Securities Industry Commentator by Bill Singer Esq

August 14, 2019
Day after day, FINRA rolls out bull-shit notices to members about initiatives, about seminars, about retrospective rule reviews. Absent from that spew of self-serving crapola is anything addressing the firing of compliance officers who report their concerns to FINRA. You'd sort of like to think that FINRA would want to draw a line in the sand when it comes to retaliation by its member firms against those who blow the whistle. You'd sort of like to think that FINRA appreciates the need to bolster Wall Street's first line of defense; namely, the industry's compliance staff. Instead, FINRA caters and panders to its powerful industry interests. What rank hypocrisy! What worse condemnation could there be of the inherent failure of Wall Street self-regulation then to see its largest self-regulatory-organization stand silent and impotent in the face of retaliation against compliance staff who are protecting the investing public and preserving whatever shreds of integrity remain on Wall Street. In a recent federal lawsuit, FINRA member firm Purshe Kaplan Sterling Investments, Inc. was sued by a former compliance officer, who alleged, in part, that she had been fired for whistleblowing to FINRA. It may be that the Plaintiff's concerns were wrong. It may be that she was dead-on. We'll leave that final determination to the courts. Regardless, as you read through the court's opinion, you realize that FINRA is largely absent from the unfolding events. Be that as it may, the federal court's initial concern is not with FINRA's action or inaction but with determining whether the compliance officer filed a Complaint that stated a claim and presented the basis for jurisdiction against her former employer and associated firms and individuals.

10Cir Affirms SEC's Sanctions of Dennis J. Malouf

I. In the Matter of Dennis J. Malouf (SEC Opinion / July 27, 2016), which stated in the Syllabus that:

Respondent, the former president and majority owner of a registered investment adviser, violated the antifraud provisions of the federal securities laws when he failed to disclose conflicts and correct misleading statements concerning ongoing payments that he received from the owner of a branch office of a broker-dealer that he had once owned. Respondent directed clients' highly liquid, AAA-rated Treasury and agency bond purchase transactions to his former broker-dealer, despite claims in registered investment adviser's Forms ADV and website that its investment advice and choice of broker-dealers were impartial and conflict-free. Respondent also failed to seek best execution for advisory clients' Treasury and agency bond trades by directing trades to his former broker-dealer without first seeking multiple competing bids, resulting in clients' payment of excessive commissions. Respondent aided and abetted and caused investment adviser's related violations. Held, it is in the public interest to bar the respondent from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; prohibit respondent from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; order the respondent to cease and desist from committing or causing any violations or future violations of the provisions violated; order disgorgement of $562,001.26, plus prejudgment interest; and assess a civil money penalty of $75,000. 

II. In the Matter of Dennis J. Malouf (SEC Corrected Order Imposing Remedial Sanctions / September 13, 2016), which stated in part that:

ORDERED that Dennis J. Malouf be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, and it is further 

ORDERED that Dennis J. Malouf be prohibited, permanently, from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, and it is further 

ORDERED that Malouf cease and desist from committing or causing any violations or future violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Sections 10(b) Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder, and Sections 206(1), 206 (2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-1(a)(5) thereunder; and it is further 

ORDERED that Malouf disgorge $562,001.26, plus prejudgment interest of $202,298.88, such prejudgment interest calculated beginning from January 1, 2008, in accordance with Commission Rule of Practice 600; and it is further 

ORDERED that Malouf pay a civil money penalty of $75,000.. . 

III. Dennis J. Malouf, Petitioner, v. Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the Tenth Circuit, No. 16-9546 / August 13, 2019) 
As set forth in the Syllabus to the 10Cir's Opinion:

Mr. Dennis Malouf occupied key roles at two firms. One of the firms (UASNM, Inc.) offered investment advice; the other firm (a branch of Raymond James Financial Services) served as a broker-dealer. Raymond James viewed those dual roles as a conflict, so Mr. Malouf sold the Raymond James branch. But the structure of the sale perpetuated the conflict. Because Mr. Malouf did not disclose perpetuation of the conflict, administrative officials sought sanctions against him for violating the federal securities laws. 

