Securities Industry Commentator by Bill Singer Esq

September 20, 2019

Citigroup's Cryptic Cryptocurrency Case ( Blog)
In a recent FINRA arbitration, an unhappy Citigroup customer was seeking between $1 million and $5 million in damages as a result of losses he sustained via investing in a variety of cryptocurrencies. Except the customer wasn't complaining about trades done at  Citigroup -- no, the customer accused the brokerage firm of negligence, breach of fiduciary duty, failure to supervise, and selling away. As best we can figure out from the tidbits of facts in the FINRA Arbitration Decision, the customer was referred by his stockbroker to an outside lawyer, who, in turn, referred the customer to a purported crypto investment genius. The crypto trades didn't go well for the customer but it didn't seem that the stockbroker had entered a single order. All of which prompted the stockbroker to try and clear his name via an expungement hearing. In the end, what did and didn't happen is far more complex and nuanced than the case set out in the FINRA Arbitration Decision.

Federal Courts Compel Arbitration of Dodd‐Frank Whistleblower Retaliation Claim.

2018 SDNY Opinion and Order

Erin Daly, Plaintiff, v. Citigroup, Inc., Citigroup Global Markets Inc., and Citibank, N.A., Defendants (Opinion and Order, United States United States District Court for the Southern District of New York ("SDNY"), 16-CV-91831 / February 6, 2018)
As set forth in the Syllabus to the SDNY Opinion and Order:

Plaintiff Erin Daly brings this action against her former employers, Defendants Citigroup, Inc., Citigroup Global Markets Inc., and Citibank, N.A. ("Defendants" or "Citi"), alleging that Defendants discriminated against her on the basis of her gender and retaliated against her after she complained about that discrimination and unrelated securites-law violations perpetrated by Defendants. Now before the Court are Defendants' motions to (1) compel arbitration and (2) dismiss Plaintiff's Sarbanes-Oxley whistleblower claim for lack of jurisdiction and/or failure to state a claim pursuant to Federal Rule of Civil Procedure 12 (Doc. No. 20.) For the reasons set forth below, the Court grants Defendants/ motions in their entirety.

Among the issues considered by SDNY was whether Plaintiff Daly had timely pursued her claims and exhausted her administrative remedies.At issue was OSHA's exclusive jurisdiction to hear Sarbanes-Oxley claims for 180 days before such may be presented to a federal court. In part, SDNY found that:

[P]laintiff was fired in December 2014, but did not file her complaint for retaliation for two years, well after the 180-day filing window that followed the alleged retaliation.

Plaintiff responds that because she continues to experience harm as a result of Defendants' filing of a negative U5 - which is accessible to potential employers via the FINRA database - she is suffering from a continuing violation for which the 180-day limit has not yet run. But while the continuing violation doctrine may function in narrow circumstances to allow courts to consider a mix of timely and time-barred conduct as part of one violative pattern of activity, see Gonzalez v. Hasty, 802 F.3d 212, 220 (2d Cir. 2015), that doctrine does not apply to the discrete acts at issue in retaliation cases - in this case, Plaintiff's alleged exclusion from certain meetings, ultimate termination, and the filing of a retaliatory U5. . .

2019 2Cir Opinion 

Daly appealed SDNY's Order to the United States Court of Appeals for the Second Circuit ("2Cir"). Erin Daly, Plaintiff/Appellant, v. Citigroup, Inc., Citigroup Global Markets Inc., and Citibank, N.A., Defendants/Appellees (Opinion, 2Cir, 18-665 / September 19, 2019) As explained, in part, by way of background in the 2Cir Opinion, Daly was first employed by Citigroup in 2007, was promoted in 2010 to Assistant Vice President of the Citi Private Bank Division. On June 29, 2012, Daly alleged that she was stripped of her authority to make allocations of shares of stock for purchases among the Defendants' customers. Thereafter, she alleges that various responsibilities of hers were diminished as part of her superiors' effort to [Ed: footnotes omitted]:

make it clear that ʺ[t]he boys were in charge.ʺ  Id. ¶ 93; J. App. 106 (emphasis omitted). 

