Securities Industry Commentator by Bill Singer Esq

May 28, 2019
There is nothing more frustrating than knowing being wrongly named in something but the bureaucracy doesn't care. Rules is rules and procedures is procedures. Ya gotta fill out the Form 1243-C52A/BII.A(iv) and come downtown to file an appeal. You wait on the line at the green light for an hour, but just as you get to the window, the clerk closes it for lunch. You wait on the line at the yellow light (which is blown out) and you tell your tale of mistaken identity to a listener who is rolling his eyes and not particularly interested. That elicits a "buddy, either pay the $100 fine or go over to the line at the red light and tell the supervisor." After waiting on a third line for another hour, the supervisor agrees with you, doesn't know why the clerk at the green light didn't resolve the error, not sure why you were on the yellow-light-line and tells you that the problem is fixed. Two weeks later you get a notice that you failed to appear as required and the $100 fine is now $1,000. In a recent FINRA expungement case, we don't have the same set of facts but we sure as hell have what looks like a case of mistaken identity and the old bureaucratic runaround from FINRA.

Upcoming FINRA Board of Governors Election / Petitions for Candidacy Due: July 8, 2019 (FINRA Election Notice) [Bill Singer supports Small Firm Candidate Robert A. Muh]
As set forth in part in the FINRA Election Notice:

The annual meeting of FINRA firms will take place on or about Monday, August 19, 2019, to elect one Large Firm Governor and one Small Firm Governor to the FINRA Board of Governors (FINRA Board). A formal notice of the meeting, including the precise date, time and location, will be mailed to executive representatives on or about July 19, 2019. 

The purpose of this Election Notice is to notify FINRA members of the FINRA Nominating Committee's nominees to fill these vacancies and inform individuals not nominated by the Nominating Committee of the petition procedures set forth in FINRA's By-Laws for being included on the ballot for these elections.

. . .

There will be two seats on the FINRA Board for election at FINRA's 2019 Annual Meeting: one Large Firm Governor and one Small Firm Governor. FINRA's Nominating Committee has nominated the following individuals:
    • Large Firm Governor Candidate: Andrew S. Duff, Board of Directors, Piper Jaffray & Co. 
    • Small Firm Governor Candidate: Robert A. Muh, CEO, Sutter Securities
. . .

A person who has not been nominated by the Nominating Committee for election to the FINRA Board may be included on the ballot for the election of governors if:5

a. within 45 days after the date of this Election Notice (July 8, 2019), such person presents to FINRA's Corporate Secretary petitions in support of his or her nomination, duly executed by at least 3 percent of FINRA member firms entitled to vote for such nominee's election. If, however, a candidate's name appears on a petition in support of more than one nominee, the petition must be endorsed by 10 percent of FINRA member firms entitled to vote for such nominees' election; and 

b. the Corporate Secretary certifies that such petitions have been duly executed by the executive representatives of the requisite number of FINRA member firms entitled to vote for such person's election, and the person being nominated satisfies the classification of the governorship to be filled. 

As of the close of business on Thursday, May 23, 2019, the number of FINRA large firms was 174, and small firms was 3,261.

. . .

Profile of Small Firm Governor Nominee 
CEO, Sutter Securities

Mr. Muh has over four decades of experience in the financial services industry. He is presently Chief Executive Officer of Sutter Securities, a 12-person broker-dealer he cofounded in San Francisco in 1992. Sutter Securities is a full-service broker-dealer. Mr. Muh was also the firm's Chief Compliance Officer until 2015, when increased regulatory burdens required Sutter to hire a full-time compliance officer. After serving as an officer in the U.S. Army, Mr. Muh began his business career at the consulting firm of McKinsey & Company. He left McKinsey to become a major owner and President of Newburger, Loeb & Co., a NYSE member firm. Prior to founding Sutter Securities, he was a partner at Bear Stearns in both Los Angeles and San Francisco. 

