Securities Industry Commentator by Bill Singer Esq

January 18, 2019

The cold, harsh reality of the ongoing government shutdown
In re: Pending Administrative Proceedings (Order, '33 Act Rel. No. 10602; '34 Act Rel. No. 84986; Invest. Adv. Act Rel. No. 5101; Invest. Co. Act Rel. No. 33344 / January 16, 2019) [Ed: footnote omitted]:

The Securities and Exchange Commission has experienced a lapse in appropriations. Absent an appropriation, the staff of the Commission is prohibited from performing the ongoing, regular functions of government except in very limited circumstances, including "emergencies involving the safety of human life or the protection of property."

Accordingly, the Commission stays all pending administrative proceedings initiated by an order instituting proceedings that set the matter down for a hearing before either an administrative law judge or the Commission. The stay is effective immediately and shall remain operative pending further order of the Commission.

Any party in a proceeding pending before an administrative law judge may request that the stay be lifted in its proceeding, if it believes that lifting the stay would be in accordance with the narrow classification of excepted matters discussed above, by filing a motion with the chief administrative law judge, who is authorized to act on such motions. Any party in a proceeding pending before the Commission may make such a request to the Commission. . .

The Department of Justice (National Security Division) entered into a settlement agreement with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP in furtherance of resolving the firm's liability for violations of the Foreign Agents Registration Act (FARA), DOJ alleged that Skadden acted as an agent of the Government of Ukraine within the meaning of FARA, 22 U.S.C. § 611 et seq., by contributing to a public relations campaign directed at select members of the U.S. news media in 2012. 
READ the Settlement Agreement
As set forth in part in the DOJ Release:

According to the Agreement, in the spring of 2012, Ukraine, Ministry of Justice (MOJ), with the assistance of Paul Manafort, hired Skadden to write a report (Report) on the evidence and procedures used during the 2011 prosecution and trial of former Prime Minister Yulia Tymoshenko and to address various questions regarding its fairness.  Skadden also agreed to advise Ukraine in connection with a second, potential future prosecution of Tymoshenko.  Although the engagement letter between Skadden and the MOJ stated that Skadden would be paid its customary fees and expenses, the contract Skadden signed with the MOJ, and which the MOJ made public, stated that the law firm would be paid only 95,000 Ukrainian hryvynas, which is approximately $12,000.  Skadden understood that a Ukrainian business person would be paying its fees, which the law firm received from a Cypriot bank account of an entity named Black Sea View Ltd., which Manafort controlled.  Skadden was eventually paid $4,657,568.91 for its work on behalf of the MOJ.  The arrangements with the Ukrainian business person, the amounts paid, and advice on a second criminal prosecution of Tymoshenko were not disclosed in connection with the issuance of the Report.

Soon after it began work for the MOJ, Skadden became aware that Ukraine intended to use the Report as part of a public relations campaign to influence U.S. policy and public opinion toward Ukraine.  After that point, Skadden's lead partner for the Ukraine engagement took steps to advance the public relations campaign.  In the fall of 2012, shortly after a meeting in New York with Manafort and a representative from Ukraine's public relations firm to finalize the Report and discuss the media strategy for its rollout, the lead partner contacted a journalist at a national newspaper and asked whether the journalist would take a call from a lobbyist for Ukraine about the Report in advance of its release.  Then, shortly before Ukraine released the report on December 13, 2012, the lead partner again contacted the journalist and arranged for delivery of the Report to the journalist, both via email and in person.  On December 12, 2012, the lead partner spoke with the national newspaper about the Report and provided a quotation for attribution. 

The lead partner's pre-release outreach to the journalist was consistent with Ukraine's media strategy for the Report, which including leaking the Report prior to its official release so as to "effectively set the agenda for subsequent coverage."

FARA requires those in the U.S. who engage in political activities on behalf of foreign principals, which include foreign governments, to make a variety of written public disclosures to the Department of Justice.  Based on its awareness of and involvement in Ukraine's public relations campaign, Skadden had an obligation to register with the Department of Justice under FARA, but it failed to do so.  If Skadden had registered, it would have had to disclose, among other things, the full amount it was being paid, the source of those payments, and the full scope of the work it was doing on behalf of the MOJ.

Five days after news articles appeared about the Report, the FARA Unit sent Skadden a letter, seeking information about its activities on behalf of Ukraine in order to assist the FARA Unit in determining whether Skadden had a registration obligation.  This was the first of several requests for information the FARA Unit made to Skadden. 

In both written and oral responses to the FARA Unit between February 6, 2013, and October 11, 2013, Skadden, in reliance on the lead partner, made false and misleading statements including, among other things, that Skadden provided a copy of the Report only in response to requests from the media and spoke to the media to correct misinformation about the report that the media was already reporting.  The firm also submitted documents to the FARA unit that were false.

The FARA Unit made a determination that Skadden did not have a registration obligation in connection with its work for Ukraine, and it based that conclusion on the false and misleading information Skadden had provided.  Before making its representations to the FARA Unit, Skadden had conducted no investigation to confirm the information the lead partner was providing to the FARA Unit and to other partners at the firm. . .

State of the Union: Clowns to the Left, Jokers to the Right ( Blog)
Who'd a thunk it? I've sort of run out of things to write about today, what with the federal government shut down and not all that much going on at the Department of Justice, the Securities and Exchange Commission, or the Commodity Futures Trading Commission. Funny thing . . . lawyers who make a living crossing swords with the Feds aren't all that happy these days.  Apparently, it's proving really, really tough to pad your bills when there's no one to communicate with at DOJ, SEC, or CFTC. Which might explain why some clients are beginning to note entries on their legal bills for inexplicable telephone calls with FINRA or NFA, or some inquiry to a state securities division. 

Arbitrator Rules in E*Trade's Favor in Market Manipulation Arbitration And Laments Inability to Sanction Customer Claimant
In the Matter of the Arbitration Between John Mercaldi, Claimant, v. E*Trade Securities Inc., Responsent (FINRA Arbitration 18-01518 / January 16, 2019)
In a FINRA Arbitration Statement of Claim filed in April 2018, public customer Mercaldi, representingn himself pro se, asserted market manipulation in connection with his allegations that he tried unsuccessfully to sell his American Electric Technologies, Inc. ("AETI") position. Claimant sought $5,253 in compensatory damages. Respondent E*Trade generally denied the allegations. The sole FINRA Arbitrator denied.
Bill Singer's Comment: Yeah, I know, what the hell??? Thankfully, notwithstanding the relatively small amount of damages at issue we were blessed with a diligent FINRA Arbitrator who penned a truly thoughtful and comprehensive explanation, which I reprint below in full:

Over the course of the day of March 29, 2018, Claimant placed and canceled 15 market and limit buy and sell orders for AETI. Claimant alleges that the stock price was being manipulated. He further alleges that when the stock price started dropping, he asked an E*Trade broker to sell everything, but the broker declined to fulfill the order and instead tried to sell him a different E*Trade product. As a result of the broker's conduct, Claimant alleges, his losses on AETI were increased by $4,500.00. 

The parties filed their Statement of Claim and Statement of Answer. In response to a request by me, E*Trade provided additional trading and market information for AETI on March 29, 2018. Claimant has not provided anything more in response or rebuttal. The information provided by E*Trade was represented to come from E*Trade's internal account documentation and from Bloomberg. I consider both sources to be trustworthy. 

On March 29, 2018, AETI's priced moved in the range of approximately $0.95-$1.55. A review of Claimant's orders and cancellations shows that he was placing limit orders to buy and sell AETI during the day, but these orders usually just missed the market price, and Claimant cancelled them. For a 48 minute period late in the day, Claimant had both buy and sell limit orders in place. A general review of the overall account does not show any pattern of general misconduct or manipulation by E*Trade. 

When dealing with specific transactions, Claimant focuses on two of them. First, he complains that at 2:00 p.m. he asked E*Trade "to cancel the initial order at $1.40." A review of the record shows that this must be Order 76 that was placed at 9:55 a.m. and filled in two pieces over the next three minutes. In other words, Claimant's request to cancel the order came a little over four hours after it was placed and executed. Claimant's statement that this order was "pending" when he asked to cancel it is contradicted by the evidence in the record. While Claimant's colorful language suggests that he was unaware that the order had been filled four hours earlier, I find that impossible to believe. Apparently, Claimant wants E*Trade to let him out of the transaction discussed in this paragraph because others were allegedly manipulating the market price. Even if market manipulation occurred (and nothing in the record suggests that it did), it would not be E*Trade's fault. Further Claimant had opportunities to sell the stock purchased in Order 76 at either no or a small loss, but he did not do so. I deny the portion of the claim asking for relief related to Order 76 for failure to show any wrongful conduct or causation by E*Trade and Claimant's failure to mitigate damages. 

Second, Claimant complains that he "had to buy 5,000 more shares [he] didn't want." A review of the record shows that this must be Order 81 that was placed at 1:11 p.m. and executed at 2:04 p.m. These times show that the order was placed well before he asked E*Trade to cancel Order 76 and executed while he was chatting with the E*Trade broker. This execution also occurred during the 48 minutes when Claimant had buy and sell limit orders in place simultaneously. Claimant has not explained why the execution of an order that he allegedly did not want to execute caused him to buy even more stock. One would think that he would be selling what he had, not buying more. He has also not explained why he waited roughly four hours to buy more stock. If he thought the stock price was being manipulated, why would he buy even more of the allegedly manipulated stock? The evidence in the record seems to contradict all Claimant's arguments about Order 81. I deny the portion of the claim asking for relief related to Order 81 for failure to show any wrongful conduct or causation by E*Trade. 

In sum, I deny all claims made against E*Trade. The material allegations against E*Trade in the Statement of Claim are factually false, and Claimant presumably could have determined this from a review of the account and market records available to him. The Statement of Claim also bases liability on unproven market manipulation by unknown, unnamed parties (not E*Trade). If I were able to award sanctions like those under Fed. R. Civ. P. 11, I would do so. Crash Complaint Expunged
In the Matter of the Arbitration Between Steven Patrick Flagg, Claimant, v. UBS Financial Services Inc., Respondent (FINRA Arbitration 18-01777 / January 16, 2019)
In a FINRA Arbitration Statement of Claim filed in May 2018, associated person Claimant Flagg sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent UBS did not oppose the requested relief; and the customer did not participate in the hearing or contest the request. The sole FINRA Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is false. The Arbitrator recommended expungement and provide this rationale:

A customer of the Claimant suffered financial losses during the 2002 crash. The customer contacted Respondent to advise that he believed he was a victim of unsuitability in securities selection, and by unauthorized, excessive trading carried out by the Claimant. Claimant responded to the Respondent that all trading was unsolicited, both as to type and frequency, and under exclusive control of the customer. After conclusion of Respondent's investigation, it denied the customer's claims. The customer did not pursue the matter further in arbitration or court.  

Bill Singer's Comment: Compliments to Claimant Flagg's attorney Eric Litow, Esq., of AdvisorLaw, LLC, A perfect example of a scenario screaming out for expungement. The underlying complaint arose during the crash, which shook the markets some 17 years ago. Those of us who are old enough -- and, sadly, I am -- remember all too painfully the one-two-three punch of the crash, 9/11, and the Great Recession. During each of those events, broker dealers and stockbrokers engaged in disgraceful fraud upon public customers; and, similarly, many public customers who were sadly wiped out by market forces sought to shift such devastation into the pockets of otherwise innocent brokerage firms and stockbrokers -- to be clear, the overwhelming misconduct emanated from Wall Street. In Claimant Flagg's case, his anger with what he viewed as an unjustified blemish on his industry record simmered for a few years shy of two decades until attorney Litow took up his cause and achieved an expungement. Stripped to its essentials, the customer's complain appears to have involved "unsolicited" trades and when the complaint was made to UBS, that firm denied the claim and the customer "did not pursue the matter further . . ." According to online FINRA BrokerCheck records as of January 18, 2019, Flagg was first registered in 1986 and was registered with UBS from 1986 to 2002. In addition to one other complaint denied by his employer broker-dealer in 2012, BrokerCheck discloses under the heading "Customer Dispute - Settled" that Merrill Lynch Pierce Fenner & Smith Inc.settled a customer complaint on November 8, 2010, for $99,950 to which Flagg did not contribute. Under the "Broker Statement" for this event it is stated: