Securities Industry Commentator by Bill Singer Esq

March 25, 2020


Aching Work-at-Home Backs Driving Demand for Ergonomic Chairs (Bloomberg.com by Matthew Boyle)

Joint Antitrust Statement Regarding COVID-19 (DOJ and FTC)

Defendants Hit with $5 Million Civil Penalties. 


Customer Wins $800,000 Award in FINRA Arbitration Against Stifel, Nicolaus. In the Matter of the Arbitration Between Merle L. Buzzotta, account titled Vito R. Buzzotta and Merle L. Buzzotta JTWROS, Claimant, v. Stifel, Nicolaus & Co., Inc. and John Hoff Russell, Respondents (FINRA Arbitration Decision)

In Praise Of NY Governor Andrew Cuomo (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5135/andrew-cuomo/

My politics aside, Andrew Cuomo has been goddamn amazing the last couple of weeks. When he holds a press conference, he doesn't blow any smoke up our collective ass. He tells us that he's thinking about doing "A," but knows that there are problems with that option; and then he tells you that he is also thinking about doing "B," but isn't sure that it will be better than "A" and could be worse. After he sets out the agony of his choices, he makes one. He says that it's on me. He says that he was elected to make these hard decisions. He trusts New Yorkers to appreciate his candor and honesty, and also hopes that if he gets it wrong, we at least credit him for acting in good faith. Good faith ain't something we associate with politicians these days. Making unpopular decisions -- or making any decision at all -- isn't something we expect from any politician until after focus groups have weighed in and someone else is set up to take the blame if things don't pan out. As I have often quipped: We are a nation that ponders everything but resolves nothing. 

https://www.bloomberg.com/news/articles/2020-03-24/aching-work-at-home-backs-driving-demand-for-ergonomic-chairs?srnd=premium
Why am I posting a link to an article about chairs? The simple answer is that I love it when an astute reporter sees dots, connects them, and produces a picture that we hadn't previously been able to discern. The ability to see dots, the skill to connect them, and the ability to figure out the picture is often what separates a successful Wall Street analyst from a lousy one.  When I read Matthew Boyle's article, I immediately wondered why I hadn't figured out that the massive exodus from office to home during the COVID 19 pandemic would likely prompt a flood of home-office chair sales. In retrospect, that's a duh. Unfortunately, I didn't make the connection but I'm sure someone will make a buck on the trade. As noted in part in the Bloomberg article:

In the past two weeks, sales of Herman Miller Inc.'s Aeron chairs -- the gold standard of ergonomic workplace seating -- have spiked fivefold at Office Chair @ Work, while demand for Steelcase and other well-known brands has doubled. Online searches for the term "office chair" increased 150% between March 9 and March 20, according to web data provider SEMrush, mirroring the increased traffic in what Steelcase.Inc says it's seen at its online showroom in recent weeks. Office superstore Staples says working from home is "the new normal" for many.

Joint Antitrust Statement Regarding COVID-19 (DOJ/Antitrust Division and FTC)
https://www.justice.gov/atr/joint-antitrust-statement-regarding-covid-19?utm_medium=email&utm_source=govdelivery
The Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission issued a joint statement clarifying that procompetitive collaboration does not violate the antitrust laws. The Agencies assert that they will attempt to respond to COVID-19-related requests within seven (7) calendar days of receipt. As noted in part in the Joint Statement:

Since joint ventures may be necessary for businesses to bring goods to communities in need, to expand existing capacity, or to develop new products or services, the Agencies will also work to expeditiously process filings under the National Cooperative Research and Production Act (as amended by the Standards Development Organization Advancement Act).  See Dep't of Justice, Filing a Notification Under NCRPA.  These statutes provide flexible treatment under the antitrust laws for certain standard development organizations and joint ventures. 

The Agencies recognize, however, that some individuals and businesses may need to act immediately in addressing this ongoing pandemic.  Many types of collaborative activities designed to improve the health and safety response to the pandemic would be consistent with the antitrust laws. . . .

. . .

The Agencies will also account for exigent circumstances in evaluating efforts to address the spread of COVID-19 and its aftermath.  For example, health care facilities may need to work together in providing resources and services to communities without immediate access to personal protective equipment, medical supplies, or health care.  Other businesses may need to temporarily combine production, distribution, or service networks to facilitate production and distribution of COVID-19-related supplies they may not have traditionally manufactured or distributed.  These sorts of joint efforts, limited in duration and necessary to assist patients, consumers, and communities affected by COVID-19 and its aftermath, may be a necessary response to exigent circumstances that provide Americans with products or services that might not be available otherwise. 

