Securities Industry Commentator by Bill Singer Esq

August 15, 2018
In what DOJ trumpets as the largest penalty imposed by it for financial crisis-era misconduct at a single entity under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Royal Bank of Scotland Group plc (RBS) agreed to pay $4.9 billion in settlement of federal civil claims that it had misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008. Through its alleged scheme, RBS earned hundreds of millions of dollars, while simultaneously ensuring that it received repayment of billions of dollars lent to originators to fund the faulty loans underlying the RMBS. Allegedly, RBS used RMBS to push the risk of the loans, and tens of billions of dollars in subsequent losses, onto unsuspecting investors, including non-profits, retirement funds, and federally-insured financial institutions. READ the FULL TEXT:
Settlement Agreement
Statement of Facts
List of Deals
FINRA should immediately appoint an outside, independent counsel to investigate the allegations raised by arbitration Chair Brooks White, particularly as they pertain to possible staff misconduct and/or fraud perpetrated upon the arbitration panel. If, when, and as appropriate, FINRA should suspend or place on administrative leave any staff whose conduct presents the reasonable appearance of malfeasance, nonfeasance, or other misconduct. If the Board determines that, in fact, misconduct occurred, a recommendation of suspension and/or termination of employment should be forthcoming. The Board should unequivocally confirm that no retaliatory action of any nature should be taken against Ardian Hasko or Brooks White, and, in particular, the Board should regularly review over the course of at least the next three years, FINRA's list of arbitrators and the appointments of same to ensure that its dictates are being followed with respect to the further service of arbitrator White. Finally, the independent counsel should be tasked with preparing a report to be provided to the Board but also publicly published on FINRA's website. 

FINRA Announces Nomination Process to Fill Upcoming Small Firm Vacancy on the National Adjudicatory Council Petitions for Candidacy Due: September 26, 2018 (FINRA Election Notice)
FINRA's Nominating and Governance Committee will not nominate a candidate for election in 2018 to fill the vacant Small Firm seat on the NAC.  On Friday, August 10, 2018, the number of FINRA small firms was 3,348. Eligible candidates may be included as candidates on the ballot to fill the open Small Firm seat on the NAC if:

a. within 45 days of the date of this Election Notice, such person presents to the Corporate
Secretary of FINRA petitions in support of his or her nomination duly executed by 3
percent of the members entitled to vote for such nominee's election; and

b. the Corporate Secretary certifies that the petitions are duly executed by the executive
representatives of the requisite number of members entitled to vote for such
nominee's election, and the person satisfies the small firm size classification of the
NAC seat to be filled, based on such information provided by the person as is
reasonably necessary to make the certification.

In the Matter of Tomahawk Exploration LLC and David Thompson Laurance, Respondents (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; '33 Act Rel. No. 10530; '34 Act Rel. No. 83839; Admin. Proc. File No. 3-18641 / August 14, 2018 ) (the "OIP").  
In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Tomahawk Exploration LLC and David Thompson Laurance submitted an Offer of Settlement, which the federal regulator accepted.In accordance with the terms of the OIP, Respondents Tomahawk and Laurance were ordered to ease and desist from committing or causing any violations and any future violations of Section 5 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Respondent Laurance is ordered to  pay a $30,000 civil penalty; and is prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 78l, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d); and he is also barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock. As set forth in the "Summary" portion of the OIP:

1. From July through September 2017, Tomahawk Exploration LLC, an oil and gas exploration company, and its founder, David Laurance (collectively, "Respondents"), offered and sold digital assets in the form of tokens called "Tomahawkcoins," or "TOM," through an online initial coin offering ("ICO"). Respondents sought to raise $5 million through the ICO, purportedly to fund oil drilling in Kern County, California, having previously tried unsuccessfully to raise money for the project through private investments and the public capital markets. The Company's website and white paper touted the tokens' potential for significant long-term profits based on Tomahawk's anticipated oil production. Promotional materials represented that TOM investors could trade their tokens for potential profits on a token trading platform, and that they would have the option to convert their tokens into Tomahawk equity at a future date. Although Respondents failed to raise money through the ICO, Tomahawk issued approximately 80,000 TOM as part of a "Bounty Program" in exchange for online promotional and marketing services. 

2. Based on the facts and circumstances set forth below, TOM tokens are securities because they are investment contracts under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), and its progeny, including the cases discussed by the Commission in its Report Of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act Of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (the "DAO Report"), and because they represent a transferable share or option on a security. Tomahawk's issuance of tokens under the Bounty Program constituted an offer and sale of securities because the Company provided TOM to investors in exchange for services designed to advance Tomahawk's economic interests and foster a trading market for its securities. Tomahawk and Laurance violated Sections 5(a) and 5(c) of the Securities Act by offering and selling TOM without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration with the Commission. 

