The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

July 24, 2020


Stay-at-home trend is a 'permanent shift,' and one stock can keep winning out, traders say (CNBC Lizzy Gurdus)

https://www.finra.org/media-center/newsreleases/2020/new-research-examines-financial-capability-women-behind-bars
There is often only step separating the sublime from the ridiculous, but FINRA seems to have built an entire staircase upon which to test that truth. And FINRA regularly treads those steps. Up and down. Down and up. All the while the self-regulatory-organization gets nowhere but fast. In yet the most recent installment of the heights and depths of FINRA's sublime ridiculousness, consider this extract from the FINRA Release:

The study, Gender and Financial Capability from Behind Bars, used primary survey data collected from 515 women and men incarcerated in five correctional facilities in Arkansas, in concert with financial capability data from the FINRA Foundation's National Financial Capability Study.

Of note, the study found that incarcerated women in Arkansas have the highest poverty rates and use of predatory lenders, as well as the lowest levels of financial literacy and financial assets-in comparison to incarcerated men and the state's general population.

Bill Singer's Comment

Oh for godsakes, really?  Another dubious study promoted by the FINRA Investor Education Foundation. Now, please, don't get me wrong. I wholeheartedly endorse studies about gender, racial, and ethnic discrimination and harassment, and how such pernicious conduct manifests itself financially and economically. If you are familiar with my published body of work, you will find that I frequently champion victims of Wall Street discriminatory practices. That being said, just how much money did FINRA spend on this study and its promotion? What exactly was the unanticipated, surprising results of the study? Did FINRA and the authors expect that a survey of 515 Arkansas inmates would show that said population ranks among the top 1% of wealthy individuals? Did those investigating this group expect that the inmates were financially literate or would have impressive financial assets? Were the investigators anticipating that incarcerated women would have higher financial literacy and more financial assets than incarcerated men? 

Not to be too cynical or snarky here (but I'm going to be just that) but there are some postulates that don't require expensive studies to confirm. For example, I imagine that incarcerated men and women have, on average, fewer Frequent Flyer Miles than those who have never been incarcerated; and, similarly, that said inmate population has on a percentage basis fewer PhDs than in the non-inmate population. Frankly, if FINRA has money to throw around on such studies, I would have much preferred that the funds were earmarked for outright financial grants to the Arkansas female inmates rather than for studies about their dire financial straits. 

Imagine if Congress and the White House had opted to fund a nationwide study about whether a Paycheck Protection Program was needed rather than just funding and paying the PPP. Was there really any doubt that folks were hurting from the economic impact of COVID? Did we need to fund a study to learn that, overall, wage-earners who were unemployed because of business closures caused by COVID had lower bank balances and less income than those wage-earners who remained employed? At some point, isn't is simply wasteful to fund studies rather than set things in motion to address the perceived problem?

Ultimately, FINRA is an unprofitable, money-losing organization. As set forth on Page 2 of FINRA's "2020 Annual Budget Summary," 
https://www.finra.org/sites/default/files/2020-05/2020_annual_budget_summary.pdf

[W]e are again projecting that our expenses will exceed our operating revenues in 2020, which could result in a potential draw-down of our reserves of $210.2 million (referred to as the Potential Reserve Reliance). As in prior years, this projection helps us understand at the beginning of the year, for budgeting purposes, how reliant we may have to be on our reserves during the course of the year. However, in practice, our actual net income or loss-to be reflected in our 2020 AFR-will ultimately include fines, investment returns and other accounting adjustments. For reference, our 2018 budget included a Potential Reserve Reliance of $138.1 million, but we ultimately reported a GAAP net loss in our 2018 AFR of $68.7 million. Our 2019 budget included a Potential Reserve Reliance of $185.8 million; our 2019 GAAP net loss, which will be lower than the Potential Reserve Reliance for 2019, will be reported as usual in the 2019 AFR this summer. 

Over the last several years, we have relied on our reserves to fund budget deficits instead of increasing member firm fees, with 2020 marking the seventh consecutive year we have not increased fees. As a result, FINRA has drawn down approximately $650 million from its reserves since 2010.

