Securities Industry Commentator by Bill Singer Esq

August 12, 2019
FINRA's brilliant strategy for fighting elder financial abuse starts with a Regulatory Notice replete with questions seeking answers, and then waiting two months for comments. After this assessment phase winds down (often with an extension for the two-month comment period), FINRA starts an "action phase, " which envisions nothing more than FINRA engaging "in its usual rulemaking process to propose amendments to the rules based on the findings." Then there's the expensive-to-attend conference with networking opportunities and paid exhibitors. Apparently, FINRA figured out that the longer it takes to conduct a retrospective rule review followed by an assessment phase and an action phase, the more elderly will die in the interim and, hey, problem solved!
Former Public Company Accounting Oversight Board ("PCAOB") Inspections Leader and KPMG Executive Director, Cynthia Holder, pled guilty in the United States District Court for the Southern District of New York  to one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud, and two counts of wire fraud. Holder was sentenced to 8 months in prison plus two years of supervised relese. As set forth in part in the DOJ Release:

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms.  By 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel such as HOLDER and HOLDER's co-conspirator, Brian Sweet. 

KPMG's efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, HOLDER, David Middendorf, Thomas Whittle, Jeffrey Wada, Sweet, and others worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results.  For example, after Sweet began employment at KPMG, but while HOLDER was still employed by the PCAOB, HOLDER fed Sweet confidential PCAOB information about certain pending inspections.  HOLDER did so while simultaneously seeking employment at KPMG.  During the pendency of her efforts to obtain employment at KPMG, HOLDER - in violation of PCAOB rules - continued to work on KPMG inspections at the PCAOB.  Once she secured a job at KPMG, HOLDER stole valuable confidential information on her way out of the PCAOB and then passed it on to Sweet, her new boss at KPMG.     

In March 2016, HOLDER obtained the PCAOB's confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion.  Wada - who was not responsible for KPMG inspections at the PCAOB - accessed and stole valuable confidential information from the PCAOB and passed it on to HOLDER.  HOLDER, in turn, provided the 2016 inspection selections to Sweet, who passed them to Middendorf, Whittle, and others.  Middendorf, Whittle, Sweet, and others then agreed to launch a stealth program to "re-review" the audits that had been selected.  In order to cover up their illicit conduct, the KPMG engagement partners were given a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to HOLDER.  At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG.  Sweet shared the preliminary inspection selections provided by Wada with Whittle and Britt, while noting that the information was only preliminary.  Whittle's response was to ask Sweet to confirm that they would get the final list as well.

In February 2017, Wada texted HOLDER saying, "I have the grocery list. . . . All the things you'll need for this year."  Wada then spoke to HOLDER and provided her with the full confidential 2017 final inspection selections.  HOLDER again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and others.  Middendorf, Whittle, and Sweet agreed to inform engagement partners on the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections. 

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, as a result of which KPMG's Office of General Counsel launched an internal investigation.  Thereafter, HOLDER and Sweet took a number of steps to destroy or fabricate evidence relevant to the investigation.  For example, HOLDER deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a "burner phone" so her conversations could not be monitored.  Similarly, Sweet burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.
Former G&C Investment Corp President/Director/Agent Jorge Garrido pled guilty in the United States District Court for the Southern District of Florida to orchestrating an investment fraud scheme and was sentenced to 70 months in prison (to run consecutively with a 46-month sentence he is serving for a separate mortgage fraud case) and ordered to pay about $5.7 million in restitution. 
As set forth in part in the DOJ Release:

[F]rom 2010 to 2017, Garrido served as the president, director and registered agent of G & C Investment Corp (G&C).  In those capacities with G&C, Garrido solicited investors for advance contributions of as much as $1 million, which Garrido stated he would use to monetize bank instruments, engage in platform trading, or fund humanitarian platforms, among other things.  Garrido promised staggering returns to his investors of as much as 15- or 20-times their initial contribution.  Garrido also claimed he could guarantee the safety of the investors' principal by asserting he owned U.S. Treasury Notes which would serve as collateral for the investments.  In reality, the Treasury Notes did not exist.

