Securities Industry Commentator by Bill Singer Esq

Contract Supply

David Pascal DPScatsx@caramail.fr via pg93p21.acuciva.com 

Hello,

I wish to introduce you to a very lucrative business. I worked as a product sourcing manager with an import and export company here in Cote d'Ivoire.In a business seminar I attended sometimes in 2014, I met one Alhaji, who is the president & CEO of a big cattle and dairy farm here in my country. Alhaji informed me that he needed a particular vaccine which he usually buys at USD2,000 per carton and he buys up wards of 3000 cartons every three months. Back in my office, I carried out a market research and discovered that we could purchase this medicine cheaper somewhere in Europe for US$575.00 per carton.

I discussed this proposal with my boss and he decided to handle the supply by himself.We moved a proposal to Alhaji to supply him with this vaccine at US$1,500.00 per carton which he accepted.My boss has supplied this vaccine to Alhaji for more than four times now, making a very huge profit.My problem now is that my boss has vehemently refused to pay me my share of the profit as we agreed.As a result of this, I decided to arrange with Alhaji to link him to the real producers of the vaccine who will give him the vaccine at a cheaper rate. After my discussion with Alhaji, I offered to supply him the vaccine at a cheaper rate of USD1,250 per carton of 12 bottles. Alhaji accepted my offer and now wants to place order for more than 3650 cartons of the vaccine. Right now, Alhaji has stopped all communications with my boss.

I therefore wish to present you as my foreign contact so that you can handle the supplies to Alhaji. If you can handle the contract, kindly contact me immediately for details and negotiations on what is going to be my commission.We will get the medicine from the producers at US$575 and supply to Alhaji at US$1250 per carton of 12 bottles(500ml).Alhaji also agreed to make a down payment of 70% of his total order to your company for the procurement of the vaccine.

Thanks and God bless you.

David Pascal

RIPPLE, Circuit Judge. Effex Capital, LLC ("Effex"), brought this action alleging that the National Futures Association (the "NFA") had defamed it in documents related to a settlement between the NFA and one of its members, Forex Capital Markets, LLC ("FXCM"). It sought injunctive relief and damages. The district court dismissed the action, holding that Effex had failed to exhaust its administrative remedies. Effex timely appealed the district court's dismissal.   

For the reasons set forth more fully in the following opinion, we now affirm the judgment of the district court. In the Commodity Exchange Act, 7 U.S.C. § 1 et seq., Congress has regulated comprehensively all matters relating to NFA discipline. As such, a federal Bivens remedy is unavailable.Further, the Commodity Exchange Act preempts Effex's state law claims. Any remedy available to Effex must be based on the provisions of that statute. 

The NFA's complaint against FXCM alleged that FXCM failed to comply with a litany of NFA rules. More pertinent‐ ly, the NFA claimed that Effex was involved in the miscon‐ duct allegedly committed by FXCM. The resulting decision outlined the allegations in the complaint, including those involving Effex, and accepted them as true. The accompanying narrative summarized the decision, including its statements about Effex. The press release, although it did not specifical‐ ly reference Effex, noted that FXCM committed numerous deceptive and abusive actions and directed the public to the narrative on the NFA's website. Effex alleges that the NFA's findings in the FXCM Settlement Documents are false and that their publication is defamatory. 

Although its investigation into FXCM implicated Effex, the NFA did not contact Effex or provide Effex with notice of the investigation. The CFTC, on the other hand, conducted its own investigation into FXCM. As part of its investigation, the Commission subpoenaed documents from Effex and took the deposition of Mr. Dittami and other Effex employees. Effex alleges that the NFA obtained documents necessary for its investigation from the CFTC despite Effex's re‐ quest that its responses as a third party be kept confidential.   

On the same day that the NFA announced its settlement with FXCM, the CFTC issued its own decision about FXCM and its business practices. It determined that FXCM had concealed an improper trading relationship with a "high‐ frequency trader" and a company the trader formed (which the Commission termed "HFT Co").15 Although not explicitly named, the HFT Co is Effex. The CFTC found materially the same facts as the NFA did regarding Effex. 

