Securities Industry Commentator by Bill Singer Esq

March 11, 2020

SEC Halts Fraudulent Offering By Florida Investment Adviser (SEC Release)

SEC Obtains Judgment Against ICO Incubator and Its Founder for Unregistered Offering and Unregistered Broker Activity (SEC Release)

FINRA Arbitrator Dismisses Expungement Claim Against Fidelity. In the Matter of the Arbitration Between Anthony Giovan Atrasz, Claimant, v. Fidelity Brokerage Services LLC, Respondent (FINRA Arbitration Decision)
Odd, isn't it, that Wall Street never wants careful deliberation or advocates letting events run their course. We go through crises and disasters. We suffer the pain and consequences. We commit to studying our failures. We hold hearings. We point fingers. Unfortunately, we never quite seem to learn the lessons and implement the safeguards. When the stock markets are hummin', Wall Street talks a good game about hedges, asset allocation, and portfolio insurance; but the minute there's a hint of trouble, all that rainy-day chatter turns to hand-wringing about the need for an immediate bail-out, central bank intervention, and whatever it takes to get through this. Wall Street talks a good game in the sunshine but runs like a coward in the rain. 

SEC Halts Fraudulent Offering By Florida Investment Adviser (SEC Release)
In a Complaint filed in the United States District Court for the Middle District of Florida, the SEC charged charges Kinetic Investment Group LLC and and its Managing member Michael Scott Williams with violating the antifraud provisions of the federal securities laws; and further charged Williams, in the alternative, with aiding and abetting Kinetic Group's violations of the federal securities laws -- the alleged fraud raised $39 million from at least 30 investors.. Six entities were also named as Relief Defendants, and the Court granted an asset freeze and ordered the preservation of records against the Defendants and the Relief Defendants. As alleged in part in the SEC Release:

[K]inetic Group and Williams fraudulently raised millions of dollars by making material misrepresentations to investors who they solicited to invest in Kinetic Funds I LLC, a purported hedge fund that they managed. The defendants allegedly represented, among other things, that Kinetic Funds' largest sub-fund invested solely in U.S.-listed financial products and that at least 90% of its portfolio was hedged using listed options. The SEC alleges, however, that Williams actually invested a significant part of the sub-fund's assets in a private start-up company owned by Williams. The complaint further alleges Williams misap-propriated at least $6.3 million through undisclosed loans to himself and his entities.

In a Complaint filed in the United States District Court for the Central District of California, the SEC alleged that ICOBox raised funds in 2017 to develop a platform for initial coin offerings by selling, in an unregistered offering, about $14.6 million of "ICOS" tokens to over 2,000 investors, and, further, that the company acted as an unregistered broker when it facilitated ICOs that over $650 million for dozens of clients. The Court entered a default judgement against ICOBox and its founder, Nikolay Evdokimo. As alleged in part in the SEC Release:

[T]he court found that the defendants illegally offered and sold ICOS tokens, which the court concluded were securities subject to the registration requirements of the federal securities laws. The court also found that the defendants acted as unregistered brokers. The court permanently enjoined ICOBox and Evdokimov from violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 and the broker registration provisions of Section 15(a) of the Securities Exchange Act of 1934, and ordered them to pay disgorgement and prejudgment interest totaling $16,059,428.99. The court also ordered Evdokimov to pay a civil penalty of $192,768.

In a FINRA Arbitration Statement of Claim filed in October 2019, associated person Claimant Atrasz sought the expungement of an allegedly defamatory Form U5 filed by Respondent Fidelity, which generally denied the allegations and asserted various affirmative defenses. Respondent Fidelity filed a Motion to Dismiss citing FINRA Code of Arbitration Rule 13206: Time Limits, which, in part, provides that:

(a) Time Limitation on Submission of Claims
No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule. . . 

In granting Respondent's Motion to Dismiss without prejudice, the sole FINRA Arbitrator offered this rationale:

Claimant is correct that Rule 13206 requires motions be filed separately and only after an answer is filed. Rule 13206, however, does not specify how much time must elapse between an answer and motion. Under Rule 13206, the motion could be filed immediately after an answer is filed. Nor does Rule 13206 set forth any penalty for filing an answer and motion together. The typical penalty the Arbitrator would impose would be to require Respondent to file them separately. This would only delay the motion being considered, not prevent it from being considered. Given that the issue here is the eligibility of the claim and that the Arbitrator needs no additional facts outside the Statement of Claim to determine the motion, there is no prejudice to Claimant in the Arbitrator considering the motion on its merits. 

The event or occurrence giving rise to the claim is the filing of the U5 with the allegedly defamatory statements. That took place in December 2008, more than six years beyond the 13206 eligibility standard. That FINRA has allowed greater access to the U5 does not change that the information was first published in 2008. It does not create a new event or occurrence, or even a continuing one. Nor did it constitute a second publication. The information was released in December 2008. That more people now have access to it does not change the initial publication date. Additionally, that Claimant had a job offer rescinded in September 2018 does not create a cause of action. The Statement of Claim includes that the job offer was rescinded due to the disclosure of the U5. This disclosure was in 2008.