Garrido failed to provide promised returns to investors, and instead used nearly $5 million for his personal benefit.  He then attempted to flee the country in March 2017 after learning of the Government's case against him, and was apprehended at Palm Beach International Airport by the FBI as he was preparing to board a private charter jet headed for Europe.

FINRA OHO Panel Fines and Suspends Rep for Outside Business Activities. FINRA Department of Enforcement, Complainant, v. Partho S. Ghosh, Respondent (FINRA Office of Hearing Officers Extended Hearing Panel Decision, Disc. Proc. No. 2016051615301)
As set forth in the "Syllabus" of the 47-page OHO Decision:

For engaging in outside business activities without providing prior written notice to his member firm employer, Respondent Partho S. Ghosh is fined $25,000, suspended for six months from associating with any FINRA member firm in any capacity, and ordered to requalify. Respondent is also ordered to pay costs

As more fully explained in the OHO Decision:

Ghosh is a former registered representative of NYLife Securities, Inc. ("NYLife
Securities" or "Firm") and a former insurance agent with its affiliate, NYLife Insurance, Inc. ("NYLife Insurance") (collectively referred to as "the NYLife entities"). Before joining the NYLife entities, Ghosh formed a company, Trans Global, Inc. ("Trans Global"). Its purpose was to provide corporate finance advisory services to financial technology companies regarding financing contingent liabilities. Later, during the hiring process at the NYLife entities, their Corporate Compliance Department ("CCD") told Ghosh that he must seek and obtain their approval to operate Trans Global as an outside business activity ("OBA"). Ghosh then filed an OBA request with the CCD. The CCD, however, denied the request and instructed Ghosh to dissolve the company as a condition of joining the NYLife entities. Ghosh complied and was hired as an insurance agent for NYLife Insurance and as an associated (non-registered fingerprint) person at NYLife Securities.

Although Ghosh dissolved Trans Global at the direction of the CCD, a few months later
he started, and began conducting business activities under, an identically purposed company, P.S. Ghosh Inc. ("P.S. Ghosh"). Ghosh was its sole owner and director. Several months after forming P.S. Ghosh-and just before he became registered with NYLife Securities-a Firm manager discovered P.S. Ghosh's existence and directed Ghosh to file an OBA request for that company with the CCD.

This time, however, Ghosh did not immediately comply. Instead, after registering with
the Firm, he resisted filing the request while trying, without success, to convince Firm
management that P.S. Ghosh was not an OBA. Meanwhile, Ghosh provided financial advice and sold NYLife Insurance products through P.S. Ghosh. When he finally submitted the OBA request several months later, the CCD denied it. But Ghosh continued conducting business through P.S. Ghosh. Then within a few weeks, he resigned when the Firm told him that his business model was not compatible with the NYLife entities' business.

The Department of Enforcement filed a Complaint against Ghosh, charging him with the above-referenced violations. Ghosh denied committing these violations and requested a hearing. For his defense, Ghosh mainly argued, first, that Enforcement failed to prove that P.S. Ghosh was a business activity outside the scope of his relationship with NYLife Securities. And, second, even if it were, according to Ghosh, his pre-registration written communications with Firm management, and the instructions he received in response, satisfied the notice requirement of FINRA Rule 3270.

A five-day disciplinary hearing was held before a FINRA Extended Hearing Panel. After
considering the evidence, the Extended Hearing Panel rejects Ghosh's defenses and concludes that Enforcement proved that he violated FINRA Rules 3270 and 2010. We set forth below our findings of fact, conclusions of law, and impose appropriate remedial sanctions.

