Securities Industry Commentator by Bill Singer Esq

April 4, 2019

Digitized IBM Red Herrings Clog Transparent Good Squares Intersection

IBM artificial intelligence can predict with 95% accuracy which workers are about to quit their jobs (CNBC.com @Work by Eric Rosenbaum)
https://www.cnbc.com/2019/04/03/ibm-ai-can-predict-with-95-percent-accuracy-which-employees-will-quit.html
A provocative CNBC article in which IBM CEO Ginni Rometty claims that "IBM artificial intelligence technology is now 95 percent accurate in predicting workers who are planning to leave their jobs." In fact, IBM purportedly has a: 

patent for its "predictive attrition program" which was developed with Watson to predict employee flight risk and prescribe actions for managers to engage employees. Rometty would not explain "the secret sauce" that allowed the AI to work so effectively in identifying workers about to jump (officially, IBM said the predictions are now in the 95 percent accuracy "range"). Rometty would only say that its success comes through analyzing many data points.

Employee flight risk? Just tossin' this out there for CEO Rometty but, you know, your employees are not felons awaiting trial -- which, just a thought here, but, your mind-set as to how you view your work force may sort of indicate why you may have a lot of "workers about to jump." In the old days, the "predictive attrition program" was an astute manager who knew when employees were getting pissed off by  low pay or asinine corporate policies. Nowadays, we got algorithms. 

CEO Rometty really seems to have bought into this whole Watson-run HR thing. A word of caution for her: The language of computer programming isn't as relatable as what we humans use in our daily relationships. Computer language may be more exact but it's also prone to programming errors and hacking. Consequently, CEO Rometty should try to debug her comment:

"If you have a skill that is not needed for the future and is abundant in the market and does not fit a strategy my company needs, you are not in a good square to stay inside of," Rometty said. "I really believe in being transparent about where skills are."

A skill that is not needed for the future and is abundant in the market and does not fit a strategy my company needs? My, how Zen that sounds but how incomprehensible it proves to be. Then there's Rometty's bizarre reference to a good square to stay inside of. A good square? To stay inside of? All of which makes you wonder whether IBM has become Westworld, and whether Rometty is a host or a guest. And another thing: What the hell does Rometty mean when she says that she believes "in being transparent about where skills are?" Does that mean all the doors for the stalls in the IBM bathrooms are see-through? Now that might explain the employee flight risk. Going back to Westworld, the CNBC article ominously explains:

"AI will change all jobs once it is in the workflow, and that is the most meaningful kind of AI. Yes, some jobs will be replaced, but that is a red herring," Rometty contends. "It is about getting people to work at the intersection of this."

Sigh . . .  AI will change all jobs once it is in the workflow. Is that like Drano in the toilet or Dulcolax in my stomach? Is Watson secretly cloning AI red herrings? One sobering point: Rometty became President/CEO of IBM on January 1, 2012. when the adjusted closing price (dividends and splits) of IBM stock was  $151.42 (the raw closing price was $192.60). On April 3, 2019, IBM shares closed at $143.63. So much for the power of AI and the brilliance of Watson. So . . . when IBM employees are walking over to the Human Resource Department with their resignation letters, do they turn left or right at the "intersection of this?"

Strategic Hub for Innovation and Financial Technology Issues Statement on the Framework for Investment Contract Analysis of Digital Assets

When the SEC launched its Strategic Hub for Innovation and Financial Technology, I thought the acronym should have been SHFIAFT. Then I thought about shortening the whole thing to the Strategic Hub for Innovative Technology or SHIT. Inexplicably, the SEC calls it "FinHub." How the hell do you get FinHub (and not HubFin) out of Strategic Hub for Innovation and Financial Technology? 

Regardless of my mystification, FinHub published: "Framework for 'Investment Contract' Analysis of Digital Assets1" https://www.sec.gov/files/dlt-framework.pdf  Odd thing about the published paper -- umm, sorry -- the published "Framework," but the title of the document actually has quotes and a footnote at the end of it.  After some 40 years on Wall Street, I'm not sure that I can recall a published paper -- sorry, "Framework" --  with a title that contains embedded quotation marks and a footnote, the latter of which warns us that:

This framework represents the views of the Strategic Hub for Innovation and Financial Technology ("FinHub," the "Staff," or "we") of the Securities and Exchange Commission (the "Commission"). It is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content. Further, this framework does not replace or supersede existing case law, legal requirements, or statements or guidance from the Commission or Staff. Rather, the framework provides additional guidance in the areas that the Commission or Staff has previously addressed. See, e.g., 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"); William Hinman, Digital Asset Transactions: When Howey Met Gary (Plastic), Remarks at the Yahoo Finance All Markets Summit: Crypto (June 14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418.
 