Enough is enough. For FINRA's beleaguered member firms of which some 91% are designated as "Small Firms" (between 1 and 150 registered representatives), FINRA continues to spiral out of financial control and seems oblivious to zero-commission/pandemic economic environment within which broker-dealers now exist. Frankly, nothing could be more stark an example of FINRA's errant direction than its funding of a survey about the financial plight of Arkansas inmates when the self-regulatory-organization had "drawn down approximately $650 million from its reserves since 2010." How does FINRA justify running such a budget deficit -- which is all the more perplexing given the Trump Stock Market euphoria from about 2017 through early 2020? Consider this hollow assurance that FINRA members are offered at Page 1 of the 2020 Budget Report:

It is important to note at the outset that the 2020 budget summarized below was developed and approved by FINRA's Board of Governors before the nature and extent of the COVID-19 outbreak became apparent. That event has significantly impacted the business and operations of many of our member firms, as well as how FINRA performs many of its functions. We expect to continue to adjust our operations as appropriate to best achieve our mission as this situation evolves. These adjustments and the pandemic's impact on our member firms may have implications for our financial performance relative to the projections in the 2020 budget. The Board will continue to monitor these developments and management's response.

No wonder the Small Firm community has been in revolt against the powers that be. This lunacy cannot persist. Thankfully, Small Firm Governor Stephen Kohn is running for re-election as one of FINRA's Small Firm Governors. Hopefully, Stephen will use his second term to press the Board for overdue reforms

http://www.brokeandbroker.com/5319/stephen-kohn-small-firm-governor/
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.

Bridgewater Over Troubled FINRA Waters (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5328/bridgewater-finra-board/
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? 

(BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5330/hugh-hewitt-stephen-kohn/
Prominent radio talk-show host Hugh Hewitt announced his support for the re-election of FINRA Small Firm Governor Stephen Kohn

https://www.justice.gov/opa/pr/justice-department-reaches-settlement-bank-america-resolve-claims-disability-discrimination
In a Complaint filed in the United States District Court for the Eastern District of New York
https://www.justice.gov/opa/press-release/file/1297116/download and pursuant to a Settlement Agreement https://www.justice.gov/opa/press-release/file/1297111/download, Bank of America, N.A. settled claims that since 2010, the Bank had denied mortgage and home equity loans to adults with disabilities who were under legal guardianships or conservatorships; and that cited policy was changed in 2016 for mortgage loans and in 2017 for home equity loans. It was alleged that the Bank had engaged in a pattern or practice of discrimination on the basis of disability, in violation of the Fair Housing Act. As alleged in part in the DOJ Release:

The Bank has ended its practice of denying mortgage and home equity loans to adults with disabilities under guardianships or conservatorships. The terms of the settlement require the Bank to pay $4,000 per loan to eligible loan applicants who were affected by the Bank's prior discriminatory policies, and we anticipate that the payments will total approximately $300,000. The settlement also requires the Bank to maintain the new, non-discriminatory loan underwriting policies and train its employees on the new policies. In addition, the Bank must monitor its loan processing and underwriting activities to ensure compliance with the Fair Housing Act.  

SEC Chair Clayton says he's worried about short-term trading in stocks like Tesla (CNBC by Thomas Franck)
https://www.cnbc.com/2020/07/23/sec-chair-jay-clayton-says-hes-worried-about-short-term-trading.html
As reported in part by CNBC's Franck:

"Here at the SEC, when we think about that investor, we think about someone who's investing for the long term: investing over time, doing it on a monthly basis," Clayton said. "What we are seeing is significant inflows from retail investors, and they have the hallmarks of short-term inflows. And does that concern me? Sure."

"Because that's more trading than investing," he continued. "Short-term trading is much more risky than long-term investing, and so I do worry."

