Securities Industry Commentator by Bill Singer Esq

November 19, 2021

Veteran Stockbroker Sues For Unjust Termination Involving Sales Goals and Outside Business Activities ( Blog)

In re: January 2021 Short Squeeze Trading Litigation / Antitrust Actions (Opinion SDFL)

Six defendants indicted for fraud that included targeting elderly citizens (DOJ Release)

McKinsey Affiliate to Pay $18 Million for Compliance Failures in Handling of Nonpublic Information (SEC Release)

SEC Charges Promoter with Conducting Cryptocurrency Investment Scams (SEC Release)

SEC Denies Award To Whistleblower Claimant and Permanently Bars Further Participation in the Whistleblower Program
Order Determining Whistleblower Award Claims

SEC Announces Enforcement Results for FY 2021 / Agency Brought Significant Actions in Traditional and Emerging Areas; Whistleblower Program Surpassed $1 Billion in Awards (SEC Release)

SEC Proposes Updates to Electronic Recordkeeping Requirements / Amendments Will Help Modernize How Broker-Dealers Preserve Electronic Records and Enhance the Requirements for Security-Based Swap Entities (SEC Release)

Worms and Dinosaurs: Statement on the Proposed Amendments to Modernize How Broker-Dealers Preserve Electronic Records (Statement by SEC Commissioner Hester M. Peirce)

SEC Proposes Rule to Provide Transparency in the Securities Lending Market Proposed Rule Would Increase Availability of Information Regarding Securities Lending Transactions (SEC Release)

The Ex-Wife, the Ex-Husband Stockbroker, the Two FINRA Arbitrations, the Stale Case, the Default Case, and the Appeal ( Blog)

Two of Three FINRA Arbitrators Ironically Disappear In Unexplained Expungement Award ( Blog)

DreamFunded Dream Faded At FINRA And SEC Declines to Stay Expulsions and Bars ( Blog)
Today's reported FINRA intra-industry arbitration is somewhat sad in nature. We are presented with the plight of a nearly four-decade industry veteran, who seems to have run afoul of a somewhat ticky-tacky bit of alleged misconduct. Frankly, his troubles may have been prompted by something as relatively minor as a failure to disclose in writing what he believed was already known by a compliance officer. Of course, Wall Street's rules are nothing but ticky-tacky at times, and the failure to dot an "i" or cross a "t" is the grist on which the industry's compliance and regulatory mills turn.

In re: January 2021 Short Squeeze Trading Litigation / Antitrust Actions (Opinion SDFL, 21-MD-2989)
The SDFL granted Defendants' Motion to Dismiss the Antitrust Tranche Complaint and dismissed without prejudice the Corrected Consolidated Class Action Complaint.
As set forth in the Opinion's "Background" [Ed: footnotes omitted]:

This putative class action is brought on behalf of individual investors (the "Retail Investors") who suffered losses as a result of Defendants' response to a "short squeeze" - a situation in which stocks or other assets rise sharply in value, distressing short positions. (See id. ¶ 12). This short squeeze occurred in late January 2021, as the Retail Investors rapidly purchased the Relevant Securities,4 exposing those with short positions in the Relevant Securities to "massive potential losses[.]" (Id. ¶ 7 (alteration added); see id. ¶ 6). According to Plaintiffs, Defendants conspired to prevent these losses by "artificially constrict[ing] the price appreciation of the Relevant Securities," in violation of the Sherman Act, 15 U.S.C. § 1. (CCAC ¶ 16 (alteration added); see id. ¶¶ 494-507)

In summarizing its ruling, SDFL states that:

What factual allegations are left standing that support a plausible inference of a conspiracy? 

Well, there are none - other than an allegation of parallel conduct - with respect to Defendants, E*Trade, Interactive Brokers, Apex, ETC, and PEAK6. Each of these Defendants therefore must be dismissed because "an allegation of parallel conduct and a bare assertion of conspiracy will not suffice" to state a section 1 claim. Twombly, 550 U.S. at 556. 

