January 30, 2019
A fabulous tale of the often comical yet deadly serious business by which Wall Street diverts its dirty laundry via mandatory customer and intra-industry arbitration. For those of us who deal with this cesspool, it is an all too familiar rendition. For those of you unfamiliar with mandatory Wall Street arbitration, prepare yourself for a cold dose of reality. Beautifully written. Spot on!
The SEC settled charges against four public companies for failing to maintain internal control over financial reporting ("ICFR") for seven to 10 consecutive annual reporting periods. Two of the charged companies also failed to complete the required evaluation of the effectiveness of ICFR for two consecutive annual reporting periods. Each of the four companies took months, or years, to remediate their material weaknesses after being contacted by the SEC staff. One of the companies is still in the process of remediating its material weaknesses. Without admitting or denying the findings, each of the four companies agreed to a cease and desist order making certain findings, requiring payment of civil penalties, and requiring an undertaking for one of the companies as set forth in the SEC Release:
- Grupo Simec S.A.B de C.V. disclosed material weaknesses in its annual filings for 10 consecutive years, from 2008 to 2017. In both 2015 and 2016, its management failed to complete the required ICFR evaluation. The company did not make significant progress in devising a control structure and remediating material weaknesses until after the SEC staff contacted it. The company continues to have material weaknesses that are being addressed through remediation. The Commission's settled order includes violations of Exchange Act Section 13(b)(2)(B) and Rules 13a-15(a) and 13a-15(c), thereunder, payment of a $200,000 civil penalty, and an undertaking requiring retention of an independent consultant to ensure remediation of material weaknesses, including those involving related party transactions.
- Lifeway Foods Inc. disclosed material weaknesses in each of its Forms 10-K for a period of nine years, from 2007 through 2015, and significant deficiencies that in the aggregate constituted a material weakness in 2016. In both 2013 and 2014, company management failed to complete the required ICFR evaluation. Lifeway did not fully remediate its material weaknesses and conclude that ICFR was effective until its fiscal year ended December 31, 2017. Lifeway's failure to address its material weaknesses was compounded by three announced restatements since fiscal 2012, including two restatements announced during fiscal 2016. The Commission's settled order includes violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 13a-1, 13a-15(a) and 13a-15(c), thereunder, and payment of a $100,000 civil penalty.
- Digital Turbine Inc. disclosed material weaknesses in each of its Forms 10-K over a period of seven years, from fiscal year 2011 through fiscal year 2017. The company did not fully remediate its material weaknesses until the end of fiscal year 2018, as disclosed in its Form 10-K for the year ended March 31, 2018. The Commission's settled order includes violations of Exchange Act Section 13(b)(2)(B) and Rule 13a-15(a), thereunder, and payment of a $100,000 civil penalty.
- CytoDyn Inc. disclosed material weaknesses in each of its Forms 10-K over a period of nine years, from 2008 through 2016. CytoDyn included in its public filings the same, nearly boilerplate, disclosure of material weaknesses for nine consecutive years. CytoDyn remediated its material weaknesses and determined that ICFR was effective as of May 31, 2017. The Commission's settled order includes violations of Exchange Act Section 13(b)(2)(B) and Rule 13a-15(a), thereunder, and payment of a $35,000 civil penalty.
You need to read it a few times before the enormity of what's being alleged, what may be involved, and what would need to be proved hits you. In 2019, a FINRA Panel of Arbitrators issues a decision addressing claims filed in 2014 seeking over $2 million in damages from Morgan Stanley for, in part, financial elder abuse, that allegedly arose from trading as far back as 1993. Prime among the points in contention was whether the customers' claims were barred by a six-year eligibility rule or applicable statues of limitations. In a workmanlike and impressive manner, a FINRA Arbitration Panel tackles the thorny issues and produces an informative decision.
FINRA NAC Imposes Plenary Bars on Former Craig Scott Capital LLC's Taddonio and Beyn
In the Matter of FINRA Department of Enforcement, Complainant, v. Craig Scott Taddonio, Brent Morgan Porges, and Edward Beyn (FINRA National Adjudicatory Council Decision, 2015044823501 and 2015044823502 / January 29, 2019)
Respondents Taddonio and Beyn appealed a FINRA Office of Hearing Officers ("OHO") Extended Hearing Panel Decision that found that:
- Beyn excessively traded customer accounts and churned customer accounts' and had made qualitatively
unsuitable recommendations to a customer. The OHO Panel barred Beyn from associating with any
FINRA member firm in any capacity; and
- Taddonio failed to exercise reasonable supervision given the existence of red flags that indicated Beyn
and several other registered representatives at his firm were excessively trading customer
accounts. Also, the OHO Panel found that Taddonio gave false testimony to FINRA in a
sworn on-the-record interview./ The OHO Panel imposed upon Taddonio for the supervisory
violations a Bar from associating with any FINRA member firm in
any principal or supervisory capacity' and for the false testimony, a Bar from associating with any FINRA member firm in any capacity.
Following a consideration of the appeals, the NAC affirmed the OHO findings and modified the sanctions. As set forth in the "Conclusion" portion of the NAC Decision:
Beyn excessively traded customer accounts, in violation of NASD Rule 2310 and FINRA
Rules 2111 and 2010, and churned customer accounts, in violation of Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010. Beyn also made an unsuitable investment recommendation to a customer, in violation of NASD Rule 2310 and FINRA Rules 2111 and 2010. For these violations, Beyn is barred from associating with any FINRA member firm in any capacity.
Former Windsor Street Capital LLP Associated Person Fined and Suspended by FINRA For Acting In Unregistered Principal Capacity
FINRA Department of Enforcement, Complainant, v. Imtiaz (Raana) Khan, Respondent (Order Accepting Offer of Settlement 2016048912703/ January 28, 2019)
Without admitting or denying the allegations of the Complaint (as amended by the Offer of Settlement), and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of FINRA, or to which FINRA is a party, to the entry of findings and violations consistent with the allegations of the Complaint (as amended by the Offer of Settlement), and to the imposition of the sanctions set forth below, and fully understands that this Order will become part of Respondent's permanent disciplinary record and may be considered in any future actions brought by FINRA, Imtiaz (Raana) Khan consented to FINRA's Order. In accordance with the terms of the Order, FINRA imposed upon Khan a $20,000 fine and a 35-business-days-suspension from associating with any FINRA member firm in any and all capacities. As set forth in the "Summary" portion of the FINRA Order [Ed: footnotes omitted]:
2. During the period January 2013 through at least March 2016, while associated with
Windsor Street Capital, LP, f/k/a Meyers Associates, L.P. (CRD No. 34171) ("Windsor Street")
Khan functioned in a principal capacity for which he was not registered and for which he had not
passed the appropriate qualification exam. As a result, Khan violated NASD Rules 1021 and 1022
and FINRA Rule 2010.
3. During the period April 2015 through May 2016, Khan engaged in outside business
activities involving a real estate and mergers and acquisitions advisory business without providing
prior written notice to Windsor Street. As a result, Khan violated FINRA Rules 3270 and 2010.
FINRA Arbitrators Grant Expungement After Finding Customers Ignored or Rejected Stockbroker's AdviceIn the Matter of the Arbitration Between Luis Bared and Ana Maria Bared, Claimants, v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent (FINRA Arbitration Decision 16-01409 / January 29, 2019)
http://www.finra.org/sites/default/files/aaCase Number: 16-01409 vs. Respondento_documents/16-01409.pdf
In a FINRA Arbitration Statement of Claim filed in May 2016, public customer Claimants asserted violation of NYSE and FINRA rules
and other applicable securities laws and regulations; securities fraud; breach of laws,
rules, norms and regulations about good faith and fair dealing; and breach of contract. The claims arose in connection with Claimants' investments in Puerto Rico Sales Tax
Financing Corporation Bonds. Respondent Claimants sought $682,553.14; $682,553.15 in punitive damages; interest; disgorgement of commissions, markups, markdowns and/or trading profits and/or interest and;or other fees; attorneys and consultants' fees; costs and expenses. Merrill Lynch generally denied the allegations, asserted various affirmative defense, and sought the expungement of the matter from non-party Andres Lewowicz's Central Registration Depository record ("CRD"). In November 2018 the parties stipulated to the dismissal with prejudice of the claims. The Panel conducted an expungement hearing at which Claimants did not participate and did not contest. In reviewing the facts, the Panel noted that given the stipulated dismissal "there was no settlement agreement for the Panel to review." In recommending expungement, the Panel made a FINRA Rule 2080 finding that the customers' claims, allegations, or information is factually impossible or clearly erroneous. The Panel offered this rationale:
The claim erroneously represents Claimants' investment experience and objectives
and also erroneously alleges improper investment advice from non-party Lewowicz.
Rather, Claimants ignored or rejected advice provided by non-party Lewowicz.
Claimants intelligently and consciously directed their own investment, while fully
aware of the risks and tax advantages of said investment.
In a Complaint filed in the United States District Court for the Northern District of Illinois, the SEC asserted that investment adviser Daniel H. Glick and his unregistered investment advisory firm Financial Management Strategies Inc. ("FMS") had provided clients with false account statements that hid Glick's improper use of client funds to pay personal expenses and his improper transfers of funds to Forte and another individual; and that Glick sent over $1 million to Edward H. Forte or to third-parties for Forte's benefit. In March 2017, the Commission charged Daniel H. Glick, a Chicago-based investment adviser, and his unregistered investment advisory firm, Financial Management Strategies Inc. (FMS), with misappropriating millions from elderly investors. The complaint named Forte as a relief defendant, alleging that he received more than $1 million of the money that had been misappropriated from Glick. Glick guilty to one count of wire fraud in a related criminal action, and on April 17, 2018, he was sentenced to 151 months imprisonment, and ordered to pay $5.2 million in restitution. On September 19, 2018, the Court in the SEC action entered final judgments against Glick, FMS and relief defendant Glick Accounting Services, Inc. ("GAS"), which included permanent injunctions against Glick and FMS and repatriation orders against Glick, FMS and GAS. The Court entered final judgment against Forte, ordering him to pay disgorgement of $1,013,637 plus prejudgment interest of $30,633.
"Most of the retail-facing fraud that we see is committed by those who are not registered," Schock said. "It is unlicensed people selling unregistered products."