Securities Industry Commentator by Bill Singer Esq

July 9, 2019
Nely Rider pled guilty to wire fraud in the United States District Court for the District of Maryland and was sentenced to 18 months in prison plus nine months of home detention as part of three years of supervised release (inclusive of nine months of home detention); and she was ordered to pay $1,285,545.01 in restitution. As set forth in part in the DOJ Release:

[F]rom December 2009 through May 2014, Rider defrauded five victims by falsely stating that an individual in Mexico, named Patricia, was in danger and needed assistance to travel to the United States.  Rider falsely stated that once "Patricia" was safely in the United States, she would have access to money to repay the victims.

Based on Rider's false statements, the victims provided her with approximately $1,285,545.01, which she used at casinos and elsewhere for her personal benefit.  As a result of the fraud, some elderly victims lost their retirement savings.
I need to borrow some money. An old family friend said he's ready to make the loan. I'll put it in a promissory note. He's more than happy to help me out. Unfortunately, my employer broker-dealer only allows for loans from family members. The friend's not a family member. Now what?
Day-trader Ronald Chernin pled guilty in the United States District Court for the District of New Jersey  to an Iformation charging him with one count each of conspiracy to commit securities and securities fraud; and he was sentenced to 18 months in prison plus three years of supervised release and fined him $2,000.. Co-Defendants Steven Constantin, Steven Fishoff, Paul Petrello, and Joseph Spera also pled guilty to their roles in the scheme and were sentenced, respectively, to prison terms of  one year in prison, 30 months in prison, three-years probation, and one-year probation. As set forth in part in the DOJ Release: 

Chernin, Costantin, and other members of the day trading operation falsely characterized their trading entities as legitimate, full-service financial management firms with as much as $150 million in assets under management, in order to increase the likelihood that the investment bankers would solicit them to participate in the stock offerings.

Before providing confidential information concerning the companies or the terms of the proposed sales, the investment bankers first required that Chernin, Costantin, Fishoff, Trader A, and their associated trading entities, enter into confidentiality, or "wall-crossing," agreements, whereby they agreed not to disclose or trade on the inside information and were brought "over the wall" for the narrow purpose of determining whether to purchase the offered securities.

Instead, Chernin, Costantin, and Fishoff violated the confidentiality agreements by directly or indirectly tipping each other and others with the inside information concerning the stock offerings; short selling the issuers' stock in anticipation of a drop in price when the stock offerings were disclosed to the public; and covering their short positions once the stock offerings were disclosed. Additionally, Fishoff tipped his friend, Paul Petrello, 57, of Boca Raton, Florida, and another conspirator, Joseph Spera.

By trading on the nonpublic information, Chernin, Costantin, and their conspirators gained more than $3.9 million in illicit profits over the course of the three-year scheme. Chernin and Costantin shared 50 percent of their profits with Fishoff.

Goldman Sachs Compels Arbitration of Anti-Retaliation Claims.  Christopher Rollins, Plaintiff, v. Goldman Sachs & Co., LLC, Goldman Sachs Group, Inc., Goldman Sachs International, Goldman Sachs Services Limited, and James P. Esposito, Defendants (Opinion and Order, United States District Court for the Southern District of New York, 18-CIV-7162 / July 2, 2019)
As set forth in the Syllabus for the SDNY Opinion and Order:

Christopher Rollins brings this action against his former employer Goldman Sachs Group ("GS Group"), certain of its subsidiaries, and James P. Esposito (collectively, "Goldman Sachs"). Amended Complaint ("Am. Compl."), Doc. 17. Rollins, a former managing partner at GS Group, alleges that Goldman Sachs retaliated against him when he blew the whistle on the Firm's concealment of anti-money laundering ("AML") compliance failures associated with a European businessman (the "Financier"). In the instant motion, Goldman Sachs moves to compel arbitration pursuant to Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. Doc. 20. For the reasons set forth below, Goldman Sachs' motion to compel arbitration is GRANTED

As set out in part under the heading "Procedural Background":

Rollins filed the instant action on August 9, 2018. Doc. 1. On September 27, 2018, Rollins filed an Amended Complaint invoking federal-question jurisdiction under 28 U.S.C. § 1331, and supplemental jurisdiction under 28 U.S.C. § 1367. He alleges claims brought under: (1) Dodd-Frank's SEC anti-retaliation provision ("SEC claim"), 7 U.S.C. § 26(h)(1)(B)(i); (2) Dodd-Frank's CFTC anti-retaliation provision ("CFTC claim"), 15 U.S.C. § 78u-6(h)(1)(A); (3) fraudulent inducement; and (4) defamation. Doc. 17. 

