Securities Industry Commentator by Bill Singer Esq

December 17, 2018
In a Complaint filed in the United States District Court for the District of New Mexico, the SEC alleged that former Chief Executive Officer of Santa Fe Gold Corporation Thomas H. Laws violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, the books and records provision of Section 13(b)(5) of the Exchange Act and Rules 13a-14, 13b2-1, and 13b2-2 thereunder, and aided and abetted Santa Fe Gold's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The Court granted the SEC's requests for an asset freeze, expedited discovery, the prohibition on the alteration or destruction of documents, and an accounting of investor funds and other assets. The SEC seeks disgorgement of the alleged ill-gotten gains, prejudgment interest, civil monetary penalties, an officer and director bar, and a penny stock bar. Also, THL Financial Services Corporation, an entity controlled by Laws, was named as a relief defendant. The Complaint alleges that Santa Fe Gold Corp transferred about $1.1 million in investor funds to THL and Laws, who attempted to hide his theft by fabricating documents, including vendor invoices, agreements, bank records, and communications.READ the Complaint
16 defendants were charged in the United States District Court for the Eastern District of New York in connection with a $147 million illegal stock manipulation scheme. To date, 11 defendants have pled guilty, among which is Anthony Vassallo, a former manager at Elite Stock Research (ESR) and who subsequently worked at My Street Research and related companies. Vassallo pled guilty to conspiracy to commit securities fraud in connection with sales of CES Synergies, Inc. (CESX), and First Choice Health Care Solutions, Inc. (FCHS) securities. Allegedly, between May 2013 and June 2016, Vassallo and his co-defendants artificially controlle the price and volume of traded CESX and FCHS shares; and they also fraudulently concealed their control of said shares othat were held in brokerage accounts in the names of other individuals or entities. READ the Indictment
Given the high cost of retaining a lawyer, we frequently see parties forced to represent themselves in courts and arbitration hearings. In some cases, it's not merely a matter of funds but of disagreement with the advice of counsel -- often whether to accept or propose a settlement. From the perspective of an adversary, few things are calculated to cause more happiness than to learn that some amateur is going to cross swords with your lawyer during a trial or hearing. On the other hand, veteran lawyers know that judges and arbitrators often allow pro se litigants to get away with murder in an effort to ensure that the unrepresented get their day in court. Unfortunately, too many pro se parties seem to prepare for their day by watching endless hours of "Law & Order" reruns. In a recent pro se FINRA arbitration, the public customer represents himself after two lawyers had withdrawn. Things went about as well as you would expect from this preamble.

Statement Before the SEC Investor Advisory Committee (Richard W. Berry, Executive Vice President, FINRA Dispute Resolution) In pertinent part, Berry states that:

[M]ost broker-dealers and many investment advisers require customers opening accounts to agree to arbitrate disputes. It's important to note that FINRA rules do not require broker-dealers or their customers to enter into these agreements. Those agreements have been standard among brokerage firms since a 1987 Supreme Court decision upholding their enforceability. While referred to as the FINRA Arbitration Forum, it's important to clarify that FINRA's primary role is to administer cases - FINRA does not have any input into the outcome of arbitrations.

. . .

Unpaid awards represent about 2% of the nearly 13,000 customer cases closed between 2012 and 2016.  The vast majority of customer cases close by settlement - not award.   This means that most arbitration cases will be resolved without the need for an award.   However, when we focus more closely on the smaller subset of cases in which the arbitrators award damages to the customer, we note that about a third of these awards go unpaid. 

FINRA has provided greater transparency for investors about a broker's arbitration history. And - unlike any other arbitration forums of which we are aware - FINRA provides data on unpaid customer awards for the past five years on its website, including a list of those responsible for the unpaid awards.

FINRA has taken numerous steps to address unpaid awards. For example, FINRA has implemented a series of regulatory measures to identify and remove bad actors from the broker-dealer industry through enforcement actions, examinations and rulemaking. We are continuing to identify additional steps that we can take in this area.