Mr. Muh has also been actively involved in security industry affairs throughout his career. He has served as Chair of FINRA's Small Firm Advisory Committee and Chair of the District 1 Committee. He was a member of the National Arbitration and Mediation Committee and on FINRA's Membership Application Task Force. In 2016, he was elected to a three-year term on the FINRA Board of Governors. Mr. Muh has been a frequent speaker at FINRA's Small Firm Conferences and FINRA's Annual Conference. He has written numerous comment letters to both FINRA and the SEC regarding new rule proposals. 

In addition, he has served on more than 20 corporate and non-profit boards. He was a Trustee of the Massachusetts Institute of Technology for more than 20 years and he is currently a Life Trustee Emeritus. He is also a Trustee and Vice Chair of the Culinary Institute of America. Mr. Muh is a graduate of MIT and he holds both an MBA and a M. Phil. from Columbia University where he was an Adjunct Assistant Professor at the Business School. Mr. Muh is currently an Adjunct Professor at the University of San Francisco Law School and an advisor to the Law School's Investor Justice Project.

Bill Singer's Comment: I proudly support the candidacy of Small Firm Governor Candidate Robert A. Muh and urge all members of FINRA's Small Firm community to support his candidacy.

Superb FINRA NAC Decision Addresses E-communications and Office Inspections. In the Matter of FINRA Department of Enforcement, Complainant, v. Southeast Investments, N.C., Inc. and Frank Harmon Black, Respondents (FINRA National Adjudicatory Council Decision; Complaint #2014039285401 / May 23, 2019)
The NAC Decision redounds to FINRA's credit as an articulate expression of the best of self-regulation. Rare words of praise from me, indeed! A well-drafted and methodical effort that comprehensivley addresses the various issues and offers a lucid presentation of the panelists' rationale. As set forth in the introductory "Decision" portion of the FINRA NAC Decision:

In the proceedings below, an Extended Hearing Panel ("Hearing Panel") found that Southeast Investments, N.C., Inc. ("SEI") and Frank Harmon Black ("Black"), the firm's president: produced fabricated documents to FINRA staff and testified falsely during an on-the-record interview concerning Black's purported inspections of five SEI offices; failed to ensure that SEI retained business-related electronic communications from March 2010 to May 2015, and that SEI's failure in this regard was in willful violation of Section 17(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 17a-4; and failed to exercise reasonable supervision to prevent the failure to inspect offices and retain firm emails. 

The Hearing Panel imposed on SEI fines totaling $243,000, broken down as follows: a $73,000 fine for providing fabricated documents and false testimony to FINRA; a $50,000 fine for failing to retain firm emails; and a $120,000 fine for supervision failures relating to office inspections and email retention. The Hearing Panel barred Black from associating with any FINRA member in any capacity for providing fabricated documents and false testimony. The Hearing Panel also indicated that Black's failure to retain emails warranted a one-year suspension and a $50,000 fine (joint and several with SEI), and that his supervisory failures relating to office inspections and email retention warranted a bar from associating with any member firm in a principal capacity and a $120,000 fine (joint and several with SEI). The Hearing Panel, however, did not impose the fines, one-year suspension, or principal bar on Black, in light of the bar that it imposed on him. Respondents appealed the Hearing Panel's decision. 

