Securities Industry Commentator by Bill Singer Esq

July 11, 2019
In her recent speech before the American Enterprise Institute, SEC Commissioner Hester Peirce bemoaned the labeling of public companies on so-called ESG issues (i.e., environmental, social and governance). Peirce told her audience that uptight social activists are now forcing corporations to wear ESG labels the same way Hester Prynne, the heroine of Nathaniel Hawthorne's The Scarlet Letter, was forced to wear her scarlet letter "A." Hester the Commissioner argues that it is unfair for corporations to be subjected to such public "shaming" as it was for Hester the Adulterer. Except, Hester the Commissioner misstates the point of the novel. So . . . let's get the novel right.

TSSB Cites Lack of Plain English Form ADV Disclosure. In the Matter of the Investment Adviser Registration of Grove Capital Management, Inc. (TSSB Order IC19-CAF-03)
The Texas State Securities Board ordered that Grove Capital Management be REPRIMANDED and pay a $5,000 administrative fine plus comply with undertakings to retain an independent compliance consultant. In part the TSSB Order alleges that:

7. The Form ADV Part 2 requires the disclosures to be made in an entirely narrative format and written in plain English. 

8. In July 2010, the Form ADV Part 2 replaced the Form ADV Part II, which had disclosed similar information, but the disclosures were made in a check-the-box format with limited narrative responses. 

9. The rule requiring the new narrative brochure Form ADV Part 2 became effective in March 2011. 

10. Respondent has never updated his Form ADV Part II to the narrative brochure Form ADV Part 2. 

11. Accordingly, Respondent's clients and potential clients were not provided required disclosures regarding the investment adviser in a clear, narrative, and plain English format. 

12. Section 116.11 of the Rules and Regulations of the Texas State Securities Board (the "Board Rules") requires all registered investment advisers to deliver to all clients or prospective clients the Part 2 of Form ADV1 prior to or at the time of entering into any investment advisory contract. 

13. Additionally, §116.12(a) of the Board Rules requires investment advisory contracts to contain language wherein the client acknowledges the receipt of the Form ADV Part 2 or a disclosure statement containing the equivalent information, and that if the appropriate document was not delivered to the client at least 48 hours prior to the client entering into any advisory contract with the investment adviser, then the client has the right to terminate the contract without penalty within five business days after entering into the contract. 

14. Respondent did not include the aforementioned required language in Respondent's investment advisory contracts. . . .

Owner And Principal Of Investment Firm Indicted For Insider Trading (DOJ Release)
In an Indictment filed in the United States District Court for the Southern District of New York ("SDNY"), Donald Blakstad was charged with two counts of securities fraud and one count each of conspiracy to commit securities fraud, conspiracy to commit wire fraud, and wire fraud.  Separately, Martha Busto, C.P. A. pled guilty to one count each of conspiracy to commit securities fraud, securities fraud, and conspiracy to commit wire fraud as set forth in an Information As set forth in part in the DOJ Release:

BLAKSTAD was the owner and principal of an investment fund known as Midcontinental Petroleum Inc., which purported to be in the business of soliciting investments in the oil and gas industry.  BUSTOS was a certified public accountant who worked in Illumina's accounting department.  By virtue of her employment at Illumina, BUSTOS had access to material nonpublic information about Illumina's financial condition, including its earnings. 

On multiple occasions, from 2016 through 2018, BLAKSTAD obtained inside information about Illumina's financial condition from BUSTOS before Illumina publicly announced its quarterly financial results.  As BLAKSTAD knew, BUSTOS owed a duty to keep inside information about Illumina confidential. 

BLAKSTAD, aware of BUSTOS's breach of duty to Illumina, used this inside information to make profitable trades in Illumina securities.  At times, BLAKSTAD tipped his associates so that they could trade Illumina stock and options based on the inside information.  At other times, in order to avoid detection, BLAKSTAD arranged for his associates to purchase Illumina securities for BLAKSTAD's benefit in accounts controlled by his associates. 

Following the public announcement of Illumina's earnings, BLAKSTAD and his associates sold the Illumina securities at a significant profit, sometimes exceeding more than 2,000 percent.  In total, BLAKSTAD and his associates made more than $6 million in profits from purchasing and selling Illumina securities. 

11 Self Regulators Fine Clearpool Over Supervision Failures Involving Layering and Spoofing Firm for Inadequate Testing and Verification. In the Matter of Clearpool Execution Services, LLC., Respondent (FINRA AWC 2014042373804)
The AWC asserts that Clearpool has been a FINRA member firm since 2014, "provides electronic trading solutions, and serves as an independent broker-dealer," and has 37 reps. The AWC states that Clearpool "does not have any relevant disciplinary history."  As set forth in the " In accordance with the terms of the AWC, FINRA imposed upon Clearpool a $473,000 fine ($43,000 payable to FINRA and the balance to be paid to the other self-regulatory organizations cited).  As set forth in the "Summary" portion of the AWC:

In Matter No. 20140423738, FINRA's Department of Market Regulation, Quality of Markets team, on behalf of FINRA and ten exchanges,1 identified and reviewed potentially manipulative trading activity by a foreign, unregistered proprietary trading fund ("Fund X")that was an affiliate and customer of Clearpool. From July 2014 to September 2016, Clearpool executed Fund X's trades and introduced its order flow to other broker-dealers for execution. Fund X traded through more than 1,000 foreign, unregistered individual traders, and triggered thousands of surveillance alerts at FINRA and multiple exchanges for potentially manipulative trading known as "layering" and "spoofing." Despite being on notice of potentially manipulative trading by Fund X, Clearpool terminated the trading access of hundreds of individual traders, but continued to execute and introduce orders from Fund X.

As a result, from July 2014 through September 2016, Clearpool failed to establish and maintain a system that was reasonably designed to achieve compliance with applicable securities laws and regulation and applicable FINRA rules. Thus, it violated NASD Rule 3010(a) (before December 1, 2014) and FINRA Rule 3110(a) (on and after December 1, 2014),3as well as FINRA Rule 2010. In addition, Clearpool failed to establish, maintain, and enforce written procedures reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. By virtue of the foregoing, Clearpool violated NASD Rule 3010(b) and FNRA Rule 3110(b), as well as FINRA Rule 2010. 
= = = = =
1: The ten exchanges include the Nasdaq Stock Market LLC, Nasdaq BX, Inc., Nasdaq PHLX LLC, Cboe BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., NYSE Arca, Inc., the New York Stock Exchange LLC, and NYSE American LLC.
2: The fund is anonymous in this AWC since it is not a party to this AWC. 
3: FINRA Rule 3110 replaced NASD Rule 3010 on December I, 2014. 

FINRA Fines Firm for Inadequate Testing and Verification. In the Matter of Traderfield Securities Inc., Respondent (FINRA AWC 2018056922501)
The AWC asserts that Traderfield Securities Inc. has been a FINRA member firm since 1987, and has three branches employing nine reps. The AWC states that "Traderfield does not have any relevant disciplinary history with the Securities Exchange Commission, FINRA or any other self-regulatory organization or state securities regulator."  As set forth in the " In accordance with the terms of the AWC, FINRA imposed upon Traderfield a $5,000 fine.  As set forth in the "Overview" portion of the AWC:

For calendar years 2014, 2015 and 2016, Traderfield failed to have a system of supervisory control procedures which test and verify that its supervisory procedures were reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules. Further, the Firm failed to create reports of its testing and verification. As a result, Traded-1dd violated FINRA Rules 3120 and 2010. In addition, for the same calendar years, Traderfield failed to complete properly annual certifications of its compliance and supervisory processes in violation of FINRA Rules 3130 and 2010.