At pages 1 - 2 of the OHO Decision

A particularly interesting aspect of the case is set out as follows [Ed: footnotes omitted]:

Especially troublesome were Ghosh's misrepresentations in emails to several prospects that he was a registered investment adviser who owed them a fiduciary duty. Ghosh made these misrepresentations in four emails to four prospects in June, July, and August 2016. In one of those emails, he also identified himself as an "investment banker." Ghosh was never registered as an investment adviser and was not an investment banker. At the hearing, he compounded this wrongdoing by, at turns, splitting hairs, equivocating, and trying to justify his misrepresentations while, at the same time, purporting to express remorse for them. 

Ghosh testified that he has "never been known for brevity" and liked to hear himself talk. Indeed, at times, his testimony was rambling, evasive, and inconsistent. This was particularly the case when he tried to explain these emails. Asked to confirm that he did not owe a fiduciary duty to the recipient of one such communication, he hedged: "Depends on what you mean by that," he began. Continuing, he explained: 

I put a fiduciary duty on myself because I felt that one of the differentiators is that most brokers and agents operate by the rules of suitability and I wanted to put onthe-record that I consider myself to have a fiduciary duty and they should sue me if I didn't fulfill that duty, . . . So did I have a legal duty, no. That is why I wanted to write the Series 65, so [it] would be imposed. But I was a fiduciary, they should sue me if I don't live up to those duties.

Upon further questioning, he clarified his response: "I live up to the standards of [a] fiduciary and advertise myself as such. I didn't say I am legally a fiduciary. I just said I am a fiduciary." He went on to say, "The distinction I am making, I had no legal obligation to be a fiduciary. I am saying I imposed the fiduciary standard on myself."

Regarding a similar email he sent to another prospect, Ghosh took a different approach. He testified that at the time he sent the email, he failed to understand the "distinction between imposing a fiduciary duty on [himself and] having a legal duty imposed upon [him]." He continued, "I considered myself to have a fiduciary duty but not necessarily a legally imposed fiduciary duty. I realize now I was wrong. It was my mistake, I take full responsibility for it. I won't do it again." When asked why he made the misrepresentation, Ghosh explained: "I intended to take the exam but I should have phrased it, []I intend to take the 65['] but it was my error."Finally, during his testimony, Ghosh apologized for an email he sent to a prospect telling him that he had a series 65 license and a fiduciary duty, calling it "unconscionable and unacceptable." 

We find Ghosh's justifications and explanations troubling. Ghosh has had a lengthy career in the financial services industry. He certainly knew he was not a registered investment adviser and, thus, did not owe the email recipients a fiduciary duty. Plainly, Ghosh made these false statements to differentiate himself from registered representatives to gain the trust of his prospects and obtain their business. Ghosh was right: this conduct was unconscionable and unacceptable.

Pages 40 - 42 of the OHO Decision

Bill Singer's Comment: Compliments to OHO Hearing Officer David R. Sonnenberg for drafting a thoughtful, articulate, and compelling Decision. The end result is a comprehensive presentation of the underlying facts and issues in dispute coupled with a meticulous rationale. 

FINRA OHO Panel Bars Rep Citing Ethical Lapses In Mortgage ReFi. FINRA Department of Enforcement, Complainant, v. William James Potter, Respondent (FINRA Office of Hearing Officers Extended Hearing Panel Decision, Disc. Proc. No. 2017052871401),
As set forth in the "Syllabus" of the 38-page OHO Decision:

Respondent is barred from associating with any member firm in any capacity for conversion and unethical business conduct, including misuse of funds. He is ordered to pay $250,000 in restitution, and hearing costs.

As more fully explained in the "Introduction" to the OHO Decision [Ed: footnotes omitted]:

This case concerns the ethical obligations FINRA Rule 2010 imposes on a registered person entrusted with others' money even when his conduct is unrelated to the purchase or sale of securities. The Complaint's first cause of action alleges that Respondent William James Potter converted a portion of funds entrusted to him as a third party to a business agreement between two other parties. The second cause of action alleges that Potter acted unethically and misused another portion of the entrusted funds when one of the parties failed to perform as the agreement required. 

