Securities Industry Commentator by Bill Singer Esq

May 10, 2019

From the Bank of Spalding (or is that "Spaldeen" ?) FINRA Department of Enforcement, Complainant, v. Michael Joseph Clarke, Respondent (FINRA Hearing Panel Decision, Disc. Proc. No. 201605938301 / May 8, 2019) http://www.finra.org/sites/default/files/fda_documents/2016050938301
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Compliments to FINRA for an articulate and well-drafted Decision replete with adequate content and context! The FINRA Hearing Panel Decision asserts that Clarke entered the securities industry in 1982 and has been associated with 13 FINRA member firms. As set forth in the Syllabus to the Decision:

Respondent Michael Clarke engaged in unethical conduct by converting $612,400 advanced to him for the purpose of purchasing and reselling sports tickets. Clarke also engaged in unethical conduct by causing at least 60 bounced checks and failed electronic payments over a three-year period. For his misconduct, Clarke is barred from associating with any FINRA member in any capacity, ordered to pay restitution, and assessed costs.  

In addressing Clark's bad checks, the FINRA Hearing Decision notes, in part, that [Ed: footnotes omitted]:

There are no Guidelines directly applicable to Clarke's misconduct in passing checks and causing electronic transfers that failed because of insufficient funds. We therefore rely on the Principal Considerations applicable to all violations to determine an appropriate sanction. 

We first note that Clarke's bad check misconduct was not aberrant or isolated. His extensive, years-long practice of passing bad checks and causing failed electronic transfers aggravates his violation. And the circumstances surrounding the misconduct make clear that Clarke's actions were intentional, as he repeatedly passed checks when he knew they could not be cashed. We also find troubling Clarke's complete lack of remorse or acceptance of responsibility for this conduct. Clarke's testimony at the hearing on the question of his bounced checks consisted of little more than an extended series of excuses and justifications for his obvious and intentional misconduct. His lack of accountability for his violative conduct is aggravating.

As set forth in part in the FINRA Hearing Decision:

Under causes one and two, Clarke converted $612,400 from three colleagues through misrepresentations, in violation of FINRA Rule 2010. We bar Clarke from association with any FINRA member in any capacity for these violations. Clarke is also ordered to pay restitution in the amount of $612,400 to Awasthi ($53,167), Raparthi ($522,266), and AG ($36,967), plus interest on the unpaid balance from the date Clarke received the funds until paid in full. So interest shall accrue beginning on November 12, 2015, for restitution owed Raparthi; November 5, 2015, for restitution owed AG; and October 26, 2015, for restitution owed Awasthi. Interest shall accrue at the rate set in 26 U.S.C. Section 6621(a)(2).177 

Under cause three, Clarke authored 60 bad checks and failed electronic transfers over a three year period, also in violation of FINRA Rule 2010. We also bar Clarke from association with any FINRA member in any capacity for this violation. 

Clarke is also ordered to pay costs of $9,337.89, which includes a $750 administrative fee and $8,587.89 for the cost of the transcript.  

In deliberating over the appropriate sanctions, the Hearing Panel noted in part that [Ed: footnotes omitted]:

We find many aggravating factors here. Misconduct that results from an intentional act is aggravating, and conversion is necessarily intentional. Also aggravating is the fact that Clarke's misconduct led to his own monetary gain, as he has been enriched by the proceeds of the loans he never repaid, totaling more than $612,000. Clarke's failure to repay the loans caused injury to his colleagues, also aggravating his misconduct. 

Clarke has not accepted responsibility for his misconduct. He never acknowledged taking the funds, continuing to insist that his "business" was legitimate and satisfaction for his victims was right around the corner. 

We are especially troubled by Clarke's history of misconduct of this sort. One employer disciplined Clarke and later fired him for borrowing money under a similar pretext of using the money for ticket resales and then failing to make repayment. Yet Clarke failed to appreciate the problematic nature of his conduct. Clarke entered into a non-prosecution agreement with the Kings County District Attorney's Office that reflects the prosecutor's view that Clarke's activity was fraudulent, yet Clarke persisted in engaging in the very same behavior. Clarke's failure to heed these prior warnings aggravates his current violations. 