An administrative law judge found that Mr. Malouf had violated the Securities Exchange Act of 1934, the Securities Act of 1933, the Investment Advisers Act of 1940, Rule 10b-5, and Rule 206(4)-1. Given these findings, the judge imposed sanctions. The SEC affirmed these findings and imposed additional sanctions, including disgorgement of profits. 

Mr. Malouf appeals the SEC's decision, and we affirm.  

Among the more interesting analyses in the Court's Opinion, is this discussion about willfulness and the recognition of wrongdoing:

First, according to Mr. Malouf, the SEC's finding of willfulness must have been based on his failure to require disclosure from others. For this argument, Mr. Malouf insists that he delegated the duty of disclosure. We disagree. Mr. Malouf blames the chief compliance officer, but this officer could not have been expected to disclose a conflict of interest that he had not known about. See pp. 22, 26, above. The SEC thus did not abuse its discretion in determining that Mr. Malouf had acted willfully. 

Second, Mr. Malouf contends that the SEC penalized him for defending himself. We disagree. The SEC reasonably considered Mr. Malouf's failure to recognize his own wrongdoing. See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (noting that a defendant's admission of wrongful conduct (or lack of an admission thereof) is a factor "that [has] been deemed relevant to the issuance of an injunction" from the securities industry), aff'd, 450 U.S. 91 (1981); ZPR Inv. Mgmt. Inc. v. SEC, 861 F.3d 1239, 1255 (11th Cir. 2017) (upholding a bar on continued work in an industry when the SEC found that the petitioner had not genuinely acknowledged his wrongdoing). Consideration of one's acceptance of responsibility constitutes "a routine and unexceptionable feature . . . of criminal, let alone civil, punishment." SEC v. Lipson, 278 F.3d 656, 664 (7th Cir. 2002). And the agency record is replete with examples of Mr. Malouf's refusal to accept responsibility for his actions. The SEC thus did not abuse its discretion in considering Mr. Malouf's failure to accept responsibility. 

Finally, Mr. Malouf stresses his (1) disclosures preceding the SEC's investigation and (2) prior payment of huge sums in restitution and civil penalties. But his earlier disclosures and payments do not render a lifetime bar unreasonable. Mr. Malouf waited roughly three years before making the disclosures. And for about nine months of that period, Mr. Malouf ignored an outside consultant's directions to make the disclosures. The SEC considered Mr. Malouf's delay together with his payments toward restitution and civil penalties, concluding that a lifetime bar from the securities industry was justified. The SEC's reasoning is rational and supported by the evidence. 

Pages 41 - 42 of the 10Cir Opinion
In Complaint filed in the United States District Court for the Eastern District of Michigan, the SEC alleges that so-called "recidivist securities law violator and convicted felon" Antonio M. Bravata violated Sections 17(a)(1) and (3) of the Securities Act. Without admitting or denying the SEC's allegations, Bravata agreed to a judgment that includes a permanent conduct-based injunction prohibiting him from participating in the issuance, purchase, offer, or sale of any securities to the public and a $75,000 penalty. As set forth in part in the SEC Release:

[B]ravata was previously charged by the SEC, and later by criminal authorities, for his participation in a $50 million securities fraud conducted through BBC Equities, LLC. In 2013, Bravata was found guilty in a jury trial, sentenced to 5 years of incarceration, and ordered to pay restitution. In the SEC case, Bravata was found liable for securities fraud, enjoined from future violations, and ordered to pay disgorgement and penalties.

The SEC's complaint alleges that while still on home confinement as a result of his criminal conviction, Bravata offered securities in Primo World Ventures, LLC ("Primo"), a company he owned and controlled. According to the complaint, Bravata prepared Primo's offering materials, which he modeled on those provided to BBC Equities investors. The materials allegedly concealed Bravata's role in Primo, and his criminal record, and falsely stated that another individual was in charge of Primo's daily operations. The complaint also alleges that, on Primo's website, Bravata falsely stated that Primo utilized a team of lawyers, accountants, real estate professionals, and analysts, when in fact no such team existed and Primo was limited to Bravata, his incarcerated father, and a former BBC Equities salesman Bravata enlisted to assist with the Primo scheme.