The plaintiff further alleges that her supervisor, James Messina, ʺconstantly demanded that [she] disclose material non‐public information of which he knew she was in possessionʺ so that ʺhe could pass the information along to his favored clients.ʺ  Id. ¶¶ 121‐22; J. App. 110.  On November 19, 2014, Daly conveyed those accusations to Citi attorneys and human resources employees.      

On December 1, 2014, less than two weeks later, Daly was notified that she was being terminated.  The defendants later filed a Uniform Termination Notice for Securities Industry Registration Form (ʺForm U‐5ʺ) with the Financial Industry Regulatory Authority (ʺFINRAʺ), as required when a registered representative of a firm departs therefrom for any reason. It contained assertions that, among other things, the plaintiff had been late to work and had mishandled confidential information.  The plaintiff asserts that these statements are ʺfalse, malicious, and defamatory.ʺ  Id. ¶¶ 36‐38; J. App. 17‐18.  Because the plaintiffʹs Form U‐5 is available in the FINRA database, which allows FINRA members to search for information about individual financial professionals, the plaintiff alleges that the defendantsʹ statements continue to have an adverse impact on her employment opportunities.

As set forth in the Syllabus to the 2Cir Opinion:

The plaintiff‐appellant, Erin Daly, is a former employee of Citigroup Inc., Citigroup Global Markets, Inc., and Citibank, N.A., the defendants‐appellees.   She brought suit against them in the United States District Court for the Southern District of New York alleging gender discrimination and whistleblower retaliation claims under several local, state, and federal statutes, including the 18‐665 Daly v. Citigroup Inc., et al. 2 Dodd‐Frank and Sarbanes‐Oxley Acts.  In response, the defendants filed a motion to compel arbitration and to dismiss the plaintiffʹs claims, arguing that each of the plaintiffʹs claims, with the exception of her Sarbanes‐Oxley claim, was subject to mandatory arbitration under her employment arbitration agreement, and that her Sarbanes‐Oxley claim should be dismissed for lack of subject matter jurisdiction.  The district court (Richard J. Sullivan, Judge) issued an opinion and order granting the defendantsʹ motion in its entirety.  On appeal, the plaintiff argues that the district court erred in dismissing her Sarbanes‐Oxley claim and compelling arbitration of the remainder of her claims.  We disagree.  The district court appropriately compelled arbitration of all but the plaintiffʹs Sarbanes‐Oxley claim, including her Dodd‐Frank whistleblower retaliation claim, because her claims fall within the scope of her employment arbitration agreement and because she failed to establish that they are precluded by law from arbitration.   The plaintiffʹs Sarbanes‐Oxley claim was also properly dismissed because the district court lacked subject matter jurisdiction over it inasmuch as the plaintiff failed to exhaust her administrative remedies under the statute.  Accordingly, the district courtʹs order is:  AFFIRMED.
Rudolph Carryl pled guilty to securities fraud in the United States District Court for the Western District of North Carolina and was sentenced to 74 months in prison plus two years of supervised; and he was ordered to pay $444,500 in restitution. As set forth in part in the DOJ Release:

[C]arryl held himself out as an investment advisor to his victims and operated Carryl Capital Management (CCM), an investment management firm with offices in New York City.  CCM maintained a website that purported the firm adhered to rigorous risk control measures, and was dedicated to achieving the investment goals for its clients.

In or about February 2015, Carryl induced a victim identified as "M.G." to hand over money which he promised to invest in stocks. Over the course of two years, M.G., who was Carryl's childhood friend and a retired nurse living in North Carolina, wired more than $90,000 to an account controlled by Carryl, based on Carryl's misrepresentations that M.G.'s money would be used to purchase stocks on M.G.'s behalf. Similarly, in or about May 2015, Carryl solicited victims "W.B.," a retired, decorated United States Air Force veteran, and his wife "A.B.," both of North Carolina, to invest approximately $350,000 in a purported investment fund that was managed by Carryl. To induce the retired couple to part with their money, Carryl claimed that he was a successful investment adviser who managed investments for the country of Saudi Arabia and that he was friends with wealthy celebrities.  

