Securities Industry Commentator by Bill Singer Esq

March 6, 2019
Without admitting or denying the charges, Cantor Fitzgerald & Co. entered into a Acceptance, Waiver & Consent regulatory settlemetn with FINRA whereby it agreed to pay $2 million for Regulation SHO violations and supervisory failures spanning a period of at least five years. Further, Cantor agreed to retain an independent consultant to conduct a comprehensive review of the firm's policies, systems, procedures and training related to Reg SHO. READ the FINRA AWC;  As set forth in part in the FINRA Release:

FINRA found that, from January 2013 through December 2017, Cantor's supervisory system, including its written supervisory procedures (WSPs), was not reasonably designed to achieve compliance with the requirements of Reg SHO. Cantor's use of a predominantly manual system to supervise its compliance with Reg SHO was not reasonable in light of the firm's business expansion and increased trading activity - from 35 billion shares in 2013 to 79 billion shares in 2014. Also, Cantor's compliance personnel identified red flags in 2013, 2014 and 2015 indicating that the firm had systemic issues with Reg SHO and that its supervisory systems were not reasonably tailored to its business. While Cantor made some changes, it did not adapt and enhance its supervision to address the deficiencies its personnel identified, commit additional staffing to monitoring its compliance with Reg SHO, or implement WSPs relating to its new lines of business until 2016. Moreover, Cantor's enhancements to its supervisory systems and procedures were not fully effective. For example, Cantor failed to identify fails-to-deliver in accounts that were not monitored by its supervisory systems.

FINRA also found that Cantor failed to timely remediate issues identified by its personnel. This was not reasonable considering, among other things, the firm's prior disciplinary history relating to Reg SHO. As a result, Cantor did not timely close-out at least 4,879 fails-to-deliver, and routed and/or executed thousands of short orders in those securities without first borrowing (or arranging to borrow) the security or issuing notice of the need for a pre-borrow to the broker-dealers for whom it cleared and settled trades.

In determining the sanctions imposed, FINRA considered Cantor's prior disciplinary history relating to Reg SHO, that the misconduct occurred over approximately a five-year period, the firm's failure to address red flags in a timely manner, the continuing supervision deficiencies, as well as the firm's efforts to improve its supervisory systems. . .
Without admitting or denying the findings, BB&T Securities consented to an SEC Order alleging that Valley Forge Asset Management, a firm acquired by BB&T Securities, used misleading statements and inadequate disclosures about its brokerage services and prices to convince customers to choose the in-house broker.  Despite promises of a high level of service at a low cost, Valley Forge allegedly did not provide any additional services to advisory clients using its in-house brokerage versus those clients who chose other brokerages with lower commissions.  The SEC Order alleges that Valley Forge charged commissions averaging about 4.5 times greater than charged by other firms and it obscured the price difference by claiming that it was giving clients a 70 percent discount off of its supposed retail commission rate. In settling the SEC Order, BB&T Securities consented to  a cease-and-desist order, a censure, and agreed to pay disgorgement of $4,712,366 and prejudgment interest of $497,387, which it will distribute to affected current and former clients through a Fair Fund, as well as a $500,000 penalty.  BB&T Securities has ended Valley Forge's existing directed brokerage program by amending its cost structure and its disclosures. READ the SEC Order
For stockbrokers representing themselves in a pro se capacity during industry-related lawsuits, often they are stepping into the street for a gunfight but armed only with a knife. Such lopsided encounters don't tend to end well for the guy with the knife (and without the lawyer); however, every so often, truth and justice prevail without an attorney's billable hour. In a recent FINRA expungement arbitration, a lone, pro se stockbroker survives High Noon.
In an Indictment filed in the United States District Court for the Southern District of New York, insurance agent, Robert Merlo, was charged with participating in a scheme to steal more than $2 million in stock certificates from the apartment of a deceased Manhattan woman, open a brokerage account in her name in order to liquidate the stocks, and then use those stolen assets to attempt to purchase over $2 million worth of gold coins. Following a four-day trial, Merlo was convicted of one count of wire fraud and one count of conspiracy to commit wire fraud; and one count of aggravated identity theft, which carries a mandatory sentence of two years in prison.  

