Securities Industry Commentator by Bill Singer Esq

April 5, 2019
As set forth in part in the FINRA Special Notice:

[F]INRA encourages the involvement of its member firms and engagement with its stakeholders through its advisory and ad hoc committees, as well as the National Adjudicatory Council (NAC), Regional Committees, the FINRA Board of Governors (FINRA Board) and the FINRA Investor Education Foundation Board (Foundation Board). FINRA can combine feedback and guidance from its advisory committees and industry outreach with the input from the investing public and others representing them to enrich its regulatory programs and develop solutions that are more practical, tailored and effective. 

FINRA has 15 advisory committees that provide feedback on rule proposals, regulatory initiatives and industry issues. In addition, FINRA consults with 16 ad hoc committees created by various departments on specific subject-matter issues. The FINRA Board includes both industry and public members who offer their unique perspectives in their oversight of management in the administration of FINRA's affairs and the promotion of FINRA's goals and objectives. In addition, the Foundation Board directs the FINRA Investor Education Foundation, a non-profit foundation furthering FINRA's investor protection goals by helping empower underserved Americans with the knowledge, skills and tools to make sound financial decisions throughout life. 

FINRA conducts elections each year to fill member firm positions on its five Regional Committees, the NAC, the Small Firm Advisory Committee (SFAC) and the FINRA Board. The FINRA Board appoints the remainder of the advisory committee members and FINRA staff selects ad hoc committee members. In addition, the Foundation Board members are appointed by FINRA. 

This Notice provides: (i) an overview of each elected or appointed vacancy to be filled in 2019; (ii) a description of responsibilities for the various bodies; and (iii) a summary of how eligible individuals can become candidates for appointment or election. . . .

Bill Singer's Comment: 

How I wish that I could believe so much as one word in FINRA's Special Notice. Unfortunately, year after year after year, we read the same promises of a more inclusive and more responsive self-regulatory-organization, but the results always come off more as a thin smear of plaster rather than a gut-job and rebuild -- which is what is needed. I have long argued that FINRA is run by a gerrymandered Board of Governors engineered to minimize the input of the majority of the organization's Small Member Firms. The Board used to be one-firm-one-vote but is now rigged in favor of larger firms and powerful interests. Shamefully, this purported self-regulator offers no vote to the hundreds of thousands of registered representatives who are its member firms's most valuable asset, and no vote to the millions of public investors and/or their advocates. In the end, FINRA is little more than the lap-dog of its large firms and a glorified trade group pretending to represent Wall Street's "stakeholders," whatever that term means. 

As a vocal but sincere critic of Wall Street self-regulation, as a proponent for the enfranchisement of all industry stakeholders into what I call a private-sector-regulatory-organization, as one of the founders of the NASD and then FINRA Dissident Movement, I note with bemusement that the one and only time the SRO asked me to serve in any capacity was in 2000, when former NASD Chairman Frank Zarb appointed me to the "NASD Chariman's Advisory Group," which met four times that year. As best I could tell, the main purpose of those meetings was to sit around a large conference table and eat lukewarm chicken. No . . . I have little interest at this point in my career in sitting on one of FINRA's 15 so-called "advisory" committees. Frankly, I'm content to be that lone voice in the wilderness calling upon FINRA to atone for its sins but doing so with some humor and a generous dose of sarcasm. For those of you who do wish to make a difference and re-direct the misguided voyage of FINRA, go online, fill out FINRA's "Indication of Interest in FINRA Service Form" and do your very best to rescue the self-regulatory-organization from those who have hijacked it. 

One last point, my criticism of FINRA's failings as an institution is not directed at either its President/Chief Executive Officer Robert Cook or its Executive Vice President/Enforcement Susan Schroeder. There is NO question in my mind -- none whatsoever -- that Cook and Schroeder are the best professionals to have held their respective titles in the history of NASD and FINRA. Did I actually write that? Wow! I'm either getting soft in my old age or those two have truly impressed me -- let's go with the latter choice. Cook and Schroeder are intelligent, thoughtful and sincere, and both have a keen sense of the competing industry forces and outside demands that buffet FINRA daily. As I often lament, however, my anger with FINRA is not based upon what the self-regulatory-organization is but with what it should be, and what it could be. With Cook and Schroeder, we have regulators capable of re-imagining and refashioning FINRA.  Your role is to politely nudge them in that direction. My role is to hector and harangue them into taking action. If you do your job, they will send you a nice thank-you note. If I do my job, they will continue to throw darts at my photo on the dartboard in their office.

