Securities Industry Commentator by Bill Singer Esq

May 22, 2018

Epic Systems Corp. v. Lewis (United States Supreme Court Opinion)
https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf
Gorsuch, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Thomas, and Alito, JJ., joined. Thomas, J., filed a concurring opinion. Ginsburg, J., filed a dissenting opinion, in which Breyer, Sotomayor, and Kagan JJ. joined. The "Syllabus" to the Supreme Court Opinion states in pertinent part:

In each of these cases, an employer and employee entered into a contract providing for individualized arbitration proceedings to resolve employment disputes between the parties. Each employee nonetheless sought to litigate Fair Labor Standards Act and related state law claims through class or collective actions in federal court. Although the Federal Arbitration Act generally requires courts to enforce arbitration agreements as written, the employees argued that its "saving clause" removes this obligation if an arbitration agreement violates some other federal law and that, by requiring individualized proceedings, the agreements here violated the National Labor Relations Act. The employers countered that the Arbitration Act protects agreements requiring arbitration from judicial interference and that neither the saving clause nor the NLRA demands a different conclusion. Until recently, courts as well as the National Labor Relations Board's general counsel agreed that such arbitration agreements are enforceable. In 2012, however, the Board ruled that the NLRA effectively nullifies the Arbitration Act in cases like these, and since then other courts have either agreed with or deferred to the Board's position. 
Held: Congress has instructed in the Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act's saving clause nor the NLRA suggests otherwise. Pp. 5-25 

(a) The Arbitration Act requires courts to enforce agreements to arbitrate, including the terms of arbitration the parties select. See 9 U. S. C. §§2, 3, 4. These emphatic directions would seem to resolve any argument here. The Act's saving clause-which allows courts to refuse to enforce arbitration agreements "upon such grounds as exist at law or in equity for the revocation of any contract," §2-recognizes only " 'generally applicable contract defenses, such as fraud, duress, or unconscionability,' " AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 339, not defenses targeting arbitration either by name or by more subtle methods, such as by "interfer[ing] with fundamental attributes of arbitration," id., at 344. By challenging the agreements precisely because they require individualized arbitration instead of class or collective proceedings, the employees seek to interfere with one of these fundamental attributes. Pp. 5-9. 

(b) The employees also mistakenly claim that, even if the Arbitration Act normally requires enforcement of arbitration agreements like theirs, the NLRA overrides that guidance and renders their agreements unlawful yet. When confronted with two Acts allegedly touching on the same topic, this Court must strive "to give effect to both." Morton v. Mancari, 417 U. S. 535, 551. To prevail, the employees must show a " 'clear and manifest' " congressional intention to displace one Act with another. Ibid. There is a "stron[g] presum[ption]" that disfavors repeals by implication and that "Congress will specifically address" preexisting law before suspending the law's normal operations in a later statute. United States v. Fausto, 484 U. S. 439, 452, 453. 

The employees ask the Court to infer that class and collective actions are "concerted activities" protected by §7 of the NLRA, which guarantees employees "the right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . . , and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection," 29 U. S. C. §157. But §7 focuses on the right to organize unions and bargain collectively. It does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the Arbitration Act. It is unlikely that Congress wished to confer a right to class or collective actions in §7, since those procedures were hardly known when the NLRA was adopted in 1935. Because the catchall term "other concerted activities for the purpose of . . . other mutual aid or protection" appears at the end of a detailed list of activities, it should be understood to protect the same kind of things, i.e., things employees do for themselves in the course of exercising their right to free association in the workplace. 

The NLRA's structure points to the same conclusion. After speaking of various "concerted activities" in §7, the statute establishes a detailed regulatory regime applicable to each item on the list, but gives no hint about what rules should govern the adjudication of class or collective actions in court or arbitration. Nor is it at all obvious what rules should govern on such essential issues as opt-out and opt-in procedures, notice to class members, and class certification standards. Telling too is the fact that Congress has shown that it knows exactly how to specify certain dispute resolution procedures, cf., e.g., 29 U. S. C. §§216(b), 626, or to override the Arbitration Act, see, e.g., 15 U. S. C. §1226(a)(2), but Congress has done nothing like that in the NLRA. 

The employees suggest that the NLRA does not discuss class and collective action procedures because it means to confer a right to use existing procedures provided by statute or rule, but the NLRA does not say even that much. And if employees do take existing rules as they find them, they must take them subject to those rules' inherent limitations, including the principle that parties may depart from them in favor of individualized arbitration. 