3. Tomahawk and Laurance also violated the antifraud provisions of the federal securities laws with respect to the offering. Specifically, they falsely stated Tomahawk's prospects for success, using inflated projections of oil reserves and production that they claimed were "risk adjusted" when they were not. They also falsely represented that Tomahawk possessed leases for the project when it did not, and falsely stated that Laurance has a "flawless background" when he has a prior criminal conviction for conduct relating to securities offerings. 

In the Matter of Lockwood Advisors Incorporated, Respondent (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing A Cease-And-Desist Order; Invest. Adv. Act Rel. No. 4984; Admin. Proc. File No. 3-18638 / August 14, 2018 ) (the "OIP").
In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Lockwood Advisors Incorporated submitted an Offer of Settlement, which the federal regulator accepted. In accordance with the terms of the OIP, Respondent Lockwood Advisors Incorporated was ordered to ease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder; and shall pay a $200,000 civil money penalty. As set forth in the "Summary" portion of the OIP:

1. This matter arises from Lockwood's failure to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its assessment, oversight, and disclosure of the trading away practices of the third-party portfolio management firms in its wrap programs. More specifically, as described below, from at least 2008, and continuing on an ongoing basis to the present, Lockwood's policies and procedures failed to require that material information about trading away (i) would be obtained and considered by Lockwood prior to making the third-party portfolio management firms available to clients in its wrap programs and/or (ii) would be disclosed to clients directly or through their third-party registered investment advisers. 

2. Lockwood sponsored separately managed account wrap programs that it offered to third-party registered investment advisers and their clients. In the wrap programs, the investments were managed by third-party portfolio management firms pursuant to investment strategies selected by the clients in consultation with their investment advisers. Lockwood and the other participating firms were compensated for the advisory, brokerage, and custodial services that they provided by sharing an annual wrap fee based on a percentage of the assets under management. Certain expenses were not covered by the wrap fee, such as when a portfolio manager elected to direct the execution of a trade through a broker-dealer firm that was not participating in the wrap program. This practice was referred to as "trading away" or "stepout trading," and, in many cases, it resulted in transaction costs being borne by the wrap program client in addition to the annual wrap fee. Despite paying these costs, wrap program clients were not notified that particular trades were stepped-out nor, if applicable, how much step-outs cost on top of the wrap fee. 

3. Lockwood's policies and procedures were not reasonably designed to prevent violations of the Advisers Act with respect to trading away in two respects. First, Lockwood's policies and procedures did not require it to determine whether a portfolio manager had a history of trading away or to assess the likelihood that the portfolio manager would do so in Lockwood's wrap programs prior to making that manager available to clients in its wrap programs. Second, the policies and procedures did not require Lockwood to provide information about trading away to clients and their investment advisers once those portfolio managers were on-boarded into Lockwood's wrap programs, even though the policies and procedures did require Lockwood to select and contact, on a quarterly basis, a portion of the portfolio managers that had traded away that quarter and gather details about the trading, the applicable policies of the given manager, and the rationale for trading away. As a result, Lockwood failed to provide clients or their investment advisers with material information about trading away and the full extent of the costs of choosing certain portfolio managers in Lockwood's wrap programs. By contract, Lockwood had allocated to the clients' investment advisers the responsibility of evaluating the suitability of the portfolio managers for the individual clients, but Lockwood did not provide the advisers with enough 3 information to perform that evaluation. By failing to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, Lockwood violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

Florida Computer Store Operator Is Sentenced To 15 Months For Wire Fraud (DOJ Press Release)
Alan F. Luboff was sentenced in the United States District Court for the Western District of North Carolina to 15 months in prison and three years of supervised release on wire fraud charges, and ordered to pay $119,900 in restitution. Try as I might, I'm not sure that I can reduce the DOJ Press Release's recitation of the allegations to fewer words that would still make sense. As such, here is the verbatim explanation in pertinent part from the Release:

Luboff was the operator of "Triple Play Sales," a computer store located in Coral Springs, Florida.  As part of his operation of Triple Play Sales, Luboff purchased and sold computer products and earned commission on those transactions.  Court records show that on January 25, 2018, Luboff emailed a past business associate, identified in court documents as "S.F.," proposing a transaction to help Luboff finance 600 central processing units (CPUs).  S.F. is a business owner and resident of Cornelius, N.C. 

According to court records, Luboff falsely represented to the victim that if S.F. gave him $131,400 to help purchase the CPUs, Luboff would provide S.F. with a $20,000 profit within one week.  To further induce S.F. to give him the money, Luboff lied to the victim and said that he was going to invest $30,000 of his own money to complete the transaction.  The victim wired $131,400 to Triple Play Sales in accordance with Luboff's instructions. 

According to court records, contrary to what he told S.F., Luboff did not have a proposed transaction for CPUs lined up, and Luboff had no intention of using S.F.'s money to purchase CPUs. Rather, Luboff spent S.F.'s money on personal expenditures, such as to pay for car insurance and law care expenses, among other things.

When S.F. confronted Luboff about his failure to return S.F.'s principal and income from the transactions, Luboff told the victim a series of lies, including that federal law enforcement agents had frozen the money because a party to the purported transaction had business overseas.