Clarke's history reinforces our view that his misconduct was not a one-time event, caused by an isolated mistake in judgment. Rather, it was an intentional, ongoing series of wrongful acts constituting a pattern of misconduct. We find no mitigating factors. 


http://www.brokeandbroker.com/4581/FINRA-OBA-PST/
Wall Street regulates the so-called Outside Business Activities ("OBA") and Private Securities Transactions ("PST") of its associated persons/registered representatives. Some say it's necessary and appropriate regulation. Others say its overly intrusive and unfair. Regardless of where you stand on OBAs and PSTs, FINRA member firms have in-house compliance policies and the self-regulator routinely enforces its rules. In a recent FINRA Acceptance, Waiver and Consent regulatory settlement, we come across one unfortunate fellow who allegedly engaged in five OBAs and two PSTs without providing the requisite prior written notice to Merrill Lynch. It doesn't end well for him. 

https://whistleblower.gov/sites/whistleblower/files/2019-05/Virtual%20Currency%20WBO%20Alert%20-%202019.05.07.pdf?utm_medium=email&utm_source=govdelivery
The CFTC Alert reiterates the IRS' definition of virtual currencies such as Bitcoin as:

a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Virtual currencies are commodities under the Commodity Exchange Act (CEA). When a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce, CFTC enforcement of the CEA comes into play.

CFTC warns those solicited for virtual currency investments to be aware of:
  • Price manipulation (like pump-and-dump schemes) involving virtual currencies and other virtual assets.
  • Pre-arranged or wash trading of virtual currencies, or swaps or futures contracts based on virtual currencies.
  • Virtual currency futures or option contracts or swaps traded on an unregistered domestic platform or facility.
  • Certain schemes involving virtual currencies marketed to retail customers by unregistered persons, such as off-exchange leveraged, margined, or financed commodity transactions with persons, even without direct evidence of fraud or manipulation.
  • Supervision failures or fraudulent conduct (e.g., creating or reporting fictitious trading) by virtual currency exchanges.

Be on the Lookout for PAC Man Fraud. Austin Man Pleads Guilty to Fraudulent Scheme to Solicit Hundreds of Thousands of Dollars in Contributions to Scam-Pacs (DOJ Release)
https://www.justice.gov/opa/pr/austin-man-pleads-guilty-fraudulent-scheme-solicit-hundreds-thousands-dollars-contributions
Kyle Gerald Prall pled guilty in the United States District Court for the Western District of Texas to to one count of mail fraud .As part of his plea, Prall agreed to pay $548,428 in restitution including a $205,496.68 forfeiture. As set forth in part in the DOJ Release:

[I]n 2015 and 2016, Prall created several political committees-including Feel Bern, HC4President and Trump Victory-which he advertised online to solicit contributions purportedly in support of presidential candidates in the 2016 election.  Prall advertised that the contributions would be used to support the candidates in various ways, including paying for transportation for voters to the polls; paying for training for volunteers to make phone calls and canvass neighborhoods to support the respective candidates; paying to help voters obtain appropriate identification documents and making contributions directly to one of the candidates and to other organizations supporting his campaign.  In reality, Prall did not intend to, and did not, use the contributions for these purposes and instead transferred much of the money to himself through sham LLC accounts and used the other funds to generate additional contributions to his fraudulent political committees.  Specifically, Prall admitted that of the $548,428 in contributions, he transferred $205,496 to himself through sham LLCs that he created for the purpose of moving the money, while contributing less than $5,100 to political causes.  Additionally, Prall used the political committees' debit cards to pay for his personal travel and entertainment expenses, such as travel to Jacksonville, Florida and Belize; hotel stays in Miami Beach, Florida, and Austin, Texas; and to pay for food, hookah, alcohol and bottle service, "club dances performed by entertainers," room service, minibar charges, a deep-tissue massage and a pet-cleaning fee.