Bill Singer's Comment: There is a line. Somewhere there is a line between the proper role of government and then what many call the intrusive "Nanny State." As a former regulator, an advocate for defrauded investors and whistleblowers, and an advocate for industry participants, I am wary about where that line should be drawn. At times, it needs to be thicker, darker, and more defined in favor of investors; but at other times, I would like to kick dirt on it, obscure it, and move it into more neutral territory. Too often those that draw the line are the paid  lackeys of Wall Street's powerful interest. On the other hand, too many lines have been too hastily drawn over the years by those who are angered by the fraud-of-the-day -- and it is only later that we realize that the proposed cure has caused more harm. So . . . sure, I understand where Clayton is coming from with his investing/trading concern --readers of my online content know that I frequently admonish about that very distinction. Sadly, we live in an age when the overwhelming evidence demonstrates the wisdom of wearing masks, yet there are those who prefer to live free without a mask notwithstanding that it poses virtually no harm to the wearer and offers much protection to the rest of us. If we can't resolve something that stark and compelling, I doubt that we will tolerate any substantive regulatory effort to prevent folks from engaging in ill-advised daytrading based upon idiotic rumors and devoid of even the most rudimentary due diligence. Perhaps we need to be mindful of the moral hazard of protecting fools from losing their money? Perhaps it's best that those who view Wall Street as a casino are allowed to place their life's savings on the green felt and watch it pulled away from them when their bet proves wrong.

https://www.cnbc.com/2020/07/23/home-depot-best-buy-staycation-era-a-permanent-shift-trader-says.html
Oh puhlease. This is not the dawn of a new "era." We are not all going underground to devolve into Morlocks. Yes, folks are staying home in 2020 and likely into 2021 but if you think that everyone is going to hunker down for an "era" and never travel anywhere again, that's just nonsense. Let's re-visit this prognostication in 2022 and see if everyone is still staycationing. After 9/11, they said that no one would fly again. After the Tech Wreck, they said that the Internet was a bust. If nothing else, human beings have a short memory and yearn to return to their creature comforts. As Wall Street pundit Freddy Nietzsche once mused "Instinct. When the house burns one forgets even lunch. Yes, but one eats it later in the ashes."

Remote Work Means Pay Cuts for White Collar Workers in NYC (Bloomberg by Alexandre Tanzi)
https://www.bloomberg.com/news/articles/2020-07-23/remote-work-means-pay-cuts-for-white-collar-workers-in-nyc?srnd=premium
Bloomberg's Tanzi reports in part that:

In New York, about one in four employers intends to reduce office footprints, and about 16% expect to move jobs out of the city, according to the Partnership for New York City, an influential group of corporate chief executives, which hired more than a dozen consulting firms to conduct the study.

That study found that less than half of companies expect their employees to return to the office by year-end.

German Citizen Charged with Orchestrating Mail Fraud Scheme Defrauding Elderly and Vulnerable Victims of Over $10 Million (DOJ Release)
https://www.justice.gov/usao-nj/pr/german-citizen-charged-orchestrating-mail-fraud-scheme-defrauding-elderly-and-vulnerable
In an Indictment filed in the United States District Court for the District of New Jersey 
https://www.justice.gov/usao-nj/press-release/file/1297301/download, Georg Ingenbleek was charged with two counts of mail fraud, four counts of money laundering, and one count of obstruction of justice. As alleged in part in the DOJ Relese:

From at least 2011 through 2016, Ingenbleek created numerous direct mail solicitations supposedly from world-renowned psychics, falsely and fraudulently claiming that the recipients were being contacted because they had been the subject of specific visions by the psychics, including visions that the recipients were going to receive large sums of money and good fortune. Many of the letters falsely promised that the psychic services or objects being offered were free of charge. In fact, the letters were mass-produced using software and information provided by Ingenbleek to a direct mail marketing services company, Company-1, located in Piscataway, New Jersey, that Ingenbleek retained to print and mail the solicitations.  

Ingenbleek directed a second company, Company-2, to send fraudulent billing notices to the same victims which stated that the victims owed money for psychic services, which in many cases had been offered free of charge. The fraudulent billing notices were labeled "collection notices" and "invoices," falsely representing that the victims owed late payment fees, and falsely stating that a psychic or astrology organization would refer the victim to a "collection agency" and take legal action if the recipient did not send a check, usually for $20 to $50. Through his fraudulent psychic mailing campaign, Ingenbleek obtained more than $10 million dollars from the victims.

