Securities Industry Commentator by Bill Singer Esq

April 29, 2019

In the Matter of Deutsche Bank Trust Company Americas, Respondent (Order Instituting Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions and a Cease-And-Desist Order; '33 Act Rel. No.  10633; Admin. Proc. File No. 3-19154 / April 25, 2019) In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Deutsche Bank Trust Company Americas submitted an Offer of Settlement, which the federal regulator accepted. In accordance with the terms of the SEC Order, Respondent was ordered to cease and desist from further violations and ordered to pay a $500,000 civil money penalty.  In part the SEC Order asserts under the heading "Summary":

This matter involves DBTCA's material omissions, in light of other disclosures, in documents that described its process for the review and selection of hedge funds ("Hedge Funds") included on its wealth management platform ("Platform"). DBTCA provides discretionary and non-discretionary investment management services (the "Services") to private banking clients. The Services include portfolio allocation and asset selection for each account, some of which include allocations to Hedge Funds. In marketing materials and other related documents provided to clients, DBTCA disclosed that it relies on an independent, in-house research group ("Research Group") that uses a multi-step due diligence process to identify, evaluate, and select best-in-class asset managers. From as early as 2009 through mid-2018 ("relevant time period"), however, DBTCA failed to also disclose that the Research Group only evaluated those Hedge Funds that would agree to share their management fees with DBTCA. This omission rendered the disclosures concerning its due diligence materially misleading. As a result, DBTCA violated Section 17(a)(2) of the Securities Act. safra-2Cir/
Today's updated blog features music videos by Carrie Underwood, Destiny's Child, and the Hollies. What kind of lawsuit, you may wonder, would prompt such an oddball array of tunes? Well, howsabaout I tease you with the fact that we got a wife suing Safra Securities LLC because she claims the firm's bank officer had an affair with her husband!  Oh . . . so now you're intrigued? Oh . . . so now, maybe, just maybe, you're gonna make some time to read today's article? Oh . . . yeah, sure, it's only because there's an important legal-regulatory-compliance-jurisdictional issue involved and you're such a serious person. And why are you smiling and laughing when you say "jursidictional" -- as if you'd find "respondeat superior" anywhere near as funny?

SEC Charges San Diego-Based Investment Adviser with Running a Ponzi Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of California,, the SEC charged Christopher D. Dougherty, his investment advisor C&D Professional Service, Inc. d/b/a "C&N Wealth Management"); and JTA Farm and JTA Real Estate (entities that he allegedly controlled) with violating the antifraud provisions of Section 17(a) of the Securities Act, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act, and also charged Dougherty and C&D with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Complaint seeks relief including permanent injunctions, disgorgement of ill-gotten gains plus interest, and civil penalties. In part the SEC Release asserts that:

[D]ougherty provided investment advice to school district employees, hospital employees, veterans, and neighbors, most of whom were unsophisticated investors and trusted Dougherty completely. According to the SEC's complaint, Dougherty had his own California-registered investment advisor, C&D Professional Services, Inc. (dba C&N Wealth Management) ("C&D"), and through C&D, offered clients the opportunity to invest in tax-free "private placements" that purportedly provided quarterly dividends of about 5%. The complaint alleges that, in reality, there were no private placements. Dougherty was simply running a Ponzi scheme by taking new investor money and using it to pay quarterly dividends to existing investors and his personal expenses. According to the complaint, Dougherty also offered investors the opportunity to invest in his farm - JTA Farm Enterprises, LLC ("JTA Farm"), and his real estate business - JTA Real Estate Holdings, LLC ("JTA Real Estate"), but investor funds in these ventures were commingled with the C&D investments and used as part of the Ponzi scheme fraud as well. Dougherty and his wife filed for personal bankruptcy in October 2018.

