Securities Industry Commentator by Bill Singer Esq

February 15, 2019
In a Complaint filed in the United States District Court for the Southern District of California, the SEC alleged that Blockvest LLC and its founder Reginald Buddy Ringgold, III aka Rasool Abdul Rahim El planned to raise funds through an initial coin offering ("ICO") for several financial products based on misrepresentations about the firm's regulatory status; and in furtherance of their alleged fraud, the Defendants used the SEC seal without permission and falsely claimed that their crypto fund was "licensed and regulated." Allegedly, Ringgold also promoted the ICO with a fake regulatory agency he created" the "Blockchain Exchange Commission," with a seal similar to the SEC's and the same address as SEC headquarters. After an initial order was issued denying a preliminary injunction, the SEC moved for partial reconsideration:

Plaintiff moves for partial reconsideration arguing that the Court committed clear error on both prongs to support a preliminary injunction on the Section 17(a) violations. First it argues that it was error for the Court to require the SEC to prove that an investment is a security based solely on the beliefs of some individual investors, rather than the objective nature of the investment being offered to the public. Second, the Court also erred on the second factor based on Defendants' promise not to commit any future securities fraud. Defendants disagree with Plaintiff's arguments. For the reasons that follow, the Court finds reconsideration is warranted based upon a prima facie showing of Defendants' past securities violation and newly developed evidence which supports the conclusion that there is a reasonable likelihood of future violations.
Page 8 of the Court Order 

The Court granted the SEC's motion for reconsideration and entered a preliminary injunction against the Defendants enjoining them from violating provisions of the federal securities law prohibiting fraudulent offers or sales of securities. Pointedly, the Court found that Defendants made an offer of unregistered securities which violated Section 17(a) [of the Securities Act of 1933], and that the promotion of the ICO of the token was a security that satisfied the Howey test. READ the Court's Order 

In addressing whether the Defendants "intentions" to sell tokens amounted to conduct that fell under Howey, the Court offered the following analysis in part:

The Court first considers the Howey factors to consider whether Defendants' promotion of the BLV token on their website and the Whitepaper constitutes a "security." On the first "investment of money" prong, Defendants' website and Whitepaper invited or enticed potential investors to provide digital or other currency in exchange for BLV tokens. (Dkt. No. 3-12, Wilner Decl., Ex. 10; Dkt. No. 3-13, Wilner Decl., Ex. 11.) This includes having a "Buy Now" button. (Dkt. No. 3-23, Suppl. Wilner Decl., Ex. 1 at p. 4.) An "investment of money" can take the form of "goods and services", Int'l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 560 n. 12 (1979) ("This is not to say that a person's ‘investment,' in order to meet the definition of an investment contract, must take the form of cash only, rather than of goods and services"); or "exchange of value." Hocking, 885 F.2d at 1471. Defendants' website and their Whitepaper's invitation to potential investors to provide digital currency in return for BLV tokens satisfies the first "investment of money" prong. 
Pages 14-15 of the Court Order

In response to the SEC's arguments that there was a reasonable likelihood of ongoing wrong, the Court Order found in part that:

Thus, in consideration the totality of the circumstances concerning Defendants and their alleged Section 17(a) violations, and because Ringgold sought to file documents that were not in compliance with Rule 11, the Court reconsiders its ruling and concludes that there is a reasonable likelihood of future violations of Section 17(a) based on newly developed facts under Rule 59. Moreover, because Ringgold, in his opposition, agreed to stop pursuing the ICO and to stop violating securities laws, (Dkt. No. 24, Ringgold Decl. ¶¶ 16, 17), a narrow injunction limited to Section 17(a) violations until a trial is held will not be burdensome on Defendants. 
Page 22 of the Court Order
If nothing else, Wall Street is a place that lives and dies with its predictions. You got those folks who have predicted 12 of the last two recessions. You got those folks who insist that yesterday's loss was only a "head fake," and urge you to double-down and load-up -- which you only regret a week later when the company declares bankruptcy. What's an investor to do? Does anyone out there know what they're talking about? Should you blindly follow an investment professional's advice? Is Wall Street like major league baseball where you can enter the Hall of Fame if you only get three hits for every ten times at bat? In today's featured FINRA Arbitration case, we are asked to consider the extent to which making what turns out to be a wrong investment is the stuff of a black mark on one's career, or simply the odds with which investors and their advisers are saddled. Flip a coin as often as you want. It won't matter. There's always, at best or worst, a 50/50 chance of heads.

Merrill Lynch Loses FINRA Employment Arbitration 
In the Matter of Michael Chester Casey, Claimant, v. Merrill Lynch Pierce Fenner & Smith Inc., Respondent (FINRA Arbitration Decision 18-02363/ February 13, 2019)
In a FINRA Arbitration Statement of Claim filed in June 2018, associated person Claimant Casey asserted against FINRA member firm Respondent Merrill Lynch defamation; defamation per se; negligence; fraud; tortious interference with business relations; unjust enrichment; breach of implied covenant of good faith and fair dealing; and tortious breach of implied covenant of good faith and fair dealing. In part, Claimant sought a finding that his Form U5 and Central Registration Depository record ("CRD") contained defamatory information, and, accordingly, that the FINRA Arbitration Panel recommend the expungement of same. Further, Claimant sought unspecified compensatory and punitive damages, interest, costs, fees, and expenses. Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses. As set forth in part in the FINRA Arbitration Decision, Respondent filed a Motion to Dismiss, and the Panel found that:

[R]espondent's Motion to Dismiss was brought based on the argument that the claims in dispute were previously released in a written release. The Panel found that Claimant executed and delivered to Respondent a general release covering all claims ("General Release and Separation Agreement") and did not revoke that release. Respondent, however, failed for over one year, without excuse, to execute the settlement agreement or to tender the settlement payment to Claimant.

The FINRA Arbitration Panel made the following decisions:

1. The General Release and Separation Agreement is in full force and effect.
2. Respondent is liable for and shall pay to Claimant the principal sum of $43,750.00 in compensatory damages as set forth in the General Release and Separation Agreement.
3. As Respondent failed to pay the above-stated sum by the required date under the General Release and Separation Agreement, Respondent is liable for and shall pay to Claimant interest on the above-stated sum at the North Carolina legal rate of 8% per annum from August 23, 2017 until paid in full. (NCGS 24-1, 24-5).
4. In light of the above rulings, Respondent's Motion to Dismiss is moot. . . .

FINRA or the Panel assessed the following:

Claimant Casey: $1,575 FINRA Initial Claim Filing Fee; $562.50 Hearing Session Fees

Respondent Merrill Lynch: $ 1,900.00 FINRA Member Surcharge; $ 3,750.00 FINRA Member; and $1,687.50 Hearing Session Fees. 

FINRA AWC Orders $2 Million Restitution For Front- and Back-End Funds Charges
In the Matter of Kestra Investment Services, LLC, Respondent (AWC 2016048404601, February 13, 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, Kestra Investment Services, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Kestra Investment Services, LLC a Censure; a $225,000 fine, and the firm was required to provide remediation to eligible customers. As noted in the AWC "Kestra will make restitution to each customer plus interest from the date of purchase through the payment date. The projected restitution of $1,947,704 is not a cap on the final amount to be paid, but a current estimate." As set forth in part under the AWC heading "Overview":

Between July 1, 2009 and February 22, 2018 (the "Relevant Period"), Kestra disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge ("Eligible Customers"). Instead of selling these customers Class A shares with no front-end sales charge, Kestra sold these Eligible Customers Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. During this period, Kestra failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that Eligible Customers who purchased mutual fund shares received the benefit of applicable sales charge waivers. As a result, Kestra violated NASD Conduct Rule 3010 (for misconduct before December 1, 2014), F1NRA Rule 3110 (for misconduct on or after December 1, 2014), and FINRA Rule 2010. 

No Show Stockbroker Hit with Nearly $250,000 In Damages and Fees in IRA Fraud
In the Matter of the Arbitration Between Eric Hippie, Claimant, v. Ernest Julius Romer, Respondent (FINRA Arbitration Decision 18-03285 / February 13, 2019)
In a FINRA Arbitration Statement of Claim filed in August 2017, public customer Claimant Hippie asserted breach of contract, fraud in the performance of contract, failure to supervise, control person liability, respondeat superior, and conversion in connection with associated person Respondent Romer's advice to take an IRA and transfer the proceeds to an entity that was owned by the Respondent, who purportedly hid said ownership from the Claimant. Claimant seeks at least $360,661.71 plus costs and attorneys' fee. Respondent Romer did not file an Answer . The sole FINRA Arbitrator found Respondent Romer liable and ordered him to pay to Claimant Hippie $180,661.71 in damages and $59,618.36 in attorneys' fees.