Securities Industry Commentator by Bill Singer Esq

September 9, 2020
FINRA seems to think that a "relevant" is a gray pachyderm with a long trunk and two large, floppy ears. Dumbo is such a cute character, no? What's not cute is the troubling double standard of FINRA when it comes to disclosing the prior relevant disciplinary histories of its large member firms. For some reason, that disclosure poses a particular challenge for FINRA. Smaller firms and the industry's men and women have their dirty laundry washed in public for all to see; however, when it comes to the big boys, well, FINRA seems to throw the large babies out with the bathwater.
The SEC published a letter from Fideres Partners LLP, which raises concerns about traders who have moved their chats about trading to encrypted software such as Whatsapp, Telegram, and Snapchat. Accordingly, Fideres proposes a new rule that:

(a) Forbids the use of private mobile phones and other devices with mobile data connectivity on trading floors. Only employer owned devices are allowed, as long as they prevent the use of unmonitored apps. The employer must put in place adequate measures to enforce such policy such as requesting that personal devices be handed in before entering trading floor
(b) Imposes criminal penalties on market participants found to have used such devices to exchange market sensitive information
(c) Creates a rebuttable presumption of breach of the relevant rules on the individuals and their employers in  cases of insider trading, market manipulation or antitrust infringement in cases where such chatrooms content cannot be retrieved.

In the Matter of the Claim for an Award in Connection With REDACTED Notice of Covered Action (SEC Order Determining Whistleblower Award Claim; '34 Act Rel. No. 89780; Whistleblower Award Proc. File No., 2020-29)
The SEC Order adopted the Claims Review Staff ("CRS") Preliminary Determination recommending a nearly $30,000 award; and also confirms the CRS's recommendation to deny an award to a second Claimant. In part the SEC Order asserts that:

[(1)] The information provided by the Claimant was significant as it alerted Enforcement staff to the violations, which would have been difficult to detect in the absence of Claimant's information and bore a close nexus to the Commission's charges; (2) Claimant provided exemplary assistance to the Enforcement staff, saving Commission resources and accelerating the pace of the investigation; (3) The underlying Enforcement action was programmatically significant; and (4) The amounts available for collection in the matter were limited.

In a FINRA Arbitration Statement of Claim filed in February 2020, public customer Claimants asserted fraud, negligence, breach of contract, breach of fiduciary duty and constructive fraud, violations of FINRA Code of
Conduct, violations of FINRA and federal rules regarding anti-money laundering, negligent supervision, conversion, violations of the Indiana Securities Act, and respondeat superior. The FINRA Arbitration Award asserts that:

[T]he causes of action relate to Claimants' allegation that, while registered with Brokers International, Perry was the President of Brendanwood Financial Brokerage, LLC ("Brendanwood"). Claimants further allege that, due to a failure to supervise, an unnamed party ("Unnamed Party"), also serving as an officer at Brendanwood, funneled seventy-eight (78) checks, one wire transfer, and one ACH account transfer into a business account and, thereafter, the funds were misappropriated by the Unnamed Party or others for personal use and consumption.

Claimants sought about $600,000 in out-of-pocket losses plus punitive damages, interest, costs, and fees. Respondents generally denied the allegations and asserted various affirmative defenses. Respondents filed a Motion to Dismiss, which the FINRA Arbitration Panel granted based upon the following rationale:

Pursuant to Rule 12504(a)(6)(B), Respondents were not associated with the account, security or conduct at issue. It appears that the Unnamed Party was the wrongdoer, and may have defrauded Claimants by misappropriating funds from Claimants' accounts. As such, Claimants' dispute is not with Respondents. Claimants were not customers of either Brokers International or Perry, and there was no written agreement between the named parties. Claimants never opened an account with or purchased any securities from Respondents. The Unnamed Party was not an associated person of Brokers International, not a financial advisor, and not licensed or authorized to sell securities. Respondents were not required to supervise the Unnamed Party. 

Furthermore, the dispute is not connected with the business activities of a member or an associated person. Claimants were sold insurance products. Rule 12200 of the Code exempts disputes involving the insurance business activities of a member that is also an insurance company from arbitration. The activities in this case involved the purchase of insurance products from a company that engaged the services of an agent of a member. No securities were purchased or sold by an associated person of a member.

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, Harry Seth Datys submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Harry Seth Datys was first registered in 1990 and by 2005, he was registered with FINRA member firm WestPark Capital, Inc.In accordance with the terms of the AWC, FINRA found that Datys had violated NASD Rule 2310, and FINRA Rules 2111 and 2010; and the self regulator imposed upon Datys a  $20,000 fine and a 15-month suspension with any FINRA member in any capacity. The AWC alleges that Sylvester Knox has the following "Relevant Disciplinary History":

In 2008, the New Jersey Bureau of Securities (NJ Bureau) issued a Summary Revocation Order and Assessment of Monetary Penalties revoking Datys' agent registration and assessing civil monetary penalties against Datys in the amount of $6,000 for failing to comply with a heightened supervisory agreement with the firm. In 2006, the NJ Bureau had conditioned Datys' registration upon his entering into this agreement with the firm. The NJ Bureau found that Datys failed to comply with the agreement by failing to disclose four items to the NJ Bureau: (1) an action impacting Datys' registration in Colorado; (2) a New Jersey customer complaint; (3) a Texas civil litigation suit; and (4) a supervisory change. 

In 2014, the NJ Bureau assessed a civil monetary penalty for Datys in the amount of $15,000, as set forth in a Consent Order, after finding that Datys continued to actively transact business for up to four New Jersey residents between May 2008 and August 2012 and caused certain clients to change their principal address from their New Jersey residential addresses to their New York business addresses, despite the fact that the clients were still residing at the New Jersey addresses, after his registration in New Jersey had been revoked.  

Under the heading "Overview," the AWC alleges that:

From 2012 to 2016, in connection with two securities offerings, Datys offered and sold 24 promissory notes issued by WestPark Capital Inc.'s parent company, WestPark Capital Financial Services LLC, to 14 customers, raising a total of $2,713,200. Datys violated NASD Rule 2310 and FINRA Rules 2111 and 2010 by failing to have a reasonable basis to recommend these notes to customers. In addition, Datys made negligent misrepresentations and omissions in connection with the sale of the offerings, in violation of FINRA Rule 2010 and in contravention of Section 17(a)(2) and (3) of the Securities Act of 1933.