Securities Industry Commentator by Bill Singer Esq

July 22, 2020

FINRA Rule 3240 prohibits a registered person from borrowing money from any customer of that registered person unless certain conditions are met. In a recent settlement, FINRA found that a registered person had violated its rule when she arranged for a loan for her son from one of her customers. FINRA thinks that its Borrowing Rule applies to those facts. Veteran industry regulatory lawyer Bill Singer isn't so sure.

Not Braking and Breaking (Speech by SEC Commissioner Hester Peirce)
In the midst of a heatwave and the COVID pandemic, some folks sit at home and aspired to be a Grandmaster Champion of online solitaire. Others -- like SEC Commissioner Peirce -- ponder the mysteries of Wall Street. Notwithstanding that my online solitaire rank likely exceeds Commissioner Peirce's, I tip my hat to her for her role as agent provocateur at the SEC. In a recent virtual speech to the Blockchain Association Singapore, Peirce discusses the SEC's action against  In part, Peirce asserts that:

That brings us to the Telegram case.[12]  Last month's settlement was the unsatisfying culmination of an enforcement action that I did not support from the beginning.  Telegram had built an operational network, made good faith efforts to comply with the federal securities laws in raising funds to build that network, and engaged extensively with the SEC staff.  With the assistance of sophisticated counsel, Telegram used the Simple Agreement for Future Tokens (SAFT) offering structure, which divides the creation of the network and the delivery of the tokens into at least two distinct stages.  First, Telegram raised funds to develop the blockchain technology underlying the Grams by selling interests in the anticipated Grams to accredited investors.  In return for providing the necessary funds, the accredited investors would receive an allotment of Grams upon the launch of the TON Blockchain.  According to Telegram, this first stage-raising funds from accredited investors in a private offering-involved a securities transaction conducted in reliance on Rule 506(c)-a frequently used exemption from our registration requirements. 

It was at the second stage that the sharpest disagreements erupted.  In one view, the second stage was to begin with the launch of the TON Blockchain and end when Telegram delivered the Grams to the accredited investors.  The accredited investors then could resell the Grams, subject to certain previously agreed-upon lockup restrictions.  In Telegram's view, these resale transactions by the accredited investors would not involve a security, but rather a digital currency, which could be used for buying and selling goods and services on the functional TON Blockchain.  As network effects took hold, the value of that digital currency, of course, would go up.

The district court in the Telegram case, at the urging of the SEC, rejected this analytical approach.[13]  In the court's view, the accredited investors' resale transactions were an offer or sale of a security because the Gram was an integral part of an investment contract.  In reaching this conclusion, the court determined that the entire sequence-the Gram purchase agreements entered by the accredited investors, Telegram's delivery of the Grams upon launch of the TON Blockchain, and the accredited investors' resale of the Grams-were a single scheme that constituted an investment contract under the securities laws. . . .

= = = = =

[12] See Telegram to Return $1.2 Billion to Investors and Pay $18.5 Million Penalty to Settle SEC Charges (June 26, 2020),

[13] See SEC v. Telegram Group Inc., No. 1:19-cv-09439-PKC (S.D.N.Y. Mar. 24, 2020) (opinion and order granting preliminary injunction) [hereinafter Telegram]; see also Complaint, SEC v. Telegram, 19-cv-09439-PKC (S.D.N.Y. Oct. 11, 2019) [hereinafter Complaint].

Also see:
In a Complaint filed in the United States District Court for the Southern District of New York ("SDNY"), the SEC alleged that Telegram Group Inc. raised capital via the sale of  2.9 billion Grams to 171 initial purchasers worldwide. SDNY issued a preliminary injunction barring the delivery of Grams and found that the SEC had shown a substantial likelihood of proving that Telegram's sales were part of a larger scheme to unlawfully distribute the Grams to the secondary public market. Without admitting or denying the allegations in the Complaint, Telegram Group Inc and its wholly owned subsidiary TON Issuer Inc. consented to entry of a final judgment enjoining them from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act; ordering them to disgorge $1,224,000 on a joint and several basis with credit for the amounts repaid to initial purchasers of Grams; ordering Telegram Group Inc. to pay a $18,500,000 civil penalty; and requiring Telegram for the next three years, to give notice to the SEC staff before participating in the issuance of any digital assets.

[In]Securities Guest Blog: Blinded by the Light by Aegis Frumento Esq ( Blog / February 27, 2020)
SEC Commissioner Hester Peirce's recently floated an informal proposal for a "safe harbor" to protect token developers from SEC enforcement actions. Peirce's proposal attempts to address the conundrum of how would-be networks can publicly distribute their tokens despite the uncertainty about whether the Howey test might deem cryptocurrencies to be cryptosecurities. Veteran Wall Street lawyer Aegis Frumento finds some merit in the Peirce's efforts but also spots a potential flaw.

