Securities Industry Commentator by Bill Singer Esq

January 14, 2020

featured in today's Securities Industry Commentator:

CFTC Orders South Korean Company to Pay $700,000 for Spoofing (CFTC Release)

Ameriprise Didn't Know When To Fold In Terminally Ill Customer Case ( Blog)

SEC Obtains Judgment Against Former CEO in Insider Trading Case (SEC Release)

Founder of Swiss Brokerage Firm Pleads Guilty in Connection with Global Securities Fraud Scheme (DOJ Release)

Orlando Man Sentenced To 10 Years In Federal Prison For Orchestrating Multi-Million Dollar Investment Fraud Scheme (DOJ Release)

In Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. 409 (2014), we held that "[t]o state a claim for breach of the duty of prudence" imposed on plan fiduciaries by the Employee Retirement Income Security Act of 1974 (ERISA) "on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." Id., at 428. We then set out three considerations that "inform the requisite analysis." Ibid. 

First, we pointed out that the "duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law." Ibid. Accordingly, "ERISA's duty of prudence cannot require" the fiduciary of an Employee Stock Ownership Plan (ESOP) "to perform an action-such as divesting the fund's holdings of the employer's stock on the basis of inside information-that would violate the securities laws." Ibid. We then added that, where a complaint "faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for failing to disclose that information to the public so that the stock would no longer be overvalued, additional considerations arise." Id., at 429. In such cases, "[t]he courts should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws." Ibid. We noted that the "U. S. Securities and Exchange Commission ha[d] not advised us of its views on these matters, and we believe[d] those views may well be relevant." Ibid. 

Third, and finally, we said that "lower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases-which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment-or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund." Id., at 429-430. 

The question presented in this case concerned what it takes to plausibly allege an alternative action "that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." Id., at 428. It asked whether Dudenhoeffer's "‘more harm than good' pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time." Pet. for Cert. i. 

In their briefing on the merits, however, the petitioners (fiduciaries of the ESOP at issue here) and the Government (presenting the views of the Securities and Exchange Commission as well as the Department of Labor), focused their arguments primarily upon other matters. The petitioners argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information. And the Government argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would "conflict" at least with "objectives of " the "complex insider trading and corporate disclosure requirements imposed by the federal securities laws . . . ." Dudenhoeffer, 573 U. S., at 429. 

The Second Circuit "did not address the[se] argument[s], and, for that reason, neither shall we." F. Hoffmann-La Roche Ltd. v. Empagran S. A., 542 U. S. 155, 175 (2004) (citation omitted); see Cutter v. Wilkinson, 544 U. S. 709, 718, n. 7 (2005) ("[W]e are a court of review, not of first view"). See also 910 F. 3d 620 (CA2 2018). Nevertheless, in light of our statement in Dudenhoeffer that the views of the "U. S. Securities and Exchange Commission" might "well be relevant" to discerning the content of ERISA's duty of prudence in this context, 573 U. S., at 429, we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance. For this reason we vacate the judgment below and remand the case, leaving it to the Second Circuit whether to determine their merits, taking such action as it deems appropriate.
An intriguing and provocative examination as to the changing face of Wall Street trading desks, and how the culture of that world is facing extinction. In part, the authors note:

Traders have no choice but to adapt to the new environment. Automation could cut headcount for Wall Street and the banking industry by 200,000 in the next decade, estimates Mike Mayo, senior bank analyst at Wells Fargo Securities. Almost one-third of financial-services jobs could be displaced by the mid-2030s, according to a report by PricewaterhouseCoopers LLP in 2018.
What's next? Compliance staff will want to review your queries to Alexa? Will the SEC and FINRA want access to your GrubHub orders? As noted in part in the article:

Edward Koo, who has spent almost 20 years at the firm, was placed on leave as the bank reviews whether he broke its policies by using WhatsApp group chats with colleagues, according to people with knowledge of the matter. The discussions included market chatter, and the probe so far hasn't indicated any improper activity, according to a person familiar with the investigation. The bank hasn't ruled out taking action against other members of the group, one of the people said.
The CFTC issued an Order simultaneously filing and settling charges against Mirae Asset Daewoo Co., Ltd. spoofing in the Chicago Mercantile Exchange (CME) E-mini S&P 500 futures market; and the firm will to pay a $700,000 civil monetary penalty (the penalty was reduced in consideration of the firm's cooperation) and to cease and desist from violating the Commodity Exchange Act's prohibition on spoofing. As alleged in part in the CFTC Release: 

