Securities Industry Commentator by Bill Singer Esq

February 4, 2019

Why do I find this hysterical? I know it's not funny. I know I shouldn't laugh -- yet, still.
Crypto Exchange Says It Can't Repay $190 Million to Clients After Founder Dies With Only Password (Gizmodo)

Canadian crypto exchange QuadrigaCX says it cannot repay most of $190 million in client holdings after its 30-year-old founder Gerald Cotten, the only person who knew the passwords to its "cold storage," unexpectedly died in India in December 2018, Coindesk reported on Friday.

Health, Stamps, Broken Copy Machine, and Religion -- An SEC ALJ's Day-In-the-Life
In the Matter of Rosalind Herman (Order Granting Extension; Admin. Proc. Rul. Rel. No. 6438, Admin. Proc. File No. 3-17828
Imagine that after some 35 days, federal workers got the "all clear" signal and were allowed to return to work after their furlough. A lot of those folks were likely chomping at the bit to get back into the saddle. Take SEC Administrative Law Judge James E. Grimes, for example -- poor guy probably couldn't wait to hear new cases, rule on his pending docket, and entertain the panoply of motion practice that is the grist of SEC ALJs' caseload. Then again, sometimes you no sooner get yourself re-situated when it dawns on you that what you were missing, maybe, just maybe, wasn't as warm and fuzzy and you had recalled when you were home, in comfy sweatpants, sipping a nice hot cup of coffee, and watching re-runs of your favorite Law & Order episodes (and, truth be told, but no one's really gonna admit it, maybe you watched some Dr. Phil or Judge Judy). Alas -- sigh -- you got what you wanted and they turned the lights back on in your little hearing room and, omigod:

In a letter dated December 17, 2018, Respondent Rosalind Herman requested a two month extension to file her opposition to the Division of Enforcement's motion for summary disposition, citing a health condition, a lack of stamps, a broken copy machine, religious restrictions, and that she expects her submission to be lengthy. 

A five-week lapse in appropriations and the decision of the Securities and Exchange Commission to stay all administrative proceedings from January 16 until January 30, 2019, prevented me from earlier ruling on Herman's motion. See Pending Admin. Proc., Securities Act of 1933 Release No. 10602, 2019 SEC LEXIS 5 (Jan. 16, 2019); Pending Admin. Proc., Securities Act Release No. 10603, 2019 SEC LEXIS 37 (Jan. 30, 2019). For good cause shown, I now GRANT the extension. 17 C.F.R. § 201.161(a). Herman's opposition was previously due December 19, 2018, and it will now be due February 19, 2019. The Division may file a reply by March 5, 2019. Given that Herman is benefitting from a two-month extension, absent extraordinary circumstances, no further extensions will be granted. 

Herman also claims that she requires additional discovery. In particular, Herman requests material "on the law firm Sadis and Goldberg [she] hired to do the hedge fund in the FBI investigation." Given that she previously confirmed that she received the investigative file from the Division, Prehr'g Tr. 17-18 (Nov. 1, 2018), Herman's cursory and unexplained request provides no basis to order any relief. Nevertheless, if the Division possesses previously undisclosed evidence relevant to Herman's request that it is required to make available under Rule of Practice 230, it must promptly do so. 17 C.F.R. § 201.230. 2 

Finally, Herman requests an additional prehearing conference. In her letter, Herman says, "I am still waiting for a telephone conference call. I asked over a month ago." Attached to her letter is a handwritten note in which Herman appears to request a call on an "unrecorded line." If the basis for Herman's request is to have a private conversation with Division counsel and me, she is informed that Commission proceedings are presumptively open to the public. See 17 C.F.R. § 201.301. Herman's request for an additional prehearing conference is denied without prejudice, meaning, she may resubmit it with an explanation of the reason for her request. 

ALJ Denies Enforcement Summary Disposition Citing Spreadsheet Inconsistencies
Summary Disposition; Admin. Proc. Rul. Rel. No. 6437, Admin. Proc. File No. 3-17849 / February 1, 2019)
The SEC's Division of Enforcement moves for summary disposition, arguing that Peraza should be ordered to disgorge $1,180,487.98, plus prejudgment interest, and pay a civil monetary penalty of $75,000. ALJ James E. Grimes denied the motion after determining that the Division failed to show that "there is no genuine issue with regard to any material fact and that [it] is entitled to a ruling as a matter of law," As set forth in part in the [Ed: footnotes omitted]:

Bearing in mind that I am required to accept the facts described in the OIP as established, Peraza is correct that the Division has not met its burden to explain how the figures in Perez's spreadsheet are consistent with the OIP. The Division takes the initial disgorgement figure of $1,521,705.87 from Perez's spreadsheet. The spreadsheet identifies gross commission revenue from Angel Oak's trades from 2010 through 2014 as $11,506,034.28. It identifies the net commissions paid to the Atlanta branch-gross minus Peraza's 15% share, clearing fees, and other expenses- as $9,984,328.41. And $1,521,705.87 is, according to Perez, Peraza's "gross share" of commissions.  

