Securities Industry Commentator by Bill Singer Esq

May 20, 2019
In today's featured FINRA intra-industry arbitration, we are asked to consider the circumstance of a settlement agreement and its impact upon an associated person's request for expungement of a customer complaint. The associated person Claimant asked his former firm to produce the settlement agreement. The firm objected on the basis of legal privilege. The sole FINRA Arbitrator slams Claimant and his counsel for not producing the settlement agreement. What's not clear is why the Arbitrator goes off on Claimant and his counsel. What's even more perplexing is why there's nary a word of criticism directed against the FINRA member firm.

SEC's "Kaplow Order" Docket of FINRA Arbitration Appeals Grows Larger. In the Matter of the Application of Timothy Charles Sullivan for Review of Action Taken by FINRA (SEC Order Denying Motion to Dismiss and Consolidation Appeal; '34 Act Rel. No. 85885; Admin. Proc. File No. 3-18616 / May 17, 2019)

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In the Matter of the Application of William Burk Rosenthal for Review of Action Taken by FINRA (SEC Order Denying Motion to Dismiss and Consolidation Appeal; '34 Act Rel. No. 85886; Admin. Proc. File No. 3-18617 / May 17, 2019)

Sullivan and Rosenthatl each appeal FINRA's denial of their requests to expunge prior adverse arbitration awards arising from customer disputes. FINRA alleges that Sullivan's and Rosenthal's notices of appeal were each filed nearly one-month late. 

SIDE BAR: SEC Rule of Practice 420: Appeal of Determinations by Self-Regulatory Organizations.

(a) Application for Review; When Available. An application for review by the Commission may be filed by any person who is aggrieved by a determination of a self-regulatory organization with respect to any

(i) final disciplinary sanction;

(ii) denial or conditioning of membership or participation;

(iii) prohibition or limitation in respect to access to services offered by that self-regulatory organization or a member thereof; or

(iv) bar from association as to which a notice is required to be filed with the Commission pursuant to Section 19(d)(1) of the Exchange Act, 15 U.S.C. 78s(d)(1).

(b) Procedure. As required by section 19(d)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d)(1), an applicant must file an application for review with the Commission within 30 days after the notice of the determination is filed with the Commission and received by the aggrieved person applying for review. The Commission will not extend this 30-day period, absent a showing of extraordinary circumstances. This rule is the exclusive remedy for seeking an extension of the 30-day period. . . .

In their opposition to FINRA's motion, Sullivan and Rosenthal do not dispute their receipt of notice from FINRA on May 31, 2018, but both assert that they sent their application to FINRA and the SEC on June 29, 2018, via certified, overnight mail within the 30-day period -- and both provided a receipt and USPS tracking information confirming the mailing dates. Moreover, the SEC's records indicate that the applications were each delivered to the federal regulator's headquarters within two business days after mailing but was then misdirected to an office other than the Secretary. 

Under the circumstances, the SEC deemed it appropriate to deny FINRA's motions; however, the federal regulator granted FINRA's separate motions to consolidate Sullivan's and Rosenthal's appeals with twelve proceedings raising the same jurisdictional issue arising from the so-called "Kaplow Order" on April 4, 2019. As noted in part in the SEC Order, the federal regulator postponed further briefing per the Kaplow Order. 

SIDE BAR: (As previously reported in the Securities Industry Commentator) 
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

SEC Charges Five Individuals with Running a Pump-and-Dump Scheme (SEC Release)
In a Complaint filed in the U.S. District Court for the Southern District of Texas, the SEC charged charges Andrew I. Farmer, Scott R. Sieck, Eddie D. Austin, Jr., Carolyn P. Austin, and John D. Brotherton, with violating the registration and antifraud provisions of Sections 5(a), 5(c), and 17(a) of the Securities Act and the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Defendants consented to the entry of final judgments which enjoin them from violating the charged provisions of the federal securities laws, enjoin them from future solicitation of the purchase or sale of securities, impose officer-and-director bars, impose penny stock bars, and order the Defendants to pay $10.25 million in disgorgement and $895,487 prejudgment interest. The Defendants have also pleaded guilty in a parallel criminal action. As set forth in part in the SEC Release:

[B]etween May 2011 and May 2017, Andrew I. Farmer of Katy, Texas, Scott R. Sieck of Winter Park, Florida, Eddie D. Austin, Jr. of Houston, Texas, Carolyn P. Austin of Houston, Texas, and John D. Brotherton of Conroe, Texas ran a series of pump-and-dump frauds. According to the SEC's complaint, the Defendants engaged in a pattern of obtaining control of all the freely trading stock of a penny stock and then allocating the stock to foreign and domestic front companies they controlled. To create the false appearance of market interest in the penny stock and to set artificially elevated share prices, Defendants allegedly conducted coordinated trading between these front companies. Additionally, Defendants allegedly orchestrated materially misleading promotional campaigns via email blasts and internet advertising, which they timed to coincide with press releases they allegedly caused each issuer to disseminate. The SEC further alleges that Defendants took advantage of the resulting stock price and trading volume rises by unloading their worthless stock on unsuspecting investors. In 2017, the SEC suspended trading in Valmie Resources, Inc., which is one of the issuers allegedly involved in the Defendants' scheme.