Having reviewed the record, we take the following actions, as fully explained in this decision: 
  • We affirm the Hearing Panel's findings that respondents provided to FINRA fabricated documents and false testimony concerning Black's purported inspections of SEI offices. 
  • We reverse the findings that respondents failed to establish and maintain a system to ensure that SEI offices were inspected. Although we find that Black did not inspect four SEI offices as he claimed to have done, FINRA's Department of Enforcement ("Enforcement") failed to clearly allege or prove what kinds of offices the SEI offices were and, consequently, failed to demonstrate how frequently SEI was required to inspect each of those offices. 
  • We affirm the findings that respondents failed to establish and maintain a reasonable supervisory system and failed to establish, maintain, and enforce reasonably designed written supervisory procedures to ensure the retention and review of business-related emails. SEI's so-called "honor system" for retaining business-related electronic correspondence-in which SEI permitted its representatives to use third-party email accounts instead of a central server and required representatives to copy or forward all business-related emails to SEI's home office-was not reasonably designed to comply with the electronic correspondence retention requirements. 
  • We affirm the findings that SEI and Black failed to retain 16 business-related emails of SEI representative Richard Sebastian ("Sebastian"), but reverse the finding that SEI "willfully" violated federal securities laws and regulations in failing to retain those 16 emails. Although the preponderance of the evidence demonstrates that SEI and Black failed to retain 16 emails of Sebastian, Enforcement did not prove that this failure was not inadvertent. 
  • We reverse the Hearing Panel's findings that SEI and Black failed to retain other business-related electronic correspondence. Although Enforcement alleged that SEI and Black failed to retain several other categories of emails (in addition to the 16 emails of Sebastian), Enforcement did not prove those specific allegations by a preponderance of the evidence. 
  • We affirm the bar imposed on Black and the $73,000 fine imposed on SEI for their providing to FINRA fabricated documents and false testimony. For failing to retain firm emails, we reduce the sanctions to a $500 fine (joint and several). For respondents' supervision failures, we reduce the sanctions to a $73,000 fine (joint and several). We do not impose any of the fines on Black, however, in light of the bar imposed on him. 

SEC Awards $4.5 Million to Whistleblower Whose Internal Reporting Led to Successful SEC Case and Related Action (SEC Release)
In the Matter of the Claim for Award in Connection with [REDACTED] Notice of Covered Action [REDACTED] (Order Determining Whistleblower Award Claim; '34 Act Rel. No. 85936; Whistleblower Award Proc. File No. 2019-6 / May 24, 2019)
As set forth in part in the SEC Release:

The Securities and Exchange Commission awarded more than $4.5 million to a whistleblower whose tip triggered the company to review the allegations as part of an internal investigation and subsequently report the whistleblower's allegations to the SEC and another agency. The whistleblower sent an anonymous tip to the company alleging significant wrongdoing and submitted the same information to the SEC within 120 days of reporting it to the company. This information prompted the company to review the whistleblower's allegations of misconduct and led the company to report the allegations to the SEC and the other agency. As a result of the self-report by the company, the SEC opened its own investigation into the alleged misconduct. Ultimately, when the company completed its internal investigation, the results were reported to the SEC and the other agency. This is the first time a claimant is being awarded under this provision of the whistleblower rules, which was designed to incentivize internal reporting by whistleblowers who also report to the SEC within 120 days.

As more fully explained in the SEC Order [Ed: Footnotes omitted]:

[R]ule 21F-4(c)(3) offers an alternative path to an award for whistleblowers who report internally as well. That rule provides that original information will be deemed to have led to the successful enforcement of a judicial or administrative action if: 

You reported original information through an entity's internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law before or at the same time you reported them to the Commission; the entity later provided your information to the Commission, or provided results of an audit or investigation initiated in whole or in part in response to information you reported to the entity; and the information the entity provided to the Commission satisfies either paragraph (c)(1) or (c)(2) of this section. Under this paragraph (c)(3), you must also submit the same information to the Commission in accordance with the procedures set forth in §240.21F-9 within 120 days of providing it to the entity. 

Rule 21F-4(c)(3) was one of several provisions we adopted as part of our whistleblower rules to incentivize whistleblowers to utilize internal compliance and reporting systems where appropriate.

Applying Rule 21F-4(c)(3) to the facts of this matter, we find as follows: Initially, Claimant reported Claimant's concerns to [REDACTED] of  [REDACTED] (the "Company") -- persons responsible for the Company's compliance with the law. Within 120 days of doing so, Claimant reported the same information to both the Commission, utilizing the procedures set forth in Rule 21F-9, and to the Other Agency. Although the staffs never communicated with Claimant or Claimant's counsel, the Company informed the Commission and the Other Agency about the tip it had received, and subsequently provided the results of an internal investigation it initiated in response to the tip. The Company's report satisfied the requirements of Rule 21F-4(c)(1) because the Company's findings were a principal motivating factor in the decisions of our staff and the staff of the Other Agency to open their respective investigations,4 and the resulting Covered Action and Related Action were based in part on the conduct alleged by Claimant. Based on these facts, we find that Claimant's original information led to the successful enforcement of the Covered Action and the Related Action under the standards set forth in Rule 21F-4(c)(3). 

