Securities Industry Commentator by Bill Singer Esq

September 21, 2020

Intellectual Siren Song (Remarks at the 7th Annual Conference on Financial Market Regulation by SEC Commissioner Hester Peirce)
In her recent musings about the proper role and context of regulation, SEC Commissioner Peirce notes in part that [Ed: footnotes omitted]:

As I have made clear elsewhere, I oppose the Commission's Consolidated Audit Trail initiative, or CAT.  For those who are unfamiliar with this program, which was prompted by the 2010 "Flash Crash," when the CAT is fully implemented, the self-regulatory organizations, which include securities exchanges and the Financial Industry Regulatory Authority, will collect and store every equity and option trade and quote, from every account at every broker, by every investor.  As even people who support the CAT acknowledge, that is a lot of data.

Now many of you might be thinking that the CAT, though unquestionably ambitious, is an understandable reaction to such a significant market event.  After all, the Commission is charged with, among other things, maintaining orderly markets, and understanding of the causes of market disruptions, such as the "Flash Crash," fits within that ambit.  Admirable intentions and earnest efforts to protect the CAT data are not enough, however, to outweigh the CAT's costs.    

Regardless of the initial (or at least stated) rationale underlying mandated information collections like the CAT, I am always concerned about the follow-on exploitation of information that can occur to the detriment of individual liberty.  As the CAT takes concrete shape, I note with alarm, though not surprise, the increasing emphasis that is being placed on the database's ultimate utility as an enforcement tool.  Staff at the Commission and at the exchanges will wade through the data pool to troll for securities violations.  Seeing that Constitution Day coincided with the start of this conference, I cannot help but ask once again how the CAT, which will track unsuspected and unsuspecting Americans' every move in the hopes of catching them in some wrongdoing, is consistent with the principles undergirding the Constitution.

Others do not share my concerns about the implications of mass data collection for liberty and privacy, but rather look at all of this information in increasingly exploitable databases as a source of hope for a brighter future.  The sheer volume of data available enables, according to some people, successful central economic planning, something that has never worked in the past. . . .
The International Consortium of Investigative Journalists ("ICIJ") reported that Suspicious Activity Reports ("SARs") filed by banks and other financial firms with the United States Department of Treasury's Financial Crimes Enforcement Network (FinCen) showed that between 1999 and 2017, over $2 trillion in transactions were denoted as "suspicious" by internal compliance departments. As reported in part in the Reuters Release:

Five global banks appeared most often in the documents - HSBC Holdings Plc HSBA.L, JPMorgan Chase & Co JPM.N, Deutsche Bank AG DBKGn.DE, Standard Chartered Plc STAN.L and Bank of New York Mellon Corp BK.N, the ICIJ reported. The SARs provide key intelligence in global efforts to stop money laundering and other crimes. The media reports on Sunday painted a picture of a system that is both under-resourced and overwhelmed, allowing vast amounts of illicit funds to move through the banking system.

Christopher Laver, Plaintiff/Appellant, v. Credit Suisse Securities (USA), LLC, Defendant/Appellee (Opinion, United States Court of Appeals for the Ninth Circuit, No. 18-16328)
As set forth in the Syllabus to the 9Cir's Opinion:

The panel affirmed the district court's dismissal of a putative class action suit against Credit Suisse Securities, USA in favor of arbitration. 

Plaintiff worked as a financial advisor at Credit Suisse Securities, USA ("CSSU"), and brought this putative class action alleging he was owed deferred compensation. CSSU moved to dismiss based on an arbitration clause and general class waiver set forth in an Employee Dispute Resolution Program. The Financial Industry Regulatory Authority ("FINRA") is a securities industry self-regulatory organization that imposes rules regulating the conduct of its broker-dealer members. CSSU is a FINRA member. Plaintiff argued that FINRA Rule 13204(a)(4) barred CSSU from compelling arbitration of his claims. 

The panel rejected plaintiff's contention that Rule 13204 invalidated the Employee Dispute Resolution Program's class waiver. Because the class waiver survived, the panel held that plaintiff relinquished his right to bring class claims in any forum. Because plaintiff was left with only individual claims, Rule 13204(a)(4)'s prohibition on enforcing arbitration agreements directed at putative or certified claims had no application here. In accord with the Second Circuit's decision in Cohen v. UBS Fin. Servs., Inc., 799 F.3d 174 (2d Cir. 2015), the panel held that the district court correctly ordered the parties to arbitrate plaintiff's remaining individual claims.

As to the underlying dispute, the 9Cir Opinion explains in part that:

Laver worked as a financial adviser in CSSU's "Private Banking Division." Form contracts governing the employment of CSSU financial advisers entitled them to "deferred compensation" unless they resigned or were terminated for cause. A "Change in Control" provision in the contracts provided that certain corporate acquisitions would allow the advisers to retain their entitlement to certain unvested deferred compensation. 

In October 2015, CSSU announced that it had entered into a "recruiting agreement" with Wells Fargo and would shut down its financial advisory operations. The agreement stated that Wells Fargo would recruit former CSSU financial advisers but would not be required to offer them employment. Laver alleges that CSSU entered into the agreement to circumvent the "Change in Control" provision and avoid paying its financial advisers millions of dollars in deferred compensation. CSSU ultimately paid deferred compensation only to those advisers hired by Wells Fargo, and not to advisers-including Laver-whom Wells Fargo did not hire. 

