Securities Industry Commentator by Bill Singer Esq

June 29, 2018

FINRA (Opinion, SEC, '34 Act Rel. No. 83555; Admin. Proc. File No. 3-17930 )
READ In the Matter of FINRA Department of Enforcement, Complainant, v.  Louis Ottimo,Respondent. (FINRA National Adjudicatory Council Decision, Complaint No. 2009017440201  / March 15, 2017)
As set forth in the preamble of the SEC Opinion:

Louis Ottimo, a former registered representative with EKN Financial Services Inc. ("EKN"), a former FINRA member firm, seeks review of a FINRA disciplinary action finding that he fraudulently omitted information from his biography in a private placement memorandum (the "PPM") in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and FINRA Rules 2020 and 2010. FINRA also found that Ottimo failed timely and accurately to update his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to reflect unsatisfied tax liens, judgments, and a bankruptcy filing in violation of FINRA Rules 1122 and 2010, NASD IM-1000-1, and Article V, Section 2(c) of FINRA's ByLaws. For the fraud violations, FINRA imposed a bar. For the Form U4 violations, FINRA assessed -- but in light of the bar did not impose -- a $25,000 fine and a two-year suspension in all capacities. FINRA also found that Ottimo's misconduct was willful and that he was statutorily disqualified from association with a FINRA member firm as a result. 

We affirm FINRA's finding of the Form U4 violations, which Ottimo does not challenge, and affirm in part its findings of fraud as to the PPM. But part of FINRA's fraud findings is not supported by the record. Accordingly, we remand for FINRA to reassess the sanctions.
There are lawsuits in which it's pretty clear that we're dealing with an innocent victim. Imagine a pedestrian simply walking down the sidewalk and he gets hit by a car, which was cut off by a cab, which was rear ended by a bus, which was swerving to avoid hitting a bicyclist, who was forced out of the bike lane by a parked ambulance handling a medical emergency. Somebody's got to pay the injured pedestrian. In a recent FINRA customer arbitration, a public customer relied upon the valuation of his bonds as posted on his brokerage firm's website. Those prices may not have been accurate. The brokerage firm argued that the customer had "options" for verifying the accuracy of the bond prices.The brokerage firm argued that it had merely reposted prices provided to it by an exchange. What's an arbitrator to do? 

SEC Proposes Whistleblower Rule Amendments (SEC Press Release 2018-120)
Established in 2010, the SEC's Whistleblower Program is in need of an overhaul. Read various articles at
The SEC intends to enhance the program through proposed rules would, among other things, provide the additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute. As set forth in part in the SEC Press Release:
  • Historically, over 60% of the awards given out in our whistleblower program have been less than $2 million.  In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the Commission in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount up to $2 million.   In exercising its discretion to increase an award under this provision, the Commission would consider whether the increase helps to better achieve the program's objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.  
  • The proposing release also includes a general inquiry for public comment regarding whether the Commission could establish a potential discretionary award mechanism for Commission enforcement actions that do not qualify as covered actions (because they do not meet the more than $1 million threshold requirement), are based on publicly available information, or where the monetary sanctions collected are de minimis. 
  • Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards.[1]  In the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the Commission in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.  However, in no event would the award be adjusted below $30 million.  This proposed amendment is intended to make sure that the Commission is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.
Former Chief Financial Officer of Bankrate Inc. Pleads Guilty to Orchestrating Complex $25 Million Accounting and Securities Fraud Scheme (DOJ Press Release)
Edward J. DiMaria, the former chief financial officer of Bankrate Inc.pled guilty in the United States District Court for the Southern District of Florida to one count of conspiracy to make false statements to a public company's accountants, falsify a public company's books, records and accounts, and commit securities fraud; and one count of making materially false statements to the Securities and Exchange Commission. The charges were in connection with his role in orchestrating an accounting and securities fraud scheme that caused more than $25 million in shareholder losses. DiMaria admitted, in part,  that between 2010 and 2014, he directed and conspired to commit a complex scheme to artificially inflate Bankrate's earnings through so-called "cookie jar" or "cushion" accounting, where millions of dollars in unsupported expense accruals were purposefully left on Bankrate's books and then selectively reversed in later quarters to boost earnings.  

Investment Advisor Pleads Guilty to Investment Fraud / Rick Guyon Defrauded Investors of $1.9 Million (DOJ Press Release)
Rick Guyon, a/k/a, Richard Guyon, a/k/a Rick Garrison, a/k/a Mark Thomas, pled guilty in the United States District Court for the District of Idaho to one count of wire fraud. Federal prosecutors alleged that from 2015 through 2017, Guyon devised a scheme to defraud individual investors that (i) resulted in an actual loss of between $1,500,000 and $3,500,000; (ii) resulted in a substantial financial hardship to an investor-victim who personally lost approximately $1,281,783; and (iii) involved the defendant acting as an organizer and leader of at least three other participants in the scheme.
In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC alleged that former Equifax software engineering manager Sudhakar Reddy Bonthu traded on confidential information he allegedly received while creating a website for consumers who had been impacted by a data breach.  The Complaint alleges that although Bonthu was told the work was being done for an unnamed potential client, he apparently concluded that Equifax itself was the victim of the breach.The Complaint alleges that Bonthu purchased Equifax Put options in advance of the company's September 2017 announcement of a massive data breach that exposed Social Security numbers and other personal information of approximately 148 million U.S. customers.  Bonthu allegedly sold the put options for a $75,000 profit, which was allegedly over a 3,500% return on his initial investment. READ the FULL TEXT Complaint  In a parallel proceeding, the U.S. Attorney's Office for the Northern District of Georgia filed criminal charges against Bonthu.To settle the SEC's civil charges, Bonthu has agreed to a permanent injunction and to return his allegedly ill-gotten gains plus interest.  The settlement is subject to court approval.

SEC Proposes New Approval Process for Certain Exchange-Traded Funds (SEC Press Release 2018-118)
The SEC proposed a  a new rule and amendments to forms designed to modernize the regulatory framework for exchange-traded funds ("ETFs").  Proposed Rule 6c-11 would permit ETFs that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 (the "Act"), and come directly to market without the cost and delay of obtaining an exemptive order. Proposed Rule 6c-11 would be available to ETFs organized as open-end funds. ETFs organized as a unit investment trusts, ETFs structured as a share class of a multi-class fund, and leveraged or inverse ETFs would not be able to rely on the proposed rule.