Securities Industry Commentator by Bill Singer Esq

October 20, 2020

Goldman Sachs expects rejection of SEC plan to raise 13F reporting threshold (Reuters by Chuck Mikolajczak)

United States of America, et al., Plaintiffs, v. Google LLC., Defendant (Complaint, United States District Court for the District of Columbia, 20-CV-03010 / October 20, 2020)
As alleged in part in the DOJ Complaint:

1. Two decades ago, Google became the darling of Silicon Valley as a scrappy startup with an innovative way to search the emerging internet. That Google is long gone. The Google of today is a monopoly gatekeeper for the internet, and one of the wealthiest companies on the planet, with a market value of $1 trillion and annual revenue exceeding $160 billion. For many years, Google has used anticompetitive tactics to maintain and extend its monopolies in the markets for general search services, search advertising, and general search text advertising-the cornerstones of its empire. 

2. As in many other businesses, a general search engine must find an effective path to consumers for it to be successful. Today, general search engines are distributed primarily on mobile devices (smartphones and tablets) and computers (desktops and laptops). These devices contain web browsers (software applications for accessing information on the internet) and other "search access points" that call on a general search engine to respond to a user's query. Over the last ten years, internet searches on mobile devices have grown rapidly, eclipsing searches on computers and making mobile devices the most important avenue for search distribution in the United States. 

3. For a general search engine, by far the most effective means of distribution is to be the preset default general search engine for mobile and computer search access points. Even where users can change the default, they rarely do. This leaves the preset default general search engine with de facto exclusivity. As Google itself has recognized, this is particularly true on mobile devices, where defaults are especially sticky. 

4. For years, Google has entered into exclusionary agreements, including tying arrangements, and engaged in anticompetitive conduct to lock up distribution channels and block rivals. Google pays billions of dollars each year to distributors-including popular-device manufacturers such as Apple, LG, Motorola, and Samsung; major U.S. wireless carriers such as AT&T, T-Mobile, and Verizon; and browser developers such as Mozilla, Opera, and UCWeb- to secure default status for its general search engine and, in many cases, to specifically prohibit Google's counterparties from dealing with Google's competitors. Some of these agreements also require distributors to take a bundle of Google apps, including its search apps, and feature them on devices in prime positions where consumers are most likely to start their internet searches. 

5. Google's exclusionary agreements cover just under 60 percent of all general search queries. Nearly half the remaining queries are funneled through Google owned-andoperated properties (e.g., Google's browser, Chrome). Between its exclusionary contracts and owned-and-operated properties, Google effectively owns or controls search distribution channels accounting for roughly 80 percent of the general search queries in the United States. Largely as a result of Google's exclusionary agreements and anticompetitive conduct, Google in recent years has accounted for nearly 90 percent of all general-search-engine queries in the United States, and almost 95 percent of queries on mobile devices. 

6. Google has thus foreclosed competition for internet search. General search engine competitors are denied vital distribution, scale, and product recognition-ensuring they have no real chance to challenge Google. Google is so dominant that "Google" is not only a noun to identify the company and the Google search engine but also a verb that means to search the internet. 

7. Google monetizes this search monopoly in the markets for search advertising and general search text advertising, both of which Google has also monopolized for many years. Google uses consumer search queries and consumer information to sell advertising. In the United States, advertisers pay about $40 billion annually to place ads on Google's search engine resultspage (SERP). It is these search advertising monopoly revenues that Google "shares" with distributors in return for commitments to favor Google's search engine. These enormous payments create a strong disincentive for distributors to switch. The payments also raise barriers to entry for rivals-particularly for small, innovative search companies that cannot afford to pay a multi-billion-dollar entry fee. Through these exclusionary payoffs, and the other anticompetitive conduct described below, Google has created continuous and self-reinforcing monopolies in multiple markets. 

8. Google's anticompetitive practices are especially pernicious because they deny rivals scale to compete effectively. General search services, search advertising, and general search text advertising require complex algorithms that are constantly learning which organic results and ads best respond to user queries; the volume, variety, and velocity of data accelerates the automated learning of search and search advertising algorithms. When asked to name Google's biggest strength in search, Google's former CEO explained: "Scale is the key. We just have so much scale in terms of the data we can bring to bear." By using distribution agreements to lock up scale for itself and deny it to others, Google unlawfully maintains its monopolies. 

9. Google's grip over distribution also thwarts potential innovation. For example, one company recently started a subscription-based general search engine that does not rely on advertising profits derived from monetizing user information. Another, DuckDuckGo, differentiates itself from Google through its privacy-protective policies. But Google's control of search access points means that these new search models are denied the tools to become true rivals: effective paths to market and access, at scale, to consumers, advertisers, or data. 

