Securities Industry Commentator by Bill Singer Esq

January 7, 2019

BREAKING NEWS: Rajat K. Gupta, Petitioner/Appellant v. United States of America, Respondent/Appellee  (Summary Order, United States Court of Appeals for the Second Circuit/ January 7, 2019)
2Cir AFFIRMS United States District Court for the Southern District of New York

Gupta asserted that his convictions should be vacated on the ground that  United States v. Newman, 773 F.3d 438 (2d Cir. 2014) :

held that a personal benefit must take the form of an 'exchange'--a quid pro quo--in which the alleged tipper receives an 'objective, consequential . . . gain of a pecuniary or similarly valuable nature,' or at least the opportunity for such gain." (Id. at 11 (quoting Newman, 773 F.3d at 452).

2Cir disagreed and affirmed SDNY. In part, 2Cir explains that:

As to cause, we recently noted in Whitman v. United States, No. 15-2686, 2018 WL 5828118 (2d Cir. Nov. 7, 2018) (summary order) ("Whitman")--another insider trading case in which the direct appeal was decided shortly before our decision in Newman--that the defendant had objected at trial to the court's personal benefit instruction but did not pursue that objection on appeal. We noted that the same objection had been pressed by defendants in other cases prior to our decision in Newman. We concluded that Whitman did not show cause for his failure to challenge the personal benefit instructions on appeal: "If other counsel were able to raise the argument, including Whitman's own former attorney, we cannot say the same argument was unavailable to his appellate counsel." Whitman, 2018 WL 5828118 at *2. 

Although Whitman was decided by nonprecedential summary order, the fact that we "[d]eny[] summary orders precedential effect does not mean that the court considers itself free to rule differently in similar cases," Order dated June 26, 2007, adopting 2d Cir. Local R. 32.1.1, and we see no basis for any different outcome here. Defendants in other insider trading prosecutions were contending that juries should be given narrower definitions of the personal benefit needed to find culpable insider trading. Gupta at his trial objected to the instructions he challenges now. We conclude that he presents no viable claim that the personal benefit challenge was unavailable to his counsel on appeal. 

CSSC Suspended and Fined and its CEO Smith Barred For Bridge Loans
FINRA Department of Enforcement, v. CSSC Brokerage Services, Inc. and Eric S. Smith (FINRA Office of Hearing Officers, Extended Hearing Panel Decision, Disc. Proc. No 2015043646501 / January 2, 2019)
As set forth in part under the "Introduction" to the OHO Decision:

Respondent Eric S. Smith is the chairman, chief executive officer, and majority owner of Consulting Services Support Corporation ("CSSC"), a financial services company he founded in 1988. CSSC owns several subsidiaries, including a registered investment advisor and insurance services entity. Smith never registered with FINRA and CSSC is not a FINRA member, but its wholly owned brokerage subsidiary, Respondent CSSC Brokerage Services, Inc. ("CSSC B/D" or "Firm"), successfully applied for FINRA membership in 2006. 

From 2010 through 2015 ("relevant period"), CSSC encountered significant financial problems. In 2010 Smith and CSSC issued a convertible debenture bond offering ("2010 Bond Offering"), hoping to raise $5 million to satisfy pressing financial obligations. The offering raised $2.45 million. In 2014 Smith and CSSC issued "bridge loan" notes ("2014 Bridge Loan Note Offering") to garner additional funds to cover operational losses. The offering raised approximately $1.1 million. It was not enough. CSSC continued to lose money. 

In a further attempt to cope with CSSC's persistent financial deterioration, Smith issued another bridge loan note offering in 2015 ("2015 Bridge Loan Note Offering"). This offering is the subject of the first three causes of action in the Complaint filed by the Department of Enforcement. Those causes of action allege that Smith and CSSC B/D engaged in fraud when offering the 2015 Bridge Loan Notes to prospective investors. The fourth and fifth causes of action allege that Smith engaged in the Firm's securities business and involved himself in the Firm's day-to-day operations in the capacities of representative and principal without registering. Smith's failure to register, the Complaint alleges, caused him and the Firm to violate NASD registration rules and FINRA's ethical conduct rule. 

As set forth in the "Syllabus" to the OHO Decision:

Respondents Eric S. Smith and CSSC Brokerage Services, Inc., knowingly made misrepresentations and omissions of material facts in connection with the sales of securities, in willful violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and in violation of FINRA Rules 2020 and 2010. Smith actively engaged in the conduct of the firm's securities business as a representative and a principal without being registered. For his misconduct, Smith is barred from associating with any member firm in any capacity. CSSC Brokerage Services, Inc. is suspended for one year and fined $120,000. Respondents are also ordered to pay restitution of $130,000 plus interest, and hearing costs. 