The complaint states that before Bravata was able to complete any sales of Primo securities, the SEC's Division of Enforcement detected his scheme and put a stop to the Primo offering.
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC charged Reginald "Reggie" Middleton, Veritaseum, Inc. and Veritaseum, LLC (collectively "Veritaseum") with violating the registration and antifraud provisions of the U.S. federal securities laws, and Middleton with additionally violating the antifraud provisions on the basis of his manipulative trading. EDNY granted a Temporary Restraining Order, which froze at least $8 million of the $14.8 million the defendants raised in 2017 and 2018 in an offering of digital securities. As set forth in part in the SEC Release:

The SEC filed charges against Reginald "Reggie" Middleton, a self-described "financial guru," and two entities he controls, Veritaseum, Inc. and Veritaseum, LLC (collectively Veritaseum).  The Commission's complaint, filed in federal court in Brooklyn, New York, alleges that the Defendants marketed and sold securities called "VERI" tokens on the internet, inducing retail investors to invest based on multiple material misrepresentations and omissions.  Among other things, Defendants allegedly knowingly misled investors about their prior business venture and the use of offering proceeds, touted oversized - but fictitious - investor demand for VERI, and claimed to have a product ready to generate revenue when no such product existed.  The complaint further alleges that Middleton manipulated the price of the VERI tokens trading on an unregistered digital asset platform.  The complaint also alleges that Middleton recently moved a significant amount of investor assets and then dissipated a portion of those assets, transferring them to Middleton's personal account.

FINRA Arbitrators Award Damages in Petersen Investments Employment Dispute. In the Matter of the Arbitration Between Vincent Miller, Jonathan Staiman, William Miller, David Robert, and Alan Green, Claimants, v. Petersen Investments, Inc., Bertram James Riley, Sr., and Bertram James Riley, Jr., Respondents (FINRA Arbitration Decision 18-03094)
In a FINRA Arbitration Statement of Claim field in September 2018, associated person Claimants asserted  breach of contract, conversion, unjust enrichment, violation of NY Labor Laws, fraudulent misrepresentation, and fraudulent concealment. At the close of the hearing, Claimants sought $290,011.66 in compensatory damages. Respondents generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting  defamation, false light, tortious interference with contractual relations, and tortious interference with prospective economic advantage. At the close of the hearing, Respondents sought $100,000 in compensatory damages. 
The FINRA Arbitration Decision states:

The Panel granted Respondents' Motion to Dismiss Bertram Riley Sr. as a party, as he did not play a role in the alleged matter. The Panel denied Respondents' Motion to Dismiss the conversion claims in regards to Claimants Jonathan Staiman, William Miller, David Robert, and Alan Green. The Panel granted Respondents' Motion to Dismiss the fraud claims in regards to non-appearing Claimants Jonathan Staiman, William Miller, David Robert, and Alan Green, [sic: comma in original] 

The Panel found Respondents Petersen Investments, Inc. and Bertram James Riley, Jr. jointly and severally liable and ordered them to pay to Claimants $52,786.27 in compensatory damages plus interest, and $2,531.25 in attorneys' fees.

Expungement Recommended by FINRA Arbitrator in Stop Loss Dispute In the Matter of the Arbitration Between Gary Lawrence Wageman, Claimant, v. LPL Financial LLC, Respondent (FINRA Arbitration Decision 19-00108)
In a FINRA Arbitration Statement of Claim filed in January 2019, associated person Claimant Wageman sought the expungement of two customer complaints from his Central Registration Depository record ("CRD"). The sole FINRA Arbitrator recommended both expungements but for purposes of this squib, I just want to focus on the rationale for a complaint arising from a disputed stop-loss:

The customer, an experienced investor, did not place a stop loss order as he alleged. He did not give the number of shares or the price of the stock and, as a sophisticated investor, he knew that information was necessary in order to place a stop loss order. He also did not complain for over a year. Based on these facts, I find the claim is false.