One Convicted And Two Sentenced As Part Of U.S. Attorney's Elder Justice Initiative (DOJ Release)
Mitzi Shawn Sears pled guilty in the United States District Court for the Eastern District of Kentucky to  financial institution fraud. As set forth in part in the DOJ Release;

[S]ears convinced a victim identified as "M.N." to buy property in Pulaski County with her, as an investment, and then to pay legal fees associated with a fictitious lawsuit concerning that real property.  She impersonated real people, in emails and phone calls to M.N., in efforts to convince M.N. that the expenses associated with the property and the lawsuit were legitimate.  Sears also admitted to forging 16 checks belonging to M.N., and cashing them or negotiating them for her own benefit.  In total, Sears obtained $455,977.00 from various bank accounts belonging to M.N., for her personal benefit.  Further, Sears admitted she lured M.N. into applying for a $40,000 business loan to cover expenses for the property, in order to obtain even more money.

Separately, John Jerome O'Hara and Paul Anthony Long, II pled guilty to fraud charges related to the theft of funds from relatives. As set forth in part in the DOJ Release:

[O]'Hara used his Power of Attorney over his mother's finances to obtain money for his personal benefit, while at the same time failing to pay his mother's living expenses at her nursing home.  Court documents indicate that while O'Hara's mother suffered from dementia, he took over $330,000 from her accounts for his personal benefit.  Judge Danny C. Reeves sentenced O'Hara to 26 months in prison and was ordered to pay $332,149.95 in restitution.  Upon release from prison, O'Hara will be on supervised release for five years.

According to Long's plea agreement, he too abused his Power of Attorney, over his grandfather's finances, to spend his grandfather's money for his own benefit.  Court documents indicate that Long's grandfather suffered from severe Alzheimer's Disease and was a resident of Thomson Hood Veterans Center in Wilmore, Kentucky.  From 2011 until his grandfather's death in 2015, Long took over $600,000 from his grandfather.  Neither his grandfather nor the Power of Attorney authorized any of those expenditures.  Judge Danny C. Reeves sentenced Long to 42 months in prison and Long was ordered to pay $608,395 in restitution.  Upon release from prison, Long will be on supervised release for five years.

Semiconductor Engineer Arrested on Charges that He Netted Large Profits in Illegal Insider Trades of His Employer's Stock (DOJ Release)
Former Skyworks Solutions, Inc. electrical principal engineer Yuh-Yue Chen was charged in a Complaint filed in the United States District Court for the Central District of California with one felony count of insider trading. As set forth in part in the DOJ Release:

On July 14, 2014, Chen ignored these warnings and gained unauthorized access to the Skyworks finance area on four occasions, according to the affidavit. On July 15, using non-public Skyworks financial information, Chen allegedly purchased 1,300 Skyworks $48 call options - which gives a securities buyer the right to buy certain stock within a specified time frame - at an average price of $1.90. On July 17, Skyworks, which closed at a price of $46.34 per share, released its quarterly earnings report after markets closed. On July 18, Skyworks shares opened at $50.11 per share - a per-share gain of $3.77 - in response to the earnings announcement. On the same day, Chen sold his Skyworks calls for an average price of $3.36, resulting in profits of approximately $484,645, the affidavit states. 

Shortly after 9 p.m. on September 15, 2014, two Skyworks employees - in the parking lot outside the company's Irvine office - caught Chen rifling through documents in the restricted accounting and finance office, the complaint alleges. When one of the employees entered the building and asked Chen to stop, Chen allegedly ran out of the office through a side door and escaped, running through nearby bushes. Chen did not return to Skyworks after this encounter, the affidavit states.

Five days later, Chen flew from Los Angeles International Airport to Taipei, Taiwan without informing anyone at Skyworks, court documents state. Chen was fired on September 30, 2014 for his actions 15 days earlier and after Skyworks had conducted an investigation where Chen was deemed to have been evasive. When Chen returned his work laptop computer by mail to Skyworks, the computer did not have any files or documents on it, the affidavit states.

Law enforcement interviewed Chen at LAX on March 29, 2019, where he confessed to committing insider trading, the complaint states. . . .