Securities Industry Commentator by Bill Singer Esq

June 30, 2020

Pending home sales spike a record 44.3% in May, as homebuyers rush back into the market (CNBC by Diana Olick)

New strain of flu found in China has potential to become a pandemic, scientists warn (CNBC Release by Holly Ellyatt)
As reported by CNBC's Ellyatt:

The scientists published their peer-reviewed findings in U.S. science journal Proceedings of the National Academy of Sciences on Monday. They said the new strain of flu, which they called "G4 EA H1N1," is a variation of swine flu, and includes the "G4" genotype that has become predominant in swine populations since 2016.

As with swine flu, the new strain has been identified as having "all the essential hallmarks of a candidate pandemic virus."
So, sure, this year, I was all set for the trade-off. I was prepared for the Great American Sacrifice: a half gallon of Tito's Vodka, home-grilled franks on rolls with mustard and sauerkraut, and my personal slab of a Costco half-sheet of cake. Eaten inside. Windows pulled shut. Shades drawn. Handled with surgical gloves. Pushed into my face over a lowered mask. And now, thanks to Costco, the Supreme Court, and the unconstitutional CFPB, even that lousy bit of fun is ruined because pinko, socialist, left wing, Antifa-lovin' progressives are forcing all Americans to eat round cake. 

Torture, Terror, and Revenge in Battle Over Fabled Irish Company / Sean Quinn was once a billionaire folk hero, but then things turned very dark in the borderlands.(Bloomberg by Kit Chellel and Liam Vaughan)
A jaw-dropping, stunning, mesmerizing story beautifully -- perfectly -- told by Chellel and Vaughan. Undoubtedly the stuff of a Hollywood movie. If the headline doesn't force you to read this article, there's nothing that I can add to finish the push. 

Sullivan, J.'s concurrence in part and dissent in part
SIDE BAR: Little known fact but the "Jay" Clayton that we all know as the SEC Chair is actually Walter Joseph "Jay" Clayton III. 

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

In 2019, the Securities and Exchange Commission promulgated Regulation Best Interest, which creates new standards of conduct for broker-dealers providing  investment services to retail customers. Petitioners XY Planning Network, LLC, Ford Financial Solutions, LLC, and a group of states and the District of Columbia 33 filed petitions for review under the Administrative Procedure Act, 5 U.S.C. § 706(2), claiming that Regulation Best Interest is unlawful under the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act. We hold that: (1) Ford Financial Solutions has Article III standing to bring its petition for review, (2) Section 913(f) of the Dodd-Frank Act authorizes Regulation Best Interest, and (3) Regulation Best Interest is not arbitrary and capricious. DENIED.

Judge Sullivan concurs in part and dissents in part in a separate opinion.
Without admitting or denying the findings in an SEC Order, BNP Paribas Securities Corp. (f/k/a BNP Paribas Prime Brokerage Inc.) ("BNPP") agreed to be censured, to cease-and-desist from violating Rule 203(a)(1) of Regulation SHO, and to pay a penalty of $250,000.The Order finds that BNPP willfully violated Rule 203(a)(1) of Regulation SHO of the Securities Exchange Act of 1934. As alleged in part in the SEC Release:

[O]n at least 35 occasions over a four-month period in 2016, BNPP's customer submitted sale orders marked as "long" to another broker for execution, which were subsequently submitted to BNPP for clearing. For each of those "long" sales, the customer did not have sufficient shares in its prime brokerage account at BNPP on the morning of the settlement date to cover the sale order. When the customer failed to deliver the shares by the settlement date, BNPP loaned the customer shares to cover the sale. The order finds that BNPP loaned its customer a total of more than eight million shares in the securities of three different issuers to settle purported "long" sales that had been submitted to BNPP for clearing.

According to the SEC's order, it was not reasonable for BNPP to rely on its customer's assurances that the orders were properly marked "long" and that the customer would deliver the securities to its BNPP account prior to the settlement date because BNPP was on notice of the customer's repeated failures to deliver the securities by the settlement date.