The critical events described in the Complaint occurred over a brief span of time in March 2013. However, the bought a valuable commercial property in Chicago, referred to as the Chicago Parcel, with an ambitious plan to develop it. 

Development of the Chicago Parcel was a complex, multifaceted project. In the aftermath of the 2007-2008 financial crisis, the developers had to refinance the Chicago Parcel under new, less favorable terms. They eventually fell behind on their obligations and in early 2013, their mortgage lender prepared to foreclose. The developers, by this time organized as Old Prairie Block Owner, LLC ("OPBO"), struggled to find a new source of financing to intervene and take over the mortgage under terms that would permit the development to proceed. Business contacts referred them to the representative of an investment company, American Capital Group LTD ("American Capital"), based in Germany. 

American Capital agreed to negotiate a settlement with the lender to forestall the foreclosure and save the project for OPBO. For its part, OPBO agreed to provide a $2 million retainer to American Capital. If American Capital failed to reach a settlement, it was to return the $2 million to OPBO. 

OPBO insisted that the retainer be deposited in a third party's account in the United States until American Capital fulfilled certain conditions. RD, a Swiss businessman acting as American Capital's agent, invited Potter, with whom he had a years-long business relationship, to facilitate the transaction as the third party who would hold the retainer. 

Unknown to OPBO, RD was substantially indebted to Potter. RD told Potter that he could keep $250,000 of the retainer for himself to defray the debt. Also unknown to OPBO, Potter and his business had been experiencing serious financial difficulties. On the day Potter received the $2 million retainer, he began spending it for personal and business purposes. Three days later, Potter wired most of the money to an entity affiliated with American Capital and to RD. Potter kept and used the rest of the funds. 

American Capital did not achieve the settlement OPBO hired it to reach. The foreclosure sale of the Chicago Parcel proceeded. OPBO lost the property and all of its equity in it. OPBO demanded return of the retainer, but American Capital refused to return it. After unsuccessful attempts to seek legal redress, OPBO's principals complained to the U.S. Postal Inspection Service. A Postal Inspection Service agent subsequently contacted FINRA.

A FINRA investigation ensued and led the Department of Enforcement to file the twocause Complaint in this case. It charges Potter with conversion and unethical business conduct, including misuse of OPBO's deposit, in violation of FINRA Rule 2010. Potter denies the charges.genesis of those events dates back to 1998 when a group of investors.

In justifying the imposition of Bars, the OHO Decision offers, in part, this rationale [Ed: footnotes omitted]:

Furthermore, aggravating factors present here underscore the appropriateness of imposing a bar for each cause of action. As noted above, Potter acted intentionally, converting thousands of dollars of OPBO's funds on the day they reached his account, and three days later transferring $50,000 to RD and $1.7 million to an affiliate of American Capital. Within a month of signing the Release Agreement, Potter had spent virtually all of the remaining funds. 

Potter denies responsibility for his wrongdoing, and shows no remorse for the harm he caused. To the contrary, he was fully aware that KS had loaned OPBO the $2 million and desperately needed repayment to avoid laying off employees. When confronted by his failure to offer to return any part of the funds he misused, Potter blithely shrugged off any concern or responsibility stating, "[t]hat was [RD's] problem or [BV's]."

At page 35 of the OHO Decision

Bill Singer's Comment: Compliments to OHO Hearing Officer Matthew Campbell for untangling a messy fact pattern and setting it out with clarity. 

