Securities Industry Commentator by Bill Singer Esq

March 7, 2019
Baton Holdings LLC, the successor in interest to financial services and marketing company Bankrate Inc., entered into a nonprosecution agreement and agreed to pay $28 million in monetary penalties and restitution. READ the Non-Prosecution Agreement As set forth in part in the DOJ Release:

Bankrate admitted in the resolution documents that former executives engaged in a complex scheme to artificially inflate Bankrate's earnings through so-called "cookie jar" or "cushion" accounting, whereby millions of dollars in unsupported expense accruals were purposefully left on Bankrate's books and then selectively reversed in later quarters to boost earnings.  In addition, Bankrate admitted that former executives misrepresented certain company expenses as "deal costs" in order to artificially inflate publicly reported adjusted earnings metrics, and also made materially false statements to Bankrate's independent auditors to conceal the improper accounting entries.  As a result of the scheme, Bankrate admitted that the fraudulent conduct caused Bankrate's shareholders to suffer at least $25 million in losses.  According to the resolution documents, Red Ventures Holdco LP, which acquired Bankrate in November 2017 after the securities and accounting fraud scheme took place, also agreed to certain terms and obligations under the agreement but had no involvement in the underlying criminal conduct.

. . .

Bankrate Inc.'s former CFO, Edward J. DiMaria, previously pleaded guilty for his role in the scheme and was sentenced by Chief U.S. District Judge K. Michael Moore of the Southern District of Florida to serve 10 years in prison and ordered to pay $21,234,214 in restitution.  Hyunjin Lerner, Bankrate's former vice president of finance, also previously pleaded guilty for his role in the scheme and was sentenced by Judge Moore to serve 30 months in prison and ordered to pay $21,234,214 in restitution.
As set forth in part in the FBI Release:

From multinational cyber syndicates to foreign intelligence services, hacktivists, and insider threats, Wray explained that the FBI takes a multidisciplinary approach to combating threats. For example, the Bureau has an elite rapid deployment force and Cyber Action Teams that can respond to incidents anywhere in the world. In addition, the FBI has joined other federal, state, and local law enforcement agencies on Cyber Task Forces to coordinate responses. Specially trained cyber agents are also embedded in FBI legal attache offices in more than 60 countries worldwide.
Bogucki traded foreign exchange for one of Barclays Bank's affiliates. The Hewlett-Packard Company was one of Barclays' customers, and Bogucki had advance knowledge of HP's intentions to sell 6 billion pounds sterling in market transactions. He knew approximately when HP was going to start selling, and he used that knowledge to depress the price of pounds in the market just before HP sold. He lied to HP about what he was doing, and he warned his team not to let Barclays management know. And he made a fortune for Barclays at HP's expense, and no doubt got a sizable bonus for his efforts. Seems pretty bad, doesn't it? And yet, federal District Judge Charles R Breyer didn't think it was fraud, and acquitted Bogucki of all charges. This acquittal has sent shockwaves through the financial industry.

In the Matter of the Application of Gregory Acosta for Review of Action Taken by FINRA (SEC Order Requesting Additional Briefing; '34 Act Rel. No. 85257; Admin. Proc. File No. 3-18637)]:
As set forth under the "Background" section of the SEC Order [Ed: footnotes omitted

On July 13, 2018, a FINRA "Regulatory Review Analyst" notified FINRA member firm
Kestra Investment Services, LLC, that Acosta, then one of its associated persons, was
disqualified as a result of an order entered against him by the California Insurance Commissioner (the "California Order"), pursuant to FINRA Rule 9522(a)(1). The California Department of Insurance had alleged in an "Accusation" that Acosta took out a life insurance policy in the name of an elderly customer and named himself the beneficiary, and that Acosta also obtained a substantial loan from the customer. The Department of Insurance's administrative complaint alleged that this conduct "violat[ed] . . . California Insurance Code sections 1668.1(a) and (b)," and also alleged that Acosta was "subject to discipline pursuant to California Insurance Code
sections 785, 1738, 1738.5, 1739, 1742 for violations of Sections 1668(i) and (j)."

On May 21, 2018, the California Order was issued based on Acosta's execution of a
Stipulation and Waiver in which, "[w]ithout admitting or denying the [Department's] allegations . . . , [he] acknowledge[d] that, if proven to be true and correct, the facts alleged . . . are grounds for the discipline" by the California Insurance Commissioner "of [Acosta's] licenses and licensing rights, pursuant to the provisions of the Insurance Code of the State of California referred to in [the] Accusation." Acosta agreed that the California Insurance Commissioner would revoke his licenses and licensing rights, "and in lieu thereof, issue . . . restricted licenses for 5 years upon [specified] terms and conditions," including an agreement to "come into compliance with California Insurance Code section 1668.1."

FINRA's notice to Kestra stated that Acosta's disqualification arose because the
California Order was "based on a violation of Section 1668(i) of the California Insurance Code, a law or regulation that prohibits fraudulent, manipulative, or deceptive conduct." FINRA's notice also informed Kestra that, "[g]enerally, no person who is . . . subject to a statutory disqualification shall associate . . . with a FINRA member unless the member requests and receives written approval from FINRA [through] the Membership Continuance process" which involves the filing of an MC-400 Application by the member on behalf of a disqualified person.

Acosta states that Kestra "declined to submit the MC-400 application and in accordance
with FINRA's instruction terminated ACOSTA's association with the firm." According to
Acosta, he "attempted to resolve these issues with FINRA's Regulatory Review staff and with FINRA's Chief Legal Officer," but FINRA staff refused to alter its position that he was statutorily disqualified. Acosta then initiated this proceeding by filing an application for review with the Commission under Exchange Act Section 19(d) and Commission Rule of Practice 420. He also filed a complaint against FINRA in federal district court seeking injunctive anddeclaratory relief, which the court stayed pending "resolution of the SEC proceedings."

The SEC Order seeks additional briefing, and, in specific, has asked the parties to address the following:

Exchange Act Section 19(d) includes among matters subject to Commission review any action by FINRA "bar[ring] any person from becoming associated with a member" or "prohibit[ing] or limit[ing] any person in respect to access to services offered by [FINRA] or [a] member thereof."6 Did FINRA's notice to Kestra constitute an action barring Acosta from becoming associated with a member? 7 Did FINRA's notice prohibit or limit him in respect to access to services offered by FINRA or by a member? 

Given that the membership continuance application process requires the participation of a sponsoring firm, and Kestra apparently declined such participation, are there any other administrative remedies available to Acosta through FINRA to appeal the determination that he is subject to a statutory disqualification? 

In determining whether the California Order is "based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct" under Exchange Act Section 15(b)(4)(H)(ii) and thus subjects Acosta to statutory disqualification under Exchange Act Section 3(a)(39), what is the relevance, if any, of Acosta's assertions that he neither admitted nor denied the allegations at issue; that the California Order "does not refer to Section 1668(i) of the California Insurance Code"; and that the California Order "is not based on fraud" because [t]he only non-procedural statute referenced . . . is Section 1668.1 [which] is not a fraud based statute, and is entirely and completely separate and distinct from 1668(i)"? 

What is the relevance, if any, of the California Order's acknowledgment that "if proven to be true and correct, the facts alleged in [the] Accusation are grounds for the discipline, . . . pursuant to the provisions . . . referred to in [the] Accusation"? 

In setting out topics for further briefing, the SEC Order references the following issues in two footnotes:

7 Among other things, the parties should address the relevance, if any, of Commission decisions addressing when SRO action effectively bars a person from associating with a member. Compare, e.g., Jon G. Symon, Exchange Act Release No. 41285, 1999 WL 212709 (Apr. 14, 1999) (finding that denial of examination waiver "effectively barred" applicant thereby establishing Commission jurisdiction to consider appeal); Richard T. Sullivan, Exchange Act Release No. 40671, 1998 WL 786943 (Nov. 12, 1998) (finding jurisdiction because revocation of registrations in all capacities for failure to pay fines and costs effectively barred applicant), with Joseph Dillon & Co., Exchange Act Release No. 43523, 2000 WL 1664016 (Nov. 6, 2000) (finding that denial of exemption from rule requiring that firm have special supervisory procedures did not constitute bar or otherwise provide jurisdictional basis for Commission review because, unlike in cases "where we have held that NASD action having the effect of barring an individual from association with all NASD members -- whether the individual is barred or not -- is reviewable under Section 19(d)," NASD's action denying the firm an exemption did not limit the ability of Dillon's employees "to associate with NASD members"). 

8 The Commission has noted that "in those cases in which we have found a denial of access, an SRO had denied or limited the applicant's ability to use one of the fundamentally important services offered by the SRO. The services at issue were not merely important to the applicant but were central to the function of the SRO." Sky Capital LLC, Exchange Act Release No. 55828, 2007 WL 1559228, at *4 (May 30, 2007) (citation omitted). The parties should address the relevance, if any, of the Commission's cases applying that standard. Compare, e.g., Sec. Indus. and Fin. Mkts. Ass'n, Exchange Act Release No. 72182, 2014 WL 1998525 (May 16, 2014) (holding that the Commission generally has jurisdiction to consider fee rule challenges as limitations on access); Tower Trading, Exchange Act Release No. 47537, 2003 WL 1339179 (Mar. 19, 2003) (finding jurisdiction based on SRO's termination of member firm's status as a market maker); with Sky Capital LLC, 2007 WL 1559228 (finding no jurisdiction to review SRO's alleged failure to act on complaints referred to its ombudsman).
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Australian-based investment advisor Goldsky Asset Management's Forms ADV for 2016 and 2017, which its owner Kenneth Grace signed, falsely stated that Goldsky's hedge fund, Goldsky Global Alpha Fund, LP, had an auditor, a prime broker and custodian, and an administrator. In its Forms ADV and ADV Part 2A, Goldsky allegedly stated that it managed over $100 million in discretionary assets under management, when it in fact had no assets. Further, the Complaint alleged that Goldsky's website falsely claimed that Goldsky Global Alpha Fund earned 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. Without admitting or denying the allegations in the company, Goldsky and Grace agreed to the entry of final judgments enjoining them from violating the antifraud provisions of Sections 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and ordering Goldsky and Grace to pay civil monetary penalties of $50,000 and $25,000, respectively.

In the Matter of Department of Enforcement, Complainant, v. Jim Jinkook Seol  Respondent (Decision, FINRA National Adjudicatory Council, Complaint No. 2014039839101)
%20Jinkook%20Seol%20CRD%202876279%20NAC%20Decision%20va.pdf As set forth in the NAC Decision under the heading "Decision":

In September 2011, while associated with Ameriprise Financial Services, Inc. ("Ameriprise"), Jim Jinkook Seol formed Western Regional Center, Inc. ("WRCI"), a California corporation, and began serving in several capacities, including WRCI's CEO and president. Between June 2012 and December 2013, Seol, through WRCI, solicited investments in California Energy Investment Fund 1, LP, a limited partnership that Seol formed to serve as a qualifying investment facility under the US Citizenship and Immigration Services' Employment Based Category 5, or EB-5, program. Seol sold $100 million in units of California Energy Investment Fund to 200 investors. In addition, in October 2013, Seol, through WRCI, entered into a consulting agreement with an entity named YL Partners, Inc. Seol agreed to assist YL Partners with the identification and solicitation of five qualified foreign nationals to develop and operate 10 yogurt shops in the US.

This case focuses on three legal issues: (1) whether Seol's activities with WRCI, including his solicitation and sales of investments in California Energy Investment Fund, violated FINRA's prohibition against undisclosed private securities transactions; (2) whether Seol's activities with WRCI, including his role as the company's president and CEO and his consulting agreement with YL Partners, violated FINRA's prohibition against undisclosed outside business activities; and (3) whether Seol provided false statements on Ameriprise's annual compliance questionnaires in response to questions concerning his private securities transactions and outside business activities. In the proceedings below, the Hearing Panel determined that Seol participated in undisclosed private securities transactions, engaged in undisclosed outside business activities, and provided false statements on Ameriprise's annual compliance questionnaires. The Hearing Panel barred Seol in all capacities for the violations. After an independent review of the record, we affirm the Hearing Panel's findings and sanctions. 

In reviewing the Office of Hearing Officer's sanctions, the NAC noted that the Bar in all capacities was a so-called "unitary sanction," that addressed the related misconduct. In affirming that extreme sanction, the NAC noted in part that [Ed: footnotes omitted]:

Seol's misconduct presents several aggravating factors. First, over the course of nearly two years, Seol raised $100 million from 200 foreign investors.Second, Seol had a proprietary interest in both WRCI and California Energy Investment Fund, the entity on whose behalf the $100 million in investments were solicited.Third, for at least three years, Seol failed to provide Ameriprise with written notice of his WRCI activities, including his solicitation and sales of investments on behalf of California Energy Investment Fund. Fourth, Seol personally solicited investors for California Energy Investment Fund's offering. Fifth, Seol improperly used Ameriprise's name in the solicitation of sales for California Energy Investment Fund's offering  Sixth, Seol intentionally misled Ameriprise about the existence of WRCI, and the selling activities he conducted through WRCI, on several different occasions. Finally, Seol received significant compensation through WRCI in the form of salary and tax distributions for the solicitation and management of the foreign investors' investments in California Energy Investment Fund. Seol's undisclosed private securities transactions and undisclosed outside business activities, coupled with his false responses on Ameriprise's annual compliance questionnaires, sidestepped Ameriprise's supervision of his activities and deprived Ameriprise of the opportunity to protect itself and California Energy Investment Fund's investors. 

Page 20 of the NAC Decision
In a FINRA Arbitration Statement of Claim filed in October 2017, customer Claimants asserted breach of fiduciary duties, violation of FINRA Rule 2010, negligence and negligent misrepresentation. Claimants sought at least $1,125,000.00, lost profits; at least $690,000 consequential and incidental damages; interest; costs, and fees. 
Respondent generally denied the allegations and asserted various affirmative defenses. Beyond informing us that the "causes of action relate to various securities," the veil of secrecy attached to many FINRA arbitrations has firmly descended upon this case and we know nothing of the underlying facts.  Through this shroud of dubious secrecy, the FINRA Arbitration Panel found Respondent Interactive Brokers liable and ordered it to pay a $600 filing fee reimbursement and to pay to:
Claimant Fortune Commodities: $568,527.24 in compensatory damages plus interest 
Claimant Elegant Commodities DMCC: $256,167.54 in compensatory damages, plus interest

In the Matter of the Arbitration Between James W. Hall, II, Claimant, v. National Planning Corporation and Michael Douglas Rees, Respondent (FINRA Arbitration Decision 17-00253)
In a FINRA Arbitration Statement of Claim filed in January 2017, associated person Hall asserted  breach of a written contract against Respondents NPC and Rees; reformation to add signature; failure to supervise; breach of duties of good faith and fair dealing; and unjust enrichment founded on a written instrument. The causes of action allegedly arose from Respondent Rees' purchase of Claimant Hall's book of business that was memorialized in a contract ("the Agreement") between them. Claimant sought an finding that the Agreement is enforceable against both Respondents and $224,000 in contractual damages plus interest and costs. Respondents NPC and Rees generally denied the allegations and asserted various affirmative defenses. Respondent Rees apparently filed a Counterclaim and/or an Amended Counterclaim asserting breach of contract, common law fraud and fraudulent inducement; and breach of duties of good faith and fair dealing. At the beginning of the February 5, 2018 hearing, Claimant dismissed with prejudice Respondent NPC and, accordingly, the Panel did not render any findings against the firm. The FINRA Arbitration Panel found Respondent Rees liable and ordered him to pay to Claimant Hall $260,000 in compensatory damages with interest.

In the Matter of the Arbitration Between Jean M. Innucci, Claimant, V. Santander Securities, LLC, Respondent (FINRA Arbitration Decision 17-00227).
In a FINRA Arbitration Statement of Claim filed in January 2017, associated person Claimant Innucci asserted  defamation; tortious interference with prospective economic advantage; and wrongful termination. Claimant sought at the close of hearings, Claimant sought:

total damages for wrongful termination, defamation, and tortious interference with prospective advantage in the amount of $2,956,508.02, comprised of the following: (i) back pay of $796,352.38, calculated from July 1, 2016 - January 1, 2019 (30 months @ annualized amount of $318,540.95); (ii) front pay of $2,070,566.00 calculated from January 1, 2019 - Claimant's 65th birthday (78 months @ annualized amount of $318,540.95); (iii) interest on back pay' at $89,589.64, calculated as follows: (a) July 1, 2016 - December 31, 2016 (27 months) of $32,252.27; (b) January 1, 2017 - December 31, 2017 (18 months interest) of $43,003.03; (c) January 1, 2018 - December 31, 2018 (6 months interest) of $14,334.34; and (d) Note: Interest on back pay of $5,972.64 per month going forward. Claimant also requested punitive damages, assessment of forum fees to Respondent, and expungement of information from Claimant's Form U5.  

Respondent Santander generally denied the allegations and asserted various affirmative defenses. The FINRA Panel of Arbitrators found Respondent Santander liable and ordered the firm to pay to Claimant Innucci $383,000 in compensatory damages plus interest. Based upon its finding of defamation, the Panel recommended the expungement of the "Reason for Termination" and the "Termination Explanation" from Claimant's Form U5 and recommended that the reason be revised to "Other," and the explanation to "Termination at Will for reasons other than those specified . . ."