Bill Singer's Comment: I'm a bit puzzled by the SEC's acceptance of what seems a relatively low fine in light of the determination that BNPP willfully violated Regulation SHO. Further, given the nature of the willful violation, I find it hard to accept that the SEC and/or FINRA had not submitted various Electronic Blue Sheet requests for which BNPP or its third-party-service-provider didn't submit erroneous data, which falsely characterized as "long" what might be charitably characterized as a synthetic "short," if not an actual "short" per statutory definition. 

SEC Updates Filing Threshold to Rule 17h Reporting Requirements for Broker-Dealers (SEC Release)
The SEC issued an Order updating the filing threshold for broker-dealers' Form 17-H filings made pursuant to Exchange Act Rules 17h-1T and Rule 17h-2T. In pertinent part the SEC Release states:

In 1992, the Commission adopted the 17h Rules, which set forth specified recordkeeping and reporting requirements for certain broker-dealers that are part of a holding company structure, pursuant to the Market Reform Act of 1990. Broker-dealers that do not hold customer funds or securities, owe money or securities to customers, or otherwise carry the accounts of or for customers are exempt from the 17h Rules provided that they maintain capital, including subordinated debt, of less than $20 million. Today's order updates this threshold for the first time and provides an exemption from the 17h Rules for broker-dealers with capital between $20 million to $50 million so long as the broker-dealer maintains less than $1 billion in total assets. Firms maintaining $50 million or more in capital, including subordinated debt, currently account for approximately 98 percent of the total capital of the broker-dealers subject to the 17h Rules; these firms will continue to remain subject to the rules.
CNBC's Olick reports that the National Association of Realtors said that May pending home sales rose 44.3% compared with April, and that's the largest one-month jump the survey began in 2001. As Olick reports in part:

Regionally, pending home sales in the Northeast rose 44.4% for the month but were down 33.2% from a year ago. In the Midwest, sales rose 37.2% monthly and were down 1.4% annually.

Pending home sales in the South increased 43.3% month-to-month and were up 1.9% from May 2019. In the West sales jumped 56.2% monthly and were 2.5% lower annually.

Bill Singer's Comment: The numbers are what they are, and I accept them. That being said, the 44.3% "historic" increase strikes me as more of a statistical event than a substantive trend because April sales were heavily impacted by the COVID pandemic. Overall annualized data seems to present indications of year-over-year reduced sales. What I'm wondering about is the trend of mortgage defaults and the trend for the "first" home that a lot of folks had abandoned in a COVID hot zone in order to relocate to the "second" home. I'm also waiting to see what may happen if those relocated folks who are telecommuting to an anchor business are suddenly confronted with layoff notices or find that the remote business location closes and the company becomes insolvent. We got lots of moving parts here and it's important to understand that percentage increases/decreases are relative indicators. I'm hoping and wishing for a speedy end to the pandemic and that we emerge with an intact, vibrant economy. That being said, I once believed in Santa Claus and the Easter Bunny.

In the Matter of Gregory A. Ricker, Respondent (FINRA AWC 2019062084002)
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, Gregory A. Ricker submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Gregory A. Ricker was first registered in 1988, and by 2013, he was registered with FINRA member firm Westpark Capital, Inc.. The AWC alleges that Ricker "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Ricker had violated FINRA Rules 3280 and 2010; and the self regulator imposed upon him a $5,000 fine, a six-month suspension from association with any FINRA member in any capacity, and a disgorgement of $75,000 in referral fees to be paid to FINRA upon re-association. As alleged in part in the AWC:

In or around October 2017, Ricker solicited A, who was not a Firm customer, to invest in the Company. Ricker introduced A to the Company's chief executive officer, attending an in-person meeting where the terms of A's prospective investment were discussed. In December 2017, A invested $500,000 in the Company. A's investment was documented with a promissory note requiring annual payments from June 2018 to December 2020. In April 2018, A invested an additional $250,000 in the Company documented with a stock purchase agreement in the amount of $750,000, representing the total amount of A's investment in the Company. For each investment by A, the Company paid Ricker a 10% referral fee in the amounts of $50,000 and $25,000, respectively. 