In another contextual clue, the employees' underlying causes of action arise not under the NLRA but under the Fair Labor Standards Act, which permits the sort of collective action the employees wish to pursue here. Yet they do not suggest that the FLSA displaces the Arbitration Act, presumably because the Court has held that an identical collective action scheme does not prohibit individualized arbitration proceedings, see Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 32. The employees' theory also runs afoul of the rule that Congress "does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions," Whitman v. American Trucking Assns., Inc., 531 U. S. 457, 468, as it would allow a catchall term in the NLRA to dictate the particulars of dispute resolution procedures in Article III courts or arbitration proceedings-matters that are usually left to, e.g., the Federal Rules of Civil Procedure, the Arbitration Act, and the FLSA. Nor does the employees' invocation of the Norris-LaGuardia Act, a predecessor of the NLRA, help their argument. That statute declares unenforceable contracts in conflict with its policy of protecting workers' "concerted activities for the purpose of collective bargaining or other mutual aid or protection," 29 U. S. C. §102, and just as under the NLRA, that policy does not conflict with Congress's directions favoring arbitration. 

Precedent confirms the Court's reading. The Court has rejected many efforts to manufacture conflicts between the Arbitration Act and other federal statutes, see, e.g. American Express Co. v. Italian Colors Restaurant, 570 U. S. 228; and its §7 cases have generally involved efforts related to organizing and collective bargaining in the workplace, not the treatment of class or collective action procedures in court or arbitration, see, e.g., NLRB v. Washington Aluminum Co., 370 U. S. 9. 

Finally, the employees cannot expect deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, because Chevron's essential premises are missing. The Board sought not to interpret just the NLRA, "which it administers," id., at 842, but to interpret that statute in a way that limits the work of the Arbitration Act, which the agency does not administer. The Board and the Solicitor General also dispute the NLRA's meaning, articulating no single position on which the Executive Branch might be held "accountable to the people." Id., at 865. And after "employing traditional tools of statutory construction," id., at 843, n. 9, including the canon against reading conflicts into statutes, there is no unresolved ambiguity for the Board to address. Pp. 9-21. 


Texas Spearheads US-Canada Probe of Cryptocurrency Investments (TSSB Press Release)
https://www.ssb.texas.gov/news-publications/texas-spearheads-us-canada-probe-cryptocurrency-investments
On the heels of the North American Securities Administrators Association (NASAA) May 1st launch of its  "Operation Cryptosweep," the Texas State Securities Board has joined over 40 U.S. state and Canadian regulators in the investigation of fraudulent cryptocurrency-related investment products. In December 2017 TSSB started a four-week investigation into cryptocurrency offerings that provided the framework for the NASAA sweep. In addition to the 10 orders, TSSB is investigating over 60 suspect offerings in which promoters are allegedly attempting to capitalize on the hype and excitement associated with Bitcoin and other cryptocurrencies to defraud senior citizens, retirees and other investors.

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Citigroup Global Markets, Inc.,submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Citigroup Global Markets, Inc.., Respondent (AWC  2014039653701, May 21, 2018).
http://www.finra.org/sites/default/files/fda_documents/2014039653701
%20Citigroup%20Global%20Markets%2C%20Inc.%20CRD%207059%20AWC%20va.pdf
FINRA alleges that from June 2006 through at least September 2017, the CGMI failed to have adequate supervisory procedures reasonably designed to ensure compliance with federal securities laws and NASD and FINRA rules regarding the issuance of accurate customer trade confirmations. Pointedly, CGMI issued approximately 12.5 million customer trade confirmations that contained inaccurate information. In accordance with the terms of the AWC, FINRA imposed upon CGMI a Censure, a $550,000 fine, and an undertaking to address the deficient supervisory system and 
WSPs and to implement remedial measures. 

Arbitration Mistake Becomes A FINRA Moneymaker (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/3989/finra-futures-arbitration/
Imagine that you logged on to the wrong website and were charged $12,000 for that oops. Imagine that Amazon was charged $12,000 every time it sent a package to the wrong address. Imagine that you got socked with a $12,000 fee for each time you butt dialed someone. If life teaches us anything, it's that we often pay for our mistakes. On the other hand, when folks goof, it shouldn't be an opportunity to a fee and a surcharge and a penalty fee and a service fee. An oops is still an oops -- except when you need two forms of photo ID and a credit card to make amends. Consider the cost of a public customer's screw-up in a recent FINRA arbitration. It's gotta be FINRA's favorite mistake and quite the money maker!

In the Matter of Department of Enforcement, Complainant, vs. Michael Todd Clements. Respondent. (FINRA National Adjudicatory Council Decision, Complaint No. 2015044960501)
http://www.finra.org/sites/default/files/fda_documents/2015044960501%20Michael%
20Todd%20Clements%20CRD%201702071%20NAC%20va.pdf
Compliments to FINRA NAC for drafting a thorough and compelling Decision! The Financial Industry Regulatory Authority's National Adjudicatory Council ("NAC") found that Respondent Clements had made material misrepresentations and omissions of material fact in connection with self-offerings to investors and failed to supervise his firm's capital raising. Upon finding Respondent had engaged in fraud, the OHO barred Clements from association with any FINRA member in all capacities. For his failure to supervise, OHO assessed, but did not impose (in light of the bar,) a $73,000 fine and a Bar in all principal capacities. Clements appealed the OHO decision. The NAC affirmed the OHO findings of liability and modified the sanctions to order restitution instead of rescission and also impose the Bar in all principal capacities. As set forth in pertinent part under the heading "Procedural History" in the NAC Decision [Ed: footnotes omitted]:

On April 27, 2015, Enforcement filed an expedited complaint against Clements, Avenir, and Ibrahim, which it thereafter amended on May 26, 2015. Only three of the five causes of action were alleged against Clements. Cause one alleged that the respondents made material misstatements and omissions in connection with the sale of Avenir equity interests, in willful violation of Exchange Act Section 10(b) and Exchange Act Rule 10b-5 and in violation of FINRA Rules 2020 and 2010. More specifically, the complaint alleged that the respondents failed to disclose to NL Avenir's dire financial condition and recent investments in Avenir at lower prices. The complaint further alleged that Clements falsely told KK that Avenir was profitable and an investment in Avenir was safe, and that Clements and Avenir failed to disclose to KK Avenir's dire financial condition, recent investments in Avenir at lower prices, and the plan of action that Avenir submitted to its clearing firm. Cause three of the complaint alleged that Clements aided and abetted violations of Exchange Act Section 10(b) and Exchange Act Rule 10b-5, by assisting Ibrahim in his fraudulent sale of Avenir equity to NL and Rodriguez in his fraudulent sales of BRCH equity and debt to six customers, in violation of FINRA Rules 2020 and 2010. Cause five of the complaint alleged that Clements failed to supervise capital raising efforts on behalf of Avenir and BRCH, in violation of NASD Rule 3010(b) and FINRA Rules 3110(b) and 2010.

After a seven-day hearing, the Hearing Panel issued a decision on September 20, 2016.The Hearing Panel found, among other things, that Clements made material misstatements and omissions in connection with the sale of Avenir equity interests and Clements failed to supervise capital raising efforts on behalf of Avenir and BRCH. The Hearing Panel dismissed the allegations that Clements aided and abetted fraud. The Hearing Panel barred Clements for the fraud and ordered him to offer rescission to NL's estate and KK of their Avenir equity interests. For Clements's failure to supervise, the Hearing Panel assessed, but did not impose in light of the bar, a $73,000 fine and a bar in all principal capacities.

In the Matter of Department of Enforcement, Complainant, vs. Allen Holeman, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 22014043001601) 
http://www.finra.org/sites/default/files/fda_documents/2014043001601
%20Allen%20Holeman%20CRD%201060910%20NAC%20Decision%20va.pdf
Again, compliments to FINRA NAC for drafting a thorough and compelling Decision! A Financial Industry Regulatory Authority Office of Hearing Officers ("OHO") Panel found that Respondent Holeman had willfully failed to timely amend his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to disclose three federal tax liens. As set forth in the NAC Decision:

[T]he Hearing Panel found that Holeman willfully failed to timely disclose the three federal tax liens on his Form U4 and falsely completed his firm's annual compliance questionnaire. Finding that Holeman's misconduct was serious but not egregious, the Hearing Panel suspended Holeman for 30 business days and imposed a $10,000 fine. The Hearing Panel concluded that because Holeman's Form U4 violation was willful and the information he failed to disclose was material, Holeman was subject to statutory disqualification. The Hearing Panel also assessed hearing costs of $2,566.19. Holeman appealed the entirety of the Hearing Panel's decision, and Enforcement filed a cross-appeal as to the sanctions imposed. 

Following his appeal to the NAC, that body affirmed the OHO findings and modified the sanctions by increasing the suspension to four months and increasing the fine to $20,000. The NAC affirmed the hearing costs and Holeman's statutory disqualification. As set forth in part in the NAC Decision [Ed: Footnotes omitted]:

The Hearing Panel concluded that Holeman's nondisclosures were merely negligent, and that his violations were serious but not egregious. We disagree. We conclude based on the number of aggravating factors and the absence of any real mitigation that Holeman's misconduct was egregious and necessitates a sanction more meaningful than that imposed by the Hearing Panel. FINRA rules obligate individuals to make truthful and accurate disclosures. Holeman's false certification on his firm's compliance questionnaire and his repeated failures to amend his Form U4 to disclose material information about his financial problems raise serious questions about his ability to comply with regulatory requirements and demonstrate that he is currently unable to meet the high standards required of those employed in the securities industry. 

Finally, we agree with Enforcement that a "chief compliance officer's false statements to his firm on a compliance questionnaire constitute a particularly serious violation." As David Lerner's CCO, Holeman is the steward of his firm's compliance culture. He is responsible for managing compliance issues at David Lerner, including ensuring that his firm is complying with its regulatory requirements and that its employees are complying with internal policies and procedures. We find it deeply troubling that Holeman was aware of FINRA's investigation into his failure to disclose his federal tax liens, yet he failed to timely amend his Form U4 and falsely certified to David Lerner that no such liens existed. Holeman has four decades of experience in the securities industry, specifically in the area of compliance. He cannot legitimately claim any lack of understanding as to the importance of answering truthfully on a compliance questionnaire or the Form U4.