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Securities Industry Commentator by Bill Singer Esq

March 24, 2021


Request to amend Financial Industry Regulatory Authority (FINRA) Rules 12904 and 13904 to allow FINRA to cease publication of expunged arbitration awards and to redact identifying information in expunged arbitration awards (Public Petition for Rulemaking on SEC.gov)

Schwab Sued Over Allegedly Malfunctioning Order System (BrokeAndBroker.com Blog)


http://www.brokeandbroker.com/5763/finra-loneliness/
As I have written in the past, and with some frequency, I am no fan of the FINRA Investor Education Foundation. Ultimately, the Foundation may have been well-intended but my guess is that the core motivation was publicity. You know, how can we burnish the name of "FINRA?" Oh, for starters, let's set up something to do with something nebulous -- any suggestions? Oh, that's a good one, lemme write that down "investor education." Yes, I am a cynic when it comes to any company's efforts to create a foundation. The way I judge the sincerity of the undertaking is by its deeds. In that aspect, the FINRA Investor Education Foundation fails. Repeatedly.

https://www.justice.gov/usao-edny/pr/brooklyn-man-charged-long-running-international-insider-trading-scheme
Jason Peltz was charged in a 10-count indictment filed in the United States District Court for the Eastern District of New York 
https://www.justice.gov/usao-edny/press-release/file/1379176/download with securities fraud, money laundering and tax evasion, among other offenses, including related conspiracy offenses. As alleged in part in the DOJ Release:

[B]etween November 2015 and October 2020, Peltz and his co-conspirators engaged in a fraudulent scheme by which they obtained MNPI about publicly traded companies from a variety of sources, including a corporate insider and a reporter at a financial news organization (the "Reporter").  Peltz and his co-conspirators allegedly used the MNPI to profitably trade in securities in advance of public disclosure through news articles.   For example, the brokerage accounts of members of the conspiracy made purchases of certain companies' securities shortly before significant corporate events, such as announcements of potential mergers or acquisitions that sometimes resulted in near-immediate increases in the companies' share prices.  The co-conspirators' brokerage accounts sold the shares at a later date in close proximity to the relevant corporate events or announcements of the events.  To prevent scrutiny of their communications, Peltz and his co-conspirators often communicated via the use of smartphone applications with end-to-end encryption.  Peltz also used prepaid cellular telephones, known as "burner" phones, to prevent scrutiny of his communications.

In February 2016, Peltz obtained MNPI from an insider at Ferro Corporation ("Ferro") about a potential takeover offer (the "Ferro Takeover Bid").  Peltz used that MNPI to (1) profitably trade in Ferro in the brokerage accounts of two co-conspirators, (2) tip certain other co-conspirators, each of whom also profitably traded on MNPI about the Ferro Takeover Bid, and (3) tip the Reporter, who wrote an article making public the news of the Ferro Takeover Bid, which resulted in an increase in the price of Ferro's stock.  Peltz and the Ferro insider each received significant financial benefits from other co-conspirators shortly after Peltz traded in those co-conspirators' brokerage accounts.

Following his profitable insider trading in Ferro, Peltz continued to cultivate his relationship with the Reporter and obtained information about the Reporter's upcoming news articles.  On multiple occasions thereafter, Peltz traded in the brokerage accounts of co-conspirators shortly before the publication of articles by the Reporter about publicly traded companies.  The articles were often followed by increases in the prices of the companies' stock.

During the course of the conspiracy, Peltz received large payments from co-conspirators, as well as other benefits, as payment for his trading activity.  Peltz received these payments in corporate and nominee bank and credit card accounts, in order to conceal his income from the IRS.  Despite receiving such payments, in 2017 Peltz falsely swore under penalty of perjury to the IRS that he had been unemployed since December 2015 and had no income.

https://www.justice.gov/usao-sdny/pr/serial-fraudster-sentenced-over-three-years-prison-scamming-elderly-victims-out
Michael Pizarro a/k/a "Eric Miller" pled guilty in the United States District Court for the Southern District of New York to a one-count Information, and he was sentenced to 40 months in prison plus three years of supervised release and ordered to pay $278.853.37 in forfeiture and restitution. As alleged in part in the DOJ Release:

Beginning in at least February 2017 through July 25, 2019, PIZARRO called the Victims, many of whom were more than 70 years old, and told them that his name was "Eric Miller" and that he was calling on behalf of a company named "National Grants."  PIZARRO informed the Victims that they had been approved for a government grant, which was being held in escrow at an account with the "World Bank" in Washington, D.C.  Before the funds could be released, however, the Victims would have to pay a registration fee.  In fact, none of the Victims had been approved for a grant, the grants did not exist, and no Victim ever received any funds.