Applying the award criteria specified in Rule 21F-6 of the Exchange Act to the specific facts and circumstances here, we find that the proposed award percentages for both the Covered Action and the Related Action are appropriate. In reaching that determination, we positively assessed the fact that Claimant's information was highly significant because Claimant's tip to the Company caused the Company first to alert the Commission and the Other Agency to the Company's ongoing violations, and then to perform an internal investigation, the results of which were provided to the Commission's and the Other Agency's investigative staffs. Further, the Commission's law enforcement interest was high here both because of the difficulty in discovering violations occurring outside the United States and because this matter involved a company [REDACTED]  In addition, we credit the Claimant with having participated in the Company's internal compliance procedures by first reporting the information to persons at the Company responsible for internal compliance. However, we also note that the staffs had no direct dealings with Claimant or Claimant's counsel (hence, Claimant did not render continuing assistance to the investigations), and further that the Covered Action and the Related Action involved two sets of allegations, only one of which related to Claimant's original information and that the other part of the case, concerning other misconduct, was not related or attributable to any information provided by Claimant. . . .

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, Gunjit Malhotra, Gurjeet Singh, and Jas Pal were each been charged with one count of conspiracy to commit mail fraud and one count of conspiracy to access a protected computer in furtherance of fraud; additionally, Singh was also charged with aggravated identity theft. As set forth in part in the DOJ Release:

MALHOTRA, SINGH, PAL, and others engaged in a scheme in which they and their co-conspirators purported to provide computer repair services to victims located throughout the United States, many of whom are elderly.  The defendants and their co-conspirators provided their victims' false and misleading information to extract payment for computer repair services.  For example, the defendants and their co-conspirators:  (i) claimed to be associated with major technology software companies when, in fact, they were not; (ii) promised to provide computer services when none were provided; and (iii) represented that computer repair services were needed when they knew that was false.  As part of their scheme, the defendants and their co-conspirators accessed their victims' computers and caused them to freeze or, in other instances, installed software on their victims' computers and caused their victims' email accounts to send emails that thanked the perpetrators for providing computer services.  In connection with the scheme, the defendants and others established several companies.  The victims typically sent payments to those companies via private and commercial interstate mail carrier, among other methods.  In total, the defendants and their co-conspirators have obtained from their victims more than $1.3 million.

SEC Charges Perpetrators of Fraudulent Prime Bank Scheme (DOJ Release)
In a Complaint filed in the United States District Court for the Central District of California,, the SEC charged David Sims, Mario Procopio and the entities they controlled, ALC Holdings, LLC, El Cether-Elyown, and SIMS Equities, Inc., with violating the antifraud provisions of Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder; further, Ralph Craig Greaves (allegedly acting as a lawyer for the other defendants) was charged with aiding and abetting these violations. As set forth in part in the SEC Release:

[S]ims, of Costa Mesa, California, and Procopio, of Newport Beach, California, operated a fraudulent scheme that raised over $1.4 million from investors. To entice potential investors, Sims and Procopio allegedly falsely claimed investors' money would be invested in "prime bank" financial instruments that would generate astronomical returns of 1,200% to 40,000%. The SEC further alleges that Sims and Procopio also falsely told investors they had special access to trade platforms used by governments, corporations, and wealthy investors to buy vast sums of currency, usually $500 million or more, at a discounted price. Sims and Procopio allegedly told investors they could "piggyback" their money on these large trading platforms and reap huge returns with "absolutely no risk." However, neither the financial instruments nor the trading platforms existed. In actuality, Sims and Procopio allegedly used nearly all of the investor funds for their own personal expenses, including cars, jewelry, travel, and golf outings. The SEC's complaint further alleges that Greaves, their San Diego based lawyer, aided and abetted their scheme by, among other things, allowing investors to deposit money into his attorney trust account, which gave the scheme a cloak of legitimacy. Greaves then allegedly transferred most of these funds to Sims and Procopio despite knowing that they were misleading investors.