E-brokers TD Ameritrade, Interactive Brokers sustained record retail trading volumes in the second quarter (CNBC by Maggie Fitzgerald)
As reported in part by CNBC's Fitzgerald:

TD Ameritrade said Tuesday it added a record 661,000 new funded retail accounts in the second quarter, surpassing the 608,000 new accounts during the first quarter. The broker, which is set to be acquired by Charles Schwab, also reported a record 3.4 million daily average revenue trades - more than four times last year's levels and 62% more than the prior quarter. 

The major online brokers - Charles Schwab, TD Ameritrade, E-Trade, Interactive Brokers and Robinhood - have seen new accounts and trading activity surge this year during the coronavirus recession. The brokerage industry experienced a flood of new, small investors who saw the market rout and subsequent rebound as a buying opportunity.
Financial Planning's Welsch offers a compelling report about the high-profile case pitting former Credit Suisse advisors Joseph Lerner and Anna Winderbaum in a battle against their former employer. After winning $6.7 million plus interest in a 2019 FINRA arbitration, the New York State Supreme Court just sustained that award. As Welsch notes in part:

The legal win comes after advisors have engaged lengthy litigation against Credit Suisse, involving a number of FINRA arbitration cases and state courts. At the heart of the issue is whether Credit Suisse effectively terminated its advisors when it decided to shutter its U.S. wealth management business four years ago. Under Credit Suisse employment contracts, advisors lose their deferred compensation if they quit. The firm has argued that they did.

Bill Singer's Comment: As reported in the "Securities Industry Commentator" (May 9, 2019)

Credit Suisse Loses Multi-Million Dollar Deferred Comp Arbitration. In the Matter of the Arbitration Between Joseph Todd Lerner and Anna Sarai Winderbaum, Claimants, v. Credit Suisse Securities (USA) LLC, Respondent (FINRA Arbitration Decision 17-00057)
In a Statement of Claim filed in January 2017, associated person Claimants Lerner and Winderbaum asserted breach of contract, breach of the implied covenant of good faith and fair dealing, conversion, unjust enrichment, false and misleading Form U-5 and fraud. Claimants sought at least $3.6 million in deferred compensation plus interest, costs, fees, and the amendment of their Forms U5. Respondent Credit Suisse generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting  breach of contract, breach of fiduciary duty, unfair competition, and misappropriation of trade secrets. Further, Respondent sought a "declaration that Claimants are not entitled to vesting or delivery of their unvested contingent deferred awards under the Share Plan and related documentation, whether under a legal theory of constructive termination or otherwise." The FINRA Arbitration Panel recommended, in part,  that the Forms U5 for Claimant Lerner and Winderbaum be changed to reflect that each had been "Terminated Without Cause." Further, the Panel found Respondent Credit Suisse liable and ordered it to pay to:

Claimant Lerner and Claimant Winderbaum: $14,009.25 in costs and $250,000 in attorneys fees per NY Labor Law Section 198(1-a)
Claimant Lerner: $1,386,628 in compensatory damages; $415,988.40 in compensatory damages; $1,386,628 in liquidated damages per NY Labor Law Section 198(1-a) plus interest
Claimant Winderbaum: $1,400,716 in compensatory damages; $420,214.80; $1,400,716 in liquidated damages per NY Labor Law Section 198(1-a) plus interest

SIDE BAR: New York Labor Law Section 198: Costs, Remedies

1. In any action instituted upon a wage claim by an employee or the commissioner in which the employee prevails, the court may allow such employee in addition to ordinary costs, a reasonable sum, not exceeding fifty dollars for expenses which may be taxed as costs. No assignee of a wage claim, except the commissioner, shall be benefited by this provision. 

1-a. On behalf of any employee paid less than the wage to which he or  she is entitled under the provisions of this article, the commissioner may bring any legal action necessary, including administrative action,  to collect such claim and as part of such legal action, in addition to any other remedies and penalties otherwise available under this article, the commissioner shall assess against the employer the full amount of  any such underpayment, and an additional amount as liquidated damages, unless the employer proves a good faith basis for believing that its  underpayment of wages was in compliance with the law. Liquidated damages  shall be calculated by the commissioner as no more than one hundred  percent of the total amount of wages found to be due, except such liquidated damages may be up to three hundred percent of the total  amount of the wages found to be due for a willful violation of section  one hundred ninety-four of this article. In any action instituted in the courts upon a wage claim by an employee or the commissioner in which the  employee prevails, the court shall allow such employee to recover the  full amount of any underpayment, all reasonable attorney's fees, prejudgment interest as required under the civil practice law and rules, and, unless the employer proves a good faith basis to believe that its underpayment of wages was in compliance with the law, an additional  amount as liquidated damages equal to one hundred percent of the total  amount of the wages found to be due, except such liquidated damages may  be up to three hundred percent of the total amount of the wages found to be due for a willful violation of section one hundred ninety-four of this article. . . .