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change to Amend FINRA Rule 5110 (Corporate Financing Rule -Underwriting Terms and Arrangements) to Make Substantive, Organizational and Terminology Changes (SEC Release No. 34-85715; File No. SR-FINRA-2019-012 / April 25, 2019)
As set forth in "Purpose" section of the SEC Release [Ed: footnotes omitted]:

The ability of small and large businesses to raise capital efficiently is critical to job creation and economic growth. Since its adoption in 1992 in response to persistent problems with underwriters dealing unfairly with issuers, Rule 5110 has played an important role in the capital raising process by prohibiting unfair underwriting terms and arrangements in connection with the public offering of securities. Moreover, Rule 5110 continues to be important to ensuring investor protection and market integrity through effective and efficient regulation that facilitates vibrant capital markets.

Rule 5110 requires a member that participates in a public offering to file documents and information with FINRA about the underwriting terms and arrangements. FINRA's Corporate Financing Department ("Department") reviews this information prior to the commencement of the offering to determine whether the underwriting compensation and other terms and arrangements meet the requirements of the applicable FINRA rules.

Rule 5110 was last revised in 2004 to better reflect the various financial activities of multi-service members. After years of experience with those amendments, and subsequent narrower amendments that addressed industry practices regarding particular underwriting terms and arrangements, FINRA recently conducted the equivalent of a retrospective review to further modernize the Rule by, among other things, significantly improving the administration of the Rule and simplifying the Rule's provisions while maintaining important protections for market participants, including issuers and investors participating in offerings.

As part of this retrospective review, FINRA engaged in extensive consultation with the industry to better understand what aspects of the Rule needed to be modernized, simplified and clarified. This retrospective review, including its industry consultation component and comments FINRA received in response to Regulatory Notice 17-15 (April 2017) ("Notice 17-15 Proposal") (as further discussed in Items II.B. and II.C. infra), has shaped and informed this proposed rule change. The proposed rule change includes a range of amendments to Rule 5110,including reorganizing and improving the readability of the Rule. FINRA proposes changes to the following areas: (1) filing requirements; (2) filing requirements for shelf offerings; (3)exemptions from filing and substantive requirements; (4) underwriting compensation; (5) venture capital exceptions; (6) treatment of non-convertible or non-exchangeable debt securities and derivatives; (7) lock-up restrictions; (8) prohibited terms and arrangements; and (9) defined terms. The changes to these areas should lessen the regulatory costs and burdens incurred when complying with the Rule.

Founder of Local Technology Company Charged With Operating a $60 Million Investment Fraud (DOJ Release)
In an Indictment filed in the United States District Court for the Southern District of California, former President/Chief Executive Officer of NL Technology, LLC, Jonny Ngo, was charged with 21 counts of wire fraud, mail frraud, and money laundering. As set forth in part in the DOJ Release:

[N]go induced his victims to invest funds in various short-term investment contracts by making false representations, including that: (a) investor money would be used to fund wholesale purchase orders of smartphone screens and other electronic goods; (b) NL Technology was a regular supplier of smartphone screens to a number of buyers, including two buyers who each ordered approximately $2 million of product from NL Technology; (c) all wholesale orders funded by investor money was pre-purchased by NL Technology clients; and (d) the quality of the products and safety of investor funds used to purchase the products was guaranteed by a third-party escrow company. 

The indictment further alleges that Ngo created counterfeit invoices falsely indicating that NL Technology had substantial purchase orders from alleged wholesale companies. The indictment alleges that Ngo also provided false financial statements purportedly certified by an accountant showing NL Technology earned income from its wholesale business totaling $12.5 million in 2015 and $15.4 million in 2016.  Moreover, as alleged, Ngo fabricated bank statements or screenshots from bank statements held in the name of NL Technology with individual line items altered to appear as legitimate wholesale business transactions.  Lastly, Ngo created false checks from wholesale companies allegedly doing business with NL Technology.   

