Securities Industry Commentator by Bill Singer Esq

May 3, 2019

As part of FINRA's ongoing initiatives to protect investors from misconduct, FINRA is requesting comment on proposed new Rule 4111 (Restricted Firm Obligations) that would impose tailored obligations, including possible financial requirements, on designated member firms that cross specified numeric disclosure-event thresholds. These thresholds were developed through a thorough analysis and are based on the number of events at similarly sized peers. The member firms that could be subject to these obligations, while small in number, present heightened risk of harm to investors and their activities may undermine confidence in the securities markets as a whole. The proposal would further promote investor protection and market integrity and give FINRA another tool to incentivize member firms to comply with regulatory requirements and to pay arbitration awards. 

FINRA is requesting comment on: 

1. proposed new Rule 4111 (Restricted Firm Obligations), which would authorize FINRA to require "Restricted Firms," identified by a multi-step process involving threshold calculations, to make deposits of cash or qualified securities that could not be withdrawn without FINRA's prior written consent, adhere to other conditions or restrictions on the member's operations that are necessary or appropriate for the protection of investors and in the public interest, or be subject to some combination of those obligations; and

2. proposed new Rule 9559 (Procedures for Regulating Activities Under Rule 4111) (new Rule 9559) and amendments to existing Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) to be renumbered as Rule 9560 (Rule 9560 or the Hearing Procedures Rule) to create an expedited proceeding that allows a prompt review of the determinations under the Restricted Firm Obligations Rule and grants a member a right to challenge any obligations imposed . . .
In today's blog we have a public customer Claimant who says he saw one of the respondents presenting an investment seminar at a restaurant in 2015. Then again, the customer says that this respondent may have just been present and not an actual presenter. Then there was another respondent, who was supposedly conducting the restaurant seminar. The customer also argued that the respondent who may have been presenting the seminar should have corrected misrepresentations made by the respondent conducting the seminar. Presenter. Conductor. Presenting. Just Present. Oh my, this is certainly going to be a mess of a FINRA arbitration.

9Cir Finds Federally Chartered Bank's Corporate Trust Department Not Under MSRB Jurisdiction for Purposes of FINRA Arbitration. BOKF, NA, Plaintiff/Counter-Defendant/Appellant, v. Robert Estes; Karen Niles; Jerry Carpenter; Shirley Carvey, James Carpenter, as Co-Trustee of the Carpenter Family Rev Trust UAD 1/19/14; Becky Lynn Carpenter, as Co-Trustee of the Carpenter Family Rev Trust UAD 1/19/14, Defendants/Counter-Claimants/Appellees (Opinion, United States Court of Appeals for the Ninth Circuit, 18-15369 / May 2, 2019) As set forth in the "Summary" of the 9Cir Opinion:

The panel reversed the district court's denial of plaintiff BOKF's motion for a preliminary injunction against arbitration by the Financial Industry Regulatory Authority and remanded for further proceedings. 

BOKF was a federally chartered bank. Its Institutional Investment Department was registered as a municipal securities dealer with the Municipal Securities Rulemaking Board ("MSRB"), but its Corporate Trust Department ("CTD") was not. 

The panel held that BOKF was likely to succeed on the question of whether BOKF or its CTD was a municipal securities dealer and thus subject to compelled arbitration before FINRA pursuant to MSRB Rule G-35. Applying the definition of a dealer in the Securities Exchange Act of 1934, the panel concluded that neither the CTD nor BOKF was a municipal securities dealer. The panel therefore reversed the district court's denial of a preliminary injunction and remanded for consideration of the remaining factors -- irreparable harm, the public interest, and balance of the equities.

Stockbroker Barred for Undisclosed Loans from Customers and Conversion. In the Matter of AXA Advisors, LLC., Respondent (FINRA AWC 2015047560501)
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, AXA Advisors, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon AXA Advisors, LLC a Censure, $600,000 fine, $172,461.33 restitutuion, and the firm agreed to undertake to send corrective disclosures to all affected plan participants. As set forth in part in the "Overview" section of the AWC:

From September 2010 through November 2015 (the "Relevant Period"), AXA distributed documents that negligently misrepresented the credit quality of certain bond funds offered within group annuity contracts for 401(k) retirement plans. Specifically, certain enrollment forms, investment options attachments, and other documents, created by its affiliated life insurance company, which AXA distributed to retirement plan sponsors, misrepresented that certain bond funds were "investment-grade" when, in fact, they were not. Based on the foregoing, AXA violated FINRA Rule 2010.

In addition, by distributing enrollment forms, investment options attachments, and other documents created by its affiliated life insurance company that contained misleading information, AXA also violated NASD Rule 2210(d)(1)(B) and FINRA Rules 2210(d)(1)(B) and 2010.

Also during the Relevant Period, AXA failed to establish, maintain, and enforce a supervisory system and written supervisory procedures ("WSPs") reasonably designed to achieve compliance with FINRA Rule 2010 or with the content standards of FINRA Rule 2201, in that AXA did not have supervisory systems or WSPs reasonably designed to determine whether the documents created by its affiliated life insurance company that were distributed to plan sponsors and participants contained accurate descriptions of the credit quality of the bond funds it sold. 
Based on the foregoing AXA violated NASD Rule 3010 and FINRA Rules 3110 and 2010.