According to court records, rather than invest the victims' funds as promised, Carryl used the money to pay for personal and other expenses, to repay his other victims other misconduct, and to make substantial cash withdrawals.

Unbeknownst to his victims, Carryl was being investigated and ultimately was convicted of federal wire fraud charges related to a separate investment scheme at the same time he was defrauding his victims in North Carolina. Carryl was sentenced in August 2017 by a federal judge in New York to 12 months and one day in prison for the other fraud.  After his sentencing but before he reported to the Federal Bureau of Prisons to begin serving his sentence, Carryl continued to be in contact with W.B., assuring W.B. that his investments were doing ok, all the while failing to disclose any information about his conviction or his impending report date to the Federal Bureau of Prisons.   

Former Austin Bank Employee Sentenced to Federal Prison for Stealing over One Million Dollars from Customer (DOJ Release)
After pleading guilty to one count of bank fraud in the United States District Court for the Western District of Texas, former Capital One bank employee Paola Gallego was sentenced to five years in prison plus four years of supervised release; and she was ordered to pay $1.2 Million forfeiture and $1,403,979.13 in restitution to Capital One Bank. As set forth in part in the DOJ Release:

[B]eginning in April 2014, Gallego began servicing the Capital One accounts of an elderly Austin couple.  Gallego told one of her victims that if the spouse should die, another family member could take control of the money in their bank account-approximately $4.4 million. In September 2016, the victim took $400,000 and opened up an account at Wells Fargo Bank with Gallego's assistance.  Over the next two weeks, Gallego spent $94,779.13 on personal and family expenditures including a $50,000 wire transfer to Bancolombia on September 28, 2016, and a $20,586.81 online credit card payment to Chase Bank to an account in the name of her mother.  Wells Fargo closed that account on suspicions of elder abuse.

Gallego and her victim subsequently opened another joint checking account, this time at J.P. Morgan Chase (Chase Bank).  Gallego told a Chase Bank employee that she was her victim's caretaker and a stay-at-home mother, which was false.  Gallego then opened up a separate individual bank account at Chase Bank.  Between October 14, 2016 and April 20, 2017, Gallego's victim withdrew $1.2 million from the joint Capital One account via cashier's checks with the understanding that Gallego would deposit those funds into their joint account at Chase Bank for investment purposes.  Instead, Gallego deposited those checks into her own Chase Bank account and used the money for personal expenses, including purchasing a Range Rover Sport HSE, shopping, a Hawaiian vacation, making home improvements including a pool, making mortgage payments, paying off family member's credit card balances, and purchasing a VW Passat for her parents.
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged ICOBox and its founder Nikolay Evdokimov with violating the registration requirements of Sections 5(a) and (c) of the Securities Act and Section 15(a) of the Securities Exchange Act and seeks injunctive relief, disgorgement with prejudgment interest, and civil money penalties. As set forth in part in the SEC Release:

[I]COBox raised funds in 2017 to develop a platform for initial coin offerings by selling, in an unregistered offering, roughly $14.6 million of "ICOS" tokens to over 2,000 investors. The complaint alleges that defendants claimed the tokens would increase in value upon trading and that ICOS token holders would be able to swap them at a discount for other tokens promoted on the ICOBox platform. According to the complaint, the ICOS tokens are virtually worthless. The complaint further alleges that ICOBox failed to register as a broker but acted as one by facilitating initial coin offerings that raised more than $650 million for dozens of clients.

Penny Stock "Mailman" and His Two Companies Agree to Settle Scalping Charges (SEC Release)
In response to an SEC Complaint filed in the United States District Court for the Northern District of Alabama, stock promoter and CPA Brian Roberrt Sodi and his two defunct companies, Capital Financial Media LLC ("CFM") and List Data Solutions LLC ("LDC") entered into a settlement whereby they agreed to injunctions barring them from violating Sections 17(a) and 17(b) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The SEC alleged that Sodi had secretly acquired shares of two companies and then sold those shares while using CFM and LDS to disseminate statements urging investors to buy those stocks, and without disclosing his sales or plans to sell.In a parallel criminal action filed in the Northern District of Alabama, Sodi pleaded guilty on May 19, 2019 to one count of securities fraud. Sentencing in that matter is scheduled for May 2020. 

