Securities Industry Commentator by Bill Singer Esq

September 17, 2019
They say you have to break some eggs to make an omelet (or, if you prefer, omelette). Similarly, you have to break some eggs in order to get egg on your face. A few years ago, it appears that the Financial Industry Regulatory Authority was attempting to make an omelet in 2016 and 2017 when it appointed Stephen M. Cutler, then Vice Chairman of JPMorgan Chase & Co., to its Board of Governors. Based upon revelations in a just-released 2019 FINRA regulatory settlement with JPM Securities LLC, FINRA didn't manage to flip the omelet and wound up with a face covered in dripping egg. I'm sort of enjoying watching the self-regulatory-organization try to maintain its composure while cleaning itself up. Can I get a toasted bagel and a refill of my coffee while I'm waiting?

Stifel, Nicolaus & Co., Inc. and BMO Capital Markets Corp. have agreed to settled has agreed to pay $2.7 million and BMO Capital Markets Corp. has agreed to pay $1.95 million to settle SEC charges alleging that the firms had provided incomplete and inaccurate securities trading information to the SEC via Electronic Blue Sheets or "EBS," An unusual aspect of the settlements is the inclusion of this language in each SEC Order:

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Respondent admits the facts set forth in Section III below, acknowledges that its conduct violated the federal securities laws, admits the Commission's jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below.

Accordingly, both Stifel and BMO admitted the facts alleged by the SEC in contradistinction to the more typical practice of entering into settlements without admitting or denying. In addition to beig Censured and subject to cease-and-desist orders, Stifel agreed to pay a $2.7 million penalty and BMO, a $1.95 million penalty.

SEC Stifel Order

As set forth in the SEC Release:

[O]ver a period of several years, Stifel and BMO each made numerous deficient blue sheet submissions containing missing or inaccurate data, largely due to undetected coding errors. The SEC found that Stifel failed to report data for approximately 9.8 million transactions and provided inaccurate information for approximately 1.4 million transactions. Separately, the SEC found that BMO submitted missing or incorrect data for approximately 5.4 million transactions. According to the SEC's orders, neither firm had adequate processes designed to validate the accuracy of its submissions and each willfully violated the broker-dealer books and records and reporting provisions of the federal securities laws.

The SEC's orders found that each firm has engaged in remedial efforts to address the causes for its deficient submissions, including the retention of an outside consultant and the adoption of new policies and procedures for processing blue sheet requests.

Bill Singer's Comment:  Compliments to the SEC for not entering into yet anothr "without admitting or deny" regulatory settlement. The misconduct at issue here was extensive and likely crippled the ability of Wall Street's regulators to effectively police the markets. As recently noted in the "Securities Industry Commentator" (September 10, 2019)

[A]fter years of delays and foot-dragging (much of which preceded Chair Clayton's tenure), we are now presented with a somewhat disingenuous CAT "update." While we continue to await the roll-out of CAT, the SEC maintains its misplaced reliance upon the industry's outdated Electronic Blue Sheets ("EBS") paper trail. See, for example:  Three Broker-Dealers to Pay More Than $6 Million in Penalties for Providing Deficient Blue Sheet Data (SEC Press Release, 2018-275 / Dec. 10, 2018)  While Wall Street's self-regulatory-organizations dawdle with implementing CAT, brokerage firms continue to generate incomplete and inaccurate securities trading information via EBS production. This lack of reliable production inhibits the SEC's ability to carry out its enforcement and regulatory obligations. If you think I'm being overly pessimistic, consider these comments from Statement on Status of the Consolidated Audit Trail (by SEC Chair Jay Clayton)

[I]n 2016, the Commission approved the CAT NMS Plan prepared by the SROs, which set forth deadlines for CAT's implementation beginning in November 2017.  The SROs have not met the CAT NMS Plan deadlines for the implementation of the CAT.
The SEC charged Prudential Financial Inc. subsidiaries AST Investment Services Inc. ("AST") and PGIM Investments LLC ("PI") with failing to disclose conflicts of interest and making misleading disclosures to 94 insurance-dedicated mutual funds to which the subsidiaries served as investment advisers. As set forth in part in the SEC Release:

[I]n 2006, the funds were reorganized so that Prudential could receive certain tax benefits. Those benefits to Prudential, however, came with negative consequences to the funds. First, AST and PI cost the funds tens of millions of dollars in interest income when they temporarily recalled securities the funds had out on loan. AST and PI did not disclose, to the funds' boards of trustees or the beneficial owners of the funds' shares, the conflict of interest between Prudential and the funds in connection with the recalls.  Second, the funds' reorganization subjected them to less favorable tax treatment in certain foreign jurisdictions, but Prudential did not timely reimburse the funds for resulting losses despite AST and PI's assurances it would do so.

The SEC's Prudential Order acknowledges that AST and PI self-reported the conduct to the SEC after initially failing to disclose it during an examination, cooperated with the staff's investigation, and voluntarily reimbursed the funds over $155 million. The SEC Order imposes a Censure on both AST and PI, and requires them to disgorge an additional $27.6 million, pay a $5 million civil monetary penalty, and cease and desist from committing any further violations. The Respondents did not admit or deny the SEC's findings. 
Bill Singer's Comment: Sadly, the SEC barely allowed a second to pass before issuing an SEC Waiver of Ineligibility Order, which states in part that:

Based on the representations set forth in Prudential's September 12, 2019 request, and on other considerations, the Commission has determined that Prudential has made a showing of good cause under clause (2) of the definition of ineligible issuer in Rule 405 of the Securities Act and that Prudential should not be considered an ineligible issuer by reason of the entry of the Cease-and-Desist Order. Any different facts from those represented would require us to revisit our determination that good cause has been shown and could constitute grounds to revoke or further condition the waiver. The Commission reserves the right, in its sole discretion, to revoke or further condition the waiver under those circumstances. 

In an Indictment filed in the United States District Court for the Northern District of New York, three Defendants: 
  • Gregg Smith, an executive director and trader on Bank A's precious metals desk;
  • Michael Nowak, a managing director who ran Bank A's global precious metals desk; and 
  • Christopher Jordan, an executive director and trader on Bank A's precious metals desk, who left Bank A in December 2009; and from March 2010 until August 2010 worked as a precious metals trader at a Swiss bank (Bank C); and from June 2011 until October 2011, traded precious metals futures contracts as an employee of a financial service company (Company D) 
were each charged with one count each of 
  • conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity (more commonly referred to as RICO conspiracy); 
  • conspiracy to commit wire fraud affecting a financial institution, bank fraud, commodities fraud, price manipulation and spoofing; 
  • bank fraud; and 
  • wire fraud affecting a financial institution.  
Additionally, Defendants Smith and Nowak were each charged with one count each of attempted price manipulation,commodities fraud and spoofing. 
Smith/Novak/Jordan Indictment
Edmonds Information
Trunz Information

As set forth in part in the DOJ Release:

[B]etween approximately May 2008 and August 2016, the defendants and their co-conspirators were members of Bank A's global precious metals trading desk in New York, London and Singapore with varying degrees of seniority and supervisory responsibility over others on the desk.  As it relates to the RICO conspiracy, the defendants and their co-conspirators were allegedly members of an enterprise-namely, the precious metals desk at Bank A-and conducted the affairs of the desk through a pattern of racketeering activity, specifically, wire fraud affecting a financial institution and bank fraud.

The indictment alleges that the defendants engaged in widespread spoofing, market manipulation and fraud while working on the precious metals desk at Bank A through the placement of orders they intended to cancel before execution (Deceptive Orders) in an effort to create liquidity and drive prices toward orders they wanted to execute on the opposite side of the market.  In thousands of sequences, the defendants and their co-conspirators allegedly placed Deceptive Orders for gold, silver, platinum and palladium futures contracts traded on the New York Mercantile Exchange Inc. (NYMEX) and Commodity Exchange Inc. (COMEX), which are commodities exchanges operated by CME Group Inc.  By placing Deceptive Orders, the defendants and their co-conspirators allegedly intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets, and to deceive other participants in those markets into believing something untrue, namely that the visible order book accurately reflected market-based forces of supply and demand.  This false and misleading information was intended to, and at times did, trick other market participants into reacting to the apparent change and imbalance in supply and demand by buying and selling precious metals futures contracts at quantities, prices and times that they otherwise likely would not have traded, the indictment alleges.

As also alleged in the indictment, the defendants and their co-conspirators defrauded Bank A's clients who had bought or sold "barrier options" by trading precious metals futures contracts in a manner that attempted to push the price towards a price level at which Bank A would make money on the option (barrier-running), or away from a price level at which Bank A would lose money on the option (barrier-defending).  Namely, when barrier-running, the defendants and their co-conspirators would allegedly place orders for precious metals futures contracts in a way that was intended to deliberately trigger the barrier option held by Bank A.  Conversely, when barrier-defending, the defendants and their co-conspirators would allegedly place orders for precious metals futures contracts in a way that was intended to deliberately avoid triggering the barrier option held by clients of Bank A.

The indictment also identifies two former Bank A precious metals traders, John Edmonds and Christian Trunz, as being among the defendant's co-conspirators.  Edmonds worked at Bank A from 2004 to 2017 and was a trader on Bank A's precious metals desk, leaving as a vice president.  On Oct. 9, 2018, Edmonds pleaded guilty in the District of Connecticut to an information charging him with one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities fraud, price manipulation and spoofing.  Trunz is a former precious metals trader at Bank A who worked at the bank from 2007 to August 20, 2019, leaving as an executive director.  On Aug. 20, 2019, Trunz pleaded guilty in the Eastern District of New York to an information charging him with one count of conspiracy to engage in spoofing and one count of spoofing.

Former Salesman of Porsche Dealership Pleads Guilty to Over $3 Million Fraud Scheme Involving Non-Existent Rare Porsche Models (DOJ Release)
Former Copans Motorsports d/b/a/ Champion Porsche salesman Shiraaz Sookralli pled guilty in the United States District Court for the Southern District of Florida to Sookralli pled guilty to conspiracy to commit mail fraud and wire fraud. As set forth in part in the DOJ Release:

[I]n 2017, Sookralli opened a shell corporation with a name bearing a close resemblance to both Champion Porsche and another corporate affiliate of the dealership. After forming the shell corporation, Sookralli opened a bank account in the shell corporation's name. Sookralli then entered into bogus sales orders with customers for the unauthorized sales of non-existent future exotic Porsche models. The majority of the vehicles were rare, highly sought-after, Carrera 911 models.  The defendant required deposits from his victims in the form of, wire transfers, bank checks, and cash that he later deposited into his shell company's bank account. The buyers relied on Sookralli's longtime employment at Champion Porsche, title as "Vice President of Marketing," representations that he or she would receive a yet-to-be-built Porsche vehicle, and the seemingly legitimate bank account for wiring deposits to Sookralli. Champion Porsche did not authorize Sookralli to conduct these transactions.

To further his scheme, Sookralli typically provided the customers with signed false and fraudulent purchase orders, sham vehicle build sheets showing the specifications of the customers' vehicle, as well as other false and fraudulent documents. Sookralli often communicated with customers using email and other wire communications.  Some customers sent Sookralli payments using the United States mails and interstate bank wire transfers. During this same fraud scheme, Sookralli defrauded another victim with whom he had agreed to sell, "on consignment," a certain Porsche vehicle for the victim.  Once the defendant sold the car, he kept the money for himself. 

Throughout the conspiracy, customers wired or otherwise transferred approximately $3,000,000 to Sookralli which he used for his personal benefit.  As set forth in the court documents, the defendant used the money for extravagant expenditures including luxury vehicles, jewelry, nightclubs, and restaurants. Sookralli also funneled amounts in excess of $10,000 at a time from his shell company account to bank accounts he controlled.

Prior to executing the fraud scheme involving the bogus sales orders for the Porsche vehicles, in or around 2014 through 2016, Sookralli opened a separate "shell" company named Color Pro Motorsport.  Through that company, Sookralli embezzled additional money from Champion Porsche.

