Securities Industry Commentator by Bill Singer Esq

August 9, 2019 Stanley TRO/
Getting a temporary restraining order ain't all that big a deal. Courts tend to hand them out with regularity. Getting the TRO transformed into a preliminary or permanent injunction, however, is a more arduous undertaking and for good reason. In a recent non-solicitation dispute, Morgan Stanley secured a TRO against former representative David James Sayler; however, when the brokerage firm tried to persuade a federal court to issue a preliminary injunction, the bench was not so disposed. The Court's Opinion is a primer on what may determine whether Wall Street's employer are granted or denied injunctions against their former employees.

Modernization of Regulation S-K Items 101, 103, and 105 (SEC Proposed Rule)
As set forth in the "Summary" portion of the 116-page SEC Proposed Rule (use above link to examine entire filing]:

The Securities and Exchange Commission ("Commission") is proposing for public comment amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items have not undergone significant revisions in over 30 years. The proposed amendments are intended to update our rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material

As noted in "SEC Proposes to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K" (SEC Press Release):

[T]he proposed amendment of Item 101(a) would:

    • make it largely principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose, and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant's business;
    • include as a listed disclosure topic, to the extent material to an understanding of the registrant's business, transactions and events that affect or may affect the company's operations, including material changes to a registrant's previously disclosed business strategy;
    • eliminate a prescribed timeframe for this disclosure; and
    • permit a registrant, in filings made after a registrant's initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period, and with an active hyperlink to the registrant's most recent filing that, together with the update, would contain the full discussion of the general development of the registrant's business.

The proposed amendment of Item 101(c) would:

    • clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
    • include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant's business,such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and
    • refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.

The proposed amendment of Item 103 would:

    • expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and
    • revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

The proposed amendment of Item 105 would:

    • require summary risk factor disclosure if the risk factor section exceeds 15 pages;
    • refine the principles-based approach of that rule by changing the disclosure standard from the "most significant" factors to the "material" factors required to be disclosed; and
    • require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.
FINRA Imposes Temporary C&D. FINRA Department of Enforcement, Complainant, v. Alpine Securities Corporation, Respondent (FINRA Office of Hearing Officers, Temporary Cease and Desist Consent Order, Temporary Cease and Desist Proceeding, TCDO190001)
In a rare event, FINRA's Department of Enforcement and member firm Respondent Alpine Securities Corporation (without the firm's admission of liability or wrongdoing) consented to the entry of a Temporary Cease and Desist Consent Order per FINRA Rule 9840. Among the more jaw-dropping provision of the Order, are two that provide for the:

d. cease and desist (i) from placing debits in customer accounts resulting from Alpine's $5,000 monthly account fee; (ii) from transferring cash from customer accounts to cover debits resulting from Alpine's $5,000 monthly account fee; and (iii) from selling, journaling, or otherwise transferring securities from customer accounts to Alpine-owned accounts in order to satisfy debits resulting from Alpine's $5,000 monthly account fee; 

e. reverse the $5,000 monthly account fee assessed in all currently open customer accounts, specifically, reverse any debits, repay any cash to cover any such debits, and restore any securities sold, journaled, or otherwise transferred from customer accounts to satisfy any such debits; 

f. cease and desist from selling, journaling, or otherwise transferring securities from customer accounts on the ground that Alpine has deemed such securities to be "worthless"; 

g. cease and desist from selling, journaling, or otherwise transferring securities from customer accounts on the ground that Alpine has deemed such securities or accounts to be "abandoned";

Bill Singer's Comments: Compliments to FINRA for utilizing a creative and seemingly suitable remedy designed to provide enhanced protection of vulnerable public customers. I'm still working on the alleged $5,000 monthly account fee. Maybe there's a way that I can charge my law firm clients such a fee? Not saying that I will but, you know, just mulling the idea over. $5,000 a month? What do I get with that? Do you toss in a MAGA hat? Can I get front row seats to the Stones concert? Is a free year of Amazon Prime included?
John Cucinella, the former investment manager of Mackrow Asset Management Group pled guilty to securities fraud in the United States District Court for the Eastern District of New York.  As part of his plea to the Information, Cucinella agreed to forfeit $948,530.  As set forth in part in the DOJ Release:

[B]etween approximately March 2015 and April 2018, Cucinella falsely represented to Mackrow investors, many of whom were elderly, that their funds would be used to invest in pre-initial public offering (pre-IPO) shares of private companies, including a company purportedly that manufactured bug spray.  In a brochure that Cucinella provided to clients, Mackrow was described as "providing you all the resources of a true financial concierge."  During the same time period, Cucinella transferred more than $400,000 from the Mackrow account to bank accounts he controlled, and spent approximately $108,000 for credit card payments and $40,000 at a Mercedes-Benz dealership in Brooklyn.  More than 80 individuals invested approximately $778,000 with Mackrow, and received only $80,818 in return.
Following a three-week jury trial in the United States District Court for the District of Maryland, Lee Elbaz was found guilty of one count of conspiracy to commit wire fraud and three counts of wire fraud. As set forth in part in the DOJ Release, Elbaz and her co-conspirators:

fraudulently sold and marketed binary options to investors located in the United States and throughout the world through two websites, known as BinaryBook and BigOption.  The evidence showed that in her role as CEO of Yukom, Elbaz, along with her co-conspirators and subordinates, misled investors using BinaryBook and BigOption by falsely claiming to represent the interests of investors when, in fact, the owners of BinaryBook and BigOption profited when investors lost money; by misrepresenting the suitability of and expected return on investments through BinaryBook and BigOption; by providing investors with false names and qualifications and falsely claiming to be working from London; and by misrepresenting whether and how investors could withdraw funds from their accounts.  Representatives of BinaryBook and BigOption, working under Elbaz's supervision, misrepresented the terms of so-called "bonuses," "risk free trades" and "insured trades," and deceptively used these supposed benefits in a manner that in fact harmed investors, the evidence showed.  

Fabio Bretas de Freitas pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit wire fraud and commodities fraud.  As set forth in part in the DOJ Release:

BRETAS operated a group of investment companies, including Phynance Capital Management LLC ("Phy Cap"), Phy Global Partners Fund LLC ("PGP"), Absolute Experience LLC ("Absolute"), and Global Partners Investors LLC ("GPI"), that he used to solicit investments from.  Phy Cap was a commodity pool operator and commodity trading advisor, registered with the NFA, as required by CFTC.  In his companies' marketing materials, BRETAS represented that he used "statistical analysis and mathematical modeling of historical data to develop quantitative systematic methodologies applied to managed futures strategies."  In fact, while BRETAS solicited more than $7.5 million from individual investors, he conducted only a minimal level of trading; his predominant use of his companies was the theft of investor money, using it to cover his personal expenses and transferring investor funds abroad.  In order to continue the scheme, and solicit additional investments, BRETAS prepared false monthly statements, purporting to demonstrate the investments' growth, and distributed them to the Victims. When his regulators, the CFTC and NFA, initiated an audit in 2017, BRETAS lied about his affiliation with Absolute, falsely claimed that the funds that the Victims invested in PGP were mere loans to his company, lied about the use of those funds and the solicitation of investments, and ultimately created a fraudulent email account for the purpose of impersonating one victim in communications with the NFA. .

SEC Charges Commercial Pilot with Real Estate Investment Fraud (SEC Release)
In a Complaint filed in the United States District Court for the Northern District of Texas, the SEC charged Jerry Lee Farish and New Summit Homes, 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.  In a related criminal proceeding, Farish was indicted on one count of wire fraud. As set forth in part in the DOJ Release:

[F]arish, a long-time commercial airline pilot, raised over $1 million from March 2016 to June 2017 by selling investments in a NSH real estate project to build and sell a high-end home on an empty lot in Westlake, Texas. Farish allegedly targeted fellow commercial airline pilots with large 401(k) accounts, and convinced them to invest their funds in the NSH real-estate investment opportunity, which was purportedly secured by a second lien on the property. As alleged in the SEC's compliant, Farish fraudulently misrepresented to investors the nature of the investment and how NSH would spend the investment funds. In fact, Farish allegedly sold the same investment on three different occasions and purported to grant three separate investors the same "second lien." The complaint further alleges that Farish and NSH did not use investor funds to build the home as promised and instead commingled investor funds in a NSH bank account with other funds, which Farish used to pay personal items, including Disney cruises, entertainment and retail expenses, and a retainer for a criminal defense lawyer for one of Farish's sons. Despite raising more than $1 million for this single project, the real estate lot and the NSH bank account are empty today.

SEC Obtains Temporary Restraining Order and Asset Freeze in Startup Company Investment Scheme (SEC Release)
In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC alleges that Tanmaya a/k/a Tan Kabra and LLC. violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and seeks a permanent injunction from future violations, disgorgement of allegedly ill-gotten gains with pre-judgment interest, and civil penalties.In a parallel action, the federal criminal charges were filed against Kabra for wire and bank fraud.The Court granted a temporary restraining order and assets freeze against the Defendants that restrains them 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; and orders that their assets be frozen, and temporarily prohibits them from soliciting or accepting any investor funds, among other things. As set forth in part in he SEC Release:

[K]abra, through, LLC, told investors they could make double-digit returns in a matter of months with no risk by providing Kabra with short-term infusions of cash to be invested in one or more startup companies that Launchbyte purportedly had an ownership interest in. In fact, these "investment" opportunities were fabrications, the SEC alleges; upon receiving investor funds, Kabra diverted them almost immediately to his own use-in one instance, to pay for a boat Kabra had agreed to purchase, and, in other instances, to pay back earlier investors in Ponzi-like distributions. The SEC alleges that Kabra repeatedly lied to investors to keep them from discovering his fraud.