Securities Industry Commentator by Bill Singer Esq

August 24, 2018

In re: Pending Administrative Proceedings (Order, Securities and Exchange Commission; '33 Act Rel. No. 10536; '34 Act Rel. No. 83907; Invest. Adv. Act. Rel. No. 4993; Invest. Co. Act Rel. No.33211 / August 22, 2018)
In light of the Supreme Court's decision in Lucia v. SEC, the SEC had stayed any pending administrative proceeding initiated by an order instituting proceedings that commenced the proceeding and set it for hearing before an ALJ, including any such proceeding currently pending before the Commission. Effective August 22, 2018, the SEC allowed the stay to expire and reiterates its ratification of the appointments of Chief Administrative Law Judge Brenda Murray and Administrative Law Judges Carol Fox Foelak, Cameron Elliot, James E. Grimes, and Jason S. Patil. In lifting the stays, the SEC Order states, in part, that [Ed: footnotes omitted]:

The assigned ALJ shall exercise the full powers conferred by the Commission's Rules of Practice and the Administrative Procedure Act and shall not give weight to or otherwise presume the correctness of any prior opinions, orders, or rulings issued in the matter. Within 21 days of being assigned to the proceeding, the ALJ shall issue an order directing the parties to submit proposals for the conduct of further proceedings. After considering the parties' submissions, the ALJ shall hold a new hearing and prepare an initial decision; but if a party fails to submit a proposal, the ALJ may enter a default against that party pursuant to Rule of Practice 155 or impose another appropriate sanction under Rule of Practice 180.
According to the customer's allegations and the arbitrator's decision, we have a situation wherein an unnamed financial advisor apparently advised the customer to sell her "Merrill Lynch Investor Choice Annuity." Why did that specific conversation occur? We don't know because the FINRA Arbitration Decision doesn't provide that background. I would have been interested to learn whether Claimant Fluharty had decided to close a Merrill Lynch account, which held her annuity, or whether she needed to raise cash, or whether the Edward Jones advisor recommended the liquidation of the annuity in order to generate proceeds to purchase some house product or other investment. Whatever prompted the Edward Jones advisor's recommendation to sell the annuity, it would appear that the advice did not include a warning that the ensuing sale would trigger a taxable event. 

Second Circuit Affirms FINRA promissory note arbitration award involving 1099-C Issue
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2012, Claimant Wells Fargo Advisors LLC asserted that Respondent Mercer had breached the terms of three promissory notes and ultimately sought   $120,752.83 compensatory damages.In the Matter of the FINRA Arbitration Between Wells Fargo Advisors. LLC, Claimant, vs. Kevin Mercer,Respondent (FINRA Arbitration 12-02131, January 28, 2014)

Respondent Mercer representing himself pro se generally denied the allegations and asserted various affirmative defenses.

The sole FINRA Arbitrator found Respondent Mercer liable and ordered him to pay to Claimant Wells Fargo $103,389.82 in compensatory damages plus $17,363.01 interest. 

On November 21, 2014, Wells Fargo moved to confirm the FINRA Arbitration Award in the United States District Court for the Southern District of New York, which granted  the firm summary judgment. SDNY denied Mercer's motion to vacate as untimely and found that his arguments did not satisfy the requirements of the Federal Arbitration Act or that the award had been rendered in manifest disregard of the law.

Mercer representing himself pro se appealed SDNY's judgment to 2Cir. 
Wells Fargo Advisors, LLC, Petitioner/Appellee, v. Kevin Mercer, Respondent/Appellant (Summary Order, United States Court of Appeals for the Second Circuit, 16-1458)

2Cir reiterated the well-worn holding as to the obligation to "timely" file a motion to vacate:

[M]ercer's request to vacate the award is time-barred."Notice of a motion to vacate, modify, or correct an award must be served upon the adverse  party or his attorney within three months after the award is filed or delivered," 9 U.S.C. § 12, and "a party may not raise a motion to vacate, modify, or correct an arbitration award after the three month period has run, even when raised as a defense to a motion to confirm," Florasynth, Inc. v. Pickholz, 750 F.2d 171, 175 (2d Cir. 1984). Though the award was issued on January 24, 2014, Mercer made no effort to challenge it until he responded to Wells Fargo's motion to confirm on March 9, 2015 -- long after the three-month period expired. Even if Mercer's request was timely, however, we find no error with the District Court's alternative consideration of the merits of Mercer's defenses, which he reiterates on appeal.

An interesting argument made by Mercer for the first time on appeal is that Wells Fargo had issued a Form 1099-C, which purportedly demonstrated that most of the promissory note debt was discharged. In response, Wells Fargo explained that the cited Form 1099-C had been issued inadvertently and subsequently corrected to show that noe of the disputed debt had been discharged. Mercer did not dispute that he had, in fact, received a Corrected 1099-C or his former firm's representations as to the disclosure in that revised form. In dismissing Mercer's argument, 2Cir prefaces its review by noting that Mercer had arguably waived the argument by raising it for the first tim in his reply brief, but, notwithstanding, 2Cir notes that the majority of courts that have addressed this issue concluded that a:

Form 1099-C is not evidence that a debt was discharged, reasoning that, under the applicable regulations, "a creditor may be obligated to file a Form 1099-C even though an actual discharge of indebtedness has not yet occurred or is not contemplated." 
. . .
[M]ercer does not allege that he reported the discharged debt as part of his gross income, and Wells Fargo issued a corrected Form 1099-C. Accordingly, the tax consequences that made collection inequitable in the cases Mercer cites are not present in his case. . .

Accordingly, 2Cir affirmed SDNY's judgment and denied Mercer's motion to admit new evidence. 

Operator of bogus charity sentenced for defrauding multiple companies (DOJ Release)
Kai Brockington, the operator of the purported non-profit "Our Genesis Project," pled guilty in the United States District Court for the Northern District of Georgia to charges of mail fraud and willfully filing a false federal income tax return; and was sentenced to three years and five months in prison plus three years of supervised release, and ordered to pay restitution. Brockington caused employees of several large companies to falsely tell their employers that they had donated money to Our Genesis Project, which triggered the employers' matching donation programs to pay some $668,000. Those funds were spent on Brockington and his family members, including purchases of jewelry and expensive clothing and shoes, trips to Italy and Disney World, as well as updates to the family home and other living expenses.
Byron A. Cardozo was indicted in the United States District Court for the District of Massachusetts with one count of cyberstalking and one count of making interstate threats as a result of his alleged 18/month cyberstalking campaign that targeted his former schoolmate, a 30-year-old Massachusetts woman.  READ the FULL TEXT INDICTMENT As set forth in the DOJ Release:

[S]hortly after the victim wrote, and had published in an online magazine, an essay describing a one-time, traumatic sexual encounter she had with Cardozo when she was approximately 13 and he was approximately 17 and they attended the same school in Florida.  She used pseudonyms for Cardozo and others in the essay.  He sent hundreds of online communications, many of which he made in the "comments" section to the essay.  In those communications, Cardozo claimed that the victim had fabricated her claims about the coercive nature of the 2001 sexual encounter, provided graphic descriptions of his purported consensual sexual encounter with the victim, and described how he continued to masturbate to the victim's photographs.  Cardozo also made express and implicit threats to injure the victim.  At other times, he also apologized to her for the traumatic sexual experience in 2001, asked for forgiveness, expressed his love for her, and made veiled threats to commit suicide "because of you."   Cardozo continued to harass and threaten the victim despite the fact that she had obtained a state court order in April 2017, forbidding him from communication with her.

Court Bars Recidivist from Serving in Senior Positions in Public Companies (SEC 
Litigation Release No. 24244 )
The United States District Court for the Southern District of Indiana permanently prohibits Gary S. Williky, a former investor relations consultant for Imperial Petroleum, Inc., from violating antifraud , anti-manipulation, and the beneficial owner provisions of various federal securities laws; and, additionally, ordered Williky to pay civil penalties of $1,746,434 and disgorgement plus interest of $1,037,811. The SEC Litigation Release characterizes Williky as a "repeat securities law violator," who had perpetrated "an illegal market manipulation and insider trading scheme" involving a purported renewable fuel production business.