In April 2018, PIZARRO was charged in New York Supreme Court in connection with his involvement with National Grants from October 2015 through January 2017.  PIZARRO pled guilty to those charges in December 2018 and was awaiting sentencing when he was arrested in connection with this scheme on May 2, 2019.  After he was released on bail in connection with the federal charges, PIZARRO continued to seek contact information for additional Victims in furtherance of the scheme.  In total, not including the conduct charged in New York Supreme Court, PIZARRO defrauded the Victims out of approximately $270,000.

SEC Charges Unregistered Brokers Who Sold Equialt Securities to Retail Investors (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25059.htm?utm_medium=email&utm_source=govdelivery
In a Complaint filed in the United States District Court for the District of Arizona https://www.sec.gov/litigation/complaints/2021/comp25059.pdf, the SEC charged charges Jason P. Wootten, Ronald Frank Stevenson, and their companies with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act and the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. As alleged in part in the SEC Release:

The Securities and Exchange Commission today announced charges against Jason P. Wootten and Ronald Frank Stevenson, two Arizona-based individuals, and the companies they controlled and operated, for registration violations in connection with their unlawful sales of securities of real estate funds managed by Florida-based EquiAlt LLC (the Funds) to retail investors. The SEC previously filed an enforcement action against EquiAlt LLC and the Funds, EquiAlt's CEO Brian Davison, and its Managing Director Barry Rybicki on February 11, 2020, alleging that they were operating a Ponzi scheme which raised more than $170 million from approximately 1,100 investors in 35 states.

According to the SEC's complaint, between approximately October 2016 and February 2020, Wootten and his company, Family Tree Estate Planning, LLC, sold over $32 million of the Funds' securities to more than 100 investors. Wootten, through Family Tree Estate Planning, received approximately $3.7 million in commissions from EquiAlt, despite neither Wootten nor Family Tree being registered as a broker-dealer. The complaint also alleges that, between approximately February 2015 and January 2020, Stevenson and his company, American Financial Security, LLC, sold over $19 million of the Funds' securities to more than 100 investors. Stevenson, through American Financial Security, received approximately $1.7 million in commissions, despite neither Stevenson nor American Financial Security being registered as a broker-dealer.

Request to amend Financial Industry Regulatory Authority (FINRA) Rules 12904 and 13904 to allow FINRA to cease publication of expunged arbitration awards and to redact identifying information in expunged arbitration awards (Public Petition for Rulemaking on SEC.gov)
https://www.sec.gov/rules/petitions/2021/petn4-770.pdf
Pickard, Djinis, & Pisarri law partner Paul J. Bazil petitioned the SEC to allow the cessation/redaction of publication of arbitration awards subject to expungements. In his petition, Bazil concludes that:

Information provided to investors about their broker-dealer's or representative's
arbitration awards is supposed to be derived from information available on the CRD.
FINRA's past rules and policies show that FINRA believes information accessible to
investors should be reliable and consistent across databases. Currently, this is not the
case for current and former FINRA members or associated persons with expunged
arbitration awards. FINRA's stated inability to remove or redact an arbitration award
from the AAO for any reason, once published, is unfair to individuals who have gone
through the expungement process, is unfair to investors who have no indication that the information they are reviewing has been deemed false and is no longer applicable, and challenges basic notions of fairness and justice when other types of final regulatory actions, such as disciplinary settlements, can be redacted or removed from publication but expunged arbitration awards cannot. The rule amendments proposed above would not only be consistent with previous FINRA policies, but would also protect investors by ensuring the public has access to the most accurate information available.

http://www.brokeandbroker.com/5760/schwab-order-system/
It's not just Robinhood. It's not just GameStop. It's not all the fault of Reddit or social media. To the contrary, Wall Street expanded to a point where its operational capacity doesn't keep pace. In the rush to cut commissions, expand online trading, and cater to those eager to "play" the stock market, brokerage firms are frequently overwhelmed by surges in volume or computer outages. Sure, there are times when it's just the nature of technology. More recently, a finger might even be pointed at COVID. But where are the industry's regulators? Where are the consequences for a lack of planning or a lack of funding or a lack of management? In a recent lawsuit against Schwab, a customer raises many of these issues.

http://www.brokeandbroker.com/5751/11cir-ohio-national/
Ohio National entered into contracts with various broker dealers whereby the former compensated the latter for sales of variable annuities. The commission paid by Ohio National to a brokerage firm is undertaken pursuant to the terms of a Selling Agreement. The problem with that arrangement is that the brokerage firms sell through human beings, who are registered representatives. What happens when Ohio National terminates a Selling Agreement and stops paying commissions to the brokerage firm? Who is supposed to pay the reps their commissions? Who should they sue?

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