What the hell? According to Footnote 1, the "Framework" only represents the views of the SEC's unholy Trinity of FinHub-Staff-we and is not a rule, regulation, or statement; and the SEC "has neither approved nor disapproved its content." Wonderful. Only a bureaucracy could generate crap like this. After publishing the 13-page Framework, the SEC then goes out and issues a press release in which a Director and a Senior Advisor each comment on the published material: "Statement on 'Framework for "Investment Contract" Analysis of Digital Assets'"(by Bill Hinman, Director of SEC Division of Corporation Finance and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation) 
https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets
You notice that I used double-quotes for the entire title of the Statement and then single quotes for the referenced title of the Framework and then double quotes for the previously-quoted "Investment Contract" embedded within the Framework quote within the Statement citation? Pretty impressive, no? Transitioning from the "Framework" itself to the "Statement" on the "Framework," we come upon this explanation by the SEC Director and SEC Senior Advisor in their "Statement" about the "Framework":

As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub is publishing a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security.  The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.  Also, the Division of Corporation Finance is issuing a response to a no-action request, indicating that the Division will not recommend enforcement action to the Commission if the digital asset described in the request is offered or sold without registration under the U.S. federal securities laws.    

Omigod, please, someone shoot me! This is all about an "analytical tool" that only represents the views of the SEC's unholy Trinity of FinHub-Staff-we; and this tool is not a rule, regulation, or statement; and neither approved nor disapproved by the SEC? Put a fork in me; I'm done. Oh . . . one last thing, included in the SEC Press Release promoting the "Statement" on the "Framework," is RE: TurnKey Jet, Inc. (Response of the SEC Division of Corporation Finance / No-Action Letter) https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.htm

"Based on the facts presented, the Division will not recommend enforcement action to the Commission if, in reliance on your opinion as counsel that the Tokens are not securities, TKJ offers and sells the Tokens without registration under the Securities Act and the Exchange Act. . ."

http://www.brokeandbroker.com/4520/aegis-frumento-lorenzo/
Every registered rep is required to have customer communications "approved" by their branch manager.Wall Street lawyer Aegis Frumento wonders if the Supreme Court's recent Lorenzo Opinion will result in only the branch manager being primarily liable for lying to customers.  Further, Frumento muses about whether those twenty-something interns who are ordered to send somewhat sketchy emails will now be found liable for "disseminating" fraudulent statements?

SEC Charges Former CEO of Silicon Valley Start-Up with Defrauding Investors (SEC Release)
https://www.sec.gov/litigation/litreleases/2019/lr24440.htm
In a Complaint filed in the United States District Court for the Northern District of California, https://www.sec.gov/litigation/complaints/2019/comp24440.pdf, the SEC charged the founder and former Chief Executive Officer of Jumio Inc., Daniel Mattes, with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities and Exchange Act and Rule 10b-5 thereunder. Mattes agreed to be enjoined from future similar violations, to be barred from being an officer or director of a publicly traded company in the U.S., and pay more than $16 million in disgorgement and prejudgment interest, plus a $640,000 civil penalty. As set forth in part in the SEC Release:

[M]attes grossly overstated Jumio's 2013 and 2014 revenues and then sold shares he held personally to investors in the private, secondary market. The complaint alleges that Mattes made approximately $14 million by selling his Jumio shares and hid these sales from Jumio's board. According to the complaint, Mattes also falsely told an investor that he didn't want to sell any of his shares because there was "lots of great stuff coming up," and that "he'd be stupid to sell at this point." Jumio restated its financial results in 2015, wiping out most of its revenue, and after it filed for bankruptcy in 2016, the shares became worthless.

