Securities Industry Commentator by Bill Singer Esq

March 27, 2019

US Supreme Court holds that dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b-5(a) and (c), as well as the relevant statutory provisions, even if the disseminator did not "make" the statements and consequently falls outside Rule 10b-5(b). 

Judge clears way for broker pay lawsuit against Ameriprise (Financial Planning by Kenneth Corbin)
Financial Planning's Kenneth Corbin reports about the Order from the United States District Court for the Central District of California denying Ameriprise's Motion to Dismiss the Complaint of former Financial Advisor Associate Vice President Michael Saunders, and ordering the firm to answer the pending Complaint. As set forth in part in Kenneth Corbin's article:

A federal judge has denied Ameriprise's attempt to dismiss a lawsuit alleging that the firm withheld reimbursement payments and wages from an advisor, allowing a class-action case that could shine an unwelcome spotlight on Wall Street's compensation and employment practices to proceed.

Michael Saunders, who was based in Woodland Hills, California, alleges that Ameriprise extended him a forgivable loan in the form of a transition bonus intended to support his practice. Saunders claims that he used those funds for necessary business purposes such as paying his employees, as stipulated in the agreement, but then Ameriprise failed to reimburse the money.
Put three folks on a FINRA Arbitration Panel and, more often than not, they all agree on the verdict. Although it's not unheard of for a FINRA Arbitration Decision to be merely that of a "majority" of arbitrators rather than "unanimous," such occurrences are unusual. In a recent FINRA public customer arbitration, the Panel split 2:1 in favor of the customer and against FINRA member firm Sterne, Agee & Leach, Inc. As to be expected, not only were there some odd procedural issues in this arbitration but the three arbitrators disagreed about the proper application of the law. All of which makes for some compelling reading. 
In a nine-count Indictment filed in the United States District Court for the Eastern District of New York, Patrick McDonnell a/k/a "Jason Flack" was charged with wire fraud. As set forth in part in the DOJ Release:

[B]etween approximately November 2014 and January 2018, McDonnell portrayed himself as an experienced trader in virtual currency, promising customers he would provide trading advice, and purchase and trade virtual currency on their behalf. Beginning in approximately May 2016, McDonnell made similar representations through his Staten Island-based company, CabbageTech, Corp., also known as Coin Drop Markets. However, neither McDonnell nor CabbageTech provided investment services.  Instead, McDonnell sent investors false balance statements purportedly showing that their investments had been profitable, and stole their money for his personal use. When investors requested refunds, McDonnell initially offered excuses for delays in repayment, and eventually stopped responding at all. In total, McDonnell defrauded at least 10 victims of at least $194,000 in U.S. currency, 4.41 Bitcoin, 206 Litecoin, 620 Ethereum Classic and 1,342,634 Verge currency.

FINRA Arbitrators Recommend Expungement of Customer Complaints Involving Yacht Used As Collateral. In the Matter of the Arbitration Between Mark Richard Maller, Claimant, v. Banc of America Investment Services, Inc., Respondent (FINRA Arbitration Decision 18-02999)
In a FINRA Arbitration Statement of Claim filed in August 2018, associated person Claimant Maller sought the expungement of two settled customer complaints (to which Claimant Maller did not contribute) alleging that the customers "were defrauded by a Ponzi scheme and that executives of Respondent, including Claimant, had prior knowledge of this and failed to warn them about it." Respondent Banc of America took no position on Claimant's requested relief, participated at the expungement hearing, but did not contest the requested expungement. None of the customers responded to notice of the hearing or appeared. In recommending expungement, the FINRA Arbitration Panel found the customers' claim, allegation, or information is facually impossible or clearly erroneous, and false; and, further, that Claimant Maller was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. As set forth in part in the FINRA Arbitration Decision:

Occurrence Nos. 1702981 and 1703273 stem from two separate court cases that were consolidated into one. Claimant obtained summary judgment in his favor in this consolidated lawsuit. However, each matter was separately reported on Claimant's CRD records and stem from the same set of events involving a Ponzi scheme of which neither the customers nor Claimant was aware. 

Claimant credibly testified that he did not give any investment advice to any of the customers nor sell any securities to them. Additionally, the customers did not purchase any securities from Respondent. The only interaction Claimant had was with one customer regarding a loan that the customer took out using his yacht as collateral. The customer used the loan proceeds to further invest in the Ponzi scheme, which had not yet been discovered to be a fraudulent investment. Claimant testified that this customer was extremely sophisticated and Claimant had no obligation to perform any due diligence regarding what Claimant intended to use the funds for, as this was only a loan transaction. Claimant's only concern was the collateral.
In an Order Determining Whistleblower Claims Awards 
the SEC denied the claims of two claimants (Claimant #4 and Claimant #7) but  awarded to two whistleblowers $13 million and $37 million, respectively Claimant #1 and Claimant #2. The claims of three other claimants were also denied in an earlier Preliminary Determination but not re-iterated in the Order because those claimants did not contest the earlier declination. In making its awards, the SEC noted in part in the Order:

[W]e also have taken into account that Claimant #1 unreasonably delayed in reporting the information to the Commission, during which time investors were continuing to suffer harm and the disgorgement amounts upon which Claimant #1's award will be based were growing, and that Claimant #1 passively financially benefitted from the underlying misconduct during a portion of the period of delay.