The OIP, however, states that Angel Oak's commissions totaled only $3,054,288. It is not completely clear how to reconcile the spreadsheet's $9,984,328.41 paid in commissions to the Atlanta branch with the OIP's lower figure of commissions paid to Angel Oak. The Division does not directly address this confusion in its reply. When addressing a different aspect of Peraza's argument, it asserts that the $6.9 million discrepancy between Perez's $9.9 million calculation and the $3 million figure in the OIP results from the fact that "Angel Oak paid the clearing fees and all other marginal costs" as well as "the share of the commissions that went to [its] individual brokers." But the Division does not explain the basis for this assertion or claim that these employee commission payments plus clearing fees and marginal costs add up to $6.9 million. 

There is another discrepancy between the spreadsheet and the OIP. The OIP states that Peraza "retained 15% of all commission revenue generated by" Angel Oak's trading activity except for commission revenue from approximately April 2011 to July 2012, when Peraza received 10%, and from approximately September to October 2011, when Peraza received 20%. Although I have to accept these figures, they are inconsistent with the spreadsheet, which puts Peraza's share at anywhere between 8% and 16% from 2010 through 2014.The $1,521,705.87 figure from the spreadsheet, on which the Division bases its disgorgement request, is therefore dependent on figures that are at odds with the percentages in the OIP which, again, I must accept as true.

Comparing the OIP and the Division's evidence raises questions of material fact. To the extent the Division seeks summary disposition on the question of disgorgement, the motion is denied. . .
Wells Fargo Clearing Services sued a former associated person for just shy of $300,000 on a promissory note securing a so-called bonus loan. The former rep fought counterclaimed and filed his own separate lawsuit against the firm. At some point, the rep tried to withdraw without prejudice some of his claims, but the FINRA arbitrators nixed the attempt. Then the rep withdrew -- or tried to -- some of his claims with prejudice. Regardless, the case moved forward to verdict. Sometimes it's about the trip. Sometimes its about the destination. Sometimes it's about detours. In today's featured case, Wells Fargo gets to where it wanted to go, even if the route seems a bit off the chart.
On November 17, 2014, the SEC filed a Complaint in the United States District Court for the District of New York alleging that Jay Fung and two others had manipulated five penny stocks between November 2009 and September 2010 through the distribution of misleading newsletters  touting the companies. The newsletters stated that Fung and the others "may" or "might" sell the shares owned in the companies that were being touted when, in fact, they intended to sell, and in some cases were selling, the shares owned. Fung consented to the entry of a judgment enjoining him from violating the antifraud provision of Section 17(b) of the Securities Act of 1933. The judgment provides that the amount of any disgorgement and civil monetary penalties to be imposed will be determined by the court at a later date. Previously, Fung settled charges in March 2016 relating to trading on inside information in advance of a pharmaceutical company merger, and in February 2014 relating to his role in a scheme in which he promoted a penny stock without adequately disclosing he was selling his shares in the same stock and receiving compensation for his promotional efforts.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Andrew B. Scherr, the co-owner of defunct, private equity firm Southport Lane Management, LLC with aiding and abetting a fraud perpetrated by Southport Lane's majority owner, Alexander C. Burns. Allegedly, Scherr acquired worthless/over-valued assets for Southport Lane that he knew or should have known that Burns intended to and did sell to the clients of his affiliated registered investment adviser, Southport Lane Advisors, LLC. Without admitting or denying the allegations in the SEC's complaint, Scherr consented to the entry of a judgment enjoining him from violating the antifraud provisions of Sections 206(1) and (2) of the Investment Advisers Act of 1940. The judgment provides that the amount of any disgorgement and civil monetary penalties to be imposed will be determined by the court at a later date. READ the SEC Complaint

Former Securities America Rep Fined And Suspended by FINRA For Commission Splitting
In the Matter of John F. Davenport, Respondent (AWC 2017055074301, January 31, 2019).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, John F. Davenport submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Davenport a $20,000 fine and A two-month suspension from associating in any and all capacities with any FINRA member firm. The AWC asserts that Davenport entered the industry in 1985 and was registered with FINRA member firm Securities America, Inc. during 2014 through October 2016; and, thereafter, with FINRA member firm Liberty Partners Financial Services, LLC. As set forth under the AWC's "Overview":

In late 2014 and early 2015, while registered with FINRA through Securities America, Davenport placed two securities transactions for a registered representative of another firm and split the commissions generated from the transactions with that representative, without the knowledge or consent of either firm, and without reflecting the commission sharing on Securities America's books and records, in violation of FINRA Rules 4511 and 2010. 

Furthermore, from October 2016 through October 2017, while registered through Liberty Partners, Davenport permitted his assistant to use a personal email address to communicate with securities customers concerning business-related matters, causing the firm to fail to retain the emails among its books and records, in violation of FINRA Rules 4511 and 2010.