Rollins' SEC and CFTC claims are based on assertions that Goldman Sachs retaliated against him, and that he is a whistleblower who is entitled to protection under the Dodd-Frank Act. Am. Compl. ¶¶ 109-111, Doc. 17. Regarding the fraudulent inducement claim, Rollins alleges that the U.K. employment contract was a "self-serving document" primarily intended to confer jurisdiction over Rollins for purposes of GSI's investigation, while removing traces of the links between Rollins, GS Group, and GSCO. Id. ¶¶ 132-33. Rollins further claims that the U.K. contract was intended to make Rollins a U.K. employee for purposes of retroactive application of U.K. policy rules. Id. ¶ 134. The defamation claim is based on Goldman Sachs' response to the employment referral request. Id. ¶¶ 139-142. Rollins alleges that Goldman Sachs sent the potential employer a false and defamatory employment reference, intending to bar Rollins from being hired for a senior role in the U.K. Id. ¶ 99. 

On October 25, 2018, Goldman Sachs moved to compel arbitration and, in the alternative, dismiss the complaint pursuant to Rule 12(b)(6). Doc. 20. In support thereof, Goldman Sachs contends that: (1) Rollins is a party to a valid and enforceable arbitration clause that precludes his attempt to assert claims; (2) Rollins' federal law claims under Dodd-Frank Act are defective as a matter of law, and they should thus be dismissed; and (3) the court should decline to exercise supplemental jurisdiction over his state law claims of fraudulent inducement and defamation. Doc. 21.

In response, Rollins claims that: (1) the arbitration clause is void and illegal under English law; (2) the arbitration clause was not validly incorporated into the employment contract; and (3) his Dodd-Frank whistleblower claims and state law claims should be sustained. Doc. 23.

FINRA Bars Former Raymond James & Associates, Inc. Compliance Associate for Falsifying Branch Audit Data. FINRA Department of Enforcement, Complainant, v. Vincent Joseph Storms, Respondent (Default Decision, FINRA Office of Hearing Officers / July 3, 2019)
As set forth in the Syllabus to the OHO Default Decision:

Respondent Vincent Joseph Storms falsified firm branch audit data. The misconduct caused the firm to maintain inaccurate books and records. For these violations, Storms is barred from associating with any FINRA member firm in any capacity. Storms also failed to timely appear for on-the-record testimony. In light of the bar, no sanction is imposed for his failure to timely appear to provide testimony. 

In pertinent part, the OHO Default Decision alleges that [Ed: footnotes omitted]:

During his time as a compliance associate, Storms's primary responsibility was to audit RJA branch offices and to perform any necessary follow-up work that resulted from the audits. As part of the audits, the Firm sent an email to each registered representative associated with the branch containing a hyperlink to complete a questionnaire. The questionnaire asked whether the representative had any undisclosed outside business activities ("OBA"), undisclosed securities accounts at other broker-dealers, LinkedIn profiles, and whether the branch used third-party vendors to store data. Depending on the responses from representatives, Storms was required to follow up. For example, if a representative stated that he or she had an undisclosed OBA, Storms's job was to determine the nature of the OBA and to ensure that the Firm had approved it before completing the audit.

The Firm used a software program to store the representatives' answers to the questionnaire. The software generated a numerical valuation for each response. A valuation of "1" or "3" did not require Storms to follow up. In contrast, a score of "2" required that Storms engage in additional steps before the audit could be considered complete.  To process the answers collected, compliance associates, including Storms, exported the data stored by the software to a master spreadsheet that recorded the representatives' responses (i.e., 1, 2, or 3).

Although the data in the software program itself could not be altered, Storms was able to change the valuations recorded on the master spreadsheet, thereby avoiding any follow-up work He changed valuations of "2" on the spreadsheet (which required follow-up) to "1" or "3" (which did not require follow-up). 