FINRA Arbitration Includes Admission of Non-Dischargability of Debt in Bankruptcy.In the Matter of the Arbitration Between Lesley Mooney IRA R/O FCC, Stephen W. Mooney, Lesley S. Mooney, and Stephen Mooney IRA R/O FCC, Claimants, v. Rhodes Securities, Inc., Christopher Paul Anthony, Jim Gordon Rhodes, J. Gordon Rhodes, and Marilyn Ruth Zehntner, Respondents (FINRA Arbitration Stipulated Award 17-02370) 
In a FINRA Arbitration Statement of Claim filed in 2017, public customer Claimants asserted breach of fiduciary duty, breach of an agent's duty to conduct a principal's business solely for the benefit of the principal, common law fraud, misrepresentation, negligent misrepresentation, breach of contract, negligence, breach of duty, violations of the Georgia Securities Act and federal securities acts, and failure to supervise. The causes purportedly arose in connection with mutual funds transactions. Claimants sought in excess of $250,000 in damages, costs, and fees. Respondents generally denied the allegations and asserted various affirmative defense. Respondent Anthony represented himself pro se. In December 2018, Claimants dismissed their claims with prejudice against Respondents Rhodes Securities, J. Gordon and Jim Gordon Rhodes, and Marilyn Ruth Sehntner; and Claimant and Respondent Anthony submitted the Stipulated Consent Award presented herein. As set forth under "Award":

1. Respondent Anthony is liable for and shall pay to Claimants the sum of $85,000.00 in compensatory damages.

2. This award shall be fully satisfied if Respondent Anthony pays Claimants any of the following amounts on or before any of the following dates, in immediately available funds, via wire transfer to Claimants' counsel:

(a) $60,000.00 on or before July 1, 2019;
(b) $65,000.00 on or before August 1, 2019;
(c) $70,000.00 on or before September 1, 2019;
(d) $75,000.00 on or before October 1, 2019;
(e) $80,000.00 on or before November 1, 2019.

3. If Respondent Anthony does not make any of the payments set forth in paragraph 2 above by stated dates, Claimant shall be entitled to take any and all legal action to collect on this Award any time on or after November 2, 2019. Claimants shall not be entitled to do so prior to November 2, 2019.

4. All forum fees, postponement or continuance fees or any other fees shall be assessed to and paid by Respondent Anthony.

5. Respondent Anthony acknowledges and agrees that this Award and the obligation to make the payments set forth in paragraph 1 above constitute a settlement and debt as defined in 11 U.S.C. §523(a)(19) and are, therefore, non-dischargeable under 11 U.S.C. §727 in event Respondent Anthony files a proceeding under the Bankruptcy
Code or has a proceeding under the Bankruptcy Code filed against him.

6. Any and all relief not specifically addressed herein is denied.

Bill Singer's Comment: FINRA and/or the Panel assessed the following:
  • Claimants: $1,425 Initial Claim Filing Fee
  • Respondent Rhodes Securities, Inc.: $1,900 Member Surcharge; $3,750 member Surcharge Process Fee
  • Respondent Anthony: $1,425 Hearing Session Fees.
11 USC Section 523(a)(19) does NOT discharge an individual debtor from any debt for, among other factors:

(19) that --

(A) is for --

(i) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934), any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or

(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and

(B) results, before, on, or after the date on which the petition was filed, from-

(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;
(ii) any settlement agreement entered into by the debtor; or
(iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor. . . .

Two Men Charged in Insurance Investment Fraud Scheme that Caused Hundreds of Millions in Victim Losses (DOJ Release)
In an Indictment filed in the United States District Court for the Northern District of Texas, former Southport Lane, L.P. (a private equity investment holding company specializing in managing investment portfolios for insurance companies) executives Andrew Scherr and Robert McGraw were each charged with one count of conspiracy to commit crimes by or affecting persons engaged in the business of insurance, one count of conspiracy to commit wire fraud affecting a financial institution and five counts of wire fraud affecting a financial institution.  As set forth in part in the DOJ Release:

[S]cherr, McGraw and their co-conspirators defrauded insurance companies by causing them to exchange cash and other liquid, valuable assets for illiquid and fraudulently overvalued securities created by the defendants and their co-conspirators.  As alleged in the indictment, Scherr, McGraw and their co-conspirators perpetrated the scheme, in part, by acquiring insurance companies and acting as an investment advisor for insurance companies, thereby gaining access to the management of the investment portfolios of victim insurance companies.  Scherr, McGraw and their co-conspirators allegedly used Southport and affiliated entities to create fraudulently overvalued securities and replace assets held by victim insurance companies with these fraudulently overvalued and illiquid securities.  The indictment further alleges that as a result of the scheme, victim insurance companies have collectively suffered hundreds of millions of dollars in losses.      

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