Securities Industry Commentator by Bill Singer Esq

December 15, 2020


http://www.brokeandbroker.com/5593/peirce-finra-due-process/
In numerous other statements and comments she has published over the years, SEC Commissioner Hester Peirce's leitmotif is an acknowledgement that many regulatory concerns and goals are justified; however, Peirce pushes back against the inroads of the Nanny State and is unapologetic in defending individual rights and liberties. She recognizes the value of a fair regulatory agenda but is not shy about questioning the costs, both financial and from a libertarian perspective. As Commissioner Peirce often argues, it is not government's role or place to ensure that every investment we make is profitable. Virtually no successful trader exists who has not been forced to eat losing trades and learn the invaluable lessons that failure teaches. Inherent in all investments is the success of the buyer at the loss of the seller, or vice versa -- it is an arena where the zero-sum game plays out in each and every trade. Wall Street is not the place for awarding Participation Certificates. The regulation of Wall Street is not supposed to be an exercise in social engineering. 

As I have often set forth in my own published works, there is a dynamic and tension in regulation. We must always exalt investor protection over the industry's desires for profit. Wall Street is besieged by criminals and fraudsters who prey on the vulnerable and exact a horrific cost when it comes to the integrity of the markets. As such, both investors and industry participants have a common interest in the fair and effective regulation of Wall Street.  As a long-time and vocal advocate for Wall Street reform, I am all to aware of the carnage caused by those who prey upon the elderly, the uneducated, and the vulnerable.  Unfortunately, ineffective rules and inept regulators achieve nothing worthwhile. What is always needed is effective regulation via fair and thoughtful rulemaking and enforcement. In policing the industry, Due Process is not an inconvenience, and the constitutional rights of investors and market participants are not obstacles to be circumvented by otherwise well-meaning but misguided politicians and regulators. That is a belief that Commissioner Peirce and I share.

https://www.sec.gov/news/press-release/2020-316
The SEC awarded over $300,000 to a whistleblower, who became aware of the potential securities law violations in connection with audit-related responsibilities and who was subject to an exception to the SEC's ineligibility rules. As alleged in part in the SEC Order Determining Whistleblower Award
https://www.sec.gov/rules/other/2020/34-90656.pdf [Ed: footnotes omitted]:

In reaching this determination, we have considered the application of Exchange Act Rule 21F-4(b)(4)(iii)(B), which excludes information from being credited as the whistleblower's "independent knowledge" or "independent analysis" -- and hence original information -- if the whistleblower "obtained the information because" the whistleblower was "[a]n employee whose principal duties involve compliance or internal audit responsibilities. . . ." Here, the record reflects that Claimant became aware of the potential securities law violations in connection with Claimant's audit-related responsibilities REDACTED However, such claimants may learn original information and be eligible for whistleblower awards if they had "a reasonable basis to believe that the relevant entity is engaging in conduct that will impede an investigation of the misconduct." . . .

Bill Singer's Comment: I personally represented the compliance professional awarded about $1.5 million as disclosed in "SEC Announces Million-Dollar Whistleblower Award to Compliance Officer" (SEC Release / April 22, 2015)
https://www.sec.gov/news/pressrelease/2015-73.html

Ex-Skyworks Solutions Semiconductor Engineer Sentenced to 18 Months in Federal Prison for Committing Insider Trading (DOJ Release)
https://www.justice.gov/usao-cdca/pr/ex-skyworks-solutions-semiconductor-engineer-sentenced-18-months-federal-prison
Yuh-Yue Chen, 53, pled guilty in the United States District Court for the Central District of California to one count of securities fraud; and he was sentenced to 18 months in prison and ordered to pay a $6,000 fine. As alleged in part in the DOJ Release:
        
          Chen was an electrical engineer at Skyworks Solutions Inc., a publicly traded Woburn, Massachusetts-based semiconductor company with a branch office and design center in Irvine. During the spring and summer of 2014, Chen bought Skyworks stock and options based on confidential information not yet available to the public.