10. Google's practices are anticompetitive under long-established antitrust law. Almost 20 years ago, the D.C. Circuit in United States v. Microsoft recognized thatanticompetitive agreements by a high-tech monopolist shutting off effective distribution channels for rivals, such as by requiring preset default status (as Google does) and making software undeletable (as Google also does), were exclusionary and unlawful under Section 2 of the Sherman Act. 

11. Back then, Google claimed Microsoft's practices were anticompetitive, and yet, now, Google deploys the same playbook to sustain its own monopolies. But Google did learn one thing from Microsoft-to choose its words carefully to avoid antitrust scrutiny. Referring to a notorious line from the Microsoft case, Google's Chief Economist wrote: "We should be careful about what we say in both public and private. 'Cutting off the air supply' and similar phrases should be avoided." Moreover, as has been publicly reported, Google's employees received specific instructions on what language to use (and not use) in emails because "Words matter. Especially in antitrust law." In particular, Google employees were instructed to avoid using terms such as "bundle," "tie," "crush," "kill," "hurt," or "block" competition, and to avoid observing that Google has "market power" in any market. 

12. Google has refused to diverge from its anticompetitive path. Earlier this year, while the United States was investigating Google's anticompetitive conduct, Google entered into agreements with distributors that are even more exclusionary than the agreements they replaced. Also, Google has turned its sights to emerging search access points, such as voice assistants, ensuring that they too are covered by the same anticompetitive scheme. And Google is now positioning itself to dominate search access points on the next generation of search platforms: internet-enabled devices such as smart speakers, home appliances, and automobiles (so-called internet-of-things, or IoT, devices). 

13. Absent a court order, Google will continue executing its anticompetitive strategy, crippling the competitive process, reducing consumer choice, and stifling innovation. Google is now the unchallenged gateway to the internet for billions of users worldwide. As a consequence, countless advertisers must pay a toll to Google's search advertising and general search text advertising monopolies; American consumers are forced to accept Google's policies, privacy practices, and use of personal data; and new companies with innovative business models cannot emerge from Google's long shadow. For the sake of American consumers, advertisers, and all companies now reliant on the internet economy, the time has come to stop Google's anticompetitive conduct and restore competition.
READ the Indictment As alleged in part in the DOJ Release:

According to the indictment, beginning in or around November 2015 and continuing until at least in or around October 2019, the defendants and their co-conspirators deployed destructive malware and took other disruptive actions, for the strategic benefit of Russia, through unauthorized access  to victim computers (hacking).  As alleged, the conspiracy was responsible for the following destructive, disruptive, or otherwise destabilizing computer intrusions and attacks:
  • Ukrainian Government & Critical Infrastructure: December 2015 through December 2016 destructive malware attacks against Ukraine's electric power grid, Ministry of Finance, and State Treasury Service, using malware known as BlackEnergy, Industroyer, and KillDisk;
  • French Elections: April and May 2017 spearphishing campaigns and related hack-and-leak efforts targeting French President Macron's "La République En Marche!" (En Marche!) political party, French politicians, and local French governments prior to the 2017 French elections;
  • Worldwide Businesses and Critical Infrastructure (NotPetya): June 27, 2017 destructive malware attacks that infected computers worldwide using malware known as NotPetya, including hospitals and other medical facilities in the Heritage Valley Health System (Heritage Valley) in the Western District of Pennsylvania; a FedEx Corporation subsidiary, TNT Express B.V.; and a large U.S. pharmaceutical manufacturer, which together suffered nearly $1 billion in losses from the attacks;
  • PyeongChang Winter Olympics Hosts, Participants, Partners, and Attendees: December 2017 through February 2018 spearphishing campaigns and malicious mobile applications targeting South Korean citizens and officials, Olympic athletes, partners, and visitors, and International Olympic Committee (IOC) officials;
  • PyeongChang Winter Olympics IT Systems (Olympic Destroyer): December 2017 through February 2018 intrusions into computers supporting the 2018 PyeongChang Winter Olympic Games, which culminated in the Feb. 9, 2018, destructive malware attack against the opening ceremony, using malware known as Olympic Destroyer;
  • Novichok Poisoning Investigations: April 2018 spearphishing campaigns targeting investigations by the Organisation for the Prohibition of Chemical Weapons (OPCW) and the United Kingdom's Defence Science and Technology Laboratory (DSTL) into the nerve agent poisoning of Sergei Skripal, his daughter, and several U.K. citizens; and
  • Georgian Companies and Government Entities: a 2018 spearphishing campaign targeting a major media company, 2019 efforts to compromise the network of Parliament, and a wide-ranging website defacement campaign in 2019.
Cybersecurity researchers have tracked the Conspirators and their malicious activity using the labels "Sandworm Team," "Telebots," "Voodoo Bear," and "Iron Viking."

