Securities Industry Commentator by Bill Singer Esq

December 3, 2020

Licensed Attorney And Disbarred Attorney Charged With Securities Fraud For Roles In Fraudulent Opinion Letter Scheme (DOJ Release)

SEC Charges Disbarred New York Attorney and Florida Attorney with Scheme to Create False Opinion Letters (SEC Release)

Energy Companies Agree to Settle Fraud Charges Stemming From Failed Nuclear Power Plant Expansion (SEC Release)

The Future of Finance Is in Wealth Management and Retail Trading / A look at the data shows where the industry's money is being made (Bloomberg by Jennifer Surane, Sridhar Natarajan, and Larry R Tabb)
A thought-provoking analysis by Bloomberg. I'm not so sold on the idea that retail is back and on a sustainable growth arc -- maybe, maybe not. Unquestionably, Zero Commissions has fueled retail but so has the stay-at-home-glued-to-the-computer impact of COVID. As such, I want to see how many daytraders keep daytrading once the all-clear whistle blows (assuming that it ever does). Regardless, the wealth management side of the prognostication looks like it will hold up. 

Licensed Attorney And Disbarred Attorney Charged With Securities Fraud For Roles In Fraudulent Opinion Letter Scheme (DOJ Release)

In an Indictment filed in the United States District Court for the Southern District of New York ("SDNY), disbarred attorney Richard Rubin, 78, and licensed attorney Thomas Craft, 55, are each charged with one count of conspiracy to commit securities fraud, one count of securities fraud, and one count of securities fraud. As alleged in part in the DOJ Release:

Securities Registration Requirements and SEC Rule 144 

Under the Securities Act of 1933 (the "Securities Act"), anyone seeking to sell a security must first register the offering of that security unless an exemption applies. See 15 U.S.C. § 77e.  This registration requirement protects investors by promoting disclosure of information pertinent to informed investment decisions. 

A company registering the offer of securities must complete a registration statement such as SEC Form S-1 before the securities can be listed on a national exchange and publicly traded.   SEC Form S-1 contains information pertinent to informed investment decisions, including, among other things, information on the company's business operations, the company's financial condition, and a description of the company's management.  In connection with SEC Form S-1, the company is required to file an opinion letter (the "Form S-1 Opinion Letter") from a licensed attorney regarding the legality of the securities being offered or sold pursuant to the registration statement.  A company's SEC Form S-1 and the Form S-1 Opinion Letter are available to the public on the SEC's Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR").

"Restricted securities" refers to securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer, with "affiliate" meaning a person that directly or indirectly controls, or is controlled by, or is under common control with, an issuer.  Affiliates can also include an executive officer or a director or large shareholder who is in a relationship of control with respect to the issuing company.  Restricted securities bear a legend indicating that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from such registration requirements.

Securities Act Rule 144 ("Rule 144"), codified at 17 C.F.R. § 230.144, provides a registration exemption for the resale of restricted securities.  Specifically, it permits the public resale of restricted securities if a number of conditions are met, including conditions relating to how long the securities are held, the way in which they are sold, the public information available to investors about the securities, and the amount that can be sold at any one time.  However, even if these conditions are met, the sale of restricted securities to the public is still not permitted until a transfer agent removes the "restricted" legend from the security. 

The term "transfer agent" refers to a company that keeps track of individuals and entities that own the stocks and bonds of a given company that has publicly traded securities.  Among other things, transfer agents issue and cancel certificates to reflect changes in ownership, serve as the company's intermediary for payouts, exchanges, or mailings, and handle lost, destroyed or stolen certificates.  Transfer agents also, when appropriate, remove the "restricted" legend from securities. 

A Rule 144 Seller's Representation Letter, or "Seller's Representation Letter," is a letter to a transfer agent to establish certain facts underlying a legal opinion that the securities at issue can be sold publicly pursuant to Rule 144.  The transfer agent relies on the Seller's Representation Letter in determining whether to remove the restricted legend from a security.

Over-the-Counter Securities and OTC Markets Group 

Over-the-counter ("OTC") securities are securities that are traded between two counterparties outside of a formal securities exchange.  OTC Markets Group ("OTC Markets") is a company headquartered in New York, New York that provides price and liquidity information for OTC securities.