          Specifically, Chen used his employee security badge to gain unauthorized access to the company's restricted office area for the accounting and financial staff. Once inside, Chen went through the desks and work areas to find the company's non-public earnings reports. Using this confidential information, Chen bought large amounts of Skyworks securities. Once Skyworks released its earnings reports to the public, Chen sold his Skyworks securities for a profit.

          In September 2014, Chen left the United States for Taiwan five days after two Skyworks employees caught him rifling through company documents in the restricted accounting and finance office, according to court papers. Soon afterward, Skyworks fired him.

          Through this insider trading scheme, Chen received more than $700,000 in illegal profit.

          In a lawsuit brought by the Securities and Exchange Commission, Chen was ordered to pay a $739,959 judgment to the SEC stemming from his insider trading scheme while he was employed at Skyworks Solutions.

Federal Court Orders Interdealer Broker to Pay $7 Million for Deceptive Trading Practices in the FX Options Markets / Former CEO and Desk Head Ordered to Pay $500,000 Each for Supervision Failures (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8335-20

In a Consent Order issued by the United States District Court for the Southern District of New York
https://www.cftc.gov/media/5446/enftfsicapconsentorder120420/download, a finding was entered that TFS-ICAP, its former Chief Executive Officer, Ian Dibb, and its former Emerging Markets desks head Jeremy Woolfenden failed to supervise diligently TFS-ICAP broker conduct. Defendants Dibb and Woolfenden are each subject to a $500,000 civil monetary penalty for their individual supervisory failures and have agreed to not apply for registration or claim exemptions from registration with the CFTC in any capacity, or engage in any activity requiring such registration or exemption from registration with the CFTC, for five years. TFS-ICAP LLC and TFS-ICAP Ltd agree to pay a $7 million civil penalty. In part the CFTC Release alleges that:

[B]etween January 2014 and August 2015, TFS-ICAP brokers represented to U.S.-based bank clients that there were bids or offers for an FX option at a particular level when, in fact, no trading institution had bid or offered the option at that level. The order also finds that TFS-ICAP brokers on the Emerging Markets desks in both London and New York communicated to one or more U.S.-based bank clients that trades had occurred when a trade had not, in fact, occurred. In the FX options industry these practices are referred to as "flying" prices and "printing" trades. TFS-ICAP admits this conduct violated provisions of the CEA and CFTC regulations, which prohibit fraudulent and deceptive practices, and posting non-bona fide prices.

With respect to the conduct of Dibb, a CFTC registrant, the order finds that he was ultimately responsible for ensuring that TFS-ICAP broker conduct was in compliance with the law. Mr. Woolfenden, who is also a CFTC registrant, had supervisory responsibility over all TFS-ICAP brokers on the Emerging Markets desks in New York and London. Both Dibb and Woolfenden were responsible for maintaining and enforcing a reasonable system of internal supervision.

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, Jay Clint Tomlinson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jay Clint Tomlinson was first registered in 1995 and since 2013, he was registered with R.F. Lafferty. Under "Relevant Disciplinary History," the AWC alleges that:

In November 2012, Tomlinson entered into an AWC pursuant to which he was suspended for 30 days in all capacities and fined $7,500 for failing to timely provide documents and information to FINRA that were requested pursuant to FINRA Rule 8210, in violation of FINRA Rules 8210 and 2010.1 
= = = = =
See Brimberg & Co. and Jay Clint Tomlinson, AWC No. 2011025773503 (Nov. 2012). 

In accordance with the terms of the AWC, FINRA deemed that Tomlinson had violated NASD Rule 2510(b) and FINRA Rules 4511 and 2010; and the self-regulator imposed upon him a $7,500 fine and a three month suspension from association with any FINRA member firm in any capacity.  The AWC alleges that:

Exercising Discretion Without Written Authorization

In late September 2015, Tomlinson took over the management of three customer accounts that had previously been managed by a third-party investment advisor who utilized a high-frequency, intra-day trading strategy focused on pharmaceutical stocks. Tomlinson continued this trading strategy, but, unlike the investment advisor, Tomlinson did not have written authorization from the customers, or written acceptance from R.F. Lafferty, to exercise discretion in the accounts. To the contrary, at all relevant times, Tomlinson was subject to a plan of heightened supervision by his firm that forbade him from placing discretionary trades in customer accounts. Also unlike the investment advisor, who acted pursuant to a fixed-fee arrangement, Tomlinson charged a commission for each trade placed in these three accounts. 