Effex did not seek review of either the NFA's decision or the Commission's decision regarding FXCM. Rather, four months after the decisions were released, Effex filed this ac‐ tion against the NFA in the district court.

[T]he CFTC had the ability to adjudicate due process claims. Moreover, the court acknowledged that even though the Commission rarely re‐ views NFA settlements, it previously had reviewed settle‐ ments. Finally, observing that Effex's claims "touch on the contents of the NFA Publications-documents generated as a result of the NFA investigation relating to a disciplinary action,"21 the district court rejected Effex's contention that it was not seeking review of an NFA disciplinary action but rather merely was seeking a court order regarding the publication of the FXCM Settlement Documents containing the alleged defamatory statements.   

[E]ffex does not maintain that there is a specific federal cause of action to redress harm inflicted by an SRO upon one of its members. Rather, it asks that we imply a cause of action to remedy harm to a nonmember (such as Effex) resulting from an SRO proceeding. It casts this cause of action as one to remedy a due process violation under Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics, 403 U.S. 388 (1971). Bivens recognized a damages remedy to compensate persons injured by the federal officers who violated the Fourth Amendment even though the Amendment does not provide for money damages "in so many words." Id. at 395- 97. In doing so, the Court noted that Congress had not explicitly foreclosed a damages remedy and that there were no "special factors" counseling against authorizing such a remedy to effectuate the statute's purpose. . . . 

An entity that was not a party to the SRO proceeding is no doubt in a somewhat different position than a party to the proceeding. We do not believe, however, that the difference is so significant that such an entity can maintain a judicially created cause of action against the SRO for harms that the nonparty claims to have suffered as a result of disciplinary proceedings. Such a view presupposes a very narrow, and in our view too narrow, understanding of the scope of the Commodity Exchange Act. Effex offers no explanation or support for why Congress, having established a comprehensive mechanism for the governance of the commodities industry, would permit disruption of that mechanism through a judicially created cause of action. 

Indeed, as the CFTC points out in its brief as amicus curiae, Congress has decided that a "person aggrieved" by the SRO's action may seek redress before the Commission. See 7 U.S.C. § 21(h)(2). To determine who falls within the scope of the provision, the CFTC submits that, like other statutorily created causes of action, there must be an inquiry into the zone‐of‐interests sought to be protected by the Commodity Exchange Act. See Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1388 (2014). This inquiry utilizes "traditional tools of statutory interpretation," id. at 1387, and "the breadth of the zone‐of‐interests varies according to the provisions of the law at issue," id. at 1389 (internal quotation marks omitted). The statutory analysis involves "discern[ing] the interests ‘arguably . . . to be protected' by the statutory provision at issue" and then asking "whether the plaintiff's interests affected by the agency action in question are among them." Nat'l Credit Union Admin. v. First Nat'l Bank & Trust Co., 522 U.S. 479, 492 (1998) (quoting Ass'n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970)). Undoubtedly, a "person aggrieved" by an SRO's action always includes a party to the proceedings. And there may be circumstances where a nonparty may fall within the zone‐of‐interests of the statute and therefore have the right to seek redress before the CFTC. Whether a particular entity falls within the zone‐of‐interests protected by the statute is a determination left to the Commission through case‐by‐case administration of the statute.

[A]t bottom, Effex's challenge remains a challenge to the settlement of a disciplinary proceeding before the NFA that was within the NFA's jurisdiction. Effex claims, in essence, that the NFA improperly conducted its disciplinary proceedings. It does not matter whether Effex is a member or nonmember of the NFA or a party or nonparty to the proceedings. Permitting a collateral attack on those proceedings based on Effex's tort claims would impair the NFA's ability to enforce its rules and carry out its regulatory role.  Preemption does not necessarily mean that Effex has no remedy; it means that it must look to the federally mandated review scheme established by Congress. The fact that these remedies may be different from those afforded by state law, or inadequate by comparison, is not of consequence. Congress has the right to determine the remedies available and the individuals who are eligible for those remedies. . .

