Securities Industry Commentator by Bill Singer Esq

October 25, 2018

The Blog will post
Guest Blogs 
Wednesday October 24th and Thursday October 25th 
from prominent industry lawyers 
Dochtor D. Kennedy, President & Founder, AdvisorLaw, LLC 
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell

( Blog)
Sears filed for bankruptcy protection last week, something long coming. Some have pegged the start of Sears's decline to its diversion of retail cash flow to non-core businesses when it acquired Dean Witter Reynolds Securities in 1981. One author blames Sears's demise on the Faustian bargain it made with hedge fund billionaire Edward Lampert in 2004. I think those are excuses wide of the real mark.
If you have ever interacted with FINRA, whether that be in a disciplinary action, an expungement matter, or up against them in court, then this article will not shock you. You have certainly experienced the frustrations that come along with the vague rules that are ever-changing and seem as though they must be designed simply to make everyone's lives that are affected by them just a tad more complicated. The latest and greatest in arbitrary FINRA practices is the denial of Dispute Resolution Forum to brokers requesting expungement of customer dispute occurrences that arose from a prior arbitration that resulted in an award/judgment.

FINRA's Revolving Door

FINRA has not done a credible job addressing its revolving door when it comes to appropriately prohibiting its regulatory staff and executives from engaging in what comes across as unethical post-employment conduct. Let me make it very clear, however, that I have no problem with any regulator or any prosecutor joining the private sector and ringing up the old cash register in terms of compensation. In a sense, that may be the natural progression of things. The only issue that I take exception to is the quick turnaround that could find FINRA self-regulatory staff assisting those who they had only recently prosecuted or threatened with such action. Similarly, there is a troubling issue of certain law firms that, go figure, always seem to vacuum up the endless supply of former FINRA executives and senior regulatory lawyers. And, also go figure, those same law firms seem to be an endless supplier of newly hired FINRA staff and executives. Even more troubling, those same law firms tend to represent the too-big-to-fail and the largest of the large, which raises questions as to whether there is some quiet understanding among many regulators and prosecutors that your former boss or colleague, who is at one of those certain law firms, you know, maybe, possibly, could be in a position to offer you a wonderful compensation package if you just play ball on this one case that's causing the former boss or colleague's big client a problem. All of which  may foster a "don't rock the boat" sensibility when it comes to dealing with those certain law firms and their former FINRA staff and executives. What does FINRA have in its quiver of rules to address the revolving door and its corrosive influence? As best I can tell, the self-regulatory-organization has these two rules, which state in pertinent part that:

FINRA Rule 9141. Appearance and Practice; Notice of Appearance
. . .
(c) One Year Revolving Door Restriction
No former officer of FINRA shall, within a period of one year immediately after termination of employment with FINRA, make an appearance before an adjudicator on behalf of any other person under the Rule 9000 Series.

FINRA Rule 9242. Pre-hearing Submission
. . .
(b) Prohibition on Serving as Expert Witness
No former officer of FINRA shall, within a period of one year immediately after termination of employment with FINRA, provide expert testimony on behalf of any other person under the Rule 9000 Series. Nothing in this Rule shall prohibit a former officer of FINRA from testifying as a witness on behalf of FINRA.

Ummm . . . you know, I can't muster up much more than the response that Rules 9141 and 9242 are, at best, tepid, and, at worst, a calculated effort to hide some important restrictions within rules that truly don't seem to have anything whatsoever to do with the ethical obligations of post-FINRA employment. Against that background, FINRA just published: Proposed Rule Change to Adopt FINRA Rule 9910 (Post-Employment Conflict of Interest Restrictions; Nonpublic Information) (FINRA Release for SR-FINRA-2018-037)
In a filing with the SEC, FINRA proposes Rule 9910 (Post-Employment Conflict of Interest Restrictions; Nonpublic Information),which would prohibit: 
  1. any former officer from making certain communications to or appearances before FINRA for one year; 
  2. any former employee from making certain communications to or appearances before FINRA at any time in a particular matter involving a specific party or parties in which the employee was personally and substantially involved during his or her employment; 
  3. any former employee from making certain communications to or appearances before FINRA for two years in a particular matter involving a specific party or parties, that was under the employee's official responsibility during the last year of his or her employment; and 
  4. any current employee from disseminating or disclosing, for a purpose unnecessary to the performance of FINRA job responsibilities, or any former employee from disseminating or disclosing, for any purpose, any nonpublic information obtained in the course of his or her employment with FINRA, unless the disclosure is expressly authorized by FINRA or is required or protected by law. 
In proposing the rule, FINRA asserts on Page 12 of the filed proposal that:

The primary benefit of this proposal would be to mitigate the conflicts of interest that may arise if a former FINRA employee used influence resulting from his or her employment at FINRA on behalf of another party. The proposal also would reduce incentives for private employers to hire FINRA employees potentially to influence matters in which the former FINRA employee had direct or indirect responsibilities. In addition, the proposal would help ensure that current and former FINRA employees do not misuse nonpublic FINRA information

READ the FULL TEXT Rule Proposal
Comment from Bill Singer about proposed Rule 9910: About goddamn time! The devil may be in some of the definitions and there may well be an argument as to whether the one-year and two-year periods are long enough but I want to make it very clear that I applaud this rule proposal. If nothing else, we finally have a single rule that clearly covers aspects of FINRA's revolving door. I compliment both FINRA President/Chief Executive Officer Robert Cook and FINRA Executive Vice President and Head of Enforcement Susan Schroeder for implementing reformist policies at the regulator. No . . . this one rule proposal is not enough to silence my dissident voice; however, yes, FINRA is taking steps in the right direction to enact some overdue reforms that prior administrations stonewalled. The thing with momentum is that it needs that first push to get things rolling. Let's see where the self-regulatory stone goes from here.
Yu Zhang pled guilty in the United States District Court for the District of Minnesota to one count of conspiracy to commit wire fraud in connection with his participation in a scheme to obtain money from victims through which co-conspirators posed as IRS agents and threatened to arrest victims unless immediate payments were made for allegedly "delinquent" taxes.Posing as government agents, the conspirators made phone calls to victims and threatened (often with arrest) or enticed them into making an immediate payment to a purported governmental entity. Victims were instructed to bring funds to a local Target store and purchase a gift card that could be used to satisfy the "debt," and provide the card number and activation code to the co-conspirator over the phone. Zhang would use the number/code to redeem the gift cards at Target stores by purchasing pre-paid, third-party gift cards such as Google Play and Steam cards. Zhang admitted to redeeming over $250,000 worth of Target gift cards. If you believe you may have fallen victim to an IRS impersonation scam, visit this stie:
In a Indictment filed in the United States District Court for the Northern District of Texas, Jeffrey Richie and his wife Wendy Richie, co-owners of the Vantage Benefits Administrators, were charged with conspiracy, theft from an employee benefit plan, wire fraud, and aggravated identify theft in connection with their alleged embezzlement of  $14.5 million from retirement plans they managed. 
Allegedly, Vantage served as third party administrator for dozens of retirement funds, including several 401(k)s. Posing as various beneficiaries with her husband's knowlege, Wendy Richie allegedly submitted fraudulent distribution requests to the retirement fund custodian, Matrix Trust Co.; and, thereafter, converted funds from at least 1,000 plan participants in at least 20 plans in order to pay Vantage payroll and other operating expenses, as well as personal expenses, including mortgage and escrow payments, farming equipment, and home decor.READ the FULL TEXT Indictment