Securities Industry Commentator by Bill Singer Esq

August 13, 2019

FINRA Censures and Fines Member Firm for 13 Unregistered Prop Traders. In the Matter of Seven Points Capital, LLC, Respondent (FINRA AWC 2015043490102)
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, Seven Points Capital, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Seven Points Capital, LLC a Censure and $20,000 fine. As set forth in part in the AWC, during the relevant period between April 22 ,2014 and February 27, 2016 [Ed: footnotes omitted]:

[S]even Points permitted 13 proprietary traders to engage in equity trading but failed to ensure that they obtained appropriate registrations prior to conducting this activity. Five out of the 13 associated persons had not qualified and registered as a General Securities Representative and an Equity Trader or, as applicable, a Securities Trader, prior to engaging in equity trading. In addition, there were eight associated persons who were registered as General Securities Representatives but did not timely complete the Series 55 or 57 examination. The Firm did not ensure that those eight associated persons were qualified and registered as an Equity Trader or Securities Trader, as applicable, although such registration was required for their equity trading activity. By virtue of the foregoing, Seven Points violated NASD Membership and Registration Rules 1031(a) and 1032(f) and FINRA Rule 2010. 

Further, during the Relevant Period, Seven Points failed to enforce its written procedures, which required the Firm to register any person who was to engage in the securities business of the Firm. The Firm failed to qualify and register 13 associated persons in the appropriate category or categories of registration when those persons engaged in equity trading on behalf of the Firm. By virtue of the foregoing, Seven Points violated NASD Rule 3010(b) (for conduct before December 1, 2014), and FINRA Rules 3110(b) and 2010 (for conduct on or after December 1, 2014
Some litigants jump the gun in an effort to improve the so-called "optics" of litigation. In situations where two parties each have claims against the other, there's a sense that it's better to be cast in the role of the Claimant than of the Respondent. The theory is that it's better to frame the lawsuit in the language of the aggrieved rather than as the alleged malefactor. In a recent FINRA arbitration, a public customer representing himself pro se sought to recover hundreds of thousands of dollars in put-sales losses. In response to his claims, the respondent brokerage firm counterclaimed for a couple of hundred thousand in its own claimed damages. 

Conman Who Posed as Beverage Entrepreneur Sentenced to more than 7 Years in Federal Prison for Running $7.5 Million Ponzi Scheme (DOJ Release)
After pleading guilty to five counts of wire fraud in the United States District Court for the Central District of California, Kemraj Dave Hardat was sentenced to 87 months in prison. As set forth in part in the DOJ Release:

[H]ardat admitted that, from August 2014 through November 2018, he raised money from investors by falsely holding himself out as a successful investor and businessman in the performance beverage and water-bottling industries. Hardat duped his investors by falsely representing that he had a doctorate and that he maintained relationships with established business figures such as computer entrepreneur Michael Dell and the chief executive officer of PepsiCo. 

Hardat falsely claimed that professional basketball star Stephen Curry would be endorsing one of his company's products, and that PepsiCo and Dr. Pepper Snapple Group, Inc. owed him more than $100 million as the result of purported business deals he had consummated with them.

Hardat supported his bogus claims of financial success by showing victims doctored digital images of bank account statements showing inflated balances. One fraudulent image emailed to a victim showed a balance of nearly $500 million in one bank account, while another phony image showed a bank account balance of nearly $170 million.

In reality, Hardat used investor funds to pay off his personal debts, purchase luxury cars worth more than $100,000 each, pay rent at the Ritz-Carlton Residences, pay tuition to exclusive private schools, and purchase luxury boxes and tickets for sporting and entertainment events. Hardat also admitted that, in the style of a Ponzi scheme, he made payments to prior victim-investors out of subsequent victim-investors' money. During the course of the scheme, Hardat took in approximately $7.5 million from investors, who suffered losses of more than $6.4 million.

Manhattan U.S. Attorney Announces Insider Trading Charges Against Analyst At Investment Bank (DOJ Release)

In a criminal Complaint filed in the United States District Court for the Southern District of New York, investment banker Bill Tsai was charged with one count of securities fraud. As set forth in part in the DOJ Release:

In March 2019, the Investment Bank began working to provide financing to a private equity firm headquartered in New York ("Private Equity Firm-1") on its possible acquisition of a publicly traded company Electronics for Imaging, Inc. ("EFI").  Information relating to the EFI deal, including its existence, was non-public and confidential.  As an analyst at the Investment Bank, TSAI was responsible for, among other things, updating a running list of active transactional deals, including mergers and acquisitions, involving clients of the Investment Bank.  As such, TSAI had access to files containing material, non-public information, including information about the EFI deal.    