That leaves Robinhood and Citadel Securities. High-level executives at these firms exchanged various vague and ambiguous emails immediately before and after Robinhood imposed trading restrictions on the Relevant Securities on January 28, 2021. These emails set up telephone discussions between the executives, the substance of which is unknown to Plaintiffs. Admittedly, these emails may be somewhat suspicious given the participants and their timing. But are a few vague and ambiguous emails between two firms in an otherwise lawful, ongoing business relationship enough to "nudge[] [Plaintiffs'] claims across the line from conceivable to plausible[?]" Id. at 570 (alterations added). The Court thinks not. 

Accordingly, the CCAC is dismissed.
In an Indictment filed in the United States District Court for the Northern District of Georgia, Vikas Mehta, Walter Valdivia, Pradip Parikh, Jaime Salas, Alpesh Patel, and Darash Shah were charged with wire fraud conspiracy, wire fraud, money laundering conspiracy, and money laundering. As alleged in part in the DOJ Release:

[T]he defendants allegedly participated in a conspiracy to defraud victims in the United States, many of whom are elderly. The conspiracy began with either robocall recordings purporting to be from a government agency or with emails purporting to be from legitimate companies. The robocall recordings and email messages provided callback numbers. When individuals called those numbers, they were connected to alleged scammers - some of whom were located in India. During these telephone calls, the scammer pretended either to work for the United States government or to represent a company.

When the scammer pretended to work for a government agency, the scammer would tell the victim that they were in some type of trouble. Oftentimes, they pretended to be a Social Security Administration employee, claiming that the victim's Social Security Number was compromised in some way.  The scammer would then tell the victim that they needed to pay money immediately, or, if they did not, they would be arrested. The scammer sometimes used actual Social Security Administration employees' names to appear legitimate.

In those instances when the scammer claimed to work for a legitimate company, they reported that the victim was entitled to a company refund. The scammer often convinced the victim to download computer software that, unbeknownst to the victim, allowed the scammer to remotely access the computer. From there, the scammer manipulated the victim's bank accounts to make it appear that, when attempting to refund the victim his or her money, the scammer "accidentally" refunded too much, and thus, the victim now owed a "debt" to the company. If the victim did not pay back this perceived debt, they would face certain consequences.

Once the scammer on the telephone scared the victims, the scammer would instruct the victim on how to pay money. Sometimes the scammer directed the victim to withdraw cash, package the cash in shipping boxes, and deliver the package as instructed. Other times, the individual on the phone would tell the victim to obtain gift cards and provide the redemption code on the back of the card. Oftentimes, the individual on the phone would tell the victim to wire money to a particular bank account; withdraw their money for cashier's checks made payable to a specific company; or deposit cash directly into a specific company's bank account.

Without admitting or denying the findings in an SEC Order, MIO Partners Inc. (an affiliate of McKinsey & company) consented to the entry of a cease-and-desist order and a censure, and agreed to pay the $18 million penalty. As alleged in part in the SEC Release:

The SEC's order finds that McKinsey's affiliate MIO Partners Inc. was investing hundreds of millions of dollars in companies that McKinsey was advising. Certain McKinsey partners oversaw MIO's investment choices and also had access to material nonpublic information as a result of their McKinsey consulting work. These partners were routinely privy to confidential information like financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management at those companies.

According to the SEC's order, MIO did not have reasonably designed policies and procedures to address the dual roles for McKinsey consultants who were involved in MIO's investment choices. For example, the order cites an instance where a McKinsey partner's access to confidential information about MIO's investments in a company through a third-party manager created a risk that one of McKinsey's units could influence the company's Chapter 11 reorganization plan in a way that favored MIO's investment.
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged Ryan Ginster with violating the antifraud and registration provisions of the Securities Act and the Securities Exchange Act. As alleged in part in the DOJ Release:

[F]rom 2018 to 2021, Ginster raised approximately $3.6 million in Bitcoin through two online and Social Profimatic-that promised astronomical rates of return by falsely claiming returns through, amongst other activities, purported "cryptocurrency trading and advertising arbitrage." The complaint also alleges that Ginster deceived investors in both offerings about, among other things, how their funds would be used, because Ginster misappropriated at least $1 million of the funds raised to pay personal expenses, including tax payments, housing expenses, and credit card bills.
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending the:
  • denial of Whistleblower Awards to a Claimant in connection with eight Covered Actions; and 
  • that the Claimant be permanently barred from future participation in the Whistleblower Program.
The Claimant timely contested the denial; however, the Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

Claimant began submitting award applications to the Office of the Whistleblower ("OWB') in 2017 and since then has submitted over 1600 applications. Claimant bases the award claims in the Covered Actions on a single tip (with multiple supplements) concerning alleged tax violations. None of Claimant's submissions referenced any of the entities, individuals, organizations or companies identified in the Covered Actions nor did they identify any possible securities law violations. Each one was closed with a disposition of No Further Action and none were forwarded to Commission investigative staff. 
. . .