Montrose Man Arrested on Wire Fraud Charge that His Adult Entertainment Website Venture Was Million-Dollar Scam (DOJ Release)
In an Indictment filed in the United States District Court for the Central District of California, Patrick Khalafian was charged with wire fraud. As alleged in part in the DOJ Release:.

[F]rom November 2009 to October 2016, Khalafian solicited investments for businesses - including 168 Entertainment LLC, Empire Entertainment Group Inc., and EEG LLC - that purportedly developed and operated adult entertainment websites.

Khalafian allegedly represented that victims' investments would be used for business operations, including developing software and the platform for the proposed websites, paying for servers, hiring employees and purchasing advertising. He also promised that victims' investments would be repaid by a certain date, according to the indictment.

Instead, Khalafian allegedly used the victim investors' funds on gambling, luxury shopping sprees, and to pay back other investors. Khalafian allegedly lied to his victims about the status of the adult entertainment websites and eventually stopped responding to victims, disconnected his phone number and changed his email address. 

In July 2015, Khalafian received $1 million of ill-gotten gains wired from a victim's bank account in Canada to a bank account he controlled in Woodland Hills, according to the indictment. Prosecutors believe this amount comprises approximately half of the money Khalafian raised via this scheme.
Marc Lawrence pled guilty in the United States District Court for the Southern District of New York to two counts of securities fraud and one count of wire fraud; and he agreed to forfeit $150,000 and pay restitution of $4,550,000. As alleged in part in the DOJ Release:

From at least in or about December 2013 through at least in or about 2017, Wagner, the chief executive officer of Downing, and LAWRENCE, the president of several Downing entities, solicited investments in Downing, a purported venture capital firm that would invest in healthcare start-ups referred to as "portfolio companies" and provide sales, operations, and management expertise to the portfolio companies in order to bring their products to market and generate returns for Downing investors, who also worked for Downing (the "employee-investors").  Wagner and LAWRENCE, and others acting at their direction, solicited more than approximately $8 million in investments in Downing from employee-investors located across the United States, including in the Southern District of New York, as a requirement of employment with Downing. 

After making the required investment of between $150,000 and $250,000 in Downing and starting their employment at Downing, employee-investors soon learned, among other things, that contrary to representations made by Wagner and LAWRENCE, and others acting at their direction, Downing did not have access to millions of dollars in funding, often could not make payroll, had virtually no products to sell, and employee investments were the overwhelming source of funding.  Employee-investors also learned that Wagner and LAWRENCE had misrepresented the companies in Downing's portfolio, their product readiness, and ability to generate revenue.  While the particular formulation of these misrepresentations shifted over time, Wagner and LAWRENCE systematically sought and obtained employee-investor money through materially false and misleading statements.

Beginning in or about May 2016, after several employee-investors had brought lawsuits against Wagner, LAWRENCE, and several Downing entities alleging claims based on, among other things, fraud, Wagner and LAWRENCE continued the scheme by recruiting employee-investors into a new company called Cliniflow Technologies, LLC ("Cliniflow"), through materially false and misleading statements about Cliniflow's cash reserves, portfolio companies, and exposure to litigation.  In fact, Cliniflow purportedly held majority ownership in the same primary portfolio company as other Downing entities and was simply a new name used by Wagner and LAWRENCE to solicit investments from new employee-investors that was not tainted by the lawsuits filed against Downing entities.  A majority of the over $1.5 million raised by Wagner and LAWRENCE through Cliniflow was transferred to other Downing entities and used to pay for, among other things, Wagner's personal expenses and the repayment of prior investors.
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged attorney Jillian Sidoti with violating the antifraud provisions of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and the registration provisions of Sections 5(a) and 5(c) of the Securities Act. As alleged in part in the SEC Release:

[S]idoti facilitated the fraudulent dumping of securities of penny stock company Blake Insomnia Therapeutics. According to the complaint, as an attorney for Blake, Sidoti drafted and signed documents that she knew contained materially false information regarding the operations and control of Blake, including a private placement memorandum and registration statements filed with the Commission. As alleged in the complaint, Sidoti then arranged to sell almost all of Blake's stock to nominee shareholders to obscure that the shares were actually being sold to shareholders affiliated with Blake. The complaint also alleges that Sidoti authored opinion letters containing false statements about the control of Blake in order to induce the transfer agent to remove restrictive legends from stock certificates held by the control group. As alleged, Sidoti's actions enabled the control group to evade legal restrictions on the sales of stock by affiliates and sell over five million shares of Blake's stock into the public market.