In violation of the Investment Bank's policies and in breach of his duties to the Investment Bank and its clients, TSAI used material, non-public information about Private Equity Firm-1's pending acquisition of EFI to purchase EFI call options.  Specifically, from on or about March 29, 2019 continuing until on or about April 12, 2019, TSAI bought 187 EFI call options, for a total price of approximately $28,410.  TSAI purchased the EFI call options through a brokerage account in his own name.  Contrary to Investment Bank policies, TSAI did not reveal his trades or the existence of the brokerage account to the Investment Bank.  

The public announcement of Private Equity Firm-1's acquisition of EFI on the morning of April 15, 2019 caused EFI's shares to increase in value.  Indeed, by the close of the market on April 15, 2019, EFI's stock price had risen to $38 per share, an approximately 29.25% increase from the previous trading day's close, resulting in an increase in the value of the call options TSAI had purchased.  On April 15, 2019, after the morning announcement of the EFI deal, TSAI placed an order to sell all 187 EFI call options he previously purchased.  TSAI's trading activity in EFI options resulted in a profit of approximately $98,750. 

In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Tsai with violating the antifraud provisions of the federal securities laws. As set forth in part in the SEC Release, Tsai:

learned of the acquisition when Siris consulted the bank about providing financing and advice on the transaction. The SEC alleges that soon after learning about the deal, Tsai purchased EFII call options, which he sold for a profit of approximately $98,750 shortly after the deal was announced in mid-April 2019.

Tsai allegedly attempted to hide his illegal activity by conducting his trading in a brokerage account that he concealed from his employer, and by circumventing the bank's policies that require employees to pre-clear securities trades.
Without admitting or denying the allegations in a SEC Complaint filed in the United States District Court for the Southern District of New York, Mark E. Burns consented to the entry of a judgment permanently enjoining him 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 the tender offer provisions of Section 14(e) of the Exchange Act and Rule 14e-8 thereunder. Also, Burns was ordered to pay $13,886 in disgorgement and prejudgment interest, and a civil penalty of $60,000. Co-Defendant Robert W. Murray settled with the SEC for his role in the matter, and, separately, he was sentenced to prison in a parallel criminal As set forth in part in the SEC Release:

[O]n November 9, 2016, Burns purchased Fitbit call options just minutes before he and his co-conspirator, Robert W. Murray, filed a fake tender offer on the SEC's EDGAR system purporting to offer to acquire Fitbit's shares at a substantial premium. Fitbit's stock price temporarily spiked when the tender offer became publicly available on November 10, 2016, and Burns sold all of his options for a profit of approximately $13,000.
In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC charged investment adviser Richard G. Duncan with violating violated the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. As set forth in part in the SEC Release, Dunan allegedly defrauded two advisory clients into investing over $300,000 by:

ignoring, and failing to disclose, warnings from two banks that the Turkish investment opportunity was probably a scam. Duncan also made materially false and misleading statements to at least one client, promising as much as a 100% return on the Turkish investment.

Belgian Citizen Pleads Guilty to Insider Trading (DOJ Release)
Nicholas Zanen pled guilty in the United States District Court for the District of Connecticut to one count of conspiracy to commit securities fraud. In the companion case Securities and Exchange Commission v. Nicolas Zanen and Francis J. Van Steenberge, a judgment was issued ordering Zanen to pay a $432,775.70 civil penalty. Zanen's Co-Defendant Steenberge pled guilty to one count of conspiracy to commit securities fraud and awaits sentencing. As set forth in part in the DOJ Release:

[Z]anen was employed by Cheniere Energy, Inc. ("Cheniere"), a Houston-based energy company whose common stock traded on the New York Stock Exchange under the symbol LNG.  Zanen was a vice president of trading in the Cheniere's United Kingdom Branch and was based in London.  Cheniere maintained written policies prohibiting the direct or indirect disclosure of confidential information and requiring employees to prevent the disclosure of such confidential information.  In his position, Zanen had access to material non-public information concerning Cheniere's deals, financings, and other business information, and he was in possession of inside information prior to public announcements.

Between November 2011 and December 2012, Zanen disclosed Cheniere inside information to a friend, Francis J. Van Steenberge, and advised him whether to buy or sell Cheniere securities with the understanding that Van Steenberge would execute the security transactions on the basis of these instructions.  Zanen and Van Steenberge generated approximately $1 million through this scheme.

Zanen also caused to be made materially false and fraudulent statements to the Financial Industry Regulatory Authority ("FINRA") that he was unaware of the circumstances under which Van Steenberge gained knowledge of Cheniere's business activities.

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.