In May 2018, a federal grand jury in the United States District Court for the District of Connecticut returned a 12-count Indictment charging Leon C. Vaccarelli, a registered representtaive with The Investment Center and an investment adviser with IC Advisory Services, Inc., with three counts of mail fraud, six counts of wire fraud and three counts of money laundering. On March 5, the grand jury returned a 21-count Superseding Indictment charging Vaccarelli with an additional three counts of wire fraud and six counts of securities fraud. Also, Vaccarelli was the owner and only member of LWLVACC, LLC, and conducted business through an entity named Lux Financial Services ("Lux Financial").  As stated in part in the DOJ Release:

Between approximately 2011 and 2017, it is alleged that Vaccarelli defrauded victim investors of more than $1 million by falsely representing that he would invest his clients' money in IRA rollover accounts, money market accounts, certificates of deposit ("CDs"), or other types of interest-earning investments.  However, instead of investing customers' funds as he had represented, Vaccarelli deposited customer funds into his own personal account and business bank accounts, commingled those funds with his own money, and used the funds to pay both business and personal expenses, including tuition and mortgage payments.  In some instances, he also used customer funds to make bogus "interest payments" to other victim-investors.
SEC Commissioner Hester M. Peirce discussed the SEC's offering and disclosure regime, and touched upon such matters as the "testing the waters" process and the expansion of Reg A exemptions. In her remarks, Peirce noted in part that she was concerned by the Council of Institutional Investors ("CII's") position in response to the Johnson & Johnson shareholder proposal that would shift shareholder disputes with the company to mandatory arbitration 
See: Securities Industry Commentator (February 12, 2019)
Peirce disagrees with CII's characterization of mandatory shareowner arbitration clauses as threatening sound governance. She muses that rather than prohibit such a clause, public shareholders might simply prefer to "divert their investments" from companies that adopt such provisions. [Ed: footnotes omitted]:

[C]II argues that "shareowner arbitration clauses in public company governing documents represent a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business." Among your worries is the non-public nature of arbitration and thus the absence of a "deterrent effect." Other observers likewise have argued that arbitration deprives shareholders of the full panoply of options available in a judicial forum and, depending on how such clauses are crafted, can deprive them of the ability to join together in a class action. Arbitration is also conducted privately with no publication of how the case was decided and on what grounds. 

The problem is that these class actions are rarely decided on the merits. Instead, the cost of litigating is so great that companies often settle to be free of the cost and hassle of the lawsuit.Settlements are rarely public and certainly involve no publication of broadly applicable legal findings. Additionally, such suits can depress shareholder value since they often result in costly payouts to make the suit go away that do not inure to the benefit of shareholders. Indeed, the cost of defending and settling these suits is a substantial cost of being a public company. The result is that the company's shareholders are ultimately harmed by the very option intended to protect them: first by the company's diversion of resources to defend often meritless litigation, and second by the resulting decline in the value of their shares. Case law remains untouched, and the shareholders not involved in the process have no idea what happened. A big chunk of shareholder money typically goes to nice payouts for the lawyers involved.

All that is not to say that I would insist on mandatory arbitration provisions for all companies. That would not be an appropriate exercise of our investor protection mandate. If shareholders value the ability to bring class actions, they can divert their investments to companies that offer such options. I am sure that CII's preferences will be well-attended by issuers seeking your investment money. I trust that shareholders like you are more than capable of handling the matter without our intervention.

    In addition to her above comments, Commissioner Peirce touches upon the broader question of shareholder proposals, which she fears often prompts "backroom deals with the proponents. These deals may not be in the best interest of the company and thus of the other shareholders who have not been part of the process." Also, Peirce offers her views on so-called "self-identification" issues that may arise when a board or nomination committee may consider a candidate's race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background; and she notes in part that [Ed: footnotes omitted]:

    A person who does not want to share his sexual orientation, religion, or ethnic background with the world may face pressure to do just that in order to allow the company to get "credit" for having a diverse board. What happens when a person decides to convert to a different religion or discovers that she has a different ethnic or cultural heritage than she previously understood? Would these changes require her to notify the board for potential reconsideration of her board membership? Will decisions that are, for some people, of an intensely personal nature suddenly become the stuff of 8-Ks?