Securities and Exchange Commission, Plaintiff, v. Lek Securities Corporation, Samuel Lek, Vali Management Partners d/b/a Avalon FA Ltd, Nathan Fayyer, and Sergey Pustelnik, Defendants (Opinion and Order, United States District Court for the Southern District of New York, 17-CV-1789)
http://brokeandbroker.com/PDF/LekOpOrdSDNY200320.pdf
As set forth in part in the Opinion [Ed: footnotes omitted]:

The evidence adduced at trial demonstrated Defendants' widespread and longstanding use of layering and the Cross-Market Strategy. Defendants employed these schemes for more than five years, from 2012 through 2016. During that time, they engaged in more than 675,000 instances of layering and 668 instances of Cross-Market trading. Both practices were also highly lucrative: Defendants generated over $21 million in revenue through layering, along with $8.1 million in revenue from the  Cross-Market scheme. Almost $4.5 million of this amount was retained by the three Defendants; approximately $25 million was distributed to Avalon's traders.

Pages 6 - 7 of the Opinion

As set forth in the SDNY's "Syllabus":

Following a jury verdict in its favor on November 12, 2019, plaintiff United States Securities and Exchange Commission ("SEC") seeks a permanent injunction, disgorgement jointly and severally in the amount of $4,495,564 plus prejudgment interest, and civil penalties in the amount of $13.8 million against each of the defendants Vali Management Partners dba Avalon FA Ltd ("Avalon"), Nathan Fayyer ("Fayyer") and Sergey Pustelnik ("Pustelnik") (collectively, the "Defendants"). The Defendants oppose the imposition of any obligation to disgorge their revenue and contend that civil penalties should be limited to $300,000 for Fayyer and Pustelnik and $1,450,000 for Avalon. For the following reasons, disgorgement is ordered, jointly and severally, in the amount requested by the SEC, with interest, and civil penalties are assessed in the amount of $5 million for each defendant, subject to an increase as described below.1

= = = = =
Footnote 1: The Defendants do not oppose an injunction permanently prohibiting them from violating Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. Accordingly, that relief is granted as well. 

Pages 1 - 2 of the Opinion

In presenting her rationale for the imposition of civil penalties , SDNY Judge Denise Cote explains, in part, that:

[D]efendants were responsible for recruiting traders to execute the fraudulent schemes and then took extensive steps to cover their trail. Defendants repeatedly concealed their participation in the layering scheme from the Lek Defendants during the investigation. The latter's settlement does not, therefore, limit the Court's discretion to assess harsher penalties on the Defendants. 

Pages 22 of the Opinion

Weighing all of the factors discussed above, a third-tier civil penalty of $5 million is assessed against each of the three Defendants. Although this penalty is significant, it corresponds to the extent and brazenness of the Defendants' conduct and the need to deter those practices in the future. It is also a fraction of the maximum tier-three penalties available and substantially less than the penalty the SEC has requested. This figure is set based at least in part on the assumption that the amount already seized by the SEC, or at least most of that amount, will be used to satisfy Defendants' duty to disgorge their profits from their schemes.12 

= = = = =
Footnote 12: This Order relies on the Defendants' commitment, expressed in their memorandum in opposition the SEC's motion and counsel's letter of March 13, 2020, that they largely consent to the application of the $5.5 million seized by the SEC to be used to satisfy their obligation to pay disgorgement. 

Pages 24 - 25 of the Opinion

https://www.justice.gov/opa/pr/pennsylvania-attorney-indicted-role-27-million-ponzi-scheme
-and-
SEC Charges Pennsylvania Attorney and Swiss Resident in $1.4 Million Dollar Ponzi Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2020/lr24778.htm

In a Superseding Indictment filed in the United States District Court for the Eastern District of Pennsylvania ("EDNY") https://www.justice.gov/opa/press-release/file/1260821/download, Todd H. Lahr was charged witn one count of conspiracy to commit securities fraud and wire fraud, two counts of securities fraud, and four counts of wire fraud.  As alleged in part in the DOJ Release:

[F]rom 2012 through 2019, Lahr conspired with others to perpetrate a securities fraud scheme targeting his own law clients, which involved the fraudulent sale of the securities of two entities, THL Holdings LLC and Ferran Global Holdings Inc.  Lahr used investor funds to finance his own lifestyle, paying his home mortgage, his child's school tuition, utility bills and other personal debts.  He allegedly perpetuated the scheme by using money that he received from new investors to pay money owed to other investors in the scheme.  