https://www.sec.gov/news/press-release/2019-51
In a Complaint filed in the United States District Court for the Eastern District of Wisconsin, https://www.sec.gov/litigation/complaints/2019/comp-pr2019-51.pdf, the SEC alleges  that former Roadrunner Transportation System, Inc. Chief Financial Officer Peter Armbruster; and former controllers Bret Naggs, and Mark Wogsland violated the antifraud and other accounting-related provisions of the federal securities laws.  The Complaint seeks permanent injunctions, penalties, and officer-and-director bars against all defendants, disgorgement plus interest from Wogsland, and clawback bonuses and other incentive-related compensation paid to Armbruster while the alleged fraud was taking place. In a parallel action, the Fraud Section of the U.S. Department of Justice has filed a Superseding Indictment against Armbruster, Naggs, and Wogsland. https://www.justice.gov/opa/press-release/file/1150796/download
In part the SEC Release states that

[P]eter Armbruster, the former CFO of Roadrunner Transportation Systems Inc., hid incurred expenses by improperly deferring and spreading them across multiple quarters to minimize their impact on Roadrunner's net earnings.  Armbruster then allegedly manipulated certain reductions to liabilities, creating an income "cushion" that could be accessed in future quarters to offset expenses.  The SEC further alleges that Armbruster as well as Bret Naggs and Mark Wogsland, former controllers of Roadrunner's Truckload segment, identified and failed to write-off millions of dollars in overvalued assets and overstated receivables at one of Roadrunner's operating companies.  According to the SEC's complaint, Armbruster, Naggs, and Wogsland also misled Roadrunner's outside auditor about these misstated accounts, and as a result Roadrunner materially misstated its operating income, net income, and earnings per share in its annual, quarterly and current reports filed with the SEC.

In response to a Complaint filed by the CFTC, the United States District Court for the District of New Jersey entered an order of default judgment and permanent injunction https://www.cftc.gov/sites/default/files/2019-04/enflanzananasankowhitedefaultjudgment031519.pdf against  Thomas Lanzana (d/b/a Unique Forex) and his company Blackbox Pulse, LLC;  and Nikolay Masanko and his company, White Cloud Mountain, LLC. The Defendants have been ordered to pay $762,807.24 in restitution, as well as a civil monetary penalty of $1.95 million. A related criminal case was filed against Lanzana, which includes two counts charging wire fraud and commodities fraud. As set forth in part in the CFTC Release:

[T]he court found that the defendants fraudulently solicited and accepted funds from customers for the purported purpose of trading forex.  Further, the court found that the defendants maintained the trust of their customers by providing fabricated account statements, links to YouTube videos describing trades and profits, and sending falsified annual tax documents to customers.  The court also found that Lanzana misappropriated customer funds by using some of those funds to pay other customers, compensate Masanko for customers that he solicited, and for his personal use.    

How Merrill Beat an Investor Claim of Contract Breach (Financial Advisor/IQ by Miriam Rozen)
http://financialadvisoriq.com/c/2242213/273843/merrill_suspended_over_expenses
In a FINRA Arbitration that bucked the trend, Merrill Lynch prevailed over a customer Claimant alleging fraud in connection with sales of Puerto Rico bonds.

Social Sentiment Investing Tools -- Think Twice Before Trading Based on Social Media (FINRA Investor Tools Alert)
http://www.finra.org/investors/alerts/social-sentiment-think-twice-trading-social-media
The purported purpose of this FINRA release this Investor Alert is:

to inform investors about social sentiment investing tools and highlight their risks. This Alert provides tips to consider before using tools that analyze or aggregate information from social media sources to make investment decisions or attempt to predict changes in the stock market's direction or in the price of a security.
https://www.globaldata.com/28-3-of-hnw-clients-children-move-their-assets-to-a-new-provider-when-they-inherit/
A somewhat scary glimpse into the future for many stockbrokers and investment advisors who may be counting on a generational transition. If nothing else, this should prompt discussion. In part the GlobalData Press Release states:

After inheriting, 28.3% of HNW clients' children discontinue the relationship with their parents' wealth manager, according to GlobalData, a leading data and analytics company.

The company's report: 2019: Trends to Watch in Global Wealth Management' states that 38% of the global HNW population is above the age of 60, which equates to 4.3 million individuals. This means wealth managers need to have a strategy in place to appeal to the next generation of investors.

Heike van den Hoevel, Senior Wealth Analyst for GlobalData explains: "Reaching out to the next generation early on is critical, but wealth managers are not doing a good job."

Results from GlobalData's 2018 Global Wealth Managers Survey reveal that involving the next generation during the estate planning process is the single most effective retention tool. However, only 59% of wealth managers across the globe offer inheritance planning services directly.