From October 2015 through April 2016, even though he had neither written authorization from his customers nor his firm's written acceptance to place discretionary trades, Tomlinson placed 379 discretionary trades in the accounts of these three customers. Tomlinson typically purchased and/or sold the same securities on the same day, often multiple times per day. While his customers understood that Tomlinson would pursue this high-frequency, intra-day trading strategy in their accounts, Tomlinson did not seek approval from his customers prior to placing each trade. Rather, Tomlinson placed trades and later updated the customers about the results of his trading. 

. . .

Causing the Firm to Maintain Inaccurate Books and Records 

. . .

From October 2015 through April 2016, Tomlinson caused R.F. Lafferty to maintain inaccurate order memoranda for each of the 379 trades he placed on a discretionary basis. Tomlinson failed to mark any of those transactions as having been entered pursuant to the exercise of discretion. In addition, Tomlinson affirmatively mismarked order tickets for 14 of those trades. Specifically, Tomlinson mismarked the order tickets for the 14 trades as "unsolicited" when, in fact, they were not unsolicited orders. As a result, Tomlinson caused R.F. Lafferty to make and maintain inaccurate order memoranda in violation of Section 17(a) of the Exchange Act, Rule 17a-3 thereunder, and FINRA Rule 4511. 

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, Michael T. Norvet submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that 

On June 19, 2017, Titan Securities (CRD No. 131392) filed an initial non-registered fingerprint form for Norvet identifying his employment start date with the firm as November 12, 2007. Norvet was associated with the firm in an unregistered capacity. 

On January 25, 2019, Titan Securities filed a non-registered fingerprint amendment form disclosing that it terminated Norvet's employment with the firm that day. Norvet is not currently registered or associated with a FINRA member firm. However, he remains subject to FINRA's jurisdiction pursuant to Article I, Section (rr) and Article V, Section 4 of FINRA's By-Laws. 

Norvet does not have any relevant disciplinary history. 

In accordance with the terms of the AWC, FINRA deemed that Norvet had "contravened Section 17(a)(2) of the Securities Act of 1933 (the Securities Act), thereby violating FINRA Rule 2010"; and the self-regulator imposed upon him $10,000 fine and a five month suspension from associating with any FINRA member firm in any capacity. The AWC alleges that:

The Hall Arts and Bishop's Lodge Offerings 

During the relevant period, Norvet and his partner (Representative 1) were the general and managing partners of Evolution Real Estate LLC, which created Hall Arts, Bishop's Lodge, and other limited partnerships. These limited partnerships raised money for different real estate projects. 

Norvet and Representative 1 were responsible, as managing partners, for managing the business and affairs of Hall Arts and Bishop's Lodge on behalf of the investors, who were limited partners. Norvet and Representative 1 also had exclusive control of Hall Arts' and Bishop's Lodge's bank accounts. Norvet and Representative 1 were responsible for, and approved the content of, the PPMs for Hall Arts and Bishop's Lodge. 

The use of proceeds sections in the Hall Arts and Bishop's Lodge PPMs stated that, after selling commissions, the amount raised would be used to fund the respective real estate projects. Both PPMs also stated that the "General Partner must not use the Partnership's assets or permit another to use the Partnership's assets in any manner except for the Partnership's exclusive benefit." Notwithstanding these limitations, Norvet mistakenly believed that he had the authority to transfer money between the partnerships. Neither PPM disclosed that partnership assets could be used for the benefit of another partnership. 

Approximately $30 million in Hall Arts limited partnership units, representing ownership interests in the entity, were sold between July 2016 and August 2019 to more than 350 investors. Approximately $19.5 million in Bishop's Lodge units were sold between January 2017 and December 2018 to more than 350 investors. 

