Securities Industry Commentator by Bill Singer Esq

May 8, 2019

Various national securities exchanges and National Market System ("NMS") plan participants (collectively, "Movants") request that the Commission reconsider an October 16, 2018 order. That order remanded to those exchanges and plan participants challenges filed by the Securities Industry and Financial Markets Association ("SIFMA") and Bloomberg L.P. (collectively, "Applicants") to exchange rule changes and NMS plan amendments ("Remand Order").1 For the reasons explained below, their motions are denied, but the deadlines for complying with the directives in the Remand Order are extended.
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Footnote 1:  Sec. Indus. & Fin. Mkts. Ass'n, Exchange Act Release No. 88433, 2018 WL 5023230 (Oct. 16, 2018). Five pending motions were filed by the following groups or entities: (1) New York Stock Exchange LLC, NYSE Arca, Inc., NYSE American LLC, and NYSE National, Inc. (collectively, "NYSE"); (2) Cboe Exchange, Inc., Cboe C2 Exchange, Inc., Cboe BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., and Cboe EDGX Exchange, Inc.; (3) Miami International Securities Exchange LLC and MIAX Pearl LLC; (4) The Consolidated Tape Association, through New York Stock Exchange LLC, acting in its capacity as Network Administrator of the Consolidated Tape Association and Consolidated Quotation Plan; and (5) the Options Price Reporting Authority, LLC. The Nasdaq Stock Market LLC, Nasdaq PHLX LLC, Nasdaq BX, Inc., Nasdaq ISE, LLC, Nasdaq GEMX, LLC, and Nasdaq MRX, LLC also filed a motion for reconsideration and withdrew it before filing a petition for review of the Remand Order in the D.C. Circuit. The Nasdaq Stock Market LLC, acting as administrator of the Nasdaq/Unlisted Trading Privileges Plan, also filed and withdrew a motion for reconsideration before filing a petition for review of the Remand Order in the D.C. Circuit.

In Re Express Scripts Holdings Company Securities Litigation (Summary Order, United States Court of Appeals for the Second Circuit, 18-CV-1850)
The Lead Plaintiff/Appellant Teachers Insurance and Annuity Association (ʺTIAAʺ) appeals from the May 22, 2018 judgment of the United States District Court for the Southern District of New York ("SDNY") dismissing its Second Amended Complaint (the ʺComplaintʺ), which alleged that Defendants Express Scripts Holding Company (ʺExpress Scriptsʺ), George Paz, Timothy Wentworth, Eric Slusser, David Queller, and James M. Havel (collectively, ʺDefendantsʺ) made materially false or misleading statements in connections with securities' sales/purchases. In its appeal, TIAA argues that SDNY incorrectly held that the Complaint failed to adequately alleged that the Defendants made the cited statements/omissions and had acted with scienter. As set forth in part in the Summary Order:

[I]n April 2009, Express Scripts and Anthem entered into a ten‐year agreement (the ʺAgreementʺ) for Express Scripts to serve as Anthemʹs exclusive pharmacy benefits manager, making Anthem its most important customer.  Under generally accepted accounting procedures (ʺGAAPʺ), the Agreement was an intangible asset and accounting for the Agreement was ʺbased on its useful life to [Express Scripts],ʺ and, under GAAP, Express Scripts was required to update any changes to the Agreementʹs useful life.  Appʹx at 637 (alterations and internal quotation marks omitted).  From 2009 to April 25, 2016, Express Scripts amortized the Agreement over a 15‐year period in its filings with the Securities and Exchange Commission (ʺSECʺ) because it anticipated renewing the Agreement with Anthem.   

Under Section 5.6 of the Agreement, Anthem could engage in a periodic pricing review every three years.  Both parties agreed to negotiate any new pricing terms under this section in good faith.  The first periodic pricing review took place in 2011, lasted nearly a year, and ʺplaced a substantial strain on Express Scriptsʹs relationship with Anthem.ʺ  Appʹx at 644.  Anthem initiated the second periodic pricing review in October 2014 and took a ʺmore aggressiveʺ approach, initially demanding nearly $15 billion in total pricing concessions.  Appʹx at 646, 649.   