According to the Complaint, from March through November 2016, Storms altered answers to 524 questions from 145 registered representatives, affecting 60 branch audits. By doing this, Storms avoided performing required follow-up work. In March 2017, Storms's supervisor confronted him about the altered branch audit data. To hide his misconduct, Storms tried unsuccessfully to correct the data he had altered.

Pages 3 - 4 of the OHO Default Decision

Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (Division of Trading and Markets, U.S. Securities and Exchange Commission and the Office of General Counsel, Financial Industry Regulatory Authority)
As set forth in part in the Joint Statement [Ed: footnotes omitted]:

Market participants have raised questions concerning the application of the federal securities laws and the rules of the Financial Industry Regulatory Authority ("FINRA") to the potential intermediation-including custody-of digital asset securities and transactions.  In this statement, the staffs of the Division of Trading and Markets (the "Division") and FINRA (collectively, the "Staffs")-drawing upon key principles from their historic approach to broker-dealer regulation and investor protection-have articulated various considerations relevant to many of these questions, particularly under the SEC's Customer Protection Rule applicable to SEC-registered broker-dealers.

As a threshold matter, it should be recognized by market participants that the application of the federal securities laws, FINRA rules and other bodies of laws to digital assets, digital asset securities and related innovative technologies raise novel and complex regulatory and compliance questions and challenges.  For example, and as discussed in more detail below, the ability of a broker-dealer to comply with aspects of the Customer Protection Rule is greatly facilitated by established laws and practices regarding the loss or theft of a security, that may not be available or effective in the case of certain digital assets.

In part, the Joint Statement notes that [Ed: footnotes omitted]:

Considerations for Broker-Dealer Custody of Digital Asset Securities

Whether a security is paper or digital, the same fundamental elements of the broker-dealer financial responsibility rules apply.  The Staffs acknowledge that market participants wishing to custody digital asset securities may find it challenging to comply with the broker-dealer financial responsibility rules without putting in place significant technological enhancements and solutions unique to digital asset securities.  As the market, infrastructure, and law applicable to digital asset securities continue to develop, the Staffs will continue their constructive engagement with market participants and to gather additional information so that they may better respond to developments in the market[10] while advancing the missions of our respective organizations: for the SEC, to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation; and for FINRA, to provide investor protection and promote market integrity.

. . .

Considerations for Digital Asset Securities

There are many significant differences in the mechanics and risks associated with custodying traditional securities and digital asset securities.  For instance, the manner in which digital asset securities are issued, held, and transferred may create greater risk that a broker-dealer maintaining custody of them could be victimized by fraud or theft, could lose a "private key" necessary to transfer a client's digital asset securities, or could transfer a client's digital asset securities to an unknown or unintended address without meaningful recourse to invalidate fraudulent transactions, recover or replace lost property, or correct errors.  Consequently, a broker-dealer must consider how it can, in conformance with Rule 15c3-3, hold in possession or control digital asset securities.

In particular, a broker-dealer may face challenges in determining that it, or its third-party custodian, maintains custody of digital asset securities. If, for example, the broker-dealer holds a private key, it may be able to transfer such securities reflected on the blockchain or distributed ledger.  However, the fact that a broker-dealer (or its third party custodian) maintains the private key may not be sufficient evidence by itself that the broker-dealer has exclusive control of the digital asset security (e.g., it may not be able to demonstrate that no other party has a copy of the private key and could transfer the digital asset security without the broker-dealer's consent).  In addition, the fact that the broker-dealer (or custodian) holds the private key may not be sufficient to allow it to reverse or cancel mistaken or unauthorized transactions.  These risks could cause securities customers to suffer losses, with corresponding liabilities for the broker-dealer, imperiling the firm, its customers, and other creditors.
An amended final judgment was entered in the United States District Court for the Southern District of New York against former former Windsor Street Capital, L.P., f/k/a Meyers Associates, L.P. registered representative Aquino who consented to the entry of an amended final judgment in which he is permanently enjoined from 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. Aquino is ordered to pay a $75,000 civil penalty, $568,805 in disgorgement, and $42,212 in prejudgment interest; and, further, he agreed to the entry of an SEC order, barring him from the securities industry and imposing a penny stock bar. In its Complaint, the SEC alleged in part that:

1. From December 2015 to November 2017, Aquino, then a registered representative at a broker-dealer based in New York City, engaged in a fraud involving excessive trading in the accounts of his retail customers that generated substantial commissions to enrich himself while his customers experienced significant losses. 