The Commission finds that the Claimant's award applications are frivolous or lacking a colorable connection between the submissions and the Commission actions for which Claimant has sought an award within the meaning of Rule 21F-8(e) of the Exchange Act. There is no relation between the information provided by Claimant and the Covered Actions. 

As such, pursuant to Rule 21F-8(e), the Commission permanently bars Claimant from participation in its Whistleblower Program because Claimant has filed three or more applications for award that are frivolous or fraudulent, or otherwise hinder the effective and efficient operation of the Whistleblower Program. Claimant has submitted over 1600 award applications that are unrelated to any of the claimed Covered Actions. Claimant's filing of frivolous claims has consumed considerable staff time and resources and has hindered the efficient operation of the Whistleblower Program. As such, we find it appropriate to permanently bar Claimant from the Commission's Whistleblower Program. This permanent bar applies to any pending applications from Claimant at any stage of the claims review process as well as to all future award claims. 
The Securities and Exchange Commission today announced that it filed 434 new enforcement actions in fiscal year 2021, representing a 7 percent increase over the prior year. Seventy percent of these new or "stand-alone" actions involved at least one individual defendant or respondent. The new actions spanned the entire securities waterfront, including against emerging threats in the crypto and SPAC spaces. For example, the SEC charged a company for operating an unregistered online digital asset exchange, charged a crypto lending platform and top executives alleging a $2 billion fraud, and brought an action against a special purpose acquisition company, its merger target, top executives, and others for alleged misconduct in a SPAC transaction. The SEC's whistleblower program was critical to these efforts and had a record-breaking year.

The agency filed 697 total enforcement actions in fiscal year 2021, including the 434 new actions, 120 actions against issuers who were delinquent in making required filings with the SEC, and 143 "follow-on" administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders. This represented a 3 percent decrease over the total actions filed in fiscal year 2020.
The SEC's broker-dealer electronic recordkeeping rule requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format (otherwise known as write once, read many). The proposed amendments would add an audit-trail alternative. Under this alternative, electronic records could be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased. The audit-trail alternative is designed to provide broker-dealers with greater flexibility in configuring their electronic recordkeeping systems so they more closely align with current technologies and practices while also protecting the authenticity and reliability of original records.

The proposed amendments would require nonbank SBSDs and MSBSPs to preserve electronic records using either of the above alternatives that would be available to broker-dealers. The amendments also would require broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format. This proposal is designed to facilitate examinations and make them more efficient.

Worms and Dinosaurs: Statement on the Proposed Amendments to Modernize How Broker-Dealers Preserve Electronic Records (Statement by SEC Commissioner Hester M. Peirce)

Technology changes faster than regulations do.  An example of this phenomenon is the electronic recordkeeping rule for broker-dealers[1] the Commission proposed to update this week.[2]  We proposed to amend the broker-dealer recordkeeping rules to eliminate the write-once/read-many ("WORM") requirement that has proven outdated and unnecessarily burdensome for firms to implement and maintain.  This rule, at twenty-five, is a dinosaur.[3]  WORM is intended to ensure that records are not altered or erased so that regulators have an accurate picture of firm's activities.  New technologies-if permitted-could give regulators even better insight into what firms do.

Technological change is a constant in our financial markets, and it generally redounds to the benefit of investors, firms, markets, and regulators.  The firms serving investors leverage new technologies to provide cheaper, more efficient, and more user-friendly services and products.  Firms use technology to monitor their own activities and to assist in regulatory oversight.

Regulators need to understand both the risks and benefits of new technology.  We need to ensure that our regulatory framework is capable of accommodating technological change while continuing to advance the regulatory mandate that Congress has entrusted to us.  Rules that, by text or interpretation, lock firms into using a specific technology well beyond that technology's "sell-by" date or that unduly delay prudent adoption of new technologies should not stand.