On January 2, 2020, the SEC charged 15 defendants in connection with a scheme that allegedly generated more than $35 million from illegal sales of stock of at least 45 microcap companies, including sales of Blake's stock that Sidoti facilitated.
In a Complaint filed in the United States District Court for the Central District of California, the SEC alleged that Motty Mizrahi and his company MBIG had defrauded at least 15 advisory clients out of more than $3 million by falsely claiming that MBIG used sophisticated trading strategies to generate guaranteed returns, that the investments were risk-free, and that clients could withdraw their funds at any time. The Complaint alleged that Mizrahi had, in fact, misappropriated client funds, including to pay for personal expenses, and concealed his misappropriation by providing clients with false account statements. In a parallel criminal action, Mizrahi was charged with wire fraud and is awaiting trial. The SEC obtained a Final Judgment against Mizrahi and MBIG that permanently enjoins them from violating the antifraud provisions of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and (2) of the Investment Advisors Act of 1940; and further orders Mizrahi to disgorge $2,408,351 in ill-gotten gains plus prejudgment interest of $519,077, and to pay a civil penalty of $192,768., the SEC alleged that Joseph P. Willner:

took advantage of the artificially higher or lower stock prices that resulted from the unauthorized trades placed in the victims' accounts by knowingly trading the same securities in his own accounts. The complaint further alleged that he disguised his real identity using a pseudonym while communicating with at least one other individual through online direct messaging applications.  To mask his payments to the other individual as part of a profit-sharing arrangement, Willner allegedly transferred proceeds of profitable trades to a digital currency company that converts U.S. dollars to Bitcoin and then transmitted the bitcoins as payment.

EDNY entered a Final Consent Judgement against Wllner enjoining him from future violations of the antifraud provisions of Sections 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the market manipulation provision of Section 9(a)(2) of the Exchange Act; and he was ordered to pay $418,581 in disgorgement/interest, which was deemed satisfied by the orders of forfeiture and restitution entered against Willner in a parallel criminal case. On July 16, 2019, Willner pled guilty to one count of conspiracy to commit securities fraud and computer intrusions; and he was sentenced to six months of incarceration plus three years of supervised release, and ordered to forfeit $350,000 and pay restitution of $897,517.
The SEC's proposal to raise the 13F quarterly reporting threshold from $100 million to $3.5 billion AUMs is garnering a lot of public support. In a rare move, sitting Commissioner Allison Herren Lee has already announced her opposition to the proposal.

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, John Henry Geary submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that John Henry Geary entered the industry in 1978 and by September 2007, he was registered with LPL Financial LLC, where he remained until April 16, 2019. The AWC alleges that John Henry Geary "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Geary had violated FINRA's By-Laws Article V, Section 2(c), and FINRA Rules 1122, 2510(b) and 2010; and the self regulator imposed upon him a $5,000 fine and an 30-calendar-day suspension from association with any FINRA member in any capacity. As alleged in part in the AWC: 

In November 2018, LPL prohibited registered representatives from using discretion in a brokerage account, except for time and price discretion. However, on November 21, 2018, Respondent sold 500 shares of a stock from a customer's brokerage account without discussing the transaction with the customer on the date of the trade. Unbeknownst to Respondent, the customer had passed away two days before Respondent effected the transaction.
. . .

On or about November 19, 2015, Respondent became aware that the IRS had filed a $70,242 tax lien against him. Respondent belatedly disclosed this lien on his Form U4 on January 12, 2016, after FlNRA inquired with the firm about it in November 2015. 

On or about August 17, 2016, Respondent became aware that the IRS had filed a $19,419 tax lien against him. Respondent belatedly disclosed this lien on his Form U4 on July 12, 2017, after the firm identified the lien and asked him about it. 

On or about July 5, 2017, Respondent became aware that the IRS had filed a $55,900 tax lien against him. Respondent belatedly disclosed this lien on his Form U4 on April 4, 2019, after FINRA inquired with the Firm about it in March 2019. 

The IRS released all of Respondent's liens after he satisfied his tax liabilities. 

Bill Singer's Comment: The Geary AWC includes this admonition:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with 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, Travis R. Nelson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Travis R. Nelson was registered in February 2012, and by June 2012, he was registered with Charles Schwab & Co., Inc., where he remained until June 2019. The AWC alleges that Travis R. Nelson "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Nelson had violated FINRA Rules 8210 and 2010; and the self regulator imposed upon him a $10,000 fine and an 19-month suspension from association with any FINRA member in any capacity. As alleged in part in the AWC: 

In April 2019, in an attempt to effect higher value transfers requested by a customer, Nelson created a letter requesting an increased fund transfer limit, in accordance with Schwab procedure. However, Nelson signed the customer's signature on the letter without the customer's authorization and submitted it to Schwab. As a result, Nelson violated FINRA Rule 2010.
. . .

In the course of FINRA's investigation regarding Nelson's alleged signing of a customer's signature, Nelson provided false statements regarding his conduct in August 2019 and January 2020 responses to FINRA Rule 8210 requests. Nelson subsequently recanted his false statements in a declaration provided to FINRA in September 2020.