CFTC Announces Whistleblower Awards Totaling More Than $1 Million (CFTC Release)
The CFTC issued an Order Determining a Whistleblower Award
to two whistleblowers. The CFTC opened an investigation after the first whistleblower's information was deemed to be sufficiently specific, credible, and timely; and, thereafter, the second whistleblower provided first-hand information obtained through participation in the underlying scheme. In approving an award to Claimant 2, the CFTC Order notes that it determined that the information provided was submitted "voluntarily" in compliance with Rule 165.2(o) despite:

the overlap in the information Claimant 2 provided to the other Regulator and the information requested by the CFTC in its November Request. Instead of being in Claimant 2's custody, this [redacted] was maintained and available from another unit within Claimant 2's employer. Additionally, the record reflects that the Division did not request documents in the personal possession of Claimant 2 prior to his/her provision of information to the Regulator and the Commission The Division also did not seek to interview Claimant 2 prior to his/her provision of information to the Division. Therefore, we determined that Claimant 2's submission was voluntary under the Rules.

In the Matter of the Claim for an Award in connection with [Redacted] (SEC Order Determining Whistleblower Award Claim, '34 Act Rel. No. 89355; File No. 2020-24 / July 21, 2020)
The SEC issued an Order adopting the recommendation of its Claims Review Staff ("CRS") in a Preliminary Determination recommending that a Claimant receive a whistleblower award in the amount of 30% of the monetary sanctions collected, or to be collected. In reaching that determination, the SEC Order notes that: 

(i) Claimant expeditiously submitted a detailed tip concerning an ongoing fraud that the Commission was not aware of at the time; (ii) Claimant's tip was specific and detailed and included significant corroborating documents, which prompted Enforcement staff to open the investigation; (iii) Claimant continued to provide information that was helpful to the investigation; and (iv) there are currently no collections in this matter.

Bill Singer's Comment: Can't recall ever seeing an actual percentage amount set out in an SEC Whistleblower Order; however, the SEC giveth and the SEC taketh because we don't know the amount of fines at issue and we are told that there are "currently no collections in this matter." So . . . okay, it could turn out to be 30% of zippo or of $1 billion. I wish the Claimant all the best!

In the Matter of the Claim for an Award in connection with [Redacted] (SEC Order Determining Whistleblower Award Claim, '34 Act Rel. No. 8935; File No. 2020-2 / July 21, 2020)
The SEC issued an Order adopting the recommendation of its Claims Review Staff ("CRS") in a Preliminary Determination recommending that a Claimant receive a whistleblower award in the amount of 20% of the monetary sanctions collected, or to be collected. It appears that the original informant is now deceased because reference is made to the fact that "Claimant's estate provided written notice that it will not contest the Preliminary Determination." In reaching its determination, the SEC Order notes that: 

(i) Claimant expeditiously submitted a tip with previously unknown details concerning an ongoing fraud; (ii) Claimant's tip was specific and detailed and included significant corroborating documents, which prompted Enforcement staff to open the investigation; (iii) Claimant's tip helped the Commission stop an ongoing fraud and resulted in the return of money to harmed investors; (iv) there are low collections in this matter; and (v) Claimant was not in a position to continue providing on-going, helpful information to the Enforcement staff during the investigation.
A federal grand jury in Spokane, Washington, returned an indictment earlier this month charging two hackers, both nationals and residents of the People's Republic of China (China), with hacking into the computer systems of hundreds of victim companies, governments, non-governmental organizations, and individual dissidents, clergy, and democratic and human rights activists in the United States and abroad, including Hong Kong and China.  The defendants in some instances acted for their own personal financial gain, and in others for the benefit of the MSS or other Chinese government agencies.  The hackers stole terabytes of data which comprised a sophisticated and prolific threat to U.S. networks.