We also take strong action against those that do not pay awards.  FINRA suspends individuals and firms from the broker-dealer industry for non-payment of awards. However, I am not aware of any federal provision that prevents those suspended for non-payment from operating in other financial services industries.

Most recently, we have proposed a series of rules to further address unpaid awards, including rules to prevent parties from avoiding payment of awards through asset transfers.

Bill Singer's Comment: I appreciate that Berry has the thankless job of defending his organization's conduct, but I want to make it clear that I disagree with his assertions and characterizations of FINRA as a somewhat benign and spectator-like participant in the perpetuation of the worst of mandatory arbitration. FINRA has the ability to reform its arbitration rules and forum, but the self-regulatory-organization persists in its role as a lap-dog for its member firm's interests to the detriment of the investing public and registered persons forced to litigate within this industry/employer designed and controlled system. As I have pointedly noted over the years and most recently in the opening paragraph of "$5 Million Awarded In FINRA Customer Arbitration. Now Let's Beat The Dead Horse" ( Blog,  August 17, 2018) 

The Blog's publisher, Bill Singer, has long advocated for the creation of an Anti-Fraud Fund on Wall Street to serve as a back-stop for defrauded public investors who obtain awards of compensatory damages against insolvent industry firms and registered representatives. Bill does not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges, but he does believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. While there may be legitimate debate as to how best to fund the anti-fraud fund, that only goes to the mechanics of doing the right thing. In the case of the Financial Industry Regulatory Authority, we have a self-regulatory-organization that needs to get behind this pro-consumer effort and with haste. Over the years, the Blog has presented cases that question the fairness of FINRA's mandatory arbitration forum. Similarly, Bill Singer often criticizes FINRA for the regulator's inept and incompetent oversight of miscreants and recidivists. In today's featured FINRA public customer arbitration, we see the troubling history of two victims dealing with the FINRA community, and we are forced to ask whether their apparent arbitration "victory" is anything more than a sham. FINRA's regulatory mandate is set out in FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." Today's Blog asks whether the self-regulatory-organization itself will observe high standards of commercial honor and just and equitable principles of trade when it comes to seeing that justice is done for defrauded public investors. 

Also, read "Bill Singer Submits Rare FINRA Comment" ( Blog, June 1, 2017) :

All of those in the FINRA community must accept the symbiotic need to police the industry, to root out the bad actors, to empower regulatory staff with the prerogatives and tools to fairly investigate and prosecute misconduct, and, in the end, to persuade the public for whom the industry exists that, yes, the private sector is a more nimble and effective regulator than big government. If you re-read the Special Notice, you will not find a single reference to the appropriate influence of associated persons, public customers, issuers, and other market participants. Who stands for those stakeholders? Who speaks out on their behalf? When do those market participants get to raise concerns about the inappropriate influence of FINRA's larger firms and of FINRA itself?

I urge FINRA to reinvent itself as a "private sector regulatory organization" ("PSRO") and to expand and enhance its mission from one for the broker-dealer industry towards one for the larger private sector served by the financial services community. In furtherance of that change, the PSRO would serve in a holding-company role that oversees each of three regulatory divisions dedicated to Small member firms (smallest 25% of broker-dealers), Mid-sized member firms (50% of broker-dealers measured from midpoint), and Large member firms (largest 25% of broker-dealers). Pursuant to that restructuring, each division would draft a rulebook responsive to the unique needs of its constituency. The PSRO would fully enfranchise associated persons, and provide for the proportionate representation for such stakeholders as public customers, issuers, and regulators. Without question, a PSRO Board seat should be set aside for an investors' advocacy group such as PIABA.

As part of reimagining the SRO into a more expansive PSRO, all industry registration and continuing education should be undertaken directly by an applicant through the PSRO holding company and not through the member firms. FINRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.