Securities Industry Commentator by Bill Singer Esq

THOMPSON posted on the information sharing site GitHub about her theft of information from the servers storing Capital One data. The intrusion occurred through a misconfigured web application firewall that enabled access to the data.  On July 17, 2019, a GitHub user who saw the post alerted Capital One to the possibility it had suffered a data theft.  After determining on July 19, 2019, that there had been an intrusion into its data, Capital One contacted the FBI.  Cyber investigators were able to identify THOMPSON as the person who was posting about the data theft.  This morning agents executed a search warrant at THOMPSON's residence and seized electronic storage devices containing a copy of the data. 

In March 2016, PINTO-THOMAZ misappropriated the Inside Information about Sherwin-Williams's acquisition of Valspar and passed it to Jeremy Millul, his friend, and Abell Oujaddou, his hairdresser, so that they could use it to make profitable trades in Valspar stock and options.  On March 21, 2016, the first trading day after the public announcement of the acquisition, the price of Valspar stock increased approximately 23 percent over the prior day's close.

Millul is a Manhattan jeweler who had a close personal friendship with PINTO-THOMAZ.  After receiving a tip about the impending Valspar deal from PINTO-THOMAZ, Millul opened a brokerage account on March 13, 2016, and shortly thereafter purchased 480 shares of Valspar common stock.  On March 18, 2016, the last trading day before the acquisition was publicly announced, Millul also purchased 75 out-of-the-money Valspar call options.  After the acquisition was publicly announced, Millul sold his Valspar stock and options for approximately $106,806 in profits.

Oujaddou is a Manhattan hairstylist and salon owner who has known PINTO-THOMAZ for years, and who is close friends with PINTO-THOMAZ's mother.  During a haircut on March 8, 2016, or March 9, 2016, PINTO-THOMAZ provided Oujaddou with the Inside Information about the impending Valspar deal in exchange for a portion of his trading profits.  Then, from March 10, 2016, through March 18, 2016, Oujaddou, who had never previously purchased Valspar or Sherwin-Williams securities, used the Inside Information he had received from PINTO-THOMAZ to purchase 8,630 shares of Valspar stock.  After the acquisition was publicly announced, Oujaddou sold his Valspar shares for approximately $192,080 in profits.  Following his successful trading, Oujaddou met PINTO-THOMAZ in the paint aisle of a hardware store and paid him a kickback.

Later, in June 2016, the Financial Industry Regulatory Authority ("FINRA") sent S&P a list of individuals and entities that had traded in Valspar in advance of the public announcement of the acquisition (the "List").  S&P forwarded the List to its employees who had worked on the Sherwin-Williams RES, including PINTO-THOMAZ, asking the employees to respond by stating whether they had a past or present relationship with any individual or entity on the List.  Although both Oujaddou and Millul were on the List, PINTO-THOMAZ denied having a relationship with anyone on the List.

Plaintiffs John and Justine Hurry and several business entities brought this action against Defendants Financial Industry Regulatory Authority, Inc. ("FINRA") and Scott Andersen, alleging that Defendants engaged in unlawful behavior arising primarily out of FINRA's investigation of some of the Hurrys' businesses. The district court dismissed most of the claims and later granted summary judgment to Defendants on the remaining claims. Plaintiffs timely appeal, and we affirm

1. The district court correctly held that regulatory immunity bars many of Plaintiffs' claims, including those claims alleging that Defendants exceeded the scope of their regulatory and investigatory authority. See Northstar Fin. Advisors, Inc. v. Schwab Invs., 904 F.3d 821, 828 (9th Cir. 2018) (holding that we review de novo a dismissal of claims). Defendants are immune for actions taken "under the aegis of the [Securities Exchange Act of 1934's] delegated authority." Sparta Surgical Corp. v. Nat'l Ass'n of Sec. Dealers, Inc., 159 F.3d 1209, 1214 (9th Cir. 1998), overruled in other part by Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S. Ct. 1562 (2016). That immunity extends to Defendants' investigatory actions. See P'ship Exch. Sec. Co. v. Nat'l Ass'n of Sec. Dealers, Inc., 169 F.3d 606, 608 (9th Cir. 1999) ("Sparta admits of no exceptions: if the action is taken under the ‘aegis of the Exchange Act's delegated authority,' the NASD [the National Association of Securities Dealers, FINRA's previous name] is protected by absolute immunity from money damages." (quoting Sparta, 159 F.3d at 1214)); see also id. at 607 (affirming regulatory immunity to the NASD even though the plaintiffs alleged "that the NASD, in its investigatory and administrative actions, went beyond the scope of its authority and ignored its disciplinary authority"). 