You know, with a headline like that, what's the point of adding any text to the body of the release? Oh well, in any event, Yevgeniy Braziler pled  guilty to one count of securities fraud in the United States District Court for the Eastern District of New York and was sentenced to 36 months in prison with restitution to be determined.  As set forth in part in the DOJ Release: 

Braziler and his associates promised potential investors, many of whom were elderly and some of whom suffered from dementia, that real estate companies in Brooklyn that he managed would use investments to purchase, renovate, rent and re-sell residential real estate in and around Buffalo and Niagara Falls, promising high returns for the investors.  In response, investors sent him over $1.8 million.  Instead of using the money for the promised purposes, Braziler stole most of it.  For example, investors sent one of Braziler's investment vehicles, Buffalo Housing, at least $978,000, but Braziler purchased only one property for approximately $12,000, and kept most of the money for himself and others.  In all, Braziler kept at least $323,510 of investors' money for his own use, which he spent on credit card bills, pet supplies, alcohol, restaurants and his child's school tuition.  The investors lost nearly all of their money.

SEC Charges Maine Resident with Defrauding Investors in $3 Million Christian Concert Scheme (SEC Release)
In a Complaint filed in the United States District Court for the District of Maine,, the SEC 
charged concert promoter Jeffrey E. Wall and his company Lighthouse Events, LLC with having violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) the Securities Exchange Act and Rule 10b-5 thereunder, and the registration provisions under Sections 5(a) and 5(c) of the Securities Act. The SEC seeks permanent injunctions, civil penalties, and disgorgement plus prejudgment interest against Wall and Lighthouse. As set forth in part in the SEC Release:

[F]rom approximately January 2014 through October 2018, Wall and Lighthouse raised more than $3 million from approximately 145 investors to promote Christian music concerts and festivals in the New England area. As alleged, Wall and Lighthouse falsely told potential investors, among other things, that their funds would be used solely to promote and host Christian music concerts and festivals, claiming that repayment of the investment was "secured" and "guaranteed" within one year of the initial investment. Instead, they used investor funds for other expenses, including payment of Lighthouse's existing debt and payments to earlier investors using later investors' money. According to the complaint, Wall and Lighthouse also failed to disclose material information to potential investors about Lighthouse's deteriorating financial condition from declining ticket sales and its growing high-interest debt from short-term loans. Wall and Lighthouse have failed to repay approximately $1.6 million of the monies fraudulently collected from investors.

In The Matter Of The Applications Of Bart Steven Kaplow, Daryl Andrew Cole, Frank Cuenca, Thomas Prentice, Kurt Jackson, Brock Mosely, Ronald R. Wetzel, Peter A. Ramsay, Donald Anthony Wojnowski, Mark Vernon Rottler, Carl G. Gordinier, and Timothy Arthur Vanderver III For Review of Action Taken by FINRA (SEC Order Consolidating Proceedings and Postponing Further Briefing; '34 Act Rel. No. 85509; Admin. Proc. File Nos. 3-18877, 3-18879, 3-18883, 3-18894, 3-18910, 3-18919, 3-18934, 3-18988, 3-19013, 3-19016, 3-19017, and 3-19019) As set forth in the Syllabus of the SEC Order:
On January 31, 2019, FINRA filed a motion to stay proceedings in several applications for review of FINRA action. These applications challenge FINRA action declining to permit associated persons of member firms to use FINRA's arbitration forum to seek expungement of prior adverse arbitration awards arising from customer disputes. We consolidate the twelve proceedings listed in the caption above for purposes of a decision on the Commission's jurisdiction based on the briefs filed in Bart Steven Kaplow and pursuant to this order
It may be that the SEC is coming after you but you just can't afford a lawyer; and you're not going to go down without a fight. In a fighting mood or not, even boxing has the Marquess of Queensberry Rules. For many industry respondents who are asked to doff the old boxin' gloves and climb into the ring with a regulator, sometimes the problem is as mundane as how to find the location of the hearing room or where to sit or when to stand. Similarly, there's always a first time for everything, and even lawyers may not be sure as to what's what for their first trial or hearing. In that spirit, today's blog presents a recent SEC "Scheduling Order," which is pretty much a primer on the preliminaries leading up to the clanging of the bell for Round One.
Following a jury finding of fraud, the United States District Court for the District of Massachusetts entered final judgment against the former Chief Financial Officer of AVEO Pharmaceuticals, Inc., David Johnston, barring him from serving as an officer or director of a public company for two years; imposing a $120,000 penalty; ordering him to pay disgorgement of $5,677; and enjoining him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5 and 13a-14 thereunder. In its Complaint, the SEC had alleged that Johnston, AVEO, and two other AVEO officers had defrauded investors through misleading statements about the prospect for FDA approval of AVEO's flagship drug.  Further, during the relevant time, Johnston traded in AVEO stock when the FDA's complete views were not revealed to the market. AVEO previously agreed to pay a $4 million penalty to settle the SEC's charges without admitting or denying the allegations in its complaint, and the SEC obtained final judgments against the two other former AVEO executives.

