Securities Industry Commentator by Bill Singer Esq

September 10, 2020

An Activist Investor Crusades Against Forced Arbitration at Tesla / The electric-car maker has faced multiple allegations of racial discrimination.(Bloomberg by Dana Hull)
Another day, another registered representative gets jammed up over alleged misconduct during the exiting of a former firm and the onboarding to the new one. As is often the case, FINRA saw the inappropriate transmission of customers' nonpublic personal information. And FINRA saw a violation of Regulation S-P. And FINRA saw a violation of its Rule 2010. And FINRA imposed a fine and sent the rep to the penalty box.
Kristin Hull, founder/Chief Executive Officer of the social impact fund Nia Impact Capital filed a proposal for a Tesla shareholder resolution in which she seeks for the Board to prepare a report on its use of arbitration for its 60,000 employees. The Board opposes Hull's proposal. As Bloomberg's Hull notes in part:

The widespread use of forced arbitration has come under fire since the #MeToo movement exposed it as a tool that effectively keeps harassment complaints quiet. In recent years, employee and shareholder activists pushed several large companies, including Facebook Inc., Microsoft Corp., Uber Technologies Inc. and Lyft Inc. to end its use for sexual harassment cases. But racial dynamics are just as pernicious, and Black Lives Matter is now drawing more attention to its role in discrimination claims.

"Arbitration is used as a form of claim suppression," Cliff Palefsky, a San Francisco employment lawyer, who has testified before Congress about mandatory arbitration, said of the practice broadly. "Instead of court, it's a secret tribunal with no right of appeal."

Bill Singer's Comment: For years, the Financial Industry Regulatory Authority ("FINRA") has appointed so-called consumer advocates to its Board. Oddly, once those folks get seated they just don't seem to have the same fire in their belly as they had before their nomination -- and oddly, that same zeal seems to erupt after their term of office. Mandatory customer and intra-industry arbitration is a disgrace and should not be countenanced. That being said, there are many, many benefits of arbitration but those pluses should emerge from a consensual agreement among the parties. Notwithstanding Wall Street's pretense to the contrary, you cannot open a brokerage account with any FINRA member firm if you strike out the mandatory arbitration clause, and you cannot secure employment on the Street if you opt to litigate your various employment disputes solely in the courts. This is not the byproduct of robust negotiations between the parties but is procured via contracts of adhesion. It's a take-it-or-leave-it demand presented to customers and employees by an employer that is backed by its own convenient self-regulatory-organization in the form of FINRA.

In a Complaint filed in the United States District Court for the Western District of Washington, the SEC charged 
Sperry and Sons with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and also charged Kirk Sperry with violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and liability for aiding and abetting Sperry and Sons' violations of Section 17(a)(2) of the Securities Act. As alleged in part in the SEC Release:

[B]etween September and December 2015, Kirk Sperry, by and through his family business, Sperry and Sons Capital Investments, LLC, fraudulently raised $125,000 from two investors in connection with a multi-million dollar residential project in Williston, North Dakota. According to the complaint, Kirk Sperry solicited the investments using a number of false and misleading statements. These included allegedly stating that the investment would be secured by a first position mortgage on the property when in fact a different investor and business partner held first position, and claiming that there were purchase agreements in place for certain lots, when those purchase agreements had been cancelled already. Further, the complaint alleges that Sperry and Sons, with Kirk Sperry's knowledge and consent, used part of the funds received from the investors to make payments to other investors in unrelated Sperry and Sons projects.

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, SeedChange Execution Services Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that SeedChange Execution Services Inc. has been a FINRA member firm since 2013 with about 20 registered representatives and that the firm primarily engages in the private placements of securities. The AWC alleges that "SeedChange  does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other selfregulatory organization." In accordance with the terms of the AWC, FINRA found that SeedChange had violated FINRA Rules 3110, 3270, and 2010.; and the self regulator imposed upon SeedChange a Censure and a $15,000 fine. The AWC alleges in pertinent part that:

In November 2017, a registered person associated with SeedChange completed an outside business activity form, disclosing his involvement with a digital assets investment fund as a portfolio manager and an active owner of the fund's general partner. SeedChange approved the outside business activity. Between November 2017 and March 2018,2 the registered person raised at least $525,000 for the investment fund from six accredited investors, none of whom were SeedChange customers. As part owner of the fund's general partner, the registered person was entitled to and received a management fee for his work with the fund. 

The firm's written supervisory procedures in effect at the time did not address the requirements of FINRA Rule 3270.01. Specifically, the firm had no written procedures to evaluate the factors enumerated in FINRA Rule 3270.01 and to determine if restrictions should be placed on an outside business activity or whether to prohibit the activity. Nor did the firm have any written procedures requiring the evaluation of a proposed outside business activity to determine whether it should be properly characterized as an outside securities activity. 

Despite knowing that the registered person's outside business activity was investment related, SeedChange failed to evaluate whether the registered person's proposed activities as portfolio manager of a digital assets investment fund would interfere with or otherwise compromise his responsibilities to the firm or the firm's customers or be viewed by customers or the public as part of the firm's business. The firm also failed to evaluate whether the registered person's involvement with the fund should be restricted or prohibited, whether it was characterized properly as an outside business activity, or whether it should have been treated as outside securities activity.

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Footnote 2:  The firm terminated the registered person in early March 2018 for reasons unrelated to the registered person's involvement with the investment fund.

Bill Singer's Comment: A very fair and balanced AWC replete with sufficient content and context so as to render the allegations intelligible and the rationale for the sanctions compelling. An all-around superior rendition.