Alleging that he is owed deferred compensation, Laver filed this putative class action suit, which alleges breach of contract and other state law claims. CSSU moved to dismiss the suit in favor of arbitration. CSSU premised its motion on an arbitration clause and a general class waiver set forth in an Employee Dispute Resolution Program ("EDRP") agreed to by Laver and the other financial advisers. . . .

at Pages 3 - 4 of the 9Cir Opinion
In a criminal Complaint filed in the United States District Court for the Southern District of Florida, Edtronda Simon was charged with access device fraud, bank fraud, and aggravated identity theft. As alleged in part in the DOJ Release:

[O]ver approximately four years starting in 2016, Edtronda Simon, of Fayette County, Georgia, ran an elder fraud scheme that generally operated as follows: Simon would cold-call elderly victims in South Florida, pretend to be from the fraud department of each senior's bank, and convince the seniors that their accounts had been compromised, which was false. Once a senior seemed convinced, Simon would offer to send a "bank representative" to the elderly victim's home to exchange any compromised credit or debit card with a new one, says the complaint. Usually with Simon still on the call trying to persuade the senior to verify a PIN number, a co-conspirator would arrive at the victim's home, take the victim's credit or debit card, and promise to return with a new one (which, of course, never happened), according to the complaint affidavit. The co-conspirators allegedly would use the seniors' credit cards, debit cards, and PINs to withdraw cash from ATMs, purchase money orders, and otherwise drain money from the accounts as quickly as possible - before real bank fraud representatives caught on to the illegal activity.

The complaint charges that through this scheme, Simon and her co-conspirators duped over 250 seniors from Broward, Palm Beach, St. Lucie, Indian River and other South Florida counties into turning over debit cards, credit cards, and related information.  They defrauded banks of over $1 million, says the complaint affidavit.   

In a separate case filed earlier this year in the Southern District of Florida (case no. 20-cr-80037), prosecutors charged six of Simon's co-conspirators for their involvement in this elder fraud scheme: Shaumbrica Stubbs, Luclesse Vernesse, Samuel Charles, Ian Felder, Diedre Dixon, and Shaquille Robinson, all Florida residents.  Stubbs and Charles have pleaded guilty.  

In an Indictment filed in the United States District Court for the Western District of Washington, Ephraim Rosenberg, Joseph Nilsen, Kristen Leccese, Hadis Nuhanovic, Rohit Kadimisetty, and Nishad Kunju were charged with conspiracy to use a communication facility to commit commercial bribery, conspiracy to access a protected computer without authorization, conspiracy to commit wire fraud, and wire fraud. As alleged in part in the DOJ Release:

[S]ince at least 2017, the defendants have used bribery and fraud to benefit merchant accounts on the Amazon Marketplace, resulting in more than $100 million of competitive benefits to those accounts, harm to competitors, and harm to consumers.  More specifically, the Indictment alleges that the defendants served as consultants to so-called third-party ("3P") sellers on the Amazon Marketplace.  Those 3P sellers consisted of individuals and entities who sold a wide range of goods, including household goods, consumer electronics, and dietary supplements on Amazon's multi-billion-dollar electronic commerce platform.  In addition to providing consulting services to these 3P sellers, some of the defendants, including NILSEN, LECCESE, and NUHANOVIC, made their own sales on the Amazon Marketplace through 3P accounts they operated. 

In the course of the conspiracy described in the Indictment, the defendants paid bribes to at least ten different Amazon employees and contractors, including KUNJU, who accepted bribes as a seller-support associate in Hyderabad, India, before becoming an outside consultant who recruited and paid bribes to his former colleagues.  In exchange for those bribes, the corrupted employees and contractors took the following illicit steps:
  • Reinstating suspended merchant accounts and product listings on the Amazon Marketplace:  The corrupted employees and contractors helped reinstate products and merchant accounts that Amazon had suspended or blocked entirely from doing business on the Amazon Marketplace.  The fraudulently reinstated products included dietary supplements that had been suspended because of customer-safety complaints, household electronics that had been flagged as flammable, consumer goods that had been flagged for intellectual-property violations, and other goods.  The fraudulently reinstated accounts included accounts that Amazon had suspended for manipulating product reviews to deceive consumers, making improper contact with consumers, and other violations of Amazon's seller policies and codes of conduct.  The Indictment describes a variety of ways in which corrupted employees and contractors misused their positions to reinstate these accounts, including by manually reinstating product listings, and approving baseless and fraudulent merchant appeals that they themselves helped draft.  In total, after their fraudulent reinstatement, the products and merchants earned in excess of $100 million in sales revenue.
  • Facilitating attacks against competitors:  The corrupted employees and contractors facilitated attacks against competitors' 3P accounts and product listings, by (a) sharing competitive intelligence about competitors' revenues, customers, advertising campaigns, and suppliers; (b) using their inside access to Amazon's network to suspend competitors' 3P accounts; and (c) providing consultants with information about Amazon's internal algorithms, which allowed the consultants to flood competitors' product listings with fictitious negative product reviews. 
  • Misappropriating Amazon's highly confidential business information:  The corrupted employees and contractors also provided consultants and 3P sellers with unauthorized access to Amazon's highly confidential standard operating procedures and algorithms.  These materials provided an obvious, unfair, competitive benefit to 3P sellers, by giving them coveted insight into the systems that power Amazon's search engine, Amazon's product reviews, and Amazon's enforcement processes.  The misappropriated data also included the contact information for Amazon employees and consumers, which the members of the conspiracy misused and shared widely.
  • Circumventing Amazon's internal limits on 3P accounts:  The corrupted employees and contractors conveyed exclusive benefits that circumvented Amazon's rules and regulations.  In exchange for bribes, they increased 3P sellers' storage limits in Amazon's warehouses, facilitated 3P sellers' otherwise meritless requests to sell products in restricted categories, and provided 3P sellers with inside knowledge about the most successful advertising campaigns and most profitable product listings.