Securities Industry Commentator by Bill Singer Esq

August 14, 2020

SEC Charges Hertz's Former CEO With Aiding and Abetting Company's Financial Reporting and Disclosure Violations (SEC Release)

Advisory Firm Settles Charges of Defrauding Investors, Agrees to Refund Allegedly Ill-Gotten Gains to Harmed Clients (SEC Release)

SEC Charges Unregistered Brokers Who Sold Equialt Securities to Main Street Investors (SEC Release)

Finra Suspends Ex-Morgan Stanley Broker Who Advised on Outside Trading (AdvisorHub by Mason Braswell)

Cease-and-Desist, Bar, and $1.05 Penalty Proposed by SEC ALJ
As set forth in pertinent part in the FINRA Notice:

FINRA is warning member firms of a new imposter website (please notice the extra "n" in the domain name)

One portion of the website contains a link to a registration site that is not legitimate (see images, below). 

In addition, it is possible bad actors could leverage the domain to send fake emails including those with imbedded phishing links or attachments containing malware. 

The domain of "" is not connected to FINRA and firms should delete all emails originating from this domain name. 

FINRA has requested that the Internet domain registrar suspend services for "".

In December 2018, Hertz agreed to pay $16 million to settle fraud and other charges brought by the SEC;  and in December 2019, the SEC issued a settled Order against Hertz former Controller Jatindar Kapur. In a Complaint filed in the United States District Court for the District of New Jersey, the SEC charged former Hertz CEO/Chair Mark Frissora with aiding and abetting Hertz's reporting and books and records violations and with violating Section 304 of the Sarbanes-Oxley Act by failing to reimburse Hertz for his incentive-based compensation. Without admitting or denying the allegations, Frissora consented to a judgment permanently enjoining him from aiding and abetting any future violations of the applicable federal securities laws; requiring him to reimburse Hertz for $1,982,654 in bonus and other incentive-based compensation; and requiring him to pay a $200,000 civil penalty.  As alleged in part in the SEC Release:

[A]s Hertz's financial results fell short of its forecasts throughout 2013, Frissora pressured subordinates to "find money," principally by re-analyzing reserve accounts, causing Hertz's staff to make accounting changes that rendered the company's financial reports materially inaccurate. According to the complaint, Frissora also led Hertz to hold rental cars in its fleet for longer periods and thus lower its depreciation expenses, without properly disclosing the change - and the risks of relying on older vehicles - to investors. In addition, the complaint alleges that Frissora approved Hertz's reaffirming its earnings guidance in November 2013, despite Hertz's internal calculations that projected lower earnings per share figures. Hertz revised its financial results in 2014 and restated them in July 2015, reducing its previously reported pretax income by $235 million.

Without admitting or denying the findings in an SEC Order, SCF Investment Advisors, Inc. will disgorge $544,446 plus $22,746 prejudgment interest, and will pay a $200,000 civil penalty; and the firm agreed to a cease-and-desist order, to be censured, and to distribute the funds to harmed investors. As alleged in part in the SEC Release:

[S]CF engaged in several practices that violated its fiduciary duty to its clients. First, the order finds that SCF purchased, recommended, or held certain mutual fund share classes for its advisory clients that charged 12b-1 fees, which were received by SCF's affiliated broker-dealer, SCF Securities, Inc. (SCFS), instead of lower-cost share classes of the same funds that were available to clients.  Second, the order finds that SCF purchased or recommended for advisory clients certain money market funds for which SCFS received revenue sharing payments from its clearing broker, without disclosing receipt of this compensation to clients.  The order finds that as a result, some SCF clients received lower performance on these investments than they would have otherwise received.  As stated in the order, SCF failed to disclose these practices or related conflicts of interest to its clients.  The order finds that SCF failed to adopt and implement policies and procedures designed to prevent violations of federal securities laws regarding its mutual fund and money market sweep fund share class selection practices, and that SCF violated its duty to seek best execution.  The order also finds that SCF did not self-report to the SEC pursuant to the Division of Enforcement's Share Class Selection Disclosure Initiative, even though it was eligible to do so.
In a Complaint filed in the United States District Court for the Middle District of Florida, the SEC alleged that Dale Tenhulzen and Live Wealthy Institute violated the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act, and the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. Without admitting or denying the allegations in the Complaint, Tenhulzen and Live Wealthy agreed to full injunctive relief with disgorgement and civil money penalties to be determined by a court at a later date. As alleged in part in the SEC Release:

[B]etween approximately April 2015 and September 2019, Tenhulzen was among EquiAlt's top revenue producers, selling approximately $15 million of its unregistered securities to more than 60 retail investors.  Tenhulzen and Live Wealthy allegedly received approximately $1.5 million in transaction-based commissions from their sales of EquiAlt securities, even though neither of them was registered as a broker-dealer or permitted to sell securities. The complaint alleges that during most of Tenhulzen and Live Wealthy's sales, EquiAlt was actually operating a massive Ponzi scheme during which it raised more than $170 million from approximately 1,100 investors in more than 35 states. The SEC filed an emergency enforcement action against EquiAlt LLC, its CEO Brian Davison, and its Managing Director Barry Rybicki on February 11, 2020, in connection with the alleged scheme. On February 14, 2020, a federal judge granted the SEC's request for emergency relief, including a temporary restraining order, an asset freeze, and an accounting, and appointed a receiver over the corporate defendants and relief defendants.

The SEC's Claims Review Staff issued Preliminary Determinations recommending the denial of two Claimants' claims based upon a finding that their information did not lead to the successful enforcement of the Covered Actions, and did not cause Staff to open the investigation or significantly contribute to the success of the Covered Action. Claimants challenged the Preliminary Determinations. Following review, the SEC affirmed the Preliminary Determinations. 
As to Claimant 1, the SEC Order alleges in part:

Although Claimant 1 claims to have provided information that "led to" the success of the Covered Action, Claimant 1 does not contend that Claimant 1's submissions satisfied any of the three components of the "led to" definition in Exchange Act Rule 21F-4(c).8 Instead, Claimant 1 contends that information from Claimant 1 still "led to" the success of the action if-as a result of the purported "stir" that followed the Redacted Newspaper article based on information provided by Claimant 1-either the Company, the Commission, Redacted "inquire[d] into different transactions, conduct, or areas as part of the existing investigation resulting in an SEC proceeding based in part on the information gathered or explored during that inquiry." . . .
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Footnote 8: Generally speaking, Exchange Act Rule 21F-4(c) provides that information will be deemed to have "led to the successful enforcement of" an action where a person provides: (1) "sufficiently specific, credible, and timely [original information to the Commission] to cause the staff to commence an examination, open an investigation, reopen an investigation [that has been closed] . . ., or to inquire concerning different conduct as part of a current examination or investigation," and the action is "based in whole or in part on conduct that was the subject of your original information"; (2) original information in connection with misconduct that is already under investigation or examination and that "submission significantly contributed to the success of the action"; and (3) information to specified reporting authorities within an entity, and the entity subsequently provides that information to the Commission (along with additional information the entity may have uncovered as a result of the tip) and the information the entity reports otherwise satisfies (1) or (2) above. Claimant 1's response to the Preliminary Determination concedes that Claimant 1's submissions to the Commission did not lead to the success of the Covered Action.

As to Claimant 2, the SEC Order alleges in part [Ed: footnotes omitted]:

Claimant 2 raises an assortment of arguments in an effort to demonstrate that Claimant 2 provided information that "led to" the success of the Covered Action, none of which is persuasive. Because the Company was making nearly weekly "robust" disclosures to the staff, we credit the staff declarations that the investigative team relied almost entirely on the Company's self reporting and we reject Claimant 2's arguments that it was necessary for the staff to detail what information provided by Claimant 2 was or was not redundant, and to detail exactly when specific information was disclosed. We do not need to engage in close consideration of whether any information provided by Claimant 2 significantly contributed to the Covered Action or otherwise "led to" its success because Claimant 2's information was not used at all to advance the investigation.

For the same reason, contrary to Claimant 2's argument, it is unnecessary to consider whether Claimant 2 might have been the "original source" (as that term is defined in Exchange Act Rule 21F-(b)(6)) of information that either the Company had not already provided or that materially added to information the staff had previously received from the Company. Because the record is clear that the staff did not actually use any of Claimant 2's information, even if Claimant 2 provided some information before or in addition to the information received from the Company, Claimant 2's whistleblower tips could not have led to the success of the enforcement action.

Empty apartments in Manhattan reach record high, topping 13,000 (CNBC by Robert Frank)
As reported in part by CNBC's Frank:

The number of apartments for rent, or listing inventory, more than doubled over last year and set a new record in the 14 years since data started being collected, according to a report from Douglas Elliman and Miller Samuel. As the number of apartments listed for rent hit 13,117, the number of new leases signed fell by 23%.

July also saw the largest fall in rental rates in nearly a decade, dropping 10%. Landlords are now offering an average of 1.7 months of free rent to try to lure tenants, according to the report, which is also a recent high.