Norvet's Negligent Misrepresentations and Omissions

 . . .

Norvet negligently failed to inform the investors in Hall Arts that money had been transferred out of the project to fund Bishop's Lodge. The transfers to Bishop's Lodge were not identified as a use of proceeds in the Hall Arts PPM and were not otherwise disclosed, thus making Norvet's representations to the Hall Arts investors about the use of Hall Arts's funds inaccurate and misleading. Additionally, Norvet negligently included the value of the transfers from Hall Arts in two supplemental PPMs issued by Bishop's Lodge, which as a result overstated the amounts raised by Bishop's Lodge during the periods covered by the supplemental PPMs. 

Between January and May 2017, Norvet also used approximately $224,000 of proceeds from the Hall Arts and Bishop's Lodge offerings to pay certain expenses of another unrelated partnership. These funds were later returned to Hall Arts and Bishop's Lodge by the offering's sponsor. This use of proceeds was not identified in the Hall Arts or Bishop's Lodge PPMs, and Norvet's negligent failure to disclose them made his other representations to the investors in Hall Arts and Bishop's Lodge inaccurate and misleading.  

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, James A. Conant submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that James A. Conant entered the industry in 1993, and was first registered in December 2001 with MML Investors Services, LLC. The AWC alleges that Conant "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA deemed that Conant had violated Article V, Section 2(c) of FINRA's By-Laws and FINRA Rules 1122 and 2010; and the self-regulator imposed upon him six-month suspension from associating with any FINRA member firm in any capacity. No fine was imposed upon Conant based upon his financial condition and demonstrated inability to pay. The AWC alleges that:

Between 2010 and 2018, Conant engaged in a pattern of willfully failing to report disclosable events. Specifically, Conant willfully failed to timely disclose 13 liens and one judgment after MML had previously placed him on special supervision for previously failing to timely disclose tax liens. The thirteen liens and one judgment described below all constituted material information. 

On December 1, 2015, Conant amended his Form U4 to disclose four IRS liens and one State of Georgia tax lien. The IRS tax liens disclosed were a March 29, 2010, lien for $14,739, a January 23, 2012, lien for $86,676, a March 1, 2013, lien for $22,381, and a September 15, 2014, lien for $46,410. The April 6, 2011, Georgia tax lien was for $11,309. Conant became aware of the tax liens shortly after they were filed; however, he willfully failed to update his Form U4 to disclose the liens within 30 days of becoming aware of them. 

In January 2017, Conant amended his Form U4 to disclose two IRS liens, a December 18, 2015, lien for $27,435 and a January 21, 2016, lien for $29,064. Conant became aware of the tax liens shortly after they were filed; however, he willfully failed to update his Form U4 to disclose the liens within 30 days of becoming aware of them. 

On September 18, 2018, Conant made six Form U4 amendments. The amendments disclosed four Georgia tax liens, a civil judgment, and an IRS lien. The Georgia tax liens were a January 1, 2018, lien for $272, a January 1, 2018, lien for $11,814, a January 1, 2018, lien for $38,416, and a May 17, 2018, lien for $24,480. The October 3, 2017, civil judgment was for $8,501. The IRS tax lien was dated January 18, 2018, in the amount of $76,153. Conant became aware of the tax liens shortly after they were filed and the civil judgment shortly after it was entered; however, he willfully failed to update his Form U4 to disclose the liens and judgment within 30 days of becoming aware of them. 

On November 15, 2018, Conant made a Form U4 amendment, disclosing an August 30, 2018, Georgia tax lien for $15,470. Conant became aware of the lien shortly after it was filed; however, he willfully failed to update his Form U4 to disclose the lien within 30 days of becoming aware of it.

The AWC asserts that:

[O]n August 14, 2019, MML submitted a Uniform Termination Notice for Securities Industry Registration (Form U5) Conant's behalf, which stated that Conant had been discharged because the firm was "no longer willing to support special supervision" related to a lack of compliance with timely reporting liens and judgements.

Finally, the AWC admonishes that:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4 on 14 occasions, 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.