Securities Industry Commentator by Bill Singer Esq

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.

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.

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."

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"? 

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 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. 

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. 

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.  

• Securities Industry Commentator
• Bill Singer