[B]eginning in March 2016, the defendants raised a total of approximately $145,500 from roughly 70 investors across the United States by selling the sports betting interests without SEC registration or an applicable exemption. In addition, the SEC alleges that, in late 2016 and early 2017, Bettor and Stuart refunded some of the investors' money and converted the remaining investors' funds into promissory notes with supposedly "guaranteed" rates of return. In so doing, the complaint alleges, the defendants misrepresented to investors numerous significant facts, including the losses Bettor and Stuart had already incurred, how those losses would be apportioned among investors, the current value of the investments, the risks associated with the investments, Stuart's compensation, and the use of investor funds. According to the complaint, Bettor and Stuart knew at the time that they had lost a significant portion of their investors' assets and, given the limited funds available for wagering, could not reasonably expect to have the funds necessary to satisfy their promissory note obligations to investors upon maturity.

[B]eaufort and Kyriacou manipulated the market for the common stock of a U.S.-based microcap issuer. The complaint alleged that in 2016, an undercover FBI agent approached Beaufort and Kyriacou, and described his business as manipulating U.S. stocks through pump-and-dump schemes. The agent later requested that Beaufort and Kyriacou open brokerage accounts for him in the names of nominees to conceal his identity and his connection to the anticipated trading activity in the accounts. Beaufort and Kyriacou opened the accounts as instructed. The SEC further alleged that Beaufort and Kyriacou executed multiple purchase orders of shares of a microcap company with the understanding that the undercover agent had arranged for an associate to simultaneously offer an equivalent number of shares.

FINRA today announced it has fined Citigroup Global Markets Inc. (CGMI) $1.25 million for failing to conduct timely or adequate background checks on approximately 10,400 non-registered associated persons spanning a seven-year period. 

Federal securities laws require broker-dealers to fingerprint certain associated persons working in a non-registered capacity prior to or upon association with the firm. The fingerprint results provide information about a prospective associated person's criminal background, and firms use the results as part of their background check to determine, among other things, whether a prospective associated person has previously engaged in misconduct that subjects the individual to a statutory disqualification. Federal banking laws require banks to conduct similar checks on banking employees using a more limited list of disqualifying events. 

FINRA found that from January 2010 through May 2017, CGMI failed to conduct timely or adequate background checks on approximately 10,400 of its non-registered associated persons. Also, the firm did not fingerprint at least 520 of the 10,400 non-registered associated persons until after they began their association with CGMI, thus preventing the firm from determining whether any individuals were subject to statutory disqualification from associating with a FINRA member firm. In addition, the firm was unable to determine whether it timely fingerprinted at least an additional 520 non-registered persons. While CGMI fingerprinted other non-registered associated persons, it failed to screen them as required by federal securities laws, instead limiting its screening to what was required by federal banking laws. FINRA found that because of these failures, three individuals who were subject to statutory disqualification because of criminal convictions were allowed to associate, or remain associated, with the firm during the relevant period. This arose from its failure to maintain a reasonable supervisory system and procedures to identify and properly screen all individuals who became associated with the firm in a non-registered capacity. . . 

engaged in a fraudulent scheme to falsely inflate the value of securities held by a hedge fund advised by their firm. For an 18-month period, Plaford and Lumiere allegedly used sham broker quotes to mismark as many as 28 securities per month, surreptitiously passing their desired prices along to brokers via Lumiere's personal cell phone or a flash drive delivered by a courier. The fund consequently reported artificially inflated returns and monthly net asset values, and paid millions of dollars in inflated management and performance fees to its investment adviser. Because of his position at the adviser, Plaford received a portion of those inflated fees. Additionally, the SEC charged Plaford for his role in an insider trading scheme conducted on behalf of certain funds advised by his firm.

Plaford and Lumiere were also charged criminally for their alleged conduct. On June 9, 2016, Plaford pled guilty, and, on February 20, 2019, he was sentenced to time served, three years' supervised release, a $7,311 fine, and criminal forfeiture of $6,611, representing Plaford's proceeds from his insider trading. Separately, following a jury trial, Lumiere was found guilty on related criminal charges. Lumiere subsequently settled with the SEC and was barred from the securities industry.

The FINRA Small Firm community must send a clear and unequivocal message to FINRA to "remain strictly neutral" when it comes to Small Firm politics. 

VOTE FOR SMALL FIRM MEMBER 
PETITION CANDIDATE 
LINDE MURPHY 
http://brokeandbroker.com/
PDF/MurphyBio1907.pdf

• Securities Industry Commentator
• Bill Singer