FINRA Small Firm Member Board of Governors Election
Voting Ends August 19, 2019

The FINRA Small Firm community is once again up in arms over the ongoing election for the open 2019 Small Firm Member Board of Governors' seat. "UPDATE: 2019 FINRA Contested Small Firm Election: Vote for Linde Murphy" ( Blog /  July 26, 2019). In this latest dust-up, FINRA's National Nominating & Governance Committee nominated sitting Small Firm Governor Robert A. Muh for re-election and, thereafter, transmitted an email on July 25, 2019, urging eligible voters to support their nominee's candidacy despite the existence of Small Firm Member Petition Candidate Linde Murphy. Murphy needed to obtain the requisite 3%-plus petitions in support of her candidacy, whereas Muh, who previously ran for his first term as a petition candidate, avoided that inconvenient qualifying step by accepting the Nominating Committee's nod. 

Why does any of this matter? 

A Board of 24

The FINRA Board of Governors consists of 24 members: 

  • Chief Executive Officer of FINRA; 
  • 13 Public Governors; 
  • 1 Floor Member Governor; 
  • 1 Independent Dealer/Insurance Affiliate Governor; 
  • 1 Investment Company Affiliate Governor; 
  • 3 Small Firm Governors (1 to 150 registered representatives);
  • 1 Mid-Size Firm Governor (151 to  registered representatives); and 
  • 3 Large Firm Governors (500 or more registered representatives) 

A Powerful Committee

According to FINRA's website:


The Nominating and Governance Committee is responsible for nominating persons for appointment or election to the FINRA Board, as well as nominating persons to fill vacancies in appointed or elected governor seats on the Board. The Committee also nominates Industry and Public members for positions on FINRA's National Adjudicatory Council.

The Committee is responsible for periodically reviewing and recommending changes to standing committee charters and, in consultation with the CEO, nominates the members and chairs of each standing committee of the Board. Also in consultation with the CEO, the Committee develops and recommends to the Board guidelines for effective corporate governance. In addition, the Committee reviews and approves appointments to each of FINRA's advisory committees and changes to the advisory committee enabling resolutions.

3,261 FINRA Small Member Firms

In "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 24, 2019), we are informed that:

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.

According to FINRA's online "Statistics", as of June 2019 there were 3,589 Member Firms. As such, FINRA's 3,261 Small Firms account for 91% of the self-regulatory-organization's membership; however, that 91% majority has been allocated only 3 out of 24 FINRA Board of Governors seats -- which amounts to 12.5% of the Board seats for 91% of the organization's member firms! 

The Power to Appoint. The Power to Nominate.

Somewhat lost in all the verbiage of the FINRA Election Notice is this nugget:

Of the 24 Board members, the following seats are appointed by the FINRA Board from candidates recommended by the Nominating Committee: the Public Governors, Floor Member Governor, Independent Dealer/Insurance Affiliate Governor and Investment Company Affiliate Governor (Appointed Governors).

The Nominating Committee also may nominate individuals to run for election for the seven elected governor seats that comprise the three Small Firm Governors, one Mid-Size Firm Governor and three Large Firm Governors (Elected Governors). . . . 

FINRA's Nominating Committee of three industry and four public governors appoints 16 of the Board's 24 Governors (which works out to 67% of the Board): 13 Public Governors and the 1 Floor Member Governor and the 1 Independent Dealer/Insurance Affiliate Governor and the 1 Investment Company Affiliate Governor. In addition, the Nominating Committee "may nominate" the 7 industry governors. Apparently, FINRA's CEO gets a free pass and is neither appointed nor nominated. We should all be so lucky!

91% With Little Proportionate Power -- FINRA's Dirty Little Governance Secret

Consider these extracts from the FINRA Nominating Committee's July 25th email in support of Muh's nomination:

[O]ur committee is comprised of three industry governors and four public governors. . .

The role of the small firm representatives on the Board, representing over 3,200 such institutions, is a crucial one that demands significant industry experience. . . 

The majority of the FINRA board are not from the industry and they have all looked to Bob to get an understanding of the impact of rule proposals on the small firm. . . .