After Champion Porsche uncovered Sookralli's fraud scheme, it contacted his victims and began its cooperation with the criminal investigation.  All of Sookralli's victims with valid claims were made whole by Champion.
Without admitting or denying the SEC's findings in an Order
admin/2019/33-10684.pdf, Marvell Technology Group, Ltd. agreed to cease and desist from further violations and to pay a $5.5 million penalty. As set forth in part in the SEC Release:

[M]arvell orchestrated a scheme to accelerate, or "pull-in," sales to the current quarter that had been scheduled for future quarters.  As stated in the order, the purpose of the pull-in sales, which took place during the fourth quarter of 2015 and first quarter of 2016, was to close the gap between actual and forecasted revenue and to meet publicly-issued revenue guidance.  The pull-ins for these quarters amounted to $24 million and $64 million of the total quarterly revenues, or 5% and 16% of revenue in its key storage segment, respectively.  According to the SEC's order, Marvell's use of pull-ins masked a substantial decline in customer demand, a loss of market share and reduced future sales.  Further, the order states that Marvell ignored internal concerns that the pull-ins were obfuscating the company's deteriorating financial results.  According to the order, by failing to disclose its use of the pull-ins, Marvell misled investors in its SEC quarterly filings and in earnings calls, making positive statements regarding its fourth quarter 2015 financial results and stating that it had met its public guidance for the first quarter of 2016. 

Ponte Vedra Man Indicted On Twelve Counts Of Wire Fraud For Investment Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the Middle District of Florida, Robert H. Hendricks was charged with 12 counts of wire fraud, and the government is seeking at least $2,638,924.34 in proceeds of the charged criminal conduct. As set forth in the DOJ Release:

[H]endricks solicited his friends and clients to invest in fraudulent and sham investments in real property and commercial business ventures. To convince the victims of the veracity of their investments, Hendricks provided falsified property documents that represented the purported investments and made statements to hide and conceal the purpose of his scheme. Hendricks spent the funds to personally enrich himself and others.
Following a trial in the United States District Court for the Eastern District of North Carolina, Stephen Condon Peters, 45, was sentenced to 40 years in prison on charges of Investment Advisor Fraud, Fraud in the Sale of Unregistered Securities, Wire Fraud, Conducting Monetary Transactions in Criminally Derived Property, and Aggravated Identity Theft; and he was ordered to make $15,063,624.30 in restitution to his numerous victims.  As set forth in part in the DOJ Release:

[P]eters, in his role as a Registered Investment Advisor, defrauded his numerous clients by steering them into investments in which Peters had a direct financial interest.  He then compounded his crimes by attempting to defraud the SEC with false documents and statements.  According to the Court, Peters's crimes were "breathtaking," but were proven with a "tsunami of evidence."  In issuing its 40 year sentence, the Court also noted that Peters "quadrupled down" on the crime by, among other things, perjurying himself at trial.

SEC Orders Brief as to Proper Corporate Representative In Appeal of FINRA Action. In the Matter of Bruce M. Zipper and Dakota Securities International, Inc. for Review of Disciplinary Action Taken by FINRA (SEC Order Requesting Additional Written Submissions; '34 Act Rel. No. 86981; Admin. Proc. File No. 3-19138)
On appeal before the SEC of a FINRA disciplinary action, Zipper is representing himself and Dakota Securities International's application for review is signed "Ann Zipper for Dakota." Several filings in pursuit of the SEC's review were made by Bruce Ziopper on behalf of both himself and Dakota and done so under his signature. The SEC has ordered Dakota "through its attorney or a bona fide officer" to file a brief in response indicating whether it is seeking permission from the SEC to "join" Bruce Zipper in its briefs, or, in the alternative, whether it will file "replacement briefs signed by an attorney or bona fide officer of the corporation." As set forth in part in the SEC Order [Ed' footnotes omitted]:

Dakota is a Florida corporation. Commission Rule of Practice 102(b) provides that a corporation may be represented by "an attorney at law" or "a bona fide officer of [the] corporation." Bruce Zipper does not appear to be an attorney. Based on our preliminary review of the record, after Bruce Zipper sold his equity interest in Dakota to his wife, he was also no longer one of Dakota's officers. As a result, BrokerCheck no longer lists Bruce Zipper as among Dakota's "direct owners and executive officers," and instead lists Margaret A. Zipper as its majority shareholder and president. In addition, amendments to Dakota's articles of incorporation-filed with the Florida Department of State Division of Corporations and available on its Corporation Search website-specify that Margaret-Ann Howington Zipper became the  president, secretary, treasurer, and director of Dakota effective February 27, 2018. Dakota's corporate filings do not list Bruce Zipper as an officer of Dakota. 

Under the circumstances, it appears that