The United States District Court for the District of New Jersey entered final judgments permanently enjoin  Evan R. Kita, Daniel Perez, Richard Yu, and Chiang Yu from violating the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act and Rules 10b-5 and 14e-3 thereunder, and ordered them to pay $442,006 in combined disgorgement and prejudgment interest, which will be deemed satisfied by forfeiture ordered or paid in the parallel criminal cases. In the parallel criminal actions Kita, Perez, Richard Yu, and Chiang Yu pled guilty to criminal charges and were ordered or agreed to forfeit their ill-gotten gains. Kita was sentenced to six months in prison. Perez, Richard Yu, and Chiang Yu were sentenced to probation. In a separate administrative proceeding, the SEC issued an order permanently suspending Kita from appearing and practicing before the SEC as an attorney. As set forth in part in the SEC Release

The SEC charged on August 31, 2017, alleging that Kita, a CPA and former accountant at Celator Pharmaceuticals Inc., provided confidential information about the company to Perez and Richard Yu, who purchased Celator stock based on Kita's tips and agreed to share their trading profits with Kita. The SEC further alleged that Richard Yu passed the tips to his father, Chiang Yu, who also traded. According to the complaint, to avoid detection, Kita communicated with Perez and Richard Yu through an encrypted smartphone application.

FINRA Fines and Suspends Rep in Real Estate Fund Note Offering. In the Matter of John D. Ernst, Respondent (FINRA AWC 2017054932701, February 26, 2019)
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, John D. Ernst submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA alleged violations of FINRA Rules 3280 and 2010; and imposed upon Ernst a $5,000 fine; $22,753 in disgorgement (reflecting a reduction of  $12,500 disgorgement ordered by State of Wisconsin relating to same promissory note sales) of a portion of commissions plus interest; and a nine-month suspension from association with any FINRA member firm in all capacities. As set forth in part in the AWC:

During the Relevant Period, Ernst solicited investors to purchase promissory notes relating to Woodbridge, a purported real estate investment fund. Ultimately, Ernst sold $509,000 in Woodbridge promissory notes to four investors, three of whom were Firm customers. He received $35,252 in commissions in connection with the transactions. In December 2017, Woodbridge filed a voluntary Chapter 11 bankruptcy petition. The Firm's written supervisory procedures specifically required registered representatives to request and obtain approval prior to engaging in private securities transactions, including the offer of promissory notes. Ernst did not provide notice to the Firm prior to participating in the private securities transactions, nor did he obtain approval from the Firm. Additionally, on the annual compliance questionnaires that Ernst submitted to the Firm for 2015, 2016, and 2017, Ernst indicated that he had not "participated in any private securities activities without first obtaining written approval from the Firm." On the annual compliance questionnaires that Ernst submitted to the Firm for 2016 and 2017, Ernst indicated that he had not sold promissory notes.