The Defendants agreed to pay, jointly and severally, a total of $1,268,000 in disgorgement and prejudgment interest, with this obligation to be offset by the total amount of restitution and/or forfeiture ultimately ordered in the parallel criminal proceeding against Sodi. Also, Sodi agreed to an injunction barring him from violating Section 5 of the Securities Act and Section 13(d) of the Exchange Act and Rule 13d-1 thereunder; and he offered to consent to a suspension from appearing or practicing before the Commission under Rule 102(e)(3) of the Commission's Rules of Practice. Finally, the Defendants agreed to be:
  • barred from participating in any penny stock offering and to be prohibited from directly or indirectly promoting the purchase of any U.S. publicly traded or quoted stock without making certain disclosures regarding sales of, plans to sell, or compensation received in, such stock; and 
  • prohibited from engaging in certain activities related to inducing the purchase or sale of securities.
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged the Montebello Unified School District's Chief Business Officer Ruben James Rojas with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder as well as Section 17(a) of the Securities Act, and seeks permanent and conduct-based injunctions as well as a financial penalty. Separately, without admitting or denying the finding in an SEC Order, the Montebello Unified School District and its former Superintendent of Schools Anthony James Martinez agreed to settle with the SEC and consented to an SEC Order. Montebello was ordered to cease and desist from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder as well as Section 17(a) of the Securities Act; and the District agreed to engage an independent consultant to evaluate its policies and procedures related to its municipal securities disclosures. Finally, Martinez was ordered to cease and desist from future violations of Section 17(a)(3) of the Securities Act  and also ordered to pay a $10,000 penalty. As set forth in part in the SEC Release:

[I]mmediately before and concurrently with the District's sale of $100 million of general obligation bonds in December 2016, Montebello's independent auditor repeatedly raised concerns about allegations of fraud and internal controls issues to the District's Board of Education and management. In response, Montebello allegedly refused to authorize the fees needed for the audit firm to complete its audit and instead decided to terminate the audit firm.  The offering documents for Montebello's December 2016 bonds failed to disclose this information to investors and instead included a copy of the District's audit report from the prior fiscal year, which included an unmodified or "clean" audit opinion from the firm. The SEC alleges that Ruben Rojas, Montebello's former Chief Business Officer, helped prepare the misleading offering documents and also concealed the audit firm's concerns by providing deceptive updates about the status of its pending audit to various gatekeepers, including the disclosure lawyers who worked on the bond offering. The SEC's order found that Anthony Martinez, Montebello's Superintendent of Schools, signed the final bond offering document and made false certifications in connection with the bonds.

Prudential Rep Wins Expungement of Customer Complaint in Tax Advice Dispute. In the Matter of the Arbitration Between Robert Alan Schwarz, Claimant, v. Prudential Equity Group, LLC, Respondent (FINRA Arbitration Decision 19-00286)
In a FINRA Arbitration Statement of Claim field in January 2019 and as amended, associated person Claimant Schwarz sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). The customer did not file an Answer or participate in the hearing. Respondent Prudential did not object to the requested relief. The sole FINRA Arbitrator recommended expungement based upon a FINRA Rule 2080 finding that Schwarz was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. The Arbitrator offered this rationale:

The evidence showed that the Claimant was not the Customer's financial advisor. Claimant was requested by the Customer's financial advisor to contact insurance companies to obtain and research annuity information, which information was not specifically tax information. He obtained such information and submitted it to the Customer's financial advisor. Claimant neither knew of the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") nor did any of the insurance companies mention it at the time. Claimant never spoke to or interacted with the Customer, had no knowledge of her financial situation or personal goals, and made no recommendation to her. Claimant was not the Customer's broker. Claimant was only a researcher.

