Securities Industry Commentator by Bill Singer Esq

June 26, 2018

Wall Street watchdog accused of age discrimination (New York Post by Kevin Dugan)
The New York Post article asserts in part that:

The Financial Industry Regulatory Authority ousted roughly 20 senior employees after it lost a lucrative contract with the New York Stock Exchange, according to a lawsuit filed by one of the employees.

Brian McIntyre, a former analyst at FINRA, claimed in court papers that each of the employees pushed out was over 40 years old.

McIntyre, who had worked for FINRA for nearly 10 years before getting the boot in 2017, was replaced by a younger, less expensive employee after the regulator tried to cut costs in the wake of lost business, according to the suit.

"FINRA utilized its pension eligibility termination as a pretext to disguise its discriminatory intent and effect upon its older employees," the suit claims.

In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Wells Fargo Advisors, LLC,submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of Wells Fargo Advisors, LLC, Respondent (SEC Order Instituting Administrative and Cease-And-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order; '33 Act Rel No. 10511; '34 Act Rel. No. 83508; Invest. Adv. Act Rel. No. 4947; Admin. Proc. File No. 3-18556 / June 25, 2018).
In accordance with the terms of the settlement, the SEC Ordered Respondent Censured and to cease and desist from committing or causing any violations and any future violations of cited provisions of the Securities Act. Further Respondent shall pay $5,108,441.27 in disgorgement, prejudgment interest, and a civil monetary penalty As set forth under the heading "Summary":

1. From at least January 2009 through June 2013, certain registered representatives at Wells Fargo Advisors, LLC ("WFA") and its predecessor Wells Fargo Investments, LLC ("WFI")2 improperly solicited customers to redeem their market-linked investments ("MLI") early and purchase new MLIs without adequate analysis or consideration of the substantial costs associated with such transactions. 

2. An MLI is a fixed maturity financial product whose interest is determined by the performance of a reference asset or market measure such as an equity or commodity index over the term of the product. MLIs have limited liquidity and significant upfront fees, and accordingly WFA considered them to be products intended to be held to maturity and in 2011 implemented a policy prohibiting representatives from engaging in "short-term trading" or "flipping" of MLIs. Notwithstanding WFA's internal guidance and policy, and despite the adverse economic consequences to WFA customers, certain WFA representatives did not reasonably investigate or understand the significant costs of MLI exchanges. Nevertheless, they recommended to their customers that they redeem their MLIs early, typically to realize profits, and to use the proceeds from those redemptions to purchase new MLIs. Supervisors routinely approved the recommendations or the exchanges. This practice caused certain WFA customers to incur significant costs and impaired the customers' ability to achieve their investment objectives. As a consequence, WFA obtained commissions by means of recommendations that contained implied representations that WFA personnel had formed a reasonable basis for the recommendations when they had not, in fact, done so. 

Second Circuit Affirms Martoma Insider Trading Ruling. In United States of America, Appellee, v. Mathew Martoma, Defendant/Appellant (Opinion, United States Court of Appeals for the Second Circuit; 14-3599 / June 25, 2018)
In a Majority Opinion by Katzman and Chin, Judges; Pooler J. dissenting, the 2Cir affirms the District Court. For background on the case visit the Blog Martoma Archive
As set forth in the "Syllabus" to the 2Cir Opinion:

Defendant‐appellant Mathew Martoma appeals from a judgment of conviction entered on September 9, 2014 in the United States District Court for the Southern District of New York (Gardephe, J.). Martoma was found guilty, after a jury trial, of one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme. After Martoma was convicted, this Court issued a decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which elaborated on the Supreme Court's ruling in Dirks v. S.E.C., 463 U.S. 646 (1983), concerning liability for a "tippee" who trades on confidential information obtained from an insider, or a "tipper."   

On appeal, Martoma argues that the jury in his case was not properly instructed and that the evidence presented at his trial was insufficient to sustain his conviction. Martoma contends that the jury instructions ran afoul of Newman by allowing the jury to find that a tipper receives a "personal benefit" from gifting inside information even where the tipper and tippee do not share a "meaningfully close personal relationship." He further argues that the evidence at trial was insufficient to sustain a conviction under any theory of personal benefit. 

We conclude that the jury instructions are inconsistent with Newman. That decision held that a personal benefit in the form of "a gift of confidential information to a trading relative or friend" requires proof that the tipper and tippee share a "meaningfully close personal relationship." 773 F.3d at 452. Newman explained that this standard "requires evidence of ‘a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].'" Id. Thus, Martoma's jury instructions were erroneous, not because they omitted the term "meaningfully close personal relationship," but because they allowed the jury to convict based solely on evidence of friendship without also requiring either that the tipper and tippee shared a quid pro quo‐like relationship or that the tipper intended to benefit the tippee. 

We nonetheless conclude that this instructional error did not affect Martoma's substantial rights. At trial, the government presented compelling evidence that at least one tipper shared a relationship suggesting a quid pro quo with Martoma. For the same reason, Martoma's challenge to the 3 sufficiency of the personal‐benefit evidence fails. The government also presented sufficient evidence for a rational trier of fact to conclude that at least one tipper received a personal benefit by disclosing inside information with the intention to benefit Martoma. Accordingly, the judgment of the district court is AFFIRMED.

The Deceased Father, Claimant Mother, Daughter, Son In Law Stockbroker, And A Kickboxing Investment (BrokeAndBroker.Com Blog)
In today's featured FINRA public customer arbitration against both UBS and Morgan Stanley, we have some curious facts and allegations. We go a mother and father and their daughter. We got the son-in-law stockbroker. We got a disputed kickboxing investment. We got some odd decisions to drop parties and not to call certain witnesses. We got allegations involving money that seems to have come and gone and come back without damage. All in all, it's a confusing case that becomes even more so after you read the arbitrators' decision. 

SEC Notices of Stay: The following boilerplate language is beginning to appear in published SEC Notice to Stay:

This proceeding is stayed pending the Securities and Exchange Commission's consideration of the parties' partial settlement. On June 21, 2018, the Commission issued an order immediately staying all administrative proceedings pending before it or its administrative law judges in light of the Supreme Court's decision in Lucia v. SEC, No. 17-130 (U.S. June 21, 2018). Pending Admin. Proc., Securities Act of 1933 Release No. 10510, The Commission's stay will last until July 23, 2018, or further order of the Commission. Id.

The United States District Court for the District of South Carolina entered a Consent Order against Defendant Jody Dupont and an Order of Default Judgment against his company (Open Range Trading) in connection with the CFTC's allegations that Dupont and Open Range fraudulently solicited at least 175 clients and prospective clients to subscribe to a commodity futures day-trading system that generated buy and sell trading signals in various futures markets, including the E-mini S & P 500 Index, the Russell 2000 Index Mini, crude oil, and soybeans. The Consent Order requires Dupont to disgorge $92,000 pay a $100,000 civil monetary penalty; the Consent Order also enjoins Dupont from future violations and permanently prohibits Dupont from seeking registration with the CFTC and from trading for five years.
Dupont Consent Order