Securities Industry Commentator by Bill Singer Esq

October 17, 2018
Former Public Company Accounting Oversight Board ("PCAOB") Inspections Leader and KPMG Executive Director Cynthia Holder pled guiltyt o one count of conspiracy to defraud the United States; one count of conspiracy to commit wire fraud; and two counts of wire fraud in the United States District Court for the Southern District of New York. Allegedly, KPMG had fared poorly in recent PCAOB inspections and in 2014, the firm received approximately twice as many comments as its competitor firms.  By 2015, KPMG was engaged in efforts to improve its perform. Holder's plea was in connection with allegations that she had participated in a scheme to defraud the SEC and the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections, the results of which were shared with, and utilized by, the SEC in carrying out its governmental functions. ance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel.
Sometimes the majesty and detail of a scam or fraud is really, really impressive. Most of the time, however, it's all a dumbass variation on a theme that I've seen tried and failed over my decades on Wall Street. Gets to the point where my reaction is likely: "Oh, that again?" In any event, we got some poor shlub selling both insurance and stocks. Apparently, he wants some travel perk but needs to close on one more insurance policy. Frankly, the whole effort comes off as somewhat lame and not thought through. Alas, it don't end well but, perhaps, this career crash will deter others. Look for a deal on Travelocity or Expedia. Use a credit card with extra travel points. Whatever you do, however  don't fake a signature on an insurance policy, okay?  ("SEC SIFMA Opinion")


As set forth in the preamble to the SEC SIFMA Opinion [Ed: footnotes omitted]:

Applicant Securities Industry and Financial Markets Association ("SIFMA") challenges fees imposed by two national securities exchanges for market data, appealing from an administrative law judge's initial decision rejecting its challenges. We review SIFMA's claims under Section 19(f) of the Securities Exchange Act of 1934 ("Exchange Act"), which requires exchanges NYSE Arca, Inc. ("NYSE Arca"), and Nasdaq Stock Market LLC ("Nasdaq") to show that their fees are "consistent with the purposes of" that act. The Exchange Act requires that the fees be "fair and reasonable" and "not unreasonably discriminatory." The exchanges must show that the fees satisfy this standard by a preponderance of the evidence. We conclude that the exchanges failed to meet their burden with respect to the fees at issue and accordingly set aside those fees prospectively (i.e., as of the date of this order). 

In light of the SEC SIFMA Opinion of the same day, the SEC ordered a remand of various rule challenges to the respective exchanges for their reveiw, the SEC declined to set aside the challenged rule changes. [Ed: footnotes omitted]:

On October 16, 2018, the Commission issued its decision in Securities Industry and Financial Markets Association (the "SIFMA Decision"). In that proceeding, the Securities Industry and Financial Markets Association ("SIFMA") challenged under Section 19 of the Securities Exchange Act of 1934 (the "Exchange Act") certain fees imposed by two national securities exchanges, NYSE Arca, Inc. and Nasdaq Stock Market LLC, as improper limitations or prohibitions of access to services offered by the exchanges. Our decision held that the exchanges failed to meet their burden of establishing that the challenged fees were consistent with the purposes of the Exchange Act, and accordingly set them aside. 

While SIFMA's challenge to those fees was before us, SIFMA and Bloomberg L.P. filed an additional 61 applications for review that challenged over 400 rule changes filed by national securities exchanges and plan amendments filed by National Market System ("NMS") plan participants as improper limitations or prohibitions of access under Exchange Act Sections 11A and 19. These applications for review remained pending while we considered the SIFMA challenges that resulted in the SIFMA Decision.
Nomura Holding America Inc. and several of its affiliates have entered into a settlement with DOJ under which Nomura will pay a $480 million penalty to resolve federal civil claims alleging that Nomura had knowingly securitized defective mortgage loans in itsresidential mortgage-backed securities ("RMBS") and misled investors regarding the quality and characteristics of those loans. READ the FULL TEXT Settlement Agreement
Ross McLellan, former executive vice president of State Street who served as global head of its Portfolio Solutions Group and president of its U.S. broker-dealer unit, was convicted by a jury in the United States District Court for the District of Massachusetts on one count of conspiring to commit securities fraud and wire fraud, two counts of securities fraud, and two counts of wire fraud in connection with his role in a scheme to defraud customers of State Street's Transition Management line of business. McLellan was found guilty of applying secret commissions to billions of dollars of securities trades executed on behalf of these customers. McLellan was sentenced to 18 months in prison and two years of supervised release.
In a Complaint filed in the United States District Court for the Northern District of California, the SEC charged Bryan B. Long, a CPA and eBay Inc.'s former Director of SEC Reporting, with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction, disgorgement of ill-gotten gains, pre-judgment interest, and civil monetary penalties. The Complaint alleged that Long purchased Xoom Corporation Call options in late May 2015, which was shortly after PayPal Holdings, which at the relevant time was owned by eBay, announced its initial acquisition offer. for the company. Approximately one month later, after learning that the deal was moving forward and could be announced in "early July," Long allegedly purchased additional Xoom Call options that were due to expire in less than a month. Long allegedly realized almost $36,000 in profits after selling all of the options after PayPal announced it was acquiring Xoom on July 1, 2015.READ the FULL TEXT Complaint As noted in the preamble to the RIABiz article:

It is hard to grow, prosper and innovate in a world where rule cops watch your every move. RIAs have lived through a golden era of infrequent and humane audits and the RIA business as a whole grew, prospered and innovated. Now there are signs that that could change out there in the ether of intellectual discussion. But here we see something scarier -- lawyers spending money to buy the services of more lawyers i.e. putting their money where their mouth is when it comes to a new era of RIA scrutiny. Yes, the story has a dissenting voice of somebody who is doubtful that such a big change is coming. Both sides are convincing.
Edward Lee Moody, Jr., a registered investment adviser and the sole owner and operator of  the investment firm CM Capital Management LLC,  pled guilty in the United States District Court for the Eastern District of Virginia to mail fraud and engaging in monetary transactions in criminally derived property. Federal proseuctors alleged that Moody ran a 13-year Ponzi scheme that victimized 53 investors, at least 13 of whom were elderly and had liquidated their retirement accounts to fund their investments. Moody diverted some $6.1 milllion in funds for his own personal benefit; including at least $1.4 million for business expenses, to purchase a home, make car loan payments, shop, travel to Las Vegas and other destinations. He also used approximately $885,000 of investor monies to buy and sell securities on his own behalf.
Jason Rhodes was charged in a criminal Complaint filed in the United States District Court for the Southern District of New York with one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, one count of wire fraud, and one count of investment adviser fraud.  Rhodes and various conspirators allegedly solicited investments in a Hedge Fund and thereafter failed to invest the investor monies as promised, but rather diverted some 25 investors funds totalling about $19.6 million to the conspirators' personal use and for Ponzi-like payments.  READ the FULL TEXT Complaint
Following on the heels of the Enforcement Division's investigations of nine public companies that fell victim to multi-million-dollar cyber fraud, the SEC issued an investigative report cautioning that public companies should consider cyber threats when implementing internal accounting controls. The SEC ROI focuses on "business email compromises" ("BECs"), which generally involves perpetrators using emails pretending to be from company executives or vendors. READ the FULL TEXT SEC Report of Investigation
68-year-old Jerome Arthur Whittington apparently had a criminal history of defrauding folks going back to 1971. In his most recent foray into fraud, Whittington apparently posed as a former federal prosecutor, a successful attorney, a special agent with the FBI, and a wealthy real estate investor. As set forth in part in the DOJ Release:

In one of the schemes, Whittington posed as an attorney and falsely promised a victim that he could help the victim recover losses suffered after investing in two bogus companies. Whittington claimed he was able to seize assets from the two fraudulent companies, but the victim needed to provide money that would be used to "post bonds" that were required prior to seizing the assets. After Whittington falsely claimed that he had obtained a $4 million judgment, Whittington told the victim that representatives from the companies and other victims were very angry and that he should leave the country to avoid confrontations and harassment.

As a result of this "reloading" scheme, the victim paid Whittington approximately $290,000 to recover the losses - but Whittington simply spent the money on personal expenses, which included making payments to other victims of his schemes.

Given that predicate, it was no wonder that the sentencing judge in the United States District Court for the Central District of California threw the book at this recidivist after Whittington pled guilty to a whopping 33 counts of conspiracy, wire fraud, and passport fraud. Whittington was sentenced to 120 months in federal prison for masterminding a series of frauds that cost victims nearly $2 million.

The New American Dream: Retirement Security (Speech at the Brookings Institute by SEC Commissioner Kara Stein)
Commissioner Stein warns that a "retirement tsunami" is fast approaching.Stein prefaces her suggestions to dealing with the looming crisis by noting in part [Ed: footnotes omitted]:

[A]mericans are having to work past traditional retirement age.And t he number of bankruptcies for those over the age of 65 has increased dramatically. The size and speed of the tsunami is likely to increase as it gets closer and closer to us. Our population is aging and the cost of medical care-an important factor for retirees -- is increasing. We must address this problem before we are collectively underwater.

The possible solutions to the retirement crisis are multi-faceted and involve many people and many government entities. My brief remarks this morning will not address the fundamental role of Social Security in the retirement paradigm or the difficulties many low-wage workers face in saving at all. As an SEC Commissioner, I'm here to talk about solutions specifically related to the third leg of the stool -- investments. Stashing away money in a savings account only gets retirees so far. To have a safe and secure retirement, Americans must invest their savings to allow them to grow. For example, someone who saves $17 a day starting at 21 will have put aside $273,000 by the time they are ready to retire at 65. However, if they invest that same amount with a return of 7%, they will have almost $1.8 million in their retirement account. Without investment, retirement may be a dream that never comes true. Given the importance of investment to Americans' ability to retire, what can the SEC do to help?

For a variation on Commisioner Stein's theme, read: "The Invisibly Vulnerable Pre-Retirees" ( Guest Blog by Aegis Frumento)