Securities Industry Commentator by Bill Singer Esq

March 7, 2018
FINRA should not require registered persons to notify their member firms of a mere "intention" or "preparation" to open their own BD or RIA. Requiring such "premature" notice to an employer is an invitation for the employer to engage in anti-competitive and retaliatory efforts to derail or hamper the employee's proposed venture. FINRA has the right to require prior written notice when a registered person intends to begin substantive BD/RIA activities in furtherance of fundraising and/or engaging in business. Activities that are generic to merely creating an entity or preparing to engage in a business, however, should not trigger the proposed FINRA Rule 3290 prior notice requirement.

In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, the New York Stock Exchange LLC, NYSE American LLC, and NYSE Arca, Inc. submitted an Offer of Settlement, which the federal regulator accepted.  In the Matter of New York Stock Exchange LLC,, NYSE American LLC, and NYSE Arca, Inc. Respondents (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; '33 Act Re. 10463; '34 Act Rel. No. 82808 ; Admin. Proc. File No. 3-18388 / March 6, 2018) (the "OIP"). READ the FULL TEXT OIP.  In accordance with the offer settlement, the exchanges agreed to pay a $14 million penalty.  

As set forth in the OIP's "Summary":

This matter involves several episodes in which the NYSE Exchanges engaged in certain business practices without having in place required and effective rules; operated in a manner that did not comply with the exchange rules then in effect; and/or operated in a manner that did not comply with the federal securities laws. The NYSE Exchanges engaged in this conduct in the following instances, which included several disruptive market events: 
  • NYSE and American's July 8, 2015 Trading Halt: On July 8, 2015, two of the NYSE Exchanges suspended intra-day trading for approximately three and one-half hours (the "Shutdown"). During the 47 minutes before the Shutdown, NYSE and American experienced escalating connectivity problems between their trading units and the communications "gateways" used by customers, which eventually prevented many customers from being able to consistently access quotations in a majority of the symbols traded on these exchanges ("Impaired Symbols"). As a result, quotations in the Impaired Symbols were no longer automated. Nonetheless, during this time period, NYSE and American continued to disseminate quotations for the Impaired Symbols marked as "automated." The quotations that were inaccurately identified as automated after these exchanges had reason to believe otherwise constituted negligent misrepresentations of material facts to market participants in violation of Section 17(a)(2) of the Securities Act. 
  • Arca's Use of Price Collars During the August 24, 2015 ETF Market Volatility: U.S. equity and equity-related futures markets experienced unusual volatility on August 24, 2015. The volatility led to a total of 1,278 Limit-Up/Limit-Down ("LULD") trading pauses on five exchanges. Arca, which was the primary listing exchange for more than 85% of these exchange traded products ("ETPs"), including exchange traded funds ("ETFs"), had 999 (or 78%) of the LULD pauses, of which 697 were repeat pauses in securities that were reopened after their first pause of the day. Many of these repeat halts were caused, at least in part, because Arca applied price collars to reopening auctions that followed LULD pauses. By applying these price collars, Arca's order imbalances on reopening auctions resolved more slowly than they would have with wider or no reopening collars and potentially limited the extent to which the prices of reopened issues could adjust to changing conditions without triggering additional LULD halts. Arca violated Section 19(b)(1) of the Exchange Act because its rules described price collars for opening and closing auctions, but not for reopening auctions. Arca also violated Section 19(g)(1) because it did not comply with its rules regarding reopening auctions. 
  • Arca's Erroneous March 31, 2015 Trading Halt: On the morning of March 31, 2015, Arca erroneously implemented a market-wide regulatory halt that stopped all trading 3 of 134 Arca-listed securities on all exchanges. Arca lifted the market-wide halt after approximately 20 minutes and resumed its own trading approximately two hours later, but could not publish closing auction order imbalance information. As a result, Arca violated Rule 608(c) of Regulation NMS by imposing a market-wide halt in violation of a national market system plan, and Section 19(g)(1) of the Exchange Act by violating its own rule that required Arca to publish closing order imbalance information. 
  • NYSE and American's Failure to Comply with Reg SCI's Business Continuity and Disaster Recovery Requirements: Regulation Systems Compliance and Integrity ("Reg SCI") requires national securities exchanges and other SCI entities to have business continuity and disaster recovery ("BC/DR") plans that provide for certain "reasonably designed" backup and recovery capabilities. For approximately one year following Reg SCI's November 3, 2015 effective date, NYSE and American, in a wide-scale disruption, would have relied on the backup systems of Arca for trading in NYSE- and American- listed symbols. NYSE and American accordingly lacked the required policies and procedures for "reasonably designed" backup and recovery capabilities and therefore violated Reg SCI Rules 1001(a)(1) and 1001(a)(2)(v). 
  • NYSE and American's Failure to State Material Aspect of Operation of Exchange Order Types: From 2008 to 2015, the interaction between two order-types on NYSE and American -- pegging orders and non-displayed reserve orders -- created the possibility that floor brokers' pegging orders could in certain circumstances detect the presence (but not the quantity) of non-displayed depth liquidity on the exchanges' order books. This potential behavior was a material aspect of the operation of the exchanges, but it was not described in any effective rules of NYSE or American during this period, despite a customer complaint that brought the potential behavior to the exchanges' attention. As a result, NYSE and American violated Section 19(b)(1) of the Exchange Act. 
Also seeDivision of Corporation Finance/Staff No-Action, Interpretive & Exemptive Letters "Incoming Letter: New York Stock Exchange LLC and NYSE American (March 2, 2018) in which Respondents assert in part:

Subjecting ICE to ineligible issuer status is not necessary or appropriate,is not in the public interest,and would disserve the Commission's mission to protect investors and promote capital formation. Accordingly, we respectfully request the Commission to determine that ICE should not be considered an ineligible issuer under Rule 405 as a result ofthe Order entered in this matter. 

Also seeIn the Matter of the Intercontinental Exchange, Inc. (Order Granting a Waiver from Being an Ineligible Issuer/March 6, 2018) which states in part:

Based on the representations set forth in ICE's March 2, 2018 request, and on other
considerations, the Commission has determined that ICE has made a showing of good cause under clause (2) of the definition of ineligible issuer in Rule 405 of the Securities Act and that ICE should not be considered an ineligible issuer by reason of the entry of the Cease-and-Desist Order. Any different facts from those represented or failure to comply with the terms of the Cease-and-Desist Order would require us to revisit our determination that good cause has been shown and could constitute grounds to revoke or further condition the waiver. The Commission reserves the right, in its sole discretion, to revoke or further condition the waiver under those circumstances.

Accordingly, IT IS ORDERED, pursuant to clause (2) of the definition of ineligible issuer in Rule 405 of the Securities Act, that a waiver from ICE being an ineligible issuer under Rule 405 of the Securities Act is hereby granted. 

William McFarland Pleads Guilty In Manhattan Federal Court To Defrauding Investors And A Ticket Vendor Of Over $26 Million / McFarland Engaged in a Scheme to Defraud over 80 Investors in Fyre Media Inc. and Fyre Festival LLC, as well as a Fyre Festival Ticket Vendor, Causing More Than $26 Million in Losses (DOJ Press Release)
William McFarland , founder and CEO of Fyre Media, Inc., pled guilty to one count of wire fraud in connection with the scheme started around 2016 and lasting until about May 2017 in which he fraudulently induced some 80 investors to invest over $24 million in his company. Also, McFarland p pled guilty to a second count of wire fraud in connection with a scheme to defraud a ticket vendor. As set forth in part in the DOJ Press Release:

McFARLAND repeatedly made materially false statements to investors about Fyre Media's revenue and income, and manipulated Fyre Media's financial statements and supporting documentation to hide Fyre Media's true financial condition.  McFARLAND represented to investors that Fyre Media had earned millions of dollars of revenue solely from talent bookings; a review of Fyre Media's records shows that those numbers were significantly overstated.  McFARLAND also provided falsified income statements to investors that purported to show that from approximately April 2016 to February 2017, Fyre Media had earned millions of dollars in income from talent bookings.  In reality, Fyre Media's income from talent bookings from approximately May 2016 to April 2017 was only $57,443.  In addition, McFARLAND provided falsified documents to investors showing over 2,500 confirmed talent bookings in a single month when, in fact, there were only 60 confirmed talent bookings in the entire year.   

McFARLAND repeatedly made misrepresentations to investors designed to overstate Fyre Media's financial condition and stability.  For example, McFARLAND told investors that a reputable venture capital firm (the "VC Firm") had completed its due diligence process and had decided to invest in Fyre Media.  To the contrary, a VC Firm employee communicated to McFARLAND that the VC Firm would not invest in Fyre Media without first completing its due diligence, which the VC Firm had not done due to McFARLAND's failure to provide many of the requested Fyre Media documents. 

In late 2016, McFARLAND established a subsidiary, Fyre Festival LLC, to hold a music festival called the "Fyre Festival" over two weekends in the Bahamas.  McFARLAND made repeated misrepresentations to investors with respect to their investments in Fyre Festival LLC. McFARLAND overstated the Festival's receivables that he used as collateral for numerous investments to cover Festival expenses.  McFARLAND also secured numerous investments in Fyre Festival LLC by claiming that investors would have the rights to payouts from Festival event cancellation insurance policies when, in reality, no event cancellation insurance policies had been executed for the Festival.  Ultimately, the Festival was canceled and widely deemed to have been a failure.