To further his investment fraud, Ngo and others allegedly told investors that they could roll over their investments into future investment contracts with NL Technology, when in fact no such future investments were possible.  Also, Ngo allegedly lulled investors about the continued viability of NL Technology through materially false representations, including that NL Technology had an outstanding purchase order from a smartphone repair company for approximately $300,000, when in fact, no such order existed. 

Instead of investing the funds in the business, the indictment alleges that Ngo converted investor funds to his own personal use and benefit by spending the money on a home, luxury cars and gambling.  As a result of his investment fraud, it is alleged that Ngo induced investors to part with more than $60 million, and ultimately caused millions of dollars in losses.

FINRA Sanctions Firm for 4 Years of Non-Compliant AML Testing
. In the Matter of Gelband & Co., Respondent (FINRA AWC 2018056465601, April 25, 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, Gelband & Co. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Gelband & Co. has been a FINRA member firm since 1993, is primarily a "placement agent for private placements and advising on mergers and acquisitions," and employs 2 registered representatives at two branches. The AWC asserts that Gelband does not have "any prior disciplinary history with the Securities and Exchange Commission, any state securities regulator, FINRA or any other self-regulatory organization. " In accordance with the terms of the AWC, FINRA found that Gelband violated FINRA Rules 3310(c) and 2010; and, accordingly, FINRA imposed on Gelband $5,000 fine. As set forth in part in AWC:

As a placement agent, Gelband was required to conduct independent testing of its AML program on an annual basis. For calendar years 2014, 2015, 2016 and 2017, the Firm had its designated AML Compliance Officer, or someone who reported to him, conduct the annual testing of its AML program. This testing was not "independent." Therefore, Gelband did not conduct the required independent testing of its AML program for calendar years 2014, 2015, 2016 and 2017.  

UPDATE: In response to the above original posting on April 26, 2019, an industry consultant wrote to me complaining about my "rant" (rant? who me??) and suggesting that I had been unfair in my Comment. In my opinion, the consultant misread and misunderstood my initial Comment, but, to the extent that I may not have said what I meant and not meant what I said, I have revised my earlier Comment to better address the consultant's apparent concerns and to further clarify my opinion:

Bill Singer's Pissy and Snarky Comment: Oh for godsakes -- really? The firm has all of 2 reps! What the hell does FINRA expect -- should the firm have gone out and hired a dozen in-house compliance idiots, who will sit on their fat asses all day long just so the firm could have conducted an "independent" test? I mean, c'mon, the Respondent firm apparently conducted testing from 2014 through 2017 -- it was NOT the case that Gelband hadn't conducted any AML testing. The issue in the AWC was that some four years of AML testing wasn't sufficiently independent. Okay, fine: How about FINRA just admonishes the member firm and explains EXACTLY what this small member firm with 2 reps was supposed to mechanically have done in order to satisfy the independent AML testing standard when its AML Compliance Officer is also the guy who changes the toilet paper in the bathroom and answers the telephone and has all the menus for the places where lunch is ordered. Of course there are plenty of outside consulting firms capable of providing such independent testing, but at some point how much more overhead can you impose upon the bulk of FINRA's small firm community before it is no longer financially feasible to run a smaller firm? Oh, and by the way, just where the hell was FINRA in 2014, 2015, 2016, and 2017, when the purportedly independent self-regulatory-organization was supposedly conducting annual oversight of its member firms? Seems to me that FINRA is also failing to adequately supervise if it took until 2019 for Wall Street's self-regulator to first discover that one of its member firms hasn't been conducting independent AML testing for four years in a row!  As you can imagine, I detest this type of gotcha regulation. Given everything set forth in the AWC, FINRA could have warned the firm about its alleged lack of independence, required an Affidavit from the firm acknowledging the non-compliance and setting forth the remediation, and let the small firm off with a warning -- this time and only this time. Frankly, I would have thought it a saner regulatory agenda to have required Gelband to undertake to spend no less than $5,000 retaining a reputable AML consultant rather than foolishly fine the small firm.