In a Complaint filed in EDNY, https://www.sec.gov/litigation/complaints/2020/comp24778.pdf, the SEC charged Lahr and Thomas Megas with violating the antifraud and registration provisions of Sections 5(a) and (c), and 17(a)(1) and (3), of the Securities Act and Section 10(b) of the Securities Exchange Act, and Rules 10b-5(a) and (c) thereunder. In part the SEC Release alleged that:  

[F]or the better part of three years ending 2017, Lahr and Megas targeted clients of Lahr's law practice to raise funds for several Megas-led business ventures, including mining operations in Papua New Guinea and real estate investments in Barcelona and London. Instead, Lahr and Megas allegedly used investor funds to pay earlier investors and for various personal expenses, including Lahr's mortgage payments and credit card bills and Megas' restaurant bills and ATM withdrawals.

https://www.sec.gov/news/press-release/2020-72
In a Complaint filed in the United States District Court for the Southern District of Florida
https://www.sec.gov/litigation/complaints/2020/comp-pr2020-72.pdf, the SEC alleged that Justin W. Keener d/b/a JMJ Financial with violating the registration provision of the Securities Exchange Act. As alleged in part in the DOJ Release:

[B]etween January 2015 and January 2018, Keener engaged in the business of purchasing convertible notes from penny stock issuers, converting the notes into shares of stock at a large discount from the market price, and selling those newly issued shares into the market at a significant profit. Keener allegedly purchased convertible notes from more than 100 separate issuers and sold more than 17.5 billion shares of newly issued penny stock into the market, generating over $21.5 million in profits. As alleged, Keener was not registered as a dealer with the SEC, in violation of the mandatory registration provisions of the federal securities laws.

https://www.sec.gov/news/press-release/2020-71
As set forth in an Order filed on March 24, 2020, https://www.sec.gov/rules/other/2020/34-88462.pdf, the proposed Whistleblower awards:

would yield a likely payout to Claimant 1 of approximately $478,000 and a likely payout to Claimant 2 of approximately $94,000. Claimant 1 and Claimant 2 provided written notice of their decisions not to contest the Preliminary Determination.

The Order also noted in Footnote 2 that:

Additionally, the CRS recommended that Claimant 2's claim for an award in connection with the Related Actions be denied in part because the original information submitted by Claimant 2 used by the Commission in connection with the Covered Action was not used in the Related Actions. Because Claimant 2 provided written notice of Claimant 2's decision not to contest the preliminary determination, the CRS's preliminarily determination as to the denial of the award in connection with the Related Actions became the final order of the Commission pursuant to Exchange Act Rule 21F-11(f); 17 C.F.R. § 240.21F-11(f).

https://onwallstreet.financial-planning.com/news/jpmorgan-wins-round-in-fight-over-client-contacts-with-merrill-broker
Industry reporter Kenneth Corbin presents the case of former JPMorgan rep Dustin Berry, who was named by ex-employer in a federal Complaint alleging his improper solicitation of former clients. As noted in part in the On Wall Street article: 

[T] parties agreed to a preliminary injunction under which Berry would admit to no wrongdoing and accept no liability, but nonetheless agree to halt any solicitation of his former clients and to return to JPMorgan any documents and records relating to his old book of business.

In a FINRA Arbitration Statement of Claim filed in August 2018, public customer Claimant Buzzotta asserted breach of fiduciary duty, fraud, securities fraud, negligence, conspiracy, material misrepresentations and omissions, and violations of FINRA Rules 3110, 3120, 3130. Claimant Buzzotta sought in excess of $3 million in compensatory damages; in excess of $1 million in punitive damages, attorneys' fee, and expenses. Respondents generally denied the allegations and asserted affirmative defenses. As set forth in part in the FINRA Arbitration Decision:

[T]he causes of action relate to the allegation that Claimant's estranged, and now deceased, husband (the "Decedent") and Russell intentionally used subterfuge to obtain Claimant's consent to transactions that removed assets from accounts, in which Claimant had an interest, to benefit a third party. Claimant further alleges that as a result of Russell's actions, alone and in concert with the Decedent, and because of Russell's failure to provide Claimant or her attorney-in-fact with material information, Claimant and her children were left substantially disinherited from the majority of the Decedent's financial assets that had been provided for them under his and Claimant's estate plans.

The FINRA Arbitration Panel found Respondents Stifel, Nicolaus and Russell jointly and severally liable and ordered them to pay to Claimant Buzzotta $800,000 in compensatory damages. The Panel denied Respondent Russell's request for expungement.