McFARLAND also repeatedly made materially false statements to investors about his own financial condition.  For example, in order to induce several investors to make an investment in Fyre Media, McFARLAND provided an altered stock ownership statement to inflate the number of shares he purportedly owned in a publicly traded company, so that it would appear that McFARLAND could personally guarantee the investment.  In addition, despite the fact that McFARLAND's applications to two banks ("Bank-1" and "Bank-2") for millions in personal loans had not been approved, McFARLAND misrepresented to investors that the monies from those bank loans could serve as collateral for their investments.  On one occasion, McFARLAND sent an investor a snapshot of an email purporting to be from a Bank-1 banker ("Banker-1") to McFARLAND approving a $3 million dollar loan.  Not only had Banker-1 not sent that email, Bank-1 had not approved McFARLAND's loan application.

McFarland also made materially false statements to certain of Fyre Media's investors about Magnises, a credit card and private club for millennials that was founded and run by McFARLAND as chief executive officer.  McFARLAND told certain of Fyre Media's investors that he had sold Magnises for approximately $40 million and made a profit of several million dollars personally from the sale, when in reality, McFARLAND had not sold Magnises.  McFARLAND also falsely stated to certain of Fyre Media's investors that specific individuals were the acquirers of Magnises, when in fact, they were not.  McFarland also falsely stated to certain of Fyre Media's investors that a group of acquiring partners were forming a new company to purchase Magnises, when in fact, no such group existed.

East Bay Resident Pleads Guilty To Wire Fraud In Scheme To Defraud Concert Promoters / Defendant Admits Misrepresenting His Connections to the Red Hot Chili Peppers and Falsifying an Escrow Account to Secure a $450,000 Payment (DOJ Press Release)
On January 12, 2017, a federal grand jury in the United States District Court for the Northern District of California indicted Quincy Krashna on seven counts of wire fraud involving a scheme to defraud European concert promoters.. Krashna pled guilty to Count One of the indictment and agreed to make restitution. As set forth in part in the DOJ Press Release:

According to the plea agreement, Krashna, 49, from Berkeley, Calif., admitted that he misrepresented to concert promoters his connections to the Red Hot Chili Peppers.  The victims were interested in promoting Red Hot Chili Peppers concerts in Eastern Europe.  Krashna further admitted he told the concert promoters that he would hold in an escrow account a $450,000 down payment to secure the band's services and that the money would be returned to the promoters if Krashna was unable to secure the band's services.  Krashna admitted in the plea agreement that he created a fraudulent "Escrow Agreement" that had the appearance of being an escrow agreement used by Chase Bank, when in fact the alleged escrow account was a personal bank account that he controlled.  The concert promoters wired $450,000 into the fake escrow account after receiving Krashna's assurances.

Krashna admitted in the plea agreement that he continued to inform the concert promoters that their money was in an escrow account controlled by Chase Bank, when in fact he had transferred the money out of his personal account into other accounts that he controlled.  Krashna admitted that he continued to misrepresent the whereabouts of the victims' money until March 2012.

Federal Court in New York Enters Preliminary Injunction Order against Patrick K. McDonnell and His Company CabbageTech, Corp. d/b/a Coin Drop Markets in Connection with Fraudulent Virtual Currency Scheme (CFTC Press Release pr7702-18)
CFTC obtained in the United States District Court for the Eastern District of New York a Preliminary Injunction Order against Defendants Patrick K. McDonnell and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM) in connection with the CFTC's January 18, 2018 Complaint charging Defendants with fraud and misappropriation in connection with purchases and trading of the virtual currencies Bitcoin and Litecoin. READ FULL TEXT CFTC Order.

Grand Jury Indicts 8 in Online Romance Money Laundering Scam (DOJ Press Release)
Kwabena M. Bonsu, Kwasi A. Oppong, Kwame Ansah, John Y. Amoah, Samuel Antwi, King Faisal Hamidu, Nkosiyoxoxo Msuthu and Cynthia Appiagyei were indicted in the United States District Court for the Southern District of Ohio for conspiring to launder and for laundering the proceeds of online romance scams. As alleged in the Indictment, the defendants created online dating profiles and after establishing relationships, they requested money that was wired in amounts ranging from $10,000 to more than $100,000. The defendants purportedly used some proceeds to purchase salvaged vehicles sold online and often exported to Ghana. As stated in the DOJ Press Release:

Fictitious reasons for investment requests included gold, diamond, oil and gas pipeline opportunities in Africa. Websites used involve,,,,, and Facebook. At least 26 victims have been identified thus far.

In one example, a victim believed she was in a serious relationship with a person named "Frank Wilberg" whom she met on She believed they planned to marry and paid $3,000 to reserve a wedding site, and had purchased a wedding gown and shoes.

"Wilberg" told the victim he owned a consulting firm that tested gold for purity and needed money to buy gold and gold contracts. He said he expected to profit $6 million and would repay her with the profits. The victim wired money to accounts controlled by Amoah, Bonsu, Msuthu, and Appiagyei, and did not receive any money back.