FINRA Small Firm Member Board of Governors Election
Voting Ends August 19, 2019

The FINRA Small Firm community is once again up in arms over the ongoing election for the open 2019 Small Firm Member Board of Governors' seat. "UPDATE: 2019 FINRA Contested Small Firm Election: Vote for Linde Murphy" ( Blog /  July 26, 2019). In this latest dust-up, FINRA's National Nominating & Governance Committee nominated sitting Small Firm Governor Robert A. Muh for re-election and, thereafter, transmitted an email on July 25, 2019, urging eligible voters to support their nominee's candidacy despite the existence of Small Firm Member Petition Candidate Linde Murphy. Murphy needed to obtain the requisite 3%-plus petitions in support of her candidacy, whereas Muh, who previously ran for his first term as a petition candidate, avoided that inconvenient qualifying step by accepting the Nominating Committee's nod. 

Why does any of this matter? 

A Board of 24

The FINRA Board of Governors consists of 24 members: 

  • Chief Executive Officer of FINRA; 
  • 13 Public Governors; 
  • 1 Floor Member Governor; 
  • 1 Independent Dealer/Insurance Affiliate Governor; 
  • 1 Investment Company Affiliate Governor; 
  • 3 Small Firm Governors (1 to 150 registered representatives);
  • 1 Mid-Size Firm Governor (151 to  registered representatives); and 
  • 3 Large Firm Governors (500 or more registered representatives) 

A Powerful Committee

According to FINRA's website:


The Nominating and Governance Committee is responsible for nominating persons for appointment or election to the FINRA Board, as well as nominating persons to fill vacancies in appointed or elected governor seats on the Board. The Committee also nominates Industry and Public members for positions on FINRA's National Adjudicatory Council.

The Committee is responsible for periodically reviewing and recommending changes to standing committee charters and, in consultation with the CEO, nominates the members and chairs of each standing committee of the Board. Also in consultation with the CEO, the Committee develops and recommends to the Board guidelines for effective corporate governance. In addition, the Committee reviews and approves appointments to each of FINRA's advisory committees and changes to the advisory committee enabling resolutions.

3,261 FINRA Small Member Firms

In "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 24, 2019), we are informed that:

As of the close of business on Thursday, May 23, 2019, the number of FINRA large firms was 174, and small firms was 3,261.

According to FINRA's online "Statistics", as of June 2019 there were 3,589 Member Firms. As such, FINRA's 3,261 Small Firms account for 91% of the self-regulatory-organization's membership; however, that 91% majority has been allocated only 3 out of 24 FINRA Board of Governors seats -- which amounts to 12.5% of the Board seats for 91% of the organization's member firms! 

The Power to Appoint. The Power to Nominate.

Somewhat lost in all the verbiage of the FINRA Election Notice is this nugget:

Of the 24 Board members, the following seats are appointed by the FINRA Board from candidates recommended by the Nominating Committee: the Public Governors, Floor Member Governor, Independent Dealer/Insurance Affiliate Governor and Investment Company Affiliate Governor (Appointed Governors).

The Nominating Committee also may nominate individuals to run for election for the seven elected governor seats that comprise the three Small Firm Governors, one Mid-Size Firm Governor and three Large Firm Governors (Elected Governors). . . . 

FINRA's Nominating Committee of three industry and four public governors appoints 16 of the Board's 24 Governors (which works out to 67% of the Board): 13 Public Governors and the 1 Floor Member Governor and the 1 Independent Dealer/Insurance Affiliate Governor and the 1 Investment Company Affiliate Governor. In addition, the Nominating Committee "may nominate" the 7 industry governors. Apparently, FINRA's CEO gets a free pass and is neither appointed nor nominated. We should all be so lucky!

91% With Little Proportionate Power -- FINRA's Dirty Little Governance Secret

Consider these extracts from the FINRA Nominating Committee's July 25th email in support of Muh's nomination:

[O]ur committee is comprised of three industry governors and four public governors. . .

The role of the small firm representatives on the Board, representing over 3,200 such institutions, is a crucial one that demands significant industry experience. . . 