Ontario Man Pleads Guilty For His Role In International Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-wdny/pr/ontario-man-pleads-guilty-his-role-international-fraud-scheme
Sheldon Hurley pled guilty guilty in the United States District Court for the Western District of New Yorkbefore to conspiracy to commit wire fraud. As set forth in part in the DOJ Release, between May 2007 and July 2011, Hurley conspired with Afiya Stoddart, Sherece Payne, Ashley Cain, Luna Noncent (all of whom were previously convicted and sentenced.), and others to fraudulently obtain money and property from loan applicants. As set forth in part in the DOJ Release:

The scheme involved a number of individuals in Canada operating websites for fictitious financial services companies which offered to arrange loans to U.S. residents with credit problems. Applicants provided their names, phone numbers, state of residence, requested loan amount, and approximate credit scores. They were then contacted by persons posing as Company "representatives" (using fictitious names), and told that a lender would be contacted for approval. When informed that a loan was arranged, applicants were instructed to sign and return a loan agreement, provide bank account information, and pay an "insurance deposit" for the lender to process the loan. Each applicant was provided wire instructions for the lender's "insurance deposit," including the name of the Company representative (payee), the amount, date, and Western Union location. Hurley engaged other individuals in the U.S. and Canada to act as Company "payees." Some traveled from Canada to the United States, picked up wired funds, and transported them back to Canada. Others, residents of the U.S., picked up funds at Western Union locations in the U.S. and sent the cash to the defendant in Canada, via DHL courier services. Applicants never received the loans, but they were often coerced into making multiple "deposits" under various pretexts.

During the course of this scheme, the defendant recruited Afiya Stoddart and Sherece Payne to travel to Western Union locations in Buffalo, NY and elsewhere to pick up funds from victims of this scheme who sent "insurance deposits" to the fraudulently established companies.

"How We Howey" (Speech by SEC Commissioner Hester Peirce to the Securities Enforcement Forum / May 9, 2019)
https://www.sec.gov/news/speech/peirce-how-we-howey-050919
Yet again, SEC Commissioner Peirce declines to pursue a go-along-to-get-along role and uses her position to prod, to question, and, frankly, to shake things up. Some industry participants wish she would just shut up. Others applaud her efforts to get the SEC to consider not just whether the federal regulator has the right to do something but whether it's the right thing to do. Among her recent remarks are these taken in part from her speech [Ed: footnotes omitted]:

[U]ndoubtedly, digital assets can be securities if they meet the Howey test. On this point, the SEC has been very clear. In 2017, before my arrival at the SEC, the Commission issued the DAO Report, which found that-despite some confounding factors-the tokens issued by the unincorporated organization known as the DAO were indeed securities under the Howey test.[4] In early 2018, SEC Chairman Jay Clayton testified during a Senate hearing "I believe every ICO I've seen is a security."[5] Later that year, Director of Corporation Finance Bill Hinman gave a now well-known speech "When Howey Met Gary (Plastics)," in which he stated "calling the transaction an initial coin offering, or 'ICO,' or a sale of a 'token,' will not take it out of the purview of the U.S. securities laws."

We also have brought a handful of enforcement actions against individuals and organizations that have issued what are clearly securities without either registering the offering with us or qualifying for an exemption. I have been pleased to see that our staff has worked to enforce our laws fairly and, in crafting its recommendations, has taken pains to provide relief where issuers have self-reported. For example, in February of this year, we settled with Gladius Network LLC. In late 2017, after the SEC's DAO report was public, Gladius conducted an ICO without registering the offering with the SEC or qualifying for an exemption. In 2018, Gladius self-reported and demonstrated a willingness to work with the SEC to take the necessary remedial steps. Because of this, we imposed no penalty. Instead, as is typically required for improperly issued private offerings, Gladius was required to make a rescission offer to its investors and to register its tokens as securities. One notable part of the order was a provision envisioning the possibility that one day the tokens might no longer be securities.

