Securities Industry Commentator by Bill Singer Esq

October 2, 2018
According to the SEC's Release: "The Securities and Exchange Commission today announced that empowering Main Street investors will be the SEC's focus during World Investor Week, which takes place Oct. 1-7, 2018.  SEC staff will emphasize both the basics of investing and savings as well as important emerging issues like the rise of initial coin offerings and digital assets, distributed ledger technology, and other innovations. . .  Also, for the first time, OIEA created a guide for teachers that provides K-12 educators with information about the basics of saving and investing, planning for retirement, and ways to protect themselves from fraud." 
Bill Singer's Comment: Seriously? Empowering Main Street investors?? This is the best use of taxpayers' money and SEC staff's time? On top of that dubious agenda, we got got kids trying to learn the difference between red and blue, and circle versus square, but the SEC has prepared a curriculum for their teachers. I can only imagine what the teaching lessons will look like:  
  • Hi boys and girls, I'm from the SEC. Can you spell S . . . E . . . C? That's good! Can you say ELON? Can you say MUSK? Can you say Elon Musk was a bad boy and the SEC is making him take a time out? 
  • Now, let's read the "Cat In the Hat is a Bitcoin Pumper and Crypto Dumper."
  • There was a farmer who had a dog and PONZI was his name-o. P-O-N-Z-I . . . P-O-N-Z-I . . . P-O-N-Z-I and PONZI was his name-o. 
FINRA Announces Plan to Consolidate Examination and Risk Monitoring Programs (FINRA Release)
FINRA plans to consolidate its Examination and Risk Monitoring Programs ("ERMPs"), integrating three separate programs into a single, unified program. Exams executed pursuant to FINRA's Regulatory Service Agreements with exchange clients will be performed by a separate, specialized unit housed in FINRA's Market Regulation department.
Bill Singer's Comment: I'm getting the sense that it's been a bit slow news-wise among Wall Street's indefatigable regulators. The SEC is in a tizzy about 2018 World Investors Week. FINRA is in its own lather about announcing its "plans" to consolidate its ERMP. Next, we should see a release from FINRA providing a status report on the ongoing plans to consolidate ERMP. Then we will likely get bombarded with releases about all sorts of folks tasked (yes, they're always "tasked") with expediting the planned ERMP consolidation. After that, FINRA will announce that planned modernization of ERMP has been revised and now envisions seven new programs with 21 specialized units as part of a dramatic, new shift to diversification. In fact, the acronym ERMP will be eliminated as that program will be totally rebranded and relaunched as the Risk Monitoring and Examination Program ("RMEP"). 

AmerisourceBergen Corporation Agrees to Pay $625 Million to Resolve Allegations That it Illegally Repackaged Cancer-Supportive Injectable Drugs to Profit From Overfill (DOJ Release) 
Bill Singer's Comment: You may wonder why I published my two comments about the SEC's and FINRA's releases. Fair question. Readers often wonder why I get so angry -- outraged -- at what I perceive to be wastes of time, money, and assets by state/federal prosecutors and regulators. My consistent answer is that time, money, and assets allocated to asinine efforts should be better used to protect the vulnerable. So . . . for all my joking and sarcasm, my goal is serious. In that regard, let me offer some praise for prosecutors who got it right. Let me directly quote some shocking paragraphs from the above-cited DOJ Release -- and note that this is what serious regulation looks like:

The Department of Justice announced today that AmerisourceBergen Corporation and its subsidiaries AmerisourceBergen Specialty Group (ABSG), AmerisourceBergen Drug Corporation (ABDC), Oncology Supply Company (OSC), and Medical Initiatives Inc. (MII) (collectively, "ABC") have agreed to pay $625 million to resolve allegations arising from its operation of a facility that improperly repackaged oncology-supportive injectable drugs into pre-filled syringes and improperly distributed those syringes to physicians treating vulnerable cancer patients.  ABC is one of the nation's largest wholesale drug companies and ranked number 11 on the Fortune 500 list.  The drugs involved in ABC's scheme were Procrit, Aloxi, Kytril and its generic form granisetron, Anzemet and Neupogen. 

Last year, AmerisourceBergen Specialty Group, a wholly-owned subsidiary of AmerisourceBergen Corporation, pled guilty to illegally distributing misbranded drugs and agreed to pay $260 million to resolve criminal liability for its distribution of these drugs from a facility that was not registered with the Food and Drug Administration (FDA).  The settlement announced today resolves ABC's civil liability to the United States under the False Claims Act for causing false claims for the drugs it repackaged to be submitted to federal health care programs.  