The majority of the FINRA board are not from the industry and they have all looked to Bob to get an understanding of the impact of rule proposals on the small firm. . . .

Given how the small firms' Board representatives roles are "crucial" since the majority of FINRA's Board "are not from the industry," it's no small wonder that such non-industry folks would look to Bob Muh in order to "get an understanding," Thankfully Bob sits on the all-power FINRA Nominating Committee. Having been unfairly restricted to disproportionate representation on the Board, at least the Small Firm community has 1 of 7 seats on the all-powerful Nominating Committee, which is about 14% of the Committee's seat and a modest bump-up from the 12.5% of the Board seats. 

Ummm . . . hold on a sec. What???

I see from the 2019 roster of the FINRA Nominating Committee that, in fact, Robert Muh is not a member of the Nominating Committee

So . . . which Small Firm Member Governor is a member of the Nominating Committee? 

I don't see the name of Small Firm Member Governor Stephen A. Kohn. 

I don't see the name of Small Firm Member Governor Page W. Pierce. 

That's all there is. There ain't no more Small Firm Governors. 

Omigod, FINRA engineered its Small Firm Member community out of any Nominating Committee seats! There are three "industry" seats set aside on the Nominating Committee. There are three "industry" categories of Large, Mid-Sized, and Small. Shamefully, there is not a single set-aside for a Small Firm Member Governor to sit on the Nominating Committee.  91% of FINRA's member firms have 0% representation on FINRA's Nominating Committee.

As to the so-called independence of the National Nominating Committee, consider this from "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 25, 2018)

FINRA Nominating Committee Nominee

FINRA's Nominating Committee has nominated the following individuals: 

Large Firm Governor Candidate: Timothy C. Scheve, Janney Montgomery Scott LLC 

Mid-Size Firm Governor Candidate: Brian J. Kovack, Kovack Securities, Inc. 

Small Firm Governor Candidate: The Nominating Committee determined it would not nominate a candidate for election in 2018. Instead, any eligible candidates who obtain the requisite number of petitions will be included on the ballot. 

Similarly, as to the Nominating Committee's Chair, consider this from "FINRA Announces Governor Elections and Appointments" (FINRA News Release / August 22, 2017)

At the July 2017 meetings, the Nominating Committee nominated and the Board made a number of appointments to the Board that became effective at the Annual Meeting. Governor Kathleen A. Murphy, President of Fidelity Personal Investing, was appointed to succeed Governor John J. Brennan as the Investment Company Affiliate on the Board. . . 

All three of the industry member firm governors sitting on FINRA's Nominating Committee were appointed or nominated by that same committee, and not one of those appointed/nominated industry governors is designated as a Small Firm Member Governor. 

So those who do the appointing are appointed to appoint those who do the appointing -- and that's a conflict-free, democratic process? 

And that's not designed to marginalize and silence the voice of 91% of the organization's member firms? 

Just imagine how one of the many public companies traded by FINRA's member firms would fare if they proposed to restrict 91% of their public shareholders to 12.5% of their Board seats and shut them out of any role on the Nominating and Governance Committee!

And FINRA wonders why its Small Firm Member community feels isolated?  Why some 3,261 firms feel marginalized? Why the Small Firm community looks upon the Nominating Committee's email as an unwanted interference in a contested election? 

The Protest Vote for Candidate Linde Murphy

Before this whole mess blew up on July 25th, Petition Candidate Linde Murphy submitted a public statement to the Blog by a July 24, 2019, 5 p.m. EDT deadline, (as did Nominee Robert Muh). In her prescient statement, Murphy assured the Small Firm Member community that:


As you know, my name is on the ballot this year because I went through the petition process to get it there.  Let's not forget the efforts of a small group of dissidents that first contested the FINRA nominee years ago.  They fought for the rights of small firms and against what they felt was a nominee handpicked by FINRA. 

At no point in the future would I accept the FINRA nomination for the Small Firm Seat for the Board of Governors.  The person who represents small firms at the board level should go to the members and ask for their support by signing a petition.

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.