Since last year's speech, we also established FinHub to provide a common contact point and center of organization for all things financial technology at the SEC. Valerie Szczepanik, who oversees FinHub, has conducted several outreach events to engage those working on crypto issues. Indeed, just last week, she held one of FinHub's so-called "peer-to-peer" events in the SEC's Denver office. These P2P events are opportunities for people working in this space to interact directly with the SEC staff.

As pleased as I am to see FinHub up and running, I view other efforts in the crypto area as more of a mixed bag. The SEC staff recently issued a framework to assist issuers with conducting a Howey analysis of potential token offerings. The document is a thorough 14 pages. It points to features of an offering and actions by an issuer that could signal that the offering is likely a securities offering. If this framework helps issuers understand what the different Howey factors might look like in an ICO context, it may be valuable. I am concerned, however, that it could raise more questions and concerns than it answers. . . .

Stockbroker Fined and Suspended for Firing Blanks. In the Matter of Stephen Patrick Tosha, Respondent (FINRA AWC 2018058794401)
http://www.finra.org/sites/default/files/fda_documents/2018058794401
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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, Stephen Patrick Tosha submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Tosha was first registered with FINRA member firm Morgan Stanley ("MS") in 2011, where he remained until 2016. In accordance with the terms of the AWC, FINRA deemed that Tosha had engaged in conduct that violated FINRA Rules 2010 and 4511, and imposed upon him a $10,000 fine and a two-month suspension from association with any FINRA member firm in any capacity. As set forth in part in the AWC:

During the Relevant Period, MS, through its affiliated bank, offered a product to Firm customers called a Portfolio Loan Account ("PLA"), which was a loan or line of credit that was secured by assets in the customer's Firm brokerage account. To obtain funds from the PLA, a customer was required to submit a PLA Disbursement Request Form ("Disbursement Request"). The Disbursement Request could be completed by the customer's registered representative or an MS Client Service Associate ("CSA"), but required the signature of the customer or someone authorized on the account after it had been completed. The Disbursement Request also required the signature of the registered representative assigned to the customer's Firm account. 

In 2012, Firm customer MB opened a PLA. MB requested that she not be required to sign a Disbursement Request each time she needed a PLA disbursement. In order to accommodate MB's request, Tosha caused MB to sign a blank master disbursement request (the "Master Disbursement Request"). Thereafter, on approximately 60 occasions during the Relevant Period, whenever MB requested a disbursement from her PLA, Tosha caused BP, who was an MS CSA and Tosha's assistant, to use a copy of the Master Disbursement Request. Tosha caused BP to fill in the details of the request and submit the form for processing. On at least two occasions, Tosha himself filled in the details on a copy of the Master Disbursement Request and submitted the request to MS for review and processing.


Two Robinhoods Fall Victim to One Arbitration Arrow. In the Matter of the Arbitration Between Sugam Vasani, Claimant, v. Robinhood Financial, LLC and Robinhood Securities, LLC, Respondents (FINRA Arbitration Decision 19-00145)
http://www.finra.org/sites/default/files/aao_documents/19-00145.pdf
In a FINRA Arbitration Statement of Claim filed in January 2019, by public customer Claimant Vasani representing himself pro se, he alleged " that the Robinhood Respondents locked his account and reversed trades causing him investment losses. The causes of action relate to Claimant's self-directed trading in SPDR S&P 500 ETF (SPY) call options." Claimant sought at least $50,000 in damages. Although it would have been interesting to have considered Respondents' version of events, they "did not file a Statement of Answer." Oh boy -- we got a pro se public customer Claimant versus no-show industry Respondents . . . ain't that gonna be a recipe for disaster! In any event, the sole FINRA Arbitrator found the Robinhood Respondents jointly and severally liable and ordered them to pay to Claimant Vacani $21,970 plus a $600 filing fee reimbursement. 