In the quarter-century since the Commission adopted rules imposing the WORM requirement on broker-dealers, the information technology landscape has changed significantly.  Indeed, it was apparent almost two decades ago that the rules, which mandate static recordkeeping, were unnecessarily restrictive.[4]  Broker-dealers increasingly use dynamically generated content to provide information to internal users and to their customers.  Investors in an increasingly liquid market have come to expect real-time information about market prices and account balances.  Broker-dealers cannot use static records for their own operational and compliance purposes, so many firms have two systems.  Requiring broker-dealers to maintain a wholly separate, redundant, ossified recordkeeping system that can capture only static snapshots has provided questionable benefits at great cost.

I have enjoyed working with the staff on this issue over the past few years and appreciate the hard work and careful thought they put into crafting this proposal.  I look forward to comments from the public.  I particularly want to hear whether the system requirements that the proposed rule would impose are in fact technologically neutral.  Will the proposed rule be sufficiently flexible to enable firms to incorporate new technological developments in the coming years?  After all, we do not need any more WORMs or dinosaurs in our rulebook.

= = =

[1] The Commission also proposed to update electronic recordkeeping rules for security-based swap dealers and major security-based swap dealers.

[2] See Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Exchange Act Rel. No. 93614 (Nov. 18, 2021) available at

[3] The current rule was originally proposed in 1993 and adopted in January 1997.  See id. at 8 n.11.

[4] In 2003, the Commission issued an interpretation that was intended to ameliorate some of these concerns with the original rule.  See Electronic Storage of Broker-Dealer Records, Exchange Act Release No. 47806 (May 7, 2003), 68 FR 25281, 25282 (May 12, 2003).  These concerns persisted, however, leading several trade associations to file a petition for rulemaking in 2017.  See Petition 4-713 (Nov. 14, 2017) filed by the Securities Industry Financial Markets Association, Financial Services Roundtable, Futures Industry Association, International Swaps Derivatives Association, and Financial Services Institute available at
The SEC proposed Exchange Act Rule 10c-1, which states in its "Summary":

The Securities and Exchange Commission ("Commission" or "SEC") is proposing a rule to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association ("RNSA"). The proposed rule would also require that the RNSA make available to the public certain information concerning each transaction and aggregate information on securities on loan and available to loan.
Here we are, 2021, and we're going to discuss a FINRA arbitration filed in 2015. We got an ex-husband, who was a stockbroker. We got his ex-wife, who filed the lawsuit. Comes 2017, and that one FINRA arbitration gets bifurcated into two separate matters. Then we got the casting of aspersions. Oh my. Then the claims in the first arbitration are dismissed as having being filed too late. In the second arbitration, the ex-wife wins by default, or so it seemed. On appeal to the courts, the judges weren't all that pleased with the lack of effective service upon the ex-husband.
Yet another bit of dubious quality control arises with yet another FINRA published document. In today's iteration, we have an alleged customer complaint from someone who wasn't actually a customer when a questioned loan was extended to the financial advisor, who wasn't the non-customer's advisor at the time that the loan in question arose. And as if all of that tortured was and was not was or wasn't enough, we have a three-arbitrator Panel declining to issue a so-called Explained Decision, which turns out to be a petard on which the arbitrators themselves get hoisted. Although the Panel of three arbitrators purportedly heard the case, oddly, inexplicably, one, and only one arbitrator, made mandatory findings, which not only seems in contravention of FINRA's Code of Arbitration Procedure but, how ironic, isn't explained in the Award.
There was a time, not many years ago, when crowdfunding was all the rage and the JOBS Act was supposed to democratize Wall Street. Desperate or naïve entrepreneurs looking to raise modest amounts of capital were attracted by the promise that their ventures would be posted on a crowdfunding website. Except, as industry veterans knew, the investors with the real cash don't waste time on crowdfunding websites. As such, after the crowdfunding sites collected their fees, more often than not, the listings sat, barely getting nibbles, wasting away. Worse, many of the offers for funding proved to be scams and frauds. Some folks raised money and launched their business -- that's great. Ifthe laws had been better drafted, if the sector had been better policed, then we might have realized the vision. In the end it was just another one of those things that fizzled out without much notice or fanfare. And so we move on to the next flash in the pan. NFTs anyone?