Ricker did not provide written notice to Westpark of his intent to solicit an investor on behalf of the Company or otherwise advise the Firm of either A's investment or Ricker's receipt of referral fees. Ricker also made false statements to the Firm on two annual compliance questionnaires concerning his participation in private securities transactions. 

By participating in a private securities transaction for which he received selling compensation without providing prior written notice to, and receiving written approval from, his member-firm employer, Ricker violated FINRA Rules 3280 and 2010.
Without admitting or denying the SEC's allegations in a Complaint filed in the United States District Court for the Northern District of Illinois, former Navistar International Corporation Chief Executive Officer Daniel C. Ustian consented to a judgment that imposed injunctions against him and ordered him to pay a penalty of $250,000 and disgorgement of $250,000. In response to a recent Motion, Ustian subsequently agreed to an Officer-and Director Bar, which the Court so ordered In 2016, the SEC had charged Ustian with misleading investors about Navistar's development of an advanced technology truck engine that could satisfy U.S. pollution standards.

CFTC Charges Chicago-Based Firm and Six Individuals in Multi-Million Dollar Options Fraud Scheme (CFTC Release)
The CFTC filed a civil enforcement Complaint in the United States District Court for the Northern District of Illinois against Long Leaf Trading Group, Inc., its principals James A. Donelson and Timothy M. Evans, and former Long Leaf associated persons Jeremey S. Ruth and Andrew D. Nelson. Also, CFTC issued two Orders filing and simultaneously settling charges against former Long Leaf associated persons Scott J. Gecas and James E. Leeney Gecas was ordered to pay a $150,000 civil monetary penalty, and he is subject to a four-year registration and trading ban. Leeney was ordered to pay a $350,000 civil monetary penalty, and he is subject to a five-year registration and trading ban. Gecas and Leeney were ordered to cease and desist from further violations of the CEA and CFTC regulations, as charged. As alleged in part in the CFTC Release:

[F]rom at least June 2015 through December 2019, Long Leaf, at the direction of Donelson and Evans, and through its agents and employees, including Ruth and Nelson, knowingly made numerous false and misleading statements to customers and prospective customers about the success of Long Leaf's "Time Means Money" options trading program. According to the complaint, all of Long Leaf's customers lost money trading pursuant to the program. The defendants were aware of the losses, and knowingly or recklessly failed to disclose them to customers and prospective customers. In total, more than 400 customers lost approximately $6.1 million, while Long Leaf made more than $4.4 million from its trading recommendations, which were designed primarily to generate commissions.

CFTC Orders Illinois Firm to Pay $250,000 for Supervision Violations / Failure to Supervise Put Seniors' Retirement Savings at Risk (CFTC Release)
The CFTC issued an Order filing and settling charges against registered futures commission merchant Cunningham Commodities, LLC for failing to diligently supervise accounts set up by an introducing broker whose activities it guaranteed ("GIB"). The Order requires Cunningham Commodities to pay a $250,000 civil monetary penalty and to cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations, as charged. Further, the Order finds that Cunningham Commodities is liable for any restitution or disgorgement obligations imposed against the GIB (not to exceed $640,000) in any related CFTC enforcement proceeding regarding the GIB's conduct during the period of the guarantee. As alleged in part in the CFTC Release:

The order finds that Cunningham Commodities' supervision of the GIB-introduced accounts over a sixteen month period was not diligent. The order further finds that Cunningham Commodities entered into the guarantee with the GIB despite knowing that the GIB offered a "trading program" to customers even though it was not registered as a commodity trading advisor and that the vast majority of customers lost money under the GIB's trading program. The GIB's customers included many senior citizens, and many of the accounts traded were retirement accounts.