[F]rost and Frost Management Company, investment advisers to five private venture capital funds, raised nearly $63 million for the funds between 2012 and 2016. Frost and Frost Management Company then invested those funds in a portfolio of start-up companies. The start-ups were incubated by Frost Data Capital, LLC, another Frost-owned company, using the so-called "Frost incubator model" and, as such, they paid incubator fees to Frost Data Capital for the purported purpose of providing operational support and other services in anticipation of the companies maturing and ultimately being sold. In reality, as alleged in the SEC's complaint, a significant portion of the incubator fees were used to cover Frost Data Capital's overhead and to pay Frost's exorbitant salary and extravagant personal expenses. When Frost needed more cash to fund his lavish lifestyle, including a personal chef and housekeeper, an archery range, beach club membership, a boat, and luxury cars, he created new start-up companies, invested more fund capital in them, and then used Frost Data Capital to extract additional incubator fees.

As the SEC's complaint alleges, Frost and Frost Management Company violated their fiduciary duties as investment advisers by failing to disclose the existence of the incubator fees or misleadingly representing that the incubator fees would be charged on a case-by-case basis and the charges were at or below market rate for the services. As further alleged, the excessive payment by the start-up companies of over $14 million in fees weakened their financial condition and prospects for success, which, in turn, harmed the funds' investments in those companies. The SEC's complaint also alleges that Frost and Frost Management Company charged two of the funds undisclosed management fees and charged another fund unearned management fees.

SEC Charges Broker-Dealer with Violations of Gatekeeping Provisions Aimed at Protecting Investors (SEC Release)
https://www.sec.gov/news/press-release/2019-151
Without admitting or denying the SEC's findings, broker-dealer Canaccord Genuity LLC consented to an SEC Order https://www.sec.gov/litigation/admin/2019/34-86658.pdf that it cease and desist from committing or causing any violations and any future violations of Section 15(c)(2) of the Exchange Act and Rule 15c2-11, imposing a censure and ordering that it pay a $250,000 penalty. As set forth in part in the SEC Release:

[C]anaccord published quotes and made markets in dozens of over-the-counter (OTC) securities without performing the review required by Exchange Act Rule 15c2-11, which requires that broker-dealers have a reasonable basis for believing the prospectus and other information made available by the issuer of the securities was accurate. The order finds that Canaccord delegated to a compliance associate the responsibility to obtain and review the information required by Rule 15c2-11 and to fill out and sign the necessary forms demonstrating compliance with the rule. The compliance associate had no trading experience and no formal training on conducting the requisite review, such as training related to the analysis of financial statements and other information. As a result of the deficient review performed by the compliance associate, Canaccord allowed dozens of OTC securities to be traded in U.S. markets without conducting the review required to protect investors.  Canaccord has since revised and improved its policies and procedures with respect to Rule 15c2-11.

Outside Business Activities Lead to FINRA Fine and Suspension. In the Matter of Leonard J. Kuczynski, Respondent (FINRA AWC 2018059177601) 
http://www.finra.org/sites/default/files/fda_documents/2018059177601
%20Leonard%20J.%20Kuczynski%20CRD%20863341%20AWC%20jm.pdf
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, Leonard J. Kuczynski submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Kuczynski had violated FINRA Rules 3270 and 2010, and imposed upon Kuczynski a $10,000 fine and a four-month suspension from association with any FINRA member in any capacity. As set forth in part in the AWC:

While associated with Innovation, Kuczynski engaged in three separate outside business activities ("OBAs") for compensation without providing required, prior written notice to the Firm. The undisclosed OBAs were as follows: 

• Between February 2013 and sometime in 2014, he mentored a colleague and partnered with him to write insurance despite representing in writing to the Firm in 2014 that he would not do so without advance approval. 
• Between 2014 and August 2017, he sold fixed annuities. 
• Finally, between 2015 and 2016, he worked for another company through which he sold alternative income products to non-Firm customers. 

Each of the above activities were outside the scope of the relationship with his Firm. Moreover, two of the OBAs were contrary to certifications on his 2015 and 2016 annual compliance questionnaires that he was not engaged in such activity. 

• Securities Industry Commentator
• Bill Singer