The United States contends that ABC sought to profit from the excess drug product or "overfill" contained within the original FDA-approved sterile vials for these cancer supportive injectable drugs by establishing a pre-filled syringe program through a subsidiary that it claimed was a pharmacy.  The United States alleged that the "pharmacy" was in reality a repackaging operation that created and shipped millions of pre-filled syringes to oncology practices for administration to cancer-stricken patients.  As part of this operation, ABC purchased original vials from their respective manufacturers, broke their sterility, pooled the contents, and repackaged the drugs into pre-filled syringes. 

. . .

In addition, by harvesting the overfill, ABC was able to create more doses than it bought from the original vial manufacturers.  The United States alleged that ABC's scheme enabled it to bill multiple health care providers for the same exact same vial of drug, causing some of those providers to bill the Federal Health Care Programs for the same vial more than once.  The scheme also allegedly enabled ABC to increase its market share by offering various product discounts, which it leveraged to obtain new customers and to keep existing customers buying its entire portfolio of oncology drugs.

. . .

Through these actions, the United States contended that ABC caused false claims to be submitted to the Centers for Medicare and Medicaid Services ("CMS"), the Department of Defense's Defense Health Agency, which administers TRICARE, the Office of Personnel Management, which administers the Federal Employees Health Benefit Program, and the United States Department of Veterans Affairs (collectively, the "Federal Healthcare Payors"). Under the terms of today's settlement, ABC will pay $581,809,006 plus accrued interest to the federal government and $43,190,994 plus accrued interest to state Medicaid programs.  

. . .

The settlement resolves allegations contained in three separate actions filed against ABC under the qui tam, or whistleblower, provisions of the False Claims Act.  Under the act, private parties may sue on behalf of the government for false claims for government funds and to receive a share of any recovery.  The relator share of the federal portion of the civil settlement will be $93,089,441. 

SEC Charges Salix Pharmaceuticals and Former CFO with Making False Statements About Distribution Channel (SEC Litigation Release No. 24302)
Without admitting or denying the allegations in SEC Complaints filed in the United States District Court for the Southern District of New York, Salix Pharmaceuticals, Ltd. and its former Chief Financial Officer Adam C. Derbyshire agreed to settle the Charges. Salix agreed to be enjoined from future violations of Section 17(a)(2) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5(b) and 13a-13. The SEC's settlement with Salix reflects the company's self-report to the Commission and its significant cooperation with the investigation. Derbyshire agreed to a permanent injunction against violations of Section 17(a)(2) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5(b), and from aiding and abetting violations of Section 13(a) of the Exchange Act and Rule 13a-13 thereunder. He also agreed to pay $558,534 in disgorgement and interest, plus a penalty of $494,836, and to be barred for five years from serving as an officer or director of a public company. The proposed settlement is subject to district court approval. Derbyshire separately agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of  companies. The SEC's order would permit Derbyshire to apply for reinstatement after five years. The SEC Complaint alleged that Salix and Derbyshire significantly understated the amount of Salix drugs that wholesaler customers held in inventory; and that Salix had engaged in a long-standing practice of flooding the distribution channel via customer inducements to purchase more products at the expense of future sales. READ the FULL TEXT Complaints:

Salix Pharmaceuticals, Ltd.

Adam C. Derbyshire

Merrill Lynch Rep Wins Expungement Of Decade Old Customer Complaint ( Blog) Blog publisher Bill Singer, Esq. has this thing about FINRA's expungement process -- he does not like it. Bill finds that it is a system rigged against the little guy and comes off more as an obstacle course than a path to achieving justice. In today's featured FINRA expungement arbitration, we come across the plight of a Merrill Lynch rep who was burdened with a ten-year-old mark on his record for something that was not of his doing. Without question, a customer sued and obtained a sizable $200,000 settlement. Clearly, the mere size of the settlement should give any regulator pause before rubbing an eraser against such a disclosure. On the other hand, the rep didn't pay a penny towards the settlement and, as the facts will show, didn't have anything to do with any wrongful aspect of the transactions that generated the customer's losses. Indeed, there are times when you are simply in the wrong place at the wrong time through no fault of your own. 

SEC Tries to Close Zipper

The curtain rises on Act XXXV of Zipper Plays Sisyphus To FINRA's Zeus ( Blog) In this next Act, SEC King Clayton and his SEC Princes and Princesses engage Count Zipper in a jousting tournament. In the Matter of the Application of Bruce Zipper for Review of Action Taken by FINRA (Order Denying Request for Reconsideration; Securities and Exchange Commission, '34 Act Rel. No. 84324; Admin. Proc. File No. 3-17963)
Zipper enters the lists following the SEC's September 29, 2017, Opinion and Order dismissing his application 
or review of FINRA's action in deeming as final (and denying his attempt to withdraw from) a Letter of Acceptance, Waiver, and Consent (the "AWC") in which he had consented to a fine and three month suspension from association with any FINRA member. As noted in the SEC's Order denying the reconsideration of its earlier dismissal [Ed: footnotes omitted]:

Zipper's reconsideration motion clarified that his argument sought relief on the ground that FINRA should have advised him of his options after he sought to withdraw from the AWC before FINRA accepted it. He does not contest our finding that the AWC contained an appellate waiver. Rather, now he contends that FINRA's failure to advise him that he could withdraw from the AWC evidences its "bias"; he also says that he misunderstood the consequences of the AWC, and signed the AWC under coercion or duress. We directed the parties to address the contentions raised in Zipper's reconsideration motion. FINRA has submitted evidence rebutting Zipper's claim that he attempted to withdraw from the AWC before FINRA accepted it, and has represented that had Zipper done so during that period it would have allowed him to withdraw the AWC. Zipper has not substantiated his claim that he sought withdrawal during that period. His other arguments do not furnish a basis for reconsideration. We therefore deny his motion. 

In a separate but wholly related matter, Zipper appealed from FINRA's Decision denying an MC-400 Membership Continuance Application filed by his firm Dakota Securities International seeking permission for Dakota to continue in membership while associating with Zipper, and approval of Zipper's continued association with Dakota, notwithstanding his statutory disqualification.In the Matter of the Application of Bruce Zipper for Review of Action Taken by FINRA (Opinion; Securities and Exchange Commission,'34 Act Release No. 84334; Admin. Proc. File No. 3-18256) The SEC dismissed the appeal. In part, the SEC offers this rationale [Ed: footnotes omitted]:

We likewise agree with the NAC that deficiencies in the supervisors and supervisory plan that Dakota proposed counseled against granting Dakota's application. Here, the proposed supervisors lacked the experience and independence necessary to stringently supervise Zipper or to reliably implement any supervisory plan. These concerns were well documented in the record and may serve as a basis to deny the application. So may the inadequacy of the proposed supervisory plan.  The final plan provided no guidance about where Zipper and his supervisors would be located, how the supervisors could insure the necessary scrutiny of his activities, how much time they would spend doing so, or how they would be compensated for doing so. It also provided insufficient detail about how they would review his communications, document compliance, and ensure that his Form U4 remained updated. We find that FINRA properly determined based on the evidence before it that Dakota failed to meet its burden as to this specific application, and that it did so in a manner consistent with the Exchange Act's purposes. 

We reject Zipper's argument that FINRA's denial acts as a "permanent bar[]," and that
this "penalty" is "excessive." As we have said, "FINRA does not subject a person to statutory disqualification as a penalty or remedial sanction," but rather "by operation of" statute. Nor did FINRA impose a penalty by denying Dakota's application. FINRA simply determined, in this case, "that it would not grant relief from a disqualification previously incurred." Another firm that proposed adequate supervisors and a supervisory plan tailored to Zipper's situation might show that Zipper's continued association would be in the public interest. 

Pages 15 - 16 of the SEC Opinion

Wolves and Wolverines (Speech by SEC Commissioner Hester Peirce)
Yet another provocative speech from Commissioner Peirce. Sure to anger her detractors and buoy her supporters. This time the commissioner touches on mandatory arbitration and Bitcoin. Among her points [Ed: footnotes omitted]:

Absent a reason consistent with our limited statutory mandate, I am loathe to substitute my judgment for that of private market participants closer to the relevant facts. As with other material information, any public company arbitration clause would need to be disclosed. Any shareholder displeasure with such an arrangement would be reflected in a lower stock price. Other shareholders and companies then would take the potential stock price effect into account when deciding whether to opt for arbitration as their dispute resolution mechanism.

Arbitration arrangements are not the only issue in which we are being asked to substitute our judgment for that of investors. Another area that has drawn much attention recently is our decision with respect to the Winklevoss Bitcoin Trust. The SEC recently considered and rejected a proposed rule change for an exchange that would have enabled the listing of a Bitcoin exchange-traded product-a security that would give investors indirect exposure to bitcoin.

While a majority of the Commissioners disapproved the proposed rule change --meaning the security cannot trade on the exchange -- I dissented from this decision. My full dissent is available on the SEC website, but I would like to touch briefly on some of the issues that informed my thinking. To me, the rejection was a product of the pressure the Commission feels to make decisions for investors in order that they will not hurt themselves. The Commission's decision focused on purported flaws in the bitcoin markets. A request for comment issued by the staff last week in conjunction with another bitcoin exchange-traded product raised similar concerns about the underlying bitcoin markets. One problem with such an approach is that it means if we ever do approve a bitcoin-based security, investors will interpret that approval as a blessing on bitcoin itself and the markets in which it trades. In the meantime, investors will seek out other markets -- markets not governed by our disclosure rules -- in which they can get access to bitcoin and other cryptocurrencies. . .