The Complaint alleges that during the Class Period Defendants made several positive statements, discussed further below, about Express Scriptsʹs relationship and negotiations with Anthem.  The Complaint further alleges that these statements were false or misleading because in fact both parties had accused each other privately of not proceeding in good faith; Anthem served Express Scripts with two notices of breach; and Express Scripts rejected or failed to respond to Anthemʹs proposals and refused on a number of occasions to meet with Anthem.  On March 21, 2016 ‐‐ the last day of the Class Period ‐‐ Anthem sued Express Scripts for breaching the Agreement.  Express Scripts disclosed the litigation and adjusted its amortization of the Agreement to reflect the assumption that the Agreement would not be renewed beyond its ten‐year term.  

at Pages 3 - 4 of the 2Cir Summary Order

In its Summary Order, 2Cir found that SDNY " correctly held that no reasonable investor would find these statements false, misleading, or incomplete." at Page 9 of the 2Cir Summary Order. In reaching its conclusions, 2Cir found that the statements at issue were "expressions of puffery and optimism" and constituted mere "opinions" that did not rise to the level of securities-law violations. Further, placing the cited statements in context, 2Cir characterized them as part of a dialog that took the form of ongoing discussions, which should "'suggest only the hope . . . that the talks would go well' and 'did not become materially misleading when the talks did not proceed well.'" at Page 9 of the 2Cir Summary Order. Finally, in rejecting any allegation that Defendants had acted with scienter, 2Cir found that:

[A]s the allegations of the Complaint and the content of the relevant documents make clear, Defendants could not have known that the negotiations with Anthem would ultimately fail, especially considering the fact that the first periodic pricing review was successful even though it took ʺapproximately a year,ʺ was ʺcombative,ʺ and led Anthem to ʺraise[] the possibility of litigationʺ to resolve the contractual dispute.  Appʹx at 642‐44.  The fact that Defendantsʹ optimism ʺturned out to be unwarranted is not circumstantial evidence of conscious fraudulent behavior or recklessness.ʺ  Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000).  Much of what TIAA alleges is ʺfraud by hindsight,ʺ but Defendants ʺneed not be clairvoyant.ʺ  Novak, 216 F.3d at 309.   Allegations, like these, ʺthat defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud.ʺ  Id.  

at Pages 12 - 13 of the 2Cir Summary Order
You post an ad to sell your used car. I answer the ad. We agree on a price -- let's say $3,500. I pay you the funds. You deliver the title to me. I drive the car away. The next day, you see an ad posted by me asking $7,000 for the same car that you just sold to me. For whatever reason, you feel cheated. I didn't put a gun to your head. You were happy with the cash that you got for your clunker. I have incurred all the risk of flipping the car that I just paid for. Still, you feel cheated and angry. Now, imagine that instead of the sale of a used car, we got two guys who engineered the sale of an investment firm, and the seller gets wind of the buyer's plan to flip the biz. Read today's blog to see how that case made its way through a FINRA arbitration.
Stanley Hugochukwu Nwoke a/k/a "Stanley Banks," "Banks," "Hugo Banks," "Banky," and "Jose Calderon," pled guilty in the United States District Court for the District of Connecticut to one count of conspiracy to commit wire fraud; and, as part of his plea, he agreed that the loss related to his role in the scheme is at least $109,100 (the total loss is purportedly over $1.8 million ) and he agreed to a restitution order of $662,053.87. As set forth in part in the DOJ Release:

[N]woke conspired with Adeyemi Odufuye and others in a business compromise scheme that targeted hundreds, if not thousands, of CFOs, controllers and others at businesses, nonprofit organizations, and schools in Connecticut and across the United States.  As part of the scheme, Odufuye, Nwoke and others, including Olumuyiwa Yahtrip Adejumo, sent e-mails addressed to executives that were made to appear to be sent from the legitimate e-mail address of the CEO or other executive from the business.  The emails were sent with the intent of having the recipients send or wire money to bank accounts used by members of the conspiracy.

The investigation revealed that scheme participants controlled multiple e-mail and social media accounts used in the scheme and, in certain instances, sent e-mails and attachments containing malware to the intended recipients.

In late 2015, Odufuye and others sent or caused to be sent dozens of e-mails to the controller of a company in Torrington, Connecticut.  In the e-mails, Odufuye posed at the real CEO of the victim company and instructed the controller to send multiple wire transfers exceeding a total of $1 million from the company's accounts to various individuals and purported entities.  The company then sent five wire transfers totaling more than $500,000 to accounts in Virginia, Florida, Washington, D.C., and Hong Kong.

Georgia Investment Representative Pleads Guilty To Stealing Over $1.4 Million From Elderly Brentwood Woman (DOJ Release)
Jay Costa Kelter pled guilty in the United States District Court for the Middle District of Tennessee, to wire fraud and securities fraud. As set forth in part in the DOJ Release:

[B]etween March 2014 and August 2016, Kelter embezzled over $1.4 million from an elderly client who lives in Brentwood, Tennessee.  As part of his scheme, Kelter convinced the victim to move her investments from a private investment company to a discount brokerage firm. Kelter used his access to the woman's accounts to periodically sell securities held in those accounts to pay for transfers to his own pass-through company. On one occasion, Kelter impersonated the victim while confirming a trade in her accounts.

Kelter did not divulge ownership of the pass through company when confronted by the victim, but later admitted that he directed the withdrawals from the accounts to his company. Kelter used portions of the stolen funds to purchase luxury cars, custom jewelry, and vacations, and to repay losses owed to other investment clients.

Boston Man Pleads Guilty to Business Loan Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the District of Massachusetts, Igor Mosieev were each charged with two counts of bank fraud and one count of aggravated identity theft; and Alexander Grinis was charged with one count of false statements on loan applications.  Grinis pled guilty to one count of false statements on loan applications. Previously, Mosieev pled guilty. As set forth in part in the DOJ Release:

Grinis was the manager of Eastern Bank in Auburndale. Among his responsibilities were assisting customers with opening and closing accounts and applying for loans and lines of credit. In approximately February 2015, Grinis assisted Mosieev in opening a checking and savings account at Eastern Bank with the license and Social Security card of another individual, without the knowledge or consent of that person. Later that year, Grinis assisted Mosieev in adding the individual to a business account in the name of TFC Enterprises, LLC. Thereafter, Moiseev forged the individual's name on applications for two purported business loans. On each loan application, Grinis falsely certified that he had complied with all bank procedures and, as a result, the loans were approved. The proceeds of the two loans were subsequently distributed to the business checking account and Moiseev forged the individual's name on checks and withdrew money from the account to pay for his own personal expenses. In addition, Moiseev, with Grinis' assistance, caused proceeds from the business checking account to be wire transferred to Russia, Canada, and elsewhere overseas using the individual's name. Both loans defaulted and were never paid back to Eastern Bank, resulting in a loss of over $90,000.

SEC Charges Nevada Man Who Traded on Confidential Information Taken From Lifelong Friend (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of Florida, the SEC alleged that Brian Fettner violated Section 10(b) of the Securities Exchange Act and Exchange Act Rule 10b-5.  Without admitting or denying the allegations in the complaint, Fettner consented to the entry of a final judgment permanently enjoining him from violating the charged provisions of the federal securities laws and imposing a penalty of $252,995.  Relief Defendant Liselotte Sandberg, Fettner's ex-wife; and Relief Defendant Kathy M. Micali, Fettner's former girlfriend each profited when Fettner used their brokerage accounts to place illicit trades, and both have agreed to disgorge those profits with prejudgment interest. Oh my . . .  an ex-wife and a former girlfriend! As set forth in part in the SEC Release:

[W]hile Brian Fettner was a guest in the home of a longtime friend who was also the general counsel of Cintas Corporation, Fettner surreptiously viewed documents contemplating an acquisition of G&K Services Inc. by Cintas.  Based on that information and without telling his friend, Fettner then purchased G&K Services stock in the brokerage accounts of his ex-wife and a former girlfriend, and persuaded his father and another girlfriend to purchase G&K shares.  The complaint further alleges that after Cintas and G&K announced the merger on Aug. 16, 2016, G&K's stock price jumped more than 17 percent, resulting in illicit profits from Fettner's misconduct of more than $250,000. 

FINRA Sanctions Rep for "Fundamental Misunderstanding" About VA. In the Matter of Ronald R. Blasczyk, Respondent (FINRA AWC 2016052503102, May 6, 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, Ronald R. Blasczyk submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Blasczyk has been registered since 1998 and by October 2008, he was associated with FINRA member firm Wells Fargo Clearing Services, LLC f/k/a Wells Fargo Investments, LLC. The AWC asserts that Blasczyk has "no prior disciplinary history."mIn accordance with the terms of the AWC, FINRA found that Blasczyk violated FINRA Rules 2110 and 2111; and, accordingly, FINRA imposed on Blasczyk a $10,000 fine and a 15-business-day suspension from associating with any FINRA member in any capacity. As set forth under "Overview" in the AWC:

In June 2015, Respondent Rona,d R. Blasczyk made an unsuitable recommendation to his customer, EF, that she liquidate a variable annuity she had owned for ten years (the "Voya VA"). Blasczyk made this recommendation based in part on a fundamental misunderstanding of the Voya VA's performance. Specifically, Blasczyk understated the annual rate of return for the Voya VA. He also wrongly concluded that EF's funds were at risk because the amount she held in Voya annuities was nearing the amount insured from loss by the Wisconsin Insurance Security Fund, when in reality they were well below that amount. As a result of Blasczyk's recommendation, EF liquidated the Voya VA and forfeited a substantial guaranteed income benefit base that EF had accumulated. Accordingly, Blasczyk did not have a reasonable basis to believe that his recommendation was suitable for EF, and thereby violated FINRA Rules 2111 and 2010