Moreover, according to the order, Cunningham Commodities learned that the National Futures Association believed that the "[GIB] used misleading and deceptive solicitations and communications to entice investment in a program that the firm know[s] has consistently lost money for substantially all customers," but did not take adequate steps in response.  The order further finds that Cunningham Commodities required the GIB to record its solicitation calls, but did not listen to those calls, even as customer accounts continued to decline in value. Taken together, these findings establish a failure to supervise.
Jacqueline Masse, 49, pled guilty in the United States District Court for the District of New Hampshire to mail fraud; and she was sentenced to 18 months in prison and ordered to pay $206,609.19 in restitution. As alleged in part in the DOJ Release:

[F]or nearly four years, Masse defrauded or attempted to defraud restaurants and insurance companies of nearly $400,000.  Masse mailed letters to restaurants and food companies in which she falsely claimed that she (or another member of her family) became seriously ill after eating food served by the restaurants or packaged by the food companies.  In some letters, Masse impersonated her children, claiming to have become seriously ill after eating food served by the restaurants or packaged by the food companies.

In each of the letters, Masse falsely stated that the purported letter-writer paid or borrowed money to pay their medical expenses because they did not have health insurance.  The defendant demanded that the restaurant or food company reimburse the supposed letter-writer for their medical expenses and compensate them for their pain and suffering.  None of this was true.

According to the court documents and statements made in court, to support each demand letter, Masse provided to the affected business and their insurance companies fraudulent medical records allegedly obtained from hospitals in New Hampshire and Massachusetts as false evidence of the fictitious illnesses.  Masse stole, and later altered, some of the medical records from the client files of a law firm, where she worked as an office manager and paralegal.  Masse also stole checks from the law firm, which she altered to support her fraudulent insurance claims.

In correspondence with the insurance carriers, Masse demanded payments totaling more than $399,000.  Some of the insurance companies responded by mailing insurance settlement checks totaling more than $206,000 to either Masse's home in Hampton or the homes of her children, who were unwitting participants in the scheme to defraud.  To conceal her involvement in the fraud, Masse had her children deposit checks mailed to them into their personal bank accounts and then write Masse a check for the full amount of the payout.      

Glendale Man Pleads Guilty to Bank Fraud for Role in Credit Card 'Bust-Out' Scheme Used to Buy Cemetery Plots, Luxury Cars (DOJ Release)
Mikayel Hmayakyan pled guilty in the United States District Court for the Central District of California to two counts of bank fraud and one count of aggravated identity theft.  Co-Defendants Gayane Hakobyan pled to one count of bank fraud. Previously, Co-Defendant Mikayel Hovhannisyan pled guilty to one count of bank fraud and is now serving nine-months in federal prison. Co-Defendant Vahan Aloyan is scheduled for trial. As alleged in part in the DOJ Release, lead Defendant Hmayakan:

admitted to running a series of fraudulent schemes, including one from November 2014 to September 2015, where he used fraudulently obtained credit cards to purchase hundreds of thousands of dollars' worth of liquor and luxury watches.

Hmayakyan and others obtained the credit cards - sometimes using their real names, but often with synthetic identities created with a combination of real and fictitious information - that were run up to the credit limit. Members of the scheme then "paid down" by submitting payments from accounts with insufficient funds or through fake accounts to restore the credit line, which allowed them to make additional purchases.

As part of the scheme, Hmayakyan and others used the fraudulently obtained credit cards to purchase hundreds of thousands of dollars in alcoholic beverages on behalf of the now-closed Liquor Spot in Glendale, where co-defendant Vahan Aloyan, 45, of Glendale, was a manager.

During the execution of a search warrant in 2016, law enforcement seized more than 37,000 bottles of alcoholic beverages, worth approximately $300,000, from the Liquor Spot. They also seized nearly $13,000 in U.S. currency from the store, as well as nearly $13,000 and 37 watches and other jewelry items from Aloyan's residence.

In criminal conduct dating back to August 2010 and continuing until April 2016, Hmayakyan fraudulently applied for loans under an alias to obtain a Kia Optima and in a real person's name for luxury cars, including Lexus automobiles, according to the plea agreement. Hmayakyan admitted that he never intended to pay any credit card bills nor made any payments on the loans.

Hmayakyan also admitted that from March 2014 until January 2017, he used fraudulent credit cards in the names of various aliases - including "Liam Sarcozzy" and "Marco Reus" - to purchase plots at Forest Lawn Cemetery in Glendale, which he later sold at a profit.

The total intended loss to which the financial institutions were exposed was $5,232,383, according to the plea agreement.