Securities Industry Commentator by Bill Singer Esq

October 15, 2018
I received an email presenting "13 Major Wall Street Flunkies and 19 Minor Wall Street Flunkies," which is characterized as profiles on "lawmakers who have taken heaps of money from big banks, payday lenders, and private equity firms etc. while using their powers of office to help those companies and their executives enrich themselves at the expense of the rest of us." The Wall Street Flunkies Project asserts that it is

Working alongside progressive groups, activists, and candidates around the country, we hope to:
  • Help good congressional candidates defeat bad candidates;
  • Demonstrate that lawmakers can be made to pay a price for doing Wall Street's bidding;
  • Inspire more candidates and office-holders to be brave about these issues;
  • Help lay the policy foundation for a financial system that serves the American people --  the vast majority of us rather than a small privileged slice of us; and
  • Help free our country and its political process from the power of organized money. . .
Three Traders Charged, and Two Have Agreed to Plead Guilty, in Connection with More Than $60 Million Commodities Fraud and Spoofing Conspiracy (DOJ Release)
In an Indictment filed in the United States District Court for the Southern District of Texas, Yuchun "Bruce" Mao, 39, a citizen of the People's Republic of China, was indicted on one count of conspiracy to commit commodities fraud, two counts of commodities fraud and two counts of spoofing. In a criminal Information, Kamaldeep Gandhi was charged with two counts of conspiracy to engage in wire fraud, commodities fraud and spoofing; and Krishna Mohan was charged by criminal information with one count of conspiracy to engage in wire fraud, commodities fraud and spoofing. Gandhi and Molan have pled guilty to the charges of criminal information.  As set forth in part in the DOJ Release:

[M]ao was co-head of a trading team that traded commodities on behalf of Trading Firm A, working in Chicago and New York.  The indictment alleges that from in or around March 2012 through in or around March 2014, Mao and others conspired to mislead the markets for E-Mini S&P 500 and E Mini NASDAQ 100 futures contracts traded on the Chicago Mercantile Exchange (CME) and E-Mini Dow futures contracts traded on the Chicago Board of Trade (CBOT). The indictment further alleges Mao and his co-conspirators deceived market participants and manipulated markets by placing thousands of orders that they did not intend to execute, or "spoof orders," in order to create the false and misleading appearance of increased supply or demand. Market participants that traded futures contracts in these three markets while the spoof orders distorted market prices incurred market losses of over $60 million. Mao and his co-conspirators are alleged to have placed these spoof orders in order to benefit themselves Trading Firm A.

Count one of the criminal information alleges Gandhi conspired, with Mao and others, to commit the underlying offenses while employed at Trading Firm A.  Count two of the criminal information alleges that, from in or around May 2014 through in or around October 2014, Gandhi, while employed at a second Chicago-based trading firm (Trading Firm B), conspired with others to mislead the markets for E-Mini S&P 500 futures contracts traded on the CME by agreeing to place, and himself placing, spoof orders for E-Mini S&P 500 futures contracts in order to create the false and misleading appearance of increased supply or demand. . .
You wouldn't think that Wall Street would want to cultivate an in-house compliance protocol of "Don't Ask, Don't Tell," but a recent FINRA arbitration suggests that such a shift in tone is underway. Wall Street's entire regulatory scheme is predicated upon DISCLOSURE. That's not a stretch. Critics of regulation argue that it's sort of okay to do anything as long as you disclose it. As a libertarian, I find it hard to argue that point -- but to a limit. Any regulatory regime based on disclosure must insist that said disclosure be made in full, in intelligible terms, and subject to reasonable updates when conditions change. A recent FINRA arbitration asks us to consider what happens when a brokerage firm sorta twists a stockbroker's arm and suggests that, hey, maybe if a customer don't ask ya about sumthin' there's no big deal about not volunteerin' nuthin. Know what I'm sayin'? No one likes a big mouth. Ya don't gotta speak if they don't ask ya, right?
The SEC entered into settlements with three former BDO USA LLP accountants for their alleged improper professional conduct during an audit. Without admitting or denying the findings, senior manager on the audit engagement Lev Nagdimov, engagement partner Richard J. Bertuglia, and engagement /quality review partner John W. Green were found to have violated auditing standards established by the Public Company Accounting Oversight Board, and engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the SEC's Rules of Practice; and each of the respondents agreed to be suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies.  Nagdimov is permitted to apply for reinstatement after five years, Bertuglia after three years, and Green after one year. The SEC Order alleges that BDO fell behind schedule while conducting its 2013 integrated audit of AmTrust Financial Services Inc. and ultimately failed to complete necessary audit procedures before AmTrust's deadline to file its annual report with the SEC. To create the appearance that BDO's audit was in fact complete, Nagdimov, instructed the audit team to sign off on all work papers and audit programs regardless of whether its work was finished; and, further, to load and sign blank or placeholder work papers in BDO's electronic files -- which resulted in improper "predated" audit documentation.READ the FULL TEXT SEC Order 