In September 2016, Ingenbleek directed representatives of Company-1 and Company-2 to destroy all materials related to his fraudulent psychic mailings in response to federal criminal investigations into his conduct and the conduct of other participants in the scheme. In one email, dated Sept. 23, 2016, Ingenbleek told a representative of Company-2, "You cannot wait! I advise you urgently to get rid of the material! Use your own car, rent a truck, start today, work all weekend."

https://www.justice.gov/usao-sdny/pr/vice-president-investment-firm-arrested-running-multimillion-dollar-ponzi-scheme
In an Indictment filed in the United States District Court for the Southern District of New York
https://www.justice.gov/usao-sdny/press-release/file/1297121/download, Naim Ismail, 60, was charged with one count each of bank fraud, wire fraud affecting a financial institution, and conspiracy to commit bank and wire fraud. As alleged in part in the DOJ Release:

From February 2007 through July 2016, ISMAIL fraudulently induced individual and corporate victims - including the New York-based subsidiary of an Afghanistan-based bank - to loan large sums of money to entities operated by ISMAIL and others.  ISMAIL did so by claiming that these funds would be used in a particular investment strategy as well as several real estate development projects.  ISMAIL promised investors a generous fixed annual rate of return and promised to return the investors' principal on a specified timeline.  In fact, ISMAIL and his companies did not invest these funds as promised, nor did ISMAIL repay many of his victims.  Instead, ISMAIL used investor funds to pay the so-called interest payments due to earlier investors in the scheme, as well as for his own personal expenses and investments. 

During the course of the fraudulent scheme, ISMAIL deprived the scheme's victims of over $15 million. 

https://www.justice.gov/usao-ut/pr/robbins-pleads-guilty-securities-fraud-money-laundering-convinced-victims-invest-just
Thomas Robbins pled guilty in the United States District Court for the District of Utah to securities fraud and money laundering. In 2011, Robbins had been sentenced to 60 months in federal prison and ordered to pay $2,462,207 in restitution to victim investors after pleading guilty to conspiracy in another investment fraud scheme. As alleged in part in the DOJ Release:

[A]s a part of his efforts to lull investors into a false sense of security about their investments, Robbins told them he had achieved high returns in his foreign day-trading business. In fact, Robbins lost millions of dollars and diverted investor money for his personal use and benefit. He solicited approximately 66 investors to invest around $10,354,700.69 in his scheme.

Robbins admitted that he made fraudulent representations in his communication with investors in the scheme.  The false representations include telling them he had spent 11 years developing an algorithm for foreign currency trading which allowed him to average returns of 5 percent to 30 percent per month; representing to them that he worked for a bank in Germany around 2005 where he was on contract to help the bank develop algorithms for their traders to use; that he used more than 13 different brokerage firms in different countries to facilitate his foreign currency trading program; assuring them that his trading program was compliant with the laws of the Commodities Futures Trading Commission; and promising that people who invested with him would never lose more than 5 percent of the net equity in their trading account due to "stop loss" measures.

He made the false representations knowing he was not providing a legitimate investment; that he had lost nearly all of the investor money; and he was using a portion of the investor money on personal living expenses; and no significant investment returns were generated.

https://www.justice.gov/usao-edtn/pr/former-smartbank-vice-president-loan-operations-sentenced-embezzlement-scheme
Connie S. Clabo, 54, pled guilty to an Information in the United States District Court for the Eastern to one count of embezzlement and one count of filing a false tax return.  Clabo was sentenced to 15 months in prison plus four years of supervised release; and she was ordered to pay $516,630.06 in restitution. As alleged in part in the DOJ Release:

From 2013 through February 2018, SmartBank employed defendant as its vice president of loan operations.  During that time, Clabo abused her position of private trust with SmartBank by misusing her general-ledger and loan-operations oversight authority to steal, embezzle, misapply, and conceal the theft, embezzlement, and misapplication of more than $600,000 of Smartbank's money, funds, and credits.  Clabo's conduct was not isolated, but reflected a pattern of repeated deceptive conduct over many years.  Clabo abused her managerial position at SmartBank and used her knowledge of SmartBank's internal controls for personal advantage intending to defraud SmartBank.In addition to embezzling and the misapplication of funds from SmartBank, Clabo filed false tax returns for 2014 through 2017 that failed to include as income the money she embezzled from her employer, resulting in additional income tax owed of over $89,000.

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