Fine and Suspension for Private Securities Transactions
In the Matter of Gary L. Pevey, Respondent (AWC 2018057586601, January 4, 2019).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue,Gary L. Pevey submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Peavey a $10,000 fine, a 12-month suspension from association with any FINRA member firm in all capacities, and ordered him to disgorge commissions as set forth in a schedule. The AWC alleged that during the relevant period between June 2016 and August 2017, Pevey violated FINRA Rules 3280 and 2010 by engaging in private securities transactions without providing notice to, or obtaining approval from, Mutual Securities, Inc. As set forth in part under the heading "FACTS AND VIOLATIVE CONDUCT": 

During the Relevant Period, Pevey solicited investors to purchase promissory notes relating to the Woodbridge Group of Companies LLC ("Woodbridge"), a purported real-estate investment fund. Pevey sold approximately $1.11 million in Woodbridge promissory notes to 15 investors, five of whom were Mutual Securities customers. He received $40,027 in commissions in connection with these transactions. The Finn's written supervisory procedures ("WSPs") specifically required registered representatives to request and obtain approval prior to engaging in private securities transactions including the offer of promissory notes. Pevey did not provide notice to Mutual Securities prior to participating in these private securities transactions, nor did he obtain approval from the Firm. 

400 Discretionary Trades Lacked Written Authorization
In the Matter of Frank Fornshell Venable III, Respondent (AWC  2017056098601, January 3, 2019).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Frank Fornshell Venable III submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Venable a $5,000 fine, a 10-business-day suspension from associating in any and all capacities with any FINRA member firm.The AWC alleged that during the relevant period from From January 2014 through March 2016, Venable exercised discretion without written authorization in five accounts belonging to three customers, all of whom were members of the same household, in violation of NASD Rule 2510(b) and FINRA Rule 2010. As set forth in part under the heading "FACTS AND VIOLATIVE CONDUCT": 

From January 2014 through March 2016, while registered through Morgan Stanley, Venable effected approximately 400 discretionary transactions in five accounts belonging to three customers, all of whom were members of the same household, without obtaining prior written authorization from the customers, and without Morgan Stanley having accepted the accounts as discretionary. Although the customers had given Venable express or implied authority to exercise discretion in their accounts, none of the customers had provided written authorization for Venable to exercise discretion. Furthermore, Morgan Stanley had not approved any of the accounts for discretionary trading. 

In addition, between 2014 and 2016, Venable provided false responses on three annual compliance questionnaires submitted to Morgan Stanley. Specifically, Venable indicated that he had not exercised discretion in any customer account when, in fact, he had done so.

Two Customer Complaints Expunged
In the Matter of the Arbitration Between Stephen Frederick Cordasco, Claimant, v. Wells Fargo Clearing Services, LLC, Respondent (FINRA Arbitration 18-00948, January 4, 2019)
In a FINRA Arbitration Statement of Claim filed in March 2018,, associated person Claimant Cordasco sought the expungement from his Central Registration Depository record ("CRD") of two customer complaints and $1 in compensatory damages. Respondent Wells Fargo did not object to the relief sought.

Following a telephonic hearing at which the customers did not participate (one was deceased), the Arbitrator recommended expungement and denied the $1 in damages. The expungement recommendations were based upon FINRA Rule 2080 findings that the claim, allegation, or information is false. In pertinent part, the sole FINRA Arbitrator offered this rationale for expunging each of the customer complaints:

The mutual funds proposed to the customers were thoroughly explained and they agreed to invest in them. After a short period of time (less than 1 year), the customers mother began calling the Claimant to say that the customers needed the sum invested for taxes. Finally, the customers directed the sale of the mutual funds, incurring penalties and counsel fees. There had been a general market decline at the time the liquidation was directed which, together with the penalties for early withdrawal, caused the bulk of the loss. Mr. Cordasco's testimony on this matter was comprehensive and convincing. 

, , ,

The customer bought a stock based on advice from a friend. The firm did not follow that stock and made no recommendation. The customer sold the stock on her own initiative, at a time when the market had dropped significantly. Mr. Cordasco gave no advice to the customer and she maintained her account even after incurring the loss and making her claim. 


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