Securities Industry Commentator by Bill Singer Esq

July 17, 2019

Federal Court Says Put A Fork In It 'Cause This Lawsuit Against FINRA is Done! Scottsdale Capital Advisors Corporation, Plaintiff, v. Financial Industry Regulatory Authority, Defendant (Opinion, United States District Court for the District of Columbia ("DDC") / 18-CV-2973) As set forth in the "Syllabus" to the DDC Opinion (and, I might add, with a perfect balance of wit, sarcasm, and judicial demeanor):

Jack Dempsey once observed that "the best defense is a good offense." In boxing, perhaps, but not always in litigation. This case proves the point. 

For the past decade, Arizona-based securities brokerage Scottsdale Capital Advisors has been in the cross-hairs of its regulator, the Financial Industry Regulatory Authority ("FINRA"). FINRA has fined, sanctioned, and censured Scottsdale and its officers multiple times for a host of violations involving Scottsdale's dealings in unregistered penny stocks. Scottsdale has vigorously defended itself against these actions, complaining that FINRA has unfairly targeted its segment of the securities industry. It has also gone on offense by suing FINRA in federal court. Its most recent suit failed in the District Court for the District of Maryland and then at the Fourth Circuit Court of Appeals for lack of subject-matter jurisdiction. Scottsdale now turns to this Court. 

Scottsdale's newest claim is not a precise mirror of its previous one. Here, it sues FINRA for alleged breaches of the membership agreement Scottsdale entered when joining the organization. But while Scottsdale brings an ostensible breach of contract claim, this Court's jurisdiction turns on the substance of that claim rather than the label affixed to it. Examining the substance, Scottsdale's allegations are all intertwined with FINRA's governance and regulatory decisions, which Congress has mandated be challenged administratively and reviewed by appellate courts. So, different label, same result: This Court lacks the power to hear Scottsdale's claims and will dismiss the case in its entirety.

Also see:
Joseph P. Willner pled guilty in the United States District Court for the Eastern District of New York to conspiring to commit securities fraud and illegally profiting from a series of coordinated trades involving more than 50 hacked online brokerage accounts.  As set forth in part in the DOJ Release:

[B]etween September 2014 and May 2017, Willner used his brokerage accounts to place "short sale" offers for publicly traded companies' stock at artificially high market prices.  Simultaneously, Willner's co-conspirators hacked into victims' online brokerage accounts and placed buy orders for the stock at the artificially high prices, matching Willner's short sale offers.  Willner and his co-conspirators then re-purchased the stock from the victims' accounts at market or below-market prices.  This sequence of fraudulent trades usually took place within minutes, and Willner immediately profited based on the difference between his artificially high short sale price and the lower price at which he re-purchased the stock.
In retrospect, Puerto Rico Bonds were a bad investment. All of which explains the legions of devastated  investors who have sued and continued to sue any moving target that might offer some recompense for their losses. In many cases, investors lost everything and were left destitute. Frankly, far too many Wall Street participants knew that they were pushing garbage, knew that the debt was beyond repayment, and should have known that the powder keg was going to explode -- none of which stopped anyone from pushing the paper on the unwary. Hard to imagine a more compelling set of circumstances suggesting fraud. Thus we arrive at the underlying dispute in today's featured FINRA customer arbitration.
Hamed Ettu pled guilty in the United States District Court for to an Information charging him with conspiracy to commit securities fraud, and he was sentenced to three three years' probation, the first nine months of which he will be required to serve in home confinement, 120 hours of community service and a fine of $15,000 -- Ettu has paid a $73,244 forfeiture. As set forth in part in the DOJ Release, Damilare Sonoiki was a junior analyst at a global investment bank and:

provided material non-public information to Ettu. Sonoiki obtained this information in violation of his duty of confidentiality that he owed to the investment bank.  In a separate case, Sonoiki also allegedly passed inside information to former Philadelphia Eagles linebacker Mychal Kendricks.

Relying on the material non-public information he received from Sonoiki, Ettu illegally purchased call options in the target companies, Compuware and Move, between July and September 2014.  When proposed mergers were announced for each company, the value of Ettu's options increased significantly.  During the period of the conspiracy, Ettu made a profit of more than $93,000 on the trades.

Former REIT Manager and Executives to Settle SEC Charges for more than $60 Million (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged AR Capital LLC and its former Chief Financial Officer Brian Block with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and falsifying books and records of American Realty Capital Properties Inc. (ARCP), a publicly-traded REIT. Also, the Complaint charges AR Capital LLC founder Nicholas S. Schorsch with negligently violating the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act , as well as books and records violations. Without admitting or denying the allegations in the complaint, AR Capital, Schorsch, and Block consented to entry of a final judgment that imposes permanent injunctions from violations of the charged provisions; orders combined disgorgement and prejudgment interest on a joint-and-several basis of over $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. As set forth in part in the DOJ Release:

[B]etween late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (ARCP), a publicly-traded REIT, to merge with two publicly-held, non-traded REITs. The SEC alleges that AR Capital, Schorsch, and Block, acting in breach of the relevant proxy disclosures, inflated an incentive fee in both mergers. As alleged, this improper calculation allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation. In addition, the complaint alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements entered into in connection with the mergers.
Deandray Buckley pled guilty in the United States District Court for the District of New Hampshire  Buckley pleaded guilty to two counts of bank fraud and two counts of aggravated identity theft, and was sentenced to 39 months in prison. As set forth in part in the DOJ Release:

[B]uckley was part of an interstate scheme with others to steal people's personal identifying information, including social security numbers and bank account information.  Buckley obtained this identification information from his accomplices and online and then used it to obtain fake driver's licenses with other people's identifying information and his or an accomplice's photograph.  Buckley and an accomplice used the fake driver's licenses to impersonate bank customers and withdraw or attempt to withdraw money from those bank customers' accounts.  When entering a bank branch, Buckley or an accomplice wore slings on their arms or bandaged their fingers together in case bank tellers asked why the signature on the withdrawal slip did not match the account owners' signature on file at the bank. 

Between October 2017 and February 2018, Buckley or an accomplice entered over 17 bank branches in New Hampshire, Kansas, Connecticut, Massachusetts, Ohio, and Rhode Island and stole or attempted to steal over $90,000 from other people's bank accounts.  On February 27, 2018, Buckley was arrested by the Salem Police Department after attempting to withdraw $6,000 from another person's bank account at a Citizen's Bank branch in Salem.  Branch employees recognized Buckley from previous internal fraud alerts, denied the transaction, and called the police.  In addition to identifying information from the known fraud victims, Buckley and an accomplice's cell phones contained bank account information or social security numbers of at least 52 other individuals.

FINRA Posts Guidances for Member Firms:

Private Placement Filings

Public Offering Review