[F]rom December 2014 to April 2016, the Daewoo Securities trader placed numerous orders for the E-mini contract with the intent to cancel those orders before execution.  One strategy the trader employed involved three steps.  First, the trader entered one or more disproportionally large orders-which he intended to cancel-on one side of the market (the spoof orders).  The trader placed the spoof orders with the intention of giving a misleading impression of market depth and inducing other market participants to trade opposite the orders.  Second, capitalizing on the increased buying or selling interest that the spoof orders created, the trader placed a small order-which he intended to execute-on the opposite side of the market (the genuine order).  Third, within seconds of the genuine order being filled, the trader cancelled the spoof order before it was executed.
Wall Street often looks and feels like a casino. Trades are bets. Traders talk about sure-things. Customers seek an edge at the table. Then ya got yer sore losers, who believe that the dice were loaded and the cards marked. Given what the House rakes in on each and every bet, there's a grudging acceptance on the Street that sometimes it's best to settle a lawsuit because the House is gonna make back the losses over time anyways, so, what the hell, give her a short stack of chips and keep her quiet. On the other hand, not all customer complaints are nonsense, and when they're not, the firm should quickly pay out the bucks needed to keep things quiet and defend its reputation. In today's blog we consider what happens when a brokerage firm declines to cut its losses via settlement and goes all-in during an arbitration.
The United States District Court for the District of Connecticut entered a preliminary judgment by consent that permanently enjoined Robert O. Carr from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and ordered him to pay a $250,628 civil penalty and barring him from serving as an officer or director of a public company for two years. Additionally, the Court had entered a judgment by consent against Katherine M.  Hanratty that permanently enjoined her from future violations of the same provisions as Carr and ordered her to pay $250,628 in disgorgement, $27,351 in prejudgment interest, and a $250,628 civil penalty. As alleged in part in the SEC Release:

[C]arr provided his longtime girlfriend, Katherine M. Hanratty, with confidential information about a potential acquisition of Heartland by another payment processing company. As alleged, in the weeks leading up to the merger announcement, Carr gave Hanratty $1 million to open a brokerage account, which she used to purchase Heartland stock. The complaint alleged that Hanratty opened the account with Carr's knowledge, made Carr the beneficiary of the account, and purchased more than 11,000 shares of Heartland stock. After the merger was announced, Heartland's stock price rose substantially, and Hanratty sought Carr's advice about when to sell the stock. Hanratty ultimately liquidated her entire position in a single day, for profits of more than $250,000.

Founder of Swiss Brokerage Firm Pleads Guilty in Connection with Global Securities Fraud Scheme (DOJ Release)
The founder and operator of a Swiss asset management firm, Roger Know, pled guilty in the United States District Court for the District of Massachusetts to securities fraud and conspiracy to commit securities fraud. As alleged in part in the DOJ Release:

Knox, with others, operated a purported asset management firm based in Switzerland called Silverton, and later renamed Wintercap. Through this business, Knox helped facilitate pump-and-dump, and other market manipulation schemes, by selling massive quantities of microcap securities on behalf of "control groups" who secretly owned the stock through nominee shareholders, and who simultaneously orchestrated promotional campaigns and other efforts to artificially inflate the price and trading volume of those shares. Knox then funneled the proceeds of the securities fraud-totaling an estimated $164 million over the last three years-to co-conspirators in the United States, and elsewhere, through a complex money transfer system that disguised the source and nature of the funds. 

One security that was traded through Knox's Silverton firm was a stock called Environmental Packaging Technologies, Inc. ("EPTI"). In June 2017, EPTI was subject to a pump-and-dump scheme using Knox's Silverton platform. Co-defendants Matthew Ledvina and Milan Patel, knowing that EPTI stock was controlled by another co-defendant, Morrie Tobin, helped create nominee entities to hold Tobin's stock so that it could be sold in a pump-and-dump in violation of United States securities laws. During the pump-and-dump, Knox's Silverton platform managed to sell approximately $1.5 million worth of EPTI stock before trading was halted by the Securities and Exchange Commission (SEC). 

Ledvina, Patel and Tobin have all pleaded guilty and await sentencing. 

Orlando Man Sentenced To 10 Years In Federal Prison For Orchestrating Multi-Million Dollar Investment Fraud Scheme (DOJ Release)
Andres Fernandez pled guilty in the United States District Court for the Middle District of Florida to 12 counts of wire fraud; and he was sentenced to 10 years in prison and ordered to pay $14.98 million money judgment. As alleged in part in the DOJ Release:

[F}ernandez orchestrated an investment scheme that defrauded at least 81 victims out of millions of dollars. Fernandez solicited individuals to invest in concert events that he claimed were being produced by his companies - Kadaae Entertainment Corporation and Kadaae LLC. He told his victims that their investment would be used to fund specific concert events for artists including Julio Iglesias, Pitbull, Nicky Jam, Garth Brooks, Ana Gabriel, and Drake, and promised a return of up to 100 percent on the investments. As part of the scheme, Fernandez used fake contracts and other false documents to convince victims that he and his companies were under contract to produce the events. In fact, neither Fernandez nor his companies were involved in most of the events he had solicited to his victims.  

Fernandez used the funds sent by investors for his own personal use and to pay fraudulent investment returns to earlier investors. 

Court Orders Technology Fund Adviser to Pay More Than $31 Million (SEC Release)
Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the Northern District of California, Michaeld B. Rothenberg consented to the entry of a final judgment enjoining him from violating the antifraud provisions of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Also, Rothenberg agreed to be barred from the securities industry with a right to reapply after five years; and he was ordered to pay $18,776,800, in disgorgement plus $3,663,323 in prejudgment interest and a $9,000,00 civil penalty. As alleged in part in the SEC Release:

[R]othenberg marketed his advisory firm, Rothenberg Ventures LLC, as uniquely positioned to identify millennial entrepreneurs and invest in "frontier technology" companies. Rothenberg and his firm allegedly misappropriated millions of dollars from the firm's funds, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.