Here's how Robinhood is raking in record cash on customer trades - despite making it free (CNBC by Kate Rooney and Maggie Fitzgerald)
It's the doctrine of TANSTAAFL. CNBC's Rooney and Fitzgerald tackle the task of explaining why there ain't no such thing as a free trade (which would be TANSTASFT). If you've wondered how Robinhood actually makes money on zero commission trades, this is as good an explanation as I've seen. 

Finra Suspends Ex-Morgan Stanley Broker Who Advised on Outside Trading (AdvisorHub by Mason Braswell)
Veteran industry reporter Mason Braswell covers the case of Christopher Reid:

The former Morgan Stanley Wealth Management broker helped an individual execute equity and options trades in a self-directed brokerage account at another firm after Morgan Stanley rejected the individual's account application, according to a letter of acceptance, waiver and consent that the Financial Industry Regulatory Authority posted this week.

It did not detail why Morgan Stanley turned down the account, nor name the individual, but said the broker and his wannabe client made about 200 trades in about two-and-a-half months in 2018 that lost about 90% of the account's $100,000 value.

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, Michael Erwin submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Michael Erwin was first registered in 2017 with FINRA member firm Edward Jones. The AWC alleges that Michael Erwin "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 Erwin had violated FINRA Rule 2010; and the self regulator imposed upon him a $2,500 fine and an 10 business-day suspension from association with any FINRA member in all capacities. As alleged in part in the AWC: 

On March 5, 2020, one of Erwin's customers at Edward Jones, Customer A, instructed Erwin to close her account by March 10. Erwin did not close Customer A's account until March 17, 2020, by which time the account had declined in value. Shortly thereafter, Customer A contacted Erwin and his branch office administrator to complain. On March 25, 2020, Erwin wrote Customer A a personal check for $2,500 to settle the complaint. Although Edward Jones was aware of Customer A's complaint, Erwin did not disclose to the firm that he had paid money to Customer A to settle the complaint. 

In the Matter of Laurie Bebo and John Buono, CPA (SEC Initial Decision as to Laurie Bebo, Init. Dec. Rel. No. 1401; Admin. Proc. File No. 3-06293)
SEC Administrative Law Judge Jason S. Patil tackles this high profile case head on and in exhausting, meticulous, and superb fashion. Although it would be absurd to expect (or, frankly, encourage) 134-page ALJ Initial Decisions, there are times when the fact patterns and the arguments raised require patience and thoroughness. Patil's output ranks among the finest Initial Decision in the SEC's history. I do not have the time or inclination to summarize the Decision (although I have read it in full); as such, I will present Patil's own "Introduction":

Respondent Laurie Bebo was the chief executive officer (CEO) of Assisted Living Concepts, Inc. (ALC), a publicly traded assisted living company that operated residences for seniors. For several years, she engaged in an elaborate scheme to hide that ALC was not meeting occupancy and financial covenants in its lease with Ventas, Inc., the landlord of eight facilities operated by ALC. To make it appear that the facilities had sufficient occupants to meet the covenant requirements each quarter, Bebo directed ALC personnel to include individuals who did not reside at the facilities. The false occupants included current and former ALC employees, people who never visited or stayed at the facilities, individuals listed as occupants at multiple different facilities on the same day, and family members that were not employed by ALC. Bebo did not disclose her scheme to Ventas or obtain Ventas's agreement. 

To further her scheme, Bebo falsified company records, directed ALC employees to create journal entries reflecting inflated revenues, submitted fraudulent financial information to Ventas, and lied to and hid information from ALC's auditors. Through Bebo's misconduct, ALC falsely represented, in its periodic reports publicly filed with the Securities and Exchange Commission, that the company was in compliance with the covenants and that it did not believe that there was a reasonably likely degree of risk of breach. The company did not disclose that it failed to meet the covenant requirements. Bebo certified the company's public filings as accurate when she knew they were not and caused ALC to violate its reporting obligations. 

Because of her misconduct, Bebo violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; Exchange Act Rule 13a-14's certification requirements; Exchange Act Section 13(b)(5)'s books-and-records and internal control provisions; Exchange Act Rule 13b2-1's prohibition against falsifying books, records, or accounts; and Exchange Act Rule 13b2-2's prohibition against company executives making false and misleading statements. Also, she caused ALC's violations of Exchange Act Section 10(b) and Rule 10b-5, Exchange Act Section 13(a) and Rules 13a-1 and 13a-13's requirement that an issuer file accurate reports, Exchange Act Rule 12b-20's requirement that an issuer provide further material information to make its reports not misleading, and Exchange Act Sections 13(b)(2)(A) and (B)'s books-and-records and internal control provisions. 

Significant sanctions are warranted. A cease-and-desist order, an officer-and-director bar with the right to reapply after six years, and civil money penalties totaling $1,050,000 will be imposed.