OTC Markets requires issuers seeking to be quoted on certain tiers of OTC Markets to hire a licensed attorney to review company records and submit a letter to OTC Markets (an "OTC Markets Attorney Letter") regarding whether information publicly disclosed by the issuer is in compliance with the condition in SEC Rule 144 governing the public information available to investors about the issuer.  OTC Markets relies on the OTC Markets Attorney Letter to determine whether an issuer's security may be quoted on OTC Markets.  OTC Markets Attorney Letters are available to the public on the OTC Markets website. 

The Scheme to Defraud 

From at least in or about 2011 through at least in or about September 2018, RUBIN and CRAFT, the defendants, participated in a fraudulent scheme in which CRAFT falsely represented that he had undertaken certain legal work in connection with Seller's Representation Letters, OTC Markets Attorney Letters, and S-1 Opinion Letters, all of which enabled the relevant securities to be sold to the investing public.  In addition, in connection with the securities of certain issuers, RUBIN, the defendant, falsely represented that he was an attorney in Seller's Representation Letters and OTC Markets Attorney Letters, all of which enabled the relevant securities to be sold to the investing public.  The false representations were in letters pertaining to over a dozen companies.

In a Complaint filed in SDNY, the SEC charged Rubin and Craft with violations of the antifraud provisions of the Securities Act and the Securities Exchange Act. Without admitting or denying the SEC's allegations, Craft consented to a bifurcated settlement that, subject to court approval, permanently enjoins him from similar violations and permanently prohibits him from participating in any offering of a penny stock. As alleged in part in the SEC Release:

[F]rom December 2015 to July 2018, Rubin, who was disbarred in 1995, continued to fraudulently practice securities law by submitting at least 128 attorney opinion letters that allowed microcap stock issuers' securities to be purchased by and sold to the investing public. The complaint alleges that Rubin signed certain letters, falsely claiming to be an attorney, and that he drafted other letters for Craft's signature. The complaint alleges that Craft signed or permitted the use of his name and signature on at least 30 letters that falsely stated he had performed substantive work to formulate the opinions in those letters

In a Complaint filed in the United States District Court for the District of South Carolina, the SEC alleged that SCANA Corp. and its subsidiary, South Carolina Electric & Gas Co. ("SCE&G"), former Chief Executive Officer Kevin B. Marsh and former Executive Vice President Stephen A. Byrne had 
misled investors by claiming that a project to build two nuclear units would qualify the company for more than $1 billion in tax credits despite allegedly knowint that the project was behind schedule and unlikely to qualify for the tax credits. Without admitting or denying the allegations, SCANA and SCE&G agreed to a permanent injunction and to pay $112.5 million in disgorgement plus prejudgment interest, which will be deemed satisfied by SCANA and SCE&G's settlement payments in related rate payer and shareholder litigation; and, further, SCANA agreed to pay a $25 million penalty.  The SEC's case against Marsh and Byrne is  ongoing.

FINRA Amends Its Equity Trade Reporting Rules Relating to Timestamp Granularity / Effective Date: November 15, 2021 (ADF and TRFs) November 14, 2022 (ORF) (FINRA Notice to Members 20-41)
As set forth in the "Summary" portion of the FINRA NTM [Ed: footnote omitted]:

FINRA has amended its rules to require firms to report time fields in trade reports submitted to a FINRA equity trade reporting facility (or FINRA Facility) using the same timestamp granularity that they use when reporting to the Consolidated Audit Trail (CAT). Once the amendments are effective, firms that report time on CAT order execution events in increments finer than milliseconds must report to the FINRA Facilities in such finer increment- up to nanoseconds. The effective dates of the amendments, along with the schedule for publication of updated technical specifications and testing . . .
An unregistered, associated person makes a couple of phone calls to his firm's affiliated insurance company. During the calls, the associated person pretends to be two individuals attempting to complete their whole life insurance applications. Why is the associated person impersonating the applicants? Good question. Actually a great question. The answer is likely found in a combination of stupidity and over-the-top customer service. For FINRA, the solution is a fine and suspension. Sometimes, all that you can do is say a prayer for the pretender, who started out so young and strong, only to surrender.