2. Aquino persuaded at least seven customers to maintain securities trading accounts with him at the firm and assured them that he would employ a profitable trading strategy on their behalf. Aquino recommended a series of frequent, short-term trades to these customers while charging them costly commissions and fees for each trade. The frequency of Aquino's trading, coupled with the commissions and fees on every trade, made it almost certain that his customers would lose money from the recommended level of trading. Indeed, the customers' investments would need to achieve annual returns of approximately 21% to 406% just to pay for the transaction costs associated with Aquino's trading strategy. 

3. Aquino was required to have a reasonable basis to believe his trading strategy was suitable for the customers to whom he recommended it. In fact, Aquino did not have a reasonable basis to believe that the frequent level of trading he recommended to customers, given the significant costs imposed on them, would be suitable for them or anyone else. Additionally, Aquino recommended a level of trading that was unsuitable to six customers, in light of those customers' financial needs, investment objectives, risk tolerance, and other circumstances. Aquino also engaged in fraudulent and deceptive conduct by executing certain trades in customers' accounts without first obtaining their approval or informing them of material facts about the trading strategy he recommended, as required for non-discretionary accounts. 

4. Aquino violated the antifraud provisions of the federal securities laws by: (a) recommending an investment strategy to his customers without a reasonable basis to believe it was suitable for those investors; (b) recommending an investment strategy that was unsuitable for certain of his customers in light of those customers' financial needs, investment objectives, and circumstances; (c) making materially false and misleading statements to customers regarding the strategy; and (d) engaging in unauthorized trading. 

5. Aquino's fraudulent acts and omissions resulted in approximately $881,000 in losses for the customers and $935,000 in ill-gotten gains for Aquino.
On the heels of the SEC's adoption of Regulation Best Interest, the SEC has embarked upon what, at times, seems a "Charm Offensive" but at other times appears to be an impassioned defense with punch. In his recent remarks, SEC Chair Clayton notes in part that:

[S]ince we adopted our rulemaking package, there has been no shortage of views expressed, both from those in support of our efforts and from those who would have preferred a different approach. Some of this commentary has, in my view, shown a lack of understanding of the law and legal obligations of financial professionals, both before and after adoption of our rulemaking package. This has only further solidified my view that our actions were timely and appropriate, and will ultimately benefit retail investors and our markets.

.  . .

Let me now address some of the commentary, or, more specifically, the criticism and misinformation, I alluded to at the outset. I believe that much of this criticism-which is focused broadly on the extent of the investor protections under Reg. BI and our Fiduciary Interpretation-is false, misleading, misguided, and unfortunately, in some cases, is simply policy preferences disguised as legal critiques.

Before discussing specific points, I want to address a general issue-whether it is appropriate to maintain a regulatory distinction between broker-dealers and investment advisers. A number of commenters expressly or impliedly advocated for regulation that would collapse the distinction, with a substantial majority of those commentators favoring the generally applicable investment adviser model where clients pay an asset-based fee or a flat fee for generally broad-based financial advice from a fiduciary. To be clear, I believe this is a good model, and for many investors, this type of investment adviser relationship may better match their needs than the typical broker-dealer relationship. However, for many other investors, the broker-dealer model, particularly after the implementation of Reg. BI-either alone or in combination with an investment adviser relationship-provides the better match. For example, a retail customer that intends to buy and hold a long-term investment may find that paying a one-time commission to a broker-dealer is more cost effective than paying an ongoing advisory fee to an investment adviser to hold the same investment. That same investor might want to use a brokerage account to hold those long-term investments, and an advisory account for other investments.

This is a key reason why one of our goals in this rulemaking was to preserve access and choice for Main Street investors. I firmly believe that as a result retail investors will be better off-choice and competition will ultimately inure to the benefit of retail investors in terms of lower fees, better services and transparency, and more offerings.

Under our approach, Main Street investors will be able to choose the type and level of services they want-from occasional recommendations about particular investments to comprehensive account management-and how they want to pay for those services. I do not believe that a "one size fits all" approach would best serve the diverse interests of our Main Street investors. Further, I believe in this area, a one-size fits all approach could reduce the availability and increase the cost of advice and services, particularly for those with relatively smaller accounts.