Securities Industry Commentator by Bill Singer Esq

March 21, 2019

Purchase Yours Today! FINRA Secret Decoder Ring Now Available for $17 to Decipher Hidden Statutory Codes. One of my favorite Wall Street colleagues suggested that I post this piece in order to show what life is like in the fast-lane of industry regulation and in-house compliance. In yet another iteration of a long, long line of dubious notices that emerge hourly from Wall Street's regulatory community, we have this fairly laughable bit of a friendly reminder "FINRA's OTC Quotations in Foreign Private Issues / FINRA Reminds Firms of Their Obligations Under SEC Rule 15c2-11(a)(4)" (FINRA Regulatory Notice 19-09).
FINRA Regulatory Notice 19-09 informs us that it is a "Notice Type: Guidance," which should be routed to Compliance, Legal, Registered Representatives, Systems, Trading, and Training. That's a helluva a lot of guidance! And what of this guidance -- well, the Notice asserts that it is a reminder to FINRA member firms issued by FINRA after consultation with SEC staff. Wow -- sounds really important. This post-SEC-consultation-FINRA-reminder warns FINRA firms about their obligations regarding foreign-private-issuers' quotations.
As a Registered FINRA Notices Explainer, I use a FINRA Secret Decoder Ring. If you don't have a FINRA Secret Decoder Ring, you can purchase one for the introductory price of $17 not including shipping and handling. Available in stainless steel.
WARNING: The FINRA Secret Decoder Ring has small parts that can be a choking hazard. Not for children under 3 years. Not for burned-out compliance officers. Not for former regulators who are now taking up office space at FINRA member firms. Not for top producers who think compliance is bull-shit and regulators are all morons.
After you purchase your FINRA Secret Decoder Ring, try your hand at deciphering the hidden code in the "Summary" portion of FINRA Regulatory Notice 19-09:

In consultation with the staff of the Securities and Exchange Commission (SEC staff), FINRA is issuing this Notice to remind firms of their obligations under Securities Exchange Act (SEA) Rule 15c2-11 and FINRA Rule 6432 (Compliance with the Information Requirements of Rule 15c2-11) regarding quotations in the securities of foreign private issuers that rely on SEA Rule 12g3-2(b). Specifically, we are reminding firms that Rule 15c2-11(a)(4) requires that they make paragraph (a)(4) information reasonably available upon request to any person expressing an interest in a transaction involving the security, such as by providing the requesting person with appropriate instructions regarding how to obtain the information electronically. Firms cannot comply with this requirement by directing customers to an issuer's website if, by its terms, the website restricts access by U.S. persons to the paragraph (a)(4) information. 

FINRA Arbitrator Pens Powerful Rationale for Granting Expungement of Two Complaints
In the Matter of the Arbitration Between John Christian Coyle,Claimant, v. Hilltop Securities, Inc., Respondent (FINRA Arbitration Decision 18-01937)
In this FINRA Arbitration seeking the expungement of two complaints made by the same customer, the sole FINRA Arbitrator found that the customer claim, allegation, information is factually impossible or clearly erroneous, and false. The customer participated at the expungementhearing and contested the requested relief. In recommending expungement, the Arbitrator rendered a beautifully written rationale, which I commend to you consideration:

The customer's claims against Claimant in the underlying arbitration case in connection with Occurrence No. 1717411 amounted to allegations that he stole funds from her account, churned or overtraded her account, and recommended unsuitable investments for her account. Both at the arbitration and the expungement hearing, Claimant testified that she understands nothing about finances and totally relied upon Claimant to assist her. Based almost exclusively on things she was told by others, she concluded that Claimant took advantage of her. The Arbitrator believed that the customer, unfortunately, believed those things and continues to believe them today. The evidence, however, shows quite the contrary. Claimant did not steal any money from the customer, nor did he overtrade her account, and all parties to the arbitration, other than Claimant, including her attorney, who quite competently and zealously represented her at the arbitration, recognized this. By the end of the arbitration hearing, it was apparent that the sole contested issue was whether the investments in customer's portfolio were suitable. The Panel found then, and the Arbitrator continued to find, that the investments were conservative, suitable and that all of them were discussed with the customer prior to purchase. 

As a further reason for expungement, the Arbitrator noted that the current CRD record is confusing and misleading. At one time, there were two customer complaint disclosures; one relating to the initial written complaint from the customer with the S.E.C., and the other relating to the arbitration filed by the customer. Both the written initial complaint and the arbitration arose from the same essential facts, although the legal characterization of the claims changed somewhat during the arbitration. Claimant added his statement contesting the customer's claims to the CRD after the arbitration Award was entered in his favor, but before the arbitration claim was removed from his public CRD record. 