Given how the small firms' Board representatives roles are "crucial" since the majority of FINRA's Board "are not from the industry," it's no small wonder that such non-industry folks would look to Bob Muh in order to "get an understanding," Thankfully Bob sits on the all-power FINRA Nominating Committee. Having been unfairly restricted to disproportionate representation on the Board, at least the Small Firm community has 1 of 7 seats on the all-powerful Nominating Committee, which is about 14% of the Committee's seat and a modest bump-up from the 12.5% of the Board seats. 

Ummm . . . hold on a sec. What???

I see from the 2019 roster of the FINRA Nominating Committee that, in fact, Robert Muh is not a member of the Nominating Committee

So . . . which Small Firm Member Governor is a member of the Nominating Committee? 

I don't see the name of Small Firm Member Governor Stephen A. Kohn. 

I don't see the name of Small Firm Member Governor Page W. Pierce. 

That's all there is. There ain't no more Small Firm Governors. 

Omigod, FINRA engineered its Small Firm Member community out of any Nominating Committee seats! There are three "industry" seats set aside on the Nominating Committee. There are three "industry" categories of Large, Mid-Sized, and Small. Shamefully, there is not a single set-aside for a Small Firm Member Governor to sit on the Nominating Committee.  91% of FINRA's member firms have 0% representation on FINRA's Nominating Committee.

As to the so-called independence of the National Nominating Committee, consider this from "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 25, 2018)

FINRA Nominating Committee Nominee

FINRA's Nominating Committee has nominated the following individuals: 

Large Firm Governor Candidate: Timothy C. Scheve, Janney Montgomery Scott LLC 

Mid-Size Firm Governor Candidate: Brian J. Kovack, Kovack Securities, Inc. 

Small Firm Governor Candidate: The Nominating Committee determined it would not nominate a candidate for election in 2018. Instead, any eligible candidates who obtain the requisite number of petitions will be included on the ballot. 

Similarly, as to the Nominating Committee's Chair, consider this from "FINRA Announces Governor Elections and Appointments" (FINRA News Release / August 22, 2017)

At the July 2017 meetings, the Nominating Committee nominated and the Board made a number of appointments to the Board that became effective at the Annual Meeting. Governor Kathleen A. Murphy, President of Fidelity Personal Investing, was appointed to succeed Governor John J. Brennan as the Investment Company Affiliate on the Board. . . 

All three of the industry member firm governors sitting on FINRA's Nominating Committee were appointed or nominated by that same committee, and not one of those appointed/nominated industry governors is designated as a Small Firm Member Governor. 

So those who do the appointing are appointed to appoint those who do the appointing -- and that's a conflict-free, democratic process? 

And that's not designed to marginalize and silence the voice of 91% of the organization's member firms? 

Just imagine how one of the many public companies traded by FINRA's member firms would fare if they proposed to restrict 91% of their public shareholders to 12.5% of their Board seats and shut them out of any role on the Nominating and Governance Committee!

And FINRA wonders why its Small Firm Member community feels isolated?  Why some 3,261 firms feel marginalized? Why the Small Firm community looks upon the Nominating Committee's email as an unwanted interference in a contested election? 

The Protest Vote for Candidate Linde Murphy

Before this whole mess blew up on July 25th, Petition Candidate Linde Murphy submitted a public statement to the Blog by a July 24, 2019, 5 p.m. EDT deadline, (as did Nominee Robert Muh). In her prescient statement, Murphy assured the Small Firm Member community that:


As you know, my name is on the ballot this year because I went through the petition process to get it there.  Let's not forget the efforts of a small group of dissidents that first contested the FINRA nominee years ago.  They fought for the rights of small firms and against what they felt was a nominee handpicked by FINRA. 

At no point in the future would I accept the FINRA nomination for the Small Firm Seat for the Board of Governors.  The person who represents small firms at the board level should go to the members and ask for their support by signing a petition.

The FINRA Small Firm community must send a clear and unequivocal message to FINRA to "remain strictly neutral" when it comes to Small Firm politics.