In the Matter of FINRA Department of Enforcement, Complainant, vs. William H. Murphy & Co., Inc. (Decision, National Adjudicatory Council, Complaint No. 2012030731802)
20Murphy%20CRD%20343492%202012030731802%20NAC%20va.pdf As set forth in the preamble portion of the NAC Decision:

William H. Murphy & Co., Inc. ("WHM") and William H. Murphy ("Murphy") appeal an Extended Hearing Panel decision issued on June 3, 2016. The Extended Hearing Panel found that WHM violated FINRA Rule 2010 by engaging in unregistered sales of securities without the benefit of an available exemption from registration, in violation of FINRA Rule 2010. For this violation, it fined WHM $50,000 and ordered that WHM disgorge $78,210.91, plus prejudgment interest. The Extended Hearing Panel also found that WHM and Murphy failed to establish and maintain a supervisory system, including written supervisory procedures, in violation of NASD Rule 3010 and FINRA Rule 2010. For these violations, the Extended Hearing Panel fined WHM $50,000, fined Murphy $50,000, suspended Murphy from association with any FINRA member in all capacities for six months, and ordered that he requalify by examination before reentering the securities industry in any registered capacity requiring qualification. After our independent review of the record, we affirm the Extended Hearing Panel's findings of violation. We, however, modify the sanctions imposed.

The NAC ordered the following: 

We affirm the Extended Hearing Panel's findings that WHM violated FINRA Rule 2010 by selling unregistered securities in violation of Section 5 of the Securities Act. For this violation, WHM is fined $50,000 and ordered to disgorge $23,230.05, plus prejudgment interest, to FINRA.

WHM and Murphy violated NASD Rule 3010 and FINRA Rule 2010 by failing to establish
and maintain a supervisory system, including written supervisory procedures, reasonably designed to ensure compliance with Section 5 of the Securities Act. For this violation, WHM and Murphy are fined $50,000, jointly and severally, Murphy is suspended from associating with any FINRA member firm in all capacities for six months, and he is required to requalify by examination before he reenters the securities industry in any capacity requiring qualification. Lastly, we affirm the
Extended Hearing Panel's order that WHM and Murphy pay, jointly and severally, hearing costs totaling $15,888.48.44.

Compliance and legal staff should read the entire NAC Decision, which is replete with sufficient content and context and presents a compelling rationale. The sense of the NAC's dissatisfaction with the facts at issue is clearly conveyed, for example, in this extract at Page 31 of the Decision:

As previously stated, the fact that WHM and Murphy ignored obvious red flags signaling violative conduct weighs towards higher sanctions. Murphy, as the firm's president, was involved in the entire onboarding process of servicing and supervising the LREA OSJ. He was fully aware that Price and Hutton were conducting radio shows and workshops on behalf of LREA and WHM. He pre-approved the LREA scripts and advertising. He also knew, or should have known, that the radio shows and workshops would generate unregistered, non-exempt sales to investors. Murphy, however, failed to effectively supervise the LREA OSJ and registered personnel. The record is
devoid of any documented evidence that Murphy periodically inspected the LREA OSJ to detect and deter WHM representatives from extending unregistered offers and sales to the general public in contravention of the securities laws and applicable FINRA rules. Murphy testified that he would visit LREA on occasion but conducted only one formal annual review. Murphy also knew that Price had no securities background before she associated with WHM and Hutton had less than one year of experience with private placements. Yet, WHM and Murphy failed to provide Hutton with any formal supervisory training to ensure Hutton carried out his supervisory responsibilities adequately, and Price was only verbally instructed to never mention any specific securities. Moreover, WI IM and Murphy also failed to document reviews of the data tracking reports and client spreadsheets, LREA's websites, podcasts and other associated communications to ensure that no unregistered securities were being offered by general solicitation.
Tully Lovisa pled guilty to conspiracy to commit mail fraud in the United States District Court for the Eastern District of New York. Lovisa obtained $30 million in fees after sending prize-promotion mailings that led recipients, many of whom were elderly and vulnerable, to believe that they could claim large cash prizes in exchange for a modest fee.  Lovisa also pleaded guilty to wire fraud in connection with a related scheme to defraud the Federal Trade Commission. Lovisa's violated prior court orders that resulted from an FTC lawsuit against him.  As part of his resolution the FTC lawsuit, Lovisa was ordered by a federal court to sell a home he owned in Las Vegas, Nevada, and turn over the proceeds to the FTC; however, he arranged for a sham sale for $155,500, and, thereafter, sold the house for $540,000 and kept the proceeds.