensation for his work as underwriter's counsel from bond offering proceeds in addition to a salary from LFC. Lynch, however, was not permitted or qualified to serve as LFC's underwriter's counsel because he was an inactive member of the Pennsylvania bar and was not authorized to practice law in any state. 

Latvian National Pleads Guilty to "Scareware" Hacking Scheme That Targeted Minneapolis Star Tribune Website (DOJ Press Release 18-141) 
Peteris Sahurovs aka Piotrek and Sagade, 28, pled guilty to one count of conspiracy to commit wire fraud in connection with his "scareware" hacking scheme that targeted visitors to the Minneapolis Star Tribune's website.  As set forth in part in the DOJ Press Release:

[F]rom at least May 2009 to June 2011, Sahurovs operated a "bullet-proof" web hosting service in Latvia, through which he leased server space to customers seeking to carry out criminal schemes without being identified or taken offline.  The defendant admitted that he knew his customers were using his servers to perpetrate criminal schemes, including the transmission of malware, fake anti-virus software, spam, and botnets to unwitting victims, and he received notices from Internet governance entities (such as Spamhaus) that his servers were hosting malicious activity.  Nonetheless, Sahurovs admitted he took steps to protect the criminal schemes from being discovered or disrupted, and hosted them on his servers for financial gain.

Sahurovs admitted that from in or about February 2010 to in or about September 2010, he registered domain names, provided bullet-proof hosting services, and gave technical support to a "scareware" scheme targeting visitors to the Minneapolis Star Tribune's website.  On Feb. 19, 2010, the Minneapolis Star Tribune began hosting an online advertisement, purporting to be for Best Western hotels, on its website,  Two days later, however, the advertisement began causing the computers of visitors to the website to be infected with malware.  This malware, also known as "scareware," caused visitors to experience slow system performance, unwanted pop-ups and total system failure.  Website visitors also received a fake "Windows Security Alert" pop-up informing them that their computer had been infected with a virus and another pop-up that falsely represented that they needed to purchase the "Antivirus Soft" computer program to fix their security issues, at a price of $49.95.

Website visitors who clicked the "Antivirus Soft" window were presented with an online order form to purchase a purported security program called "Antivirus Soft."  Users who purchased "Antivirus Soft" would receive a file download that "unfroze" their computers and stopped the pop-ups and security notifications.  However, the defendant admitted, the file was not a real anti-virus product and did not perform legitimate computer security functions, and merely caused malware that members of the conspiracy had previously installed to cease operating.  Meanwhile, the defendant admitted, victim users who did not choose to purchase "Antivirus Soft" became immediately inundated with so many pop-ups containing fraudulent "security alerts" that all information, data, and files on their computers were rendered inaccessible.  Members of the conspiracy defrauded victims out of substantial amounts of money as a result of the scheme.  The defendant admitted that as a result of his participation, he made between $150,000 and $250,000 U.S. dollars.