The 11-count indictment alleges LI Xiaoyu, 34, and DONG Jiazhi, 33, who were trained in computer applications technologies at the same Chinese university, conducted a hacking campaign lasting more than ten years to the present, targeting companies in countries with high technology industries, including the United States, Australia, Belgium, Germany, Japan, Lithuania, the Netherlands, Spain, South Korea, Sweden, and the United Kingdom.  Targeted industries included, among others, high tech manufacturing; medical device, civil, and industrial engineering; business, educational, and gaming software; solar energy; pharmaceuticals; defense.  In at least one instance, the hackers sought to extort cryptocurrency from a victim entity, by threatening to release the victim's stolen source code on the Internet.  More recently, the defendants probed for vulnerabilities in computer networks of companies developing COVID-19 vaccines, testing technology, and treatments.
In a FINRA Arbitration Statement of Claim filed in May 2019, public customers Claimant asserted Arizona securities fraud; breaches of contract, the covenant of good faith and fair dealing, and of fiduciary duty; professional negligence; negligent supervision; respondeat superior; and innocent misrepresentation/constructive fraud. As set forth in part in the FINRA Award:

[T]he causes of action relate to an alleged breach of the terms of a Secured Promissory Note dated May 2, 2014 between Lincoln and Company C (the "Note"). Mr. C, who was a principal of Company C and was registered with Respondent, allegedly failed to honor a personal guaranty on the Note.

Claimants sought compensatory/consequential/general damages of about $650,000, punitive damages, disgorgement, restitution, costs, fees, and interest. Respondent FINRA member firm Cetera Advisors LLC generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel granted Respondents Motion to Dismiss pursuant to FINRA Code of Arbitration Procedure Rule 12504(a)(6)(B).

SIDE BAR: FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12504: Motions to Dismiss:

(a) Motions to Dismiss Prior to Conclusion of Case in Chief

(6) The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that:

(A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release;
(B) the moving party was not associated with the account(s), security(ies), or conduct at issue; or
(C) The non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.

In part, the Panel offered this rationale:

FINRA lacks arbitral jurisdiction because none of the named Claimants have or had an account or customer relationship with Respondent. Pursuant to an alternative argument raised in the motion, no separate agreement to arbitrate existed and Respondent was not involved with the transactions giving rising to the harm alleged by Claimants. 

Although the claim asserted against Respondent is for alleged failure to supervise Mr. C, the conduct at issue was Mr. C's failure to honor a personal guaranty on the Note. The Note was unrelated to Respondent and its business. The Note was executed in connection with a potential investment by Lincoln in an insurance business venture that was also unrelated to Respondent and its securities business. The Panel has determined that Respondent was not associated with the making of that Note and was not responsible for performance under the personal guaranty. Moreover, in connection with that insurance-related transaction, Mr. C was not acting in his capacity as a securities broker or on behalf of Respondent. Therefore, Claimants' argument that the Note was a security, as that term is defined by federal or state securities laws, is immaterial. 

The Panel also has determined that it is immaterial that Mr. C may have asked for, needed, or received Respondent's permission to enter into the business relationship between Company C and Lincoln. Mr. C was also a licensed insurance agent. Respondent is not in that business, and the transaction at issue is related to the insurance business. 

Accordingly, the Panel unanimously grants Respondent's motion and dismisses this case under FINRA Rule 12504(a)(6)(B) and, alternatively, under FINRA Rule 12200.

Bridgewater Over Troubled FINRA Waters ( Blog)
I must ask -- indeed, all Wall Street reform advocates must wonder -- whether FINRA's Nominating Committee knew about an American Arbitration Association hearing panel's finding of fabrication of evidence by Bridgewater Associates that occurred during the newly-elected FINRA Board Chair Eileen Murray's term as CEO of Bridgewater. If the Nominating Committee knew of the allegations/findings about fabricated evidence, was that disclosed to all FINRA Board members before they voted to approve Murray's nomination? If the Nominating Committee did not know about the fabricated evidence issue, shouldn't Murray have disclosed such facts during the vetting process given that FINRA is Wall Street's leading self-regulatory-organization?
Prominent radio talk-show host Hugh Hewitt announced his support for the re-election of FINRA Small Firm Governor Stephen Kohn

Vote for Stephen Kohn for 2020 FINRA Small Firm Governor ( Blog)
As a 38-year Wall Street veteran and a founder of the NASD and FINRA Dissident Movement, I have tired of far too many candidates for FINRA elective office who talk the talk but won't walk the walk. Following his election as the 2017 FINRA Small Firm Governor, Stephen Kohn pressed for a number of meaningful reforms. Too often it was Stephen and only Stephen who fought for the small firms. Despite his lonely advocacy, Stephen persisted. If re-elected in 2020, Stephen will remain a passionate voice in raising the legitimate grievances of the small firm community. I urge all FINRA Small Firm Executive Representatives to cast a proxy in support of Stephen Kohn's candidacy for the 2020 FINRA Small Firm Governor.