https://www.justice.gov/usao-sdny/pr/us-attorney-announces-charges-against-multimillion-dollar-business-email-compromiseIn an Indictment filed in the United States District Court for the Southern District of New York https://www.justice.gov/usao-sdny/press-release/file/1161316/download, Cyril Ashu, Ifeanyi Eke, Joshua Ikejimba, and Chinedu Ironuah (who remains at large) were each charged with one count of conspiracy to commit wire fraud, and one count of wire fraud. Also Ashu was charged with one count of aggravated identity theft. As set forth in part in the DOJ Release:

[T]he defendants, and others known and unknown, engaged in a fraudulent business email compromise ("BEC") scheme designed to deceive various victims, including an intergovernmental organization headquartered in New York City, into diverting commercial payments from their intended beneficiaries to bank accounts controlled by the defendants and their co-conspirators.

The defendants executed this fraudulent scheme by, among other things, obtaining fraudulent identification documents in false names, registering and incorporating shell companies, and opening fake bank accounts at various banks throughout the United States.  Victims were successfully tricked into wiring funds in accordance with fraudulent wiring instructions sent from fake email accounts, which were designed to resemble email accounts for individuals and companies with whom those victims had business relationships.  The defendants defrauded numerous victims of millions of dollars during the period from 2016 through July 2018.

SEC Proposes Amendments to More Appropriately Tailor the Accelerated and Large Accelerated Filer Definitions (SEC Release)
https://www.sec.gov/news/press-release/2019-68
The SEC proposed amendments to the accelerated filer and large accelerated filer definitions. As set forth in part in the SEC Release, the amendments would:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a Smaller Reporting Company ("SRC") and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available
  • Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status
In particular, our proposed rules are aimed at that subset of issuers where the added step of an ICFR auditor attestation is likely to add significant costs and is unlikely to enhance financial reporting or investor protection. The proposed amendments are intended to reduce costs without harming investors for certain smaller public companies and, importantly, encourage more companies to enter our public markets. . . .

Statement on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition by Commissioner Robert J. Jackson Jr. https://www.sec.gov/news/public-statement/jackson-statement-proposed-amendments-accelerated-filer-definition
Today my colleagues propose to roll back the requirement that auditors attest to the adequacy of certain companies' internal controls. The proposal's analysis of the costs of attestation is based on data that's over a decade old, and the proposal makes no real attempt to assess the investor-protection benefits of gatekeepers in our markets. Having conducted my own analysis using data from today's marketplace, it's clear that this proposal has no apparent basis in evidence. Accordingly, I respectfully dissent. . . .

Statement at Open Meeting on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition by Commissioner Hester M. Peirce https://www.sec.gov/news/public-statement/peirce-proposed-amendments-sox-404b-accelerated-filer-definition
[T]his proposal is a step in the right direction, which is why I intend to support the proposal. Yet, it still does not go far enough. The complexity remains; there still will be many SRCs that are also accelerated filers. The process of determining whether a company is an SRC and a non-accelerated filer, or an SRC and an accelerated filer, or outside of both categories is so complicated that even we at the SEC need diagrams to figure it out. The fact that we ourselves struggling to understand our own regime does not bode well for smaller companies trying to follow our rules without the benefit of a staff of seasoned securities attorneys. WAZE . . .

Statement at Open Meeting on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition by Commissioner Elad L. Roisman https://www.sec.gov/news/public-statement/roisman-statement-proposed-amendments-sox-404b-accelerated-filer-definition
[I] do question, however, whether the benefits of 404(b) outweigh the burdens for smaller companies that, even in the absence of a 404(b) requirement, must still establish and maintain ICFR and have their management assess and report on the effectiveness of their ICFR. I would be remiss in not noting that 404(b) auditor attestation is not the only reason investors' trust in companies' financial statements have increased. Reporting companies are required to have the financial statements in their annual reports examined and reported on by an independent auditor, who, even if not engaged to provide an ICFR auditor attestation, is responsible for considering ICFR in the performance of the financial statement audit. Additionally, information presented is more easily understood, markets have changed, and companies have added protections to the process. . . .