Bill Singer's Comment: As set forth on FINRA's online BrokerCheck as of September 20, 2019, Prudential entered under the heading "Customer Dispute - Settled" a complaint that was received in March 2004 alleging:


Prudential disclosed that it settled the matter in April 2004 for $17,660, and that Schwarz did not contribute to said settlement. Under the heading "Firm Statement" [Ed: I believe this to be an error and that the statement was of the "Broker Statement" variety], Prudential disclosed:

FINRA's Chief of its Department of Enforcement since 2017,  Susan Schroeder, will be leaving the regulator. Jessica Hopper, Deputy Head of Enforcement, has been named the Acting Head of Enforcement. FINRA will undertake a search for a new head of Enforcement that will consider both internal and external candidates.
Bill Singer's Comment: Without question Susan was among the finest industry regulators that I have known. In my personal Pantheon of the industry's best regulators, she ranks up there with former NASD Enforcement Chief Barry Goldsmith,  Susan brought a rare combination of humor, savvy, Street smarts, and pragmatism to her job. She never postured. When you talked to her, you spoke with a human being who seemed eager to find a fair and constructive resolution to a given dispute. As I have often said, and I say so as a former regulator married to a career federal prosecutor, anyone who works in regulation must accept that it is a thankless job. You do well, your detractors say it's expected and you should have done better. You do poorly, and it's all your fault. The weight of the world is always pressing down upon you. As one of FINRA's most vocal critics, perhaps the most telling comment that I can offer is that I will miss her, FINRA will miss her, and the public investor community will miss her. At best, FINRA will merely replace Susan but they will never, ever find anyone who will do a better job.
Ah yes -- the very popular statement updating a prior statement!! In today's restatement of what was previously stated but now with an update, we learn of the following clarification, in part,  provided for the earlier June 24, 2019, statement:

[T]he International Swaps and Derivatives Association (ISDA) recently released a proposed protocol designed to address certain issues related to narrowly tailored credit events.  This protocol contains two amendments to the 2014 ISDA Credit Derivatives Definitions.  One relates to the Failure to Pay definition and the other to the Outstanding Principal Balance definition.  We welcome these efforts.

As a general matter, we expect firms to consider how the aforementioned opportunistic strategies may impact their businesses and to take appropriate action to mitigate market, reputation and other risks arising from these types of strategies.  With regard to the proposed ISDA protocol, firms should consider how adherence to the proposed ISDA protocol may help them mitigate these risks.  Firms should also consider the risks to which they may be exposing themselves by trading with counterparties who do not adhere to the proposed ISDA protocol.

However, by itself, the proposed ISDA protocol will not address many of the concerns identified in the Joint Statement, such as opportunistic strategies that do not involve narrowly tailored credit events. We look forward to further industry efforts to improve the functioning of the credit derivative markets and welcome continuing engagement with market participants.

In part, Commissioner Lee warns that [Ed: footnotes omitted]:

What we have done with this rule amendment is make policy choices that were urged upon us by the banks -give them greater discretion and they will rein in their own behavior despite strong incentives to the contrary. Both logic and the sobering experience of recent history demonstrate this to be a risky proposition at best. I sincerely hope, as the release suggests, that banks will remain diligent in identifying and mitigating their own risks, but the families and businesses whose wellbeing would be threatened by another financial crisis deserve more than our hope. Accordingly, I must respectfully dissent.

Statement on Volcker Rule Amendments by Commissioner Robert J. Jackson Jr. (SEC Statement)
In part, Commissioner Jackson warns that [Ed: footnotes omitted]:

Because my dissenting colleagues, and Chairman Volcker himself, have already ably explained why this rollback is deeply misguided, I will offer just two brief thoughts. First, while the optimal design of structural risk limits is debatable, allowing bankers to get paid to gamble with taxpayer money is not. During the last crisis, nine million American families lost their homes because regulators neglected the basic economics of banker incentives. We could and should have addressed those incentives before considering the actions before us now.