Since all of the customer's claims have been determined to be false and/or clearly erroneous, and since both entries relate to those claims, they should both be removed from the Claimant's CRD record. Leaving either Claimant's statement or the reference to the initial customer complaint on the CRD would perpetuate disclosure of a claim that the Arbitrator has determined to be appropriately expunged pursuant to Rule 2080 as explained in the first paragraph of this explanation.
Operation Varsity Blues alleges that parents bribed coaches to recruit their kids as college-level athletes even if they never played; paid proctors to correct their imperfect SAT answers; and (even easier) hired smarter kids to take the SAT for them. When it comes to this developing story, Aegis Frumento says he's not a disgruntled outsider. He calls himself a disgruntled insider. Frumento, a Harvard graduate, interviews prospective applicants for admission and finds the candidates bright and qualified, but their high school careers are impossibly over-scheduled with AP courses and extracurricular achievements, each student trying to outdo his classmates to impress some faceless college admissions committee. They do it to please their insecure parents and striving teachers, and because they've been brainwashed into thinking the prize of attending a college ranked a spot higher by US News & World Report is worth the abuse they endure. Frumento says that's the fraud that dwarfs Operation Varsity Blues.
In a Complaint filed in the United States District Court for the District of Rhode Island, the SEC alleged, among other things, that Wells Fargo Securities, which served as the placement agent for the 38 Studios bond offering, failed to disclose that the project being financed by the bonds, the development of a video game, could not be completed with the financing the bonds would provide. The Complaint alleged that the defendants did not disclose that even with the proceeds of the loan financed by the 38 Studios Bonds, 38 Studios faced a known shortfall in funding. In addition, the SEC alleged that Wells Fargo and its lead banker on the deal, Peter M. Cannava, failed to disclose to bond purchasers that Wells Fargo was receiving additional compensation from 38 Studios, totaling $400,000, that was directly tied to the issuance of the municipal bonds. Without admitting or denying the allegations in the Complaint, Wells Fargo consented to the Court entering a final judgement against the firm that enjoins the firm from violating provisions of the federal securities laws that require disclosure of material information and fair dealing in municipal bond transactions, specifically Section 17(a)(2) of the Securities Act, Section 15B(c)(1) of the Securities Exchange Act and Rule G-17 promulgated by the Municipal Securities Rulemaking Board and orders Wells Fargo to pay a $812,500 civil penalty. The civil penalty paid by Wells Fargo will be transferred to the bond Trustee for the benefit of bondholders. The SEC's litigation continues against Cannava.
Bishap Mittal pled guilty in to conspiracy to access a protected computer in the United States District Court for the Western District of North Carolina. As set forth in part in the DOJ Release:

[M]ittal was part of a conspiracy that carried out an international internet "Tech Support Scam," by placing fake pop-up ads on victims' computers to convince them they had a serious computer problem, and to induce them to pay for purported "technical support" services to resolve the issue.  Mittal admitted in court today that he and "Individual 1" resided together in Charlotte.  Individual 1 was the owner/manager of Capstone Technologies LLC (Capstone), a company headquartered in Charlotte that claimed to provide computer-related services to its customers.  Capstone conducted business using several different aliases, including Authenza Solutions LLC, MS-Squad Technologies,, MS Infotech, United Technologies, and Reventus Technologies, (collectively, Capstone Technologies).  Individual 1, Mittal, and others carried out the tech support scam using a call center located in India, set up to handle "tech support" calls with potential victims.

According to the information, pop-up ads were a central part of the conspiracy's tech support scam.  Individual 1 and other co-conspirators purchased blocks of malicious pop-up adware from publishers around the world.  The fake pop-ups would suddenly appear on victims' computers freezing their screens, prompting victims to contact Capstone Technologies at a number shown on the pop-up ad.  When victims called the Indian-based tech support center for assistance, the co-conspirators used remote access tools to gain control of the victims' computers.  Once in control of the computers, the scammers identified various fictitious causes for the victims' purported computer malfunction, including the presence of malware or computer viruses, and induced victims to pay for virus clean-up or other tech support services.  The co-conspirators then charged victims between $200 and $2,400 to make computers operable again.  According to the information, Mittal and his co-conspirators defrauded hundreds of victims throughout the United States, some of whom were elderly, of more than $3 million.

SEC Charges Investment Adviser with Stealing Millions from Investors to Perpetrate Ponzi Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Central District of California,, the SEC charged former CPA and unregistered investment adviser Carol Ann Pedersen with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8 thereunder. Pedersen consented to a final judgment that imposes injunctive relief and she will be liable for approximately $2.7 million in disgorgement and interest, which will be deemed satisfied by the anticipated entry of a restitution order against her in a seperate criminal action arising from the same conduct. As set forth in part in the SEC Release, Pedersen:

raised at least $29 million from 25 investors, falsely promising to invest their money in securities. Pedersen told prospective investors that she would place their money in "federally guaranteed" securities with returns typically greater than 8%. Pedersen also solicited investments in the C.A. Pedersen Client Investment Pool, a limited partnership managed by Pedersen that she claimed owned a large and diverse stock portfolio. According to the complaint, rather than make the promised investments, Pedersen used about $25.6 million to make Ponzi-style payments to investors, and the remaining funds to pay for personal expenses including car payments and home renovation costs. To conceal her fraudulent scheme, Pedersen provided investors with fabricated account statements that falsely represented that their money had been invested and was earning a return. Pedersen's scheme fell apart in 2017 when she began to experience chronic cash flow problems and investors sued her.

SEC Proposes Offering Reforms for Business Development Companies and Registered Closed-End Funds (SEC Release)
The SEC proposed rule amendments to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act in an effort to improve access to capital and facilitate investor communications by business development companies and registered closed-end funds. Business development companies ("BDCs") are a type of closed-end fund established by Congress that primarily invest in small and developing companies.The SEC's proposal would allow eligible funds to engage in a more streamlined registration process to sell securities in response to market opportunities. BDCs and registered closed-end funds will be able to use communications and prospectus delivery rules currently available to operating companies. Proposed amendments include new periodic and current reporting requirements and new structured data requirements; and a modernized approach to registration fee payments for closed-end funds that operate as "interval funds." READ the SEC Rule Proposal