Page 4 of the Order

On [Redacted]--  following two meetings with Claimant #2 and Claimant #2's counsel -- Enforcement staff opened a new and separate investigation (the "Second Investigation") (the First and Second Investigations are referred to herein collectively as the "Covered Action Investigations") focused on Claimant #2's allegations. During the Second Investigation, Claimant #2 met with Enforcement staff two additional times and provided information and documentation that were of a significantly high quality and critically important to staff's ability to bring the Covered Action Investigations to an efficient and successful resolution. The documents Claimant #2 provided staff were akin to "smoking gun" evidence in that they indisputably showed that [Redacted]

Based on the foregoing contributions that Claimant #2 made to the Commission's successful pursuit of this Covered Action, and considering the relative contributions of Claimant #2 and Claimant #1 to this matter, we adopt the Preliminary Determination's recommendation that Claimant #2 should receive *** of the monetary sanctions collected in the Covered Action, excluding the amount of monetary sanctions for which Claimant #2 has already received an award from the Other Agency under its whistleblower award program.7 In reaching this determination, we have carefully considered the award criteria specified in Exchange Act Rules 21F-5 and 21F-6 as they relate to Claimant #2's contributions to the Covered Action. In particular, we have considered the facts that Claimant #2's information was highly significant and critical to the success of the Covered Action; that Claimant #2 acted swiftly in reporting the information to the Commission; and that Claimant #2 provided continuing additional assistance to the Enforcement staff.


FOOTNOTE 7:  7 On [Redacted] the Other Agency issued Claimant #2 a whistleblower award of [Redacted] calculated as *** of the full [Redacted]of monetary sanctions in the Other Agency Action-including both the [Redacted] payable to the Other Agency and also the [Redacted]. As a result, were we to grant Claimant #2 an award based on the full amount of monetary sanctions collected in the Covered Action, we would effectively grant Claimant #2 a second award with respect to the same [Redacted] that was paid just once in satisfaction of both orders.

We believe this situation exposes an ambiguity in the operation of the organic statutes for our whistleblower program and that of the Other Agency, both of which [Redacted] First, Congress wrote Dodd-Frank to establish a 30% ceiling on awards [Redacted]  To permit double-counting of the [Redacted] Other Agency's award and in our award to Claimant #2 would vitiate the statutory ceiling. Second, neither [Redacted] suggests that Congress considered [Redacted] when a payment to one agency offsets an obligation to the other. [Redacted] Third, permitting such double-counting would also produce the irrational result of encouraging multiple "bites at the apple" in adjudicating claims for the same action and potentially could allow multiple recoveries. See Lawson v. Suwannee Fruit & S.S. Co., 336 U.S. 198, 201 (1949) (rejecting literal application of statutorily defined term that would "create obvious incongruities in the language"); Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1068 (D.C. Cir. 1998) ("If a literal construction of the words of a statute be absurd, the act must be so construed as to avoid the absurdity."). Indeed, we cited similar concerns about multiple "bites at the apple" when we adopted Rule 21F-3(b)(3), which provides that we will not pay on a related action if the whistleblower program administered by the U.S. Commodities Futures Trading Commission has issued an award for the same action. See Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34,300, 34,305 (June 13, 2011); see also Order Determining Whistleblower Award Claim, Release No. 34-77530, at 2 n.1 (April 5, 2016) (ordering that monetary sanctions collected in the covered action or in the related criminal action that are either deemed to satisfy or are in fact used to satisfy any payment obligations of the defendants in the other action shall not be double counted for purposes of paying an award). 

We believe this ambiguity is best resolved by excluding from our award calculation the amount of monetary sanctions [Redacted] for which Claimant #2 already received an award from the Other Agency. This approach respects the textual limit of 30% [Redacted] and thus accords with the fundamental rule that courts should "interpret the statute as a symmetrical and coherent regulatory scheme." FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000) (citation and internal quotation marks omitted).

Pages 5 - 6 of the Order

We find that, as the record clearly demonstrates, Claimant #4 did not provide information that led to the successful enforcement of the Covered Action under Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c) thereunder. In reaching this conclusion, we have carefully considered the entire record as it relates to Claimant #4's award application, including the materials that Claimant #4 submitted in response to the Preliminary Determination and the detailed supplemental declaration prepared by the Responsible Covered Action Staff ("Supplemental Declaration"), as well as a declaration from Regional Office Staff who met with Claimant #4's counsel ("Regional Office Declaration"). 

Under the whistleblower rules, as relevant here, an individual's original information leads to the success of an action where it causes the staff to (i) commence an examination, (ii) open or reopen an investigation, or (iii) inquire into different conduct as part of a current Commission examination or investigation under Rule 21F-4(c)(1) of the Exchange Act; or alternatively, where in the context of an existing investigation, the individual's original information significantly contributes to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act. In determining whether an individual's information significantly contributed to an action, we consider factors such as whether the information allowed us to bring: the action in significantly less time or with significantly fewer resources; additional successful claims; or successful claims against additional individuals or entities. The individual's information must have been "meaningful" in that it "made a substantial and important contribution" to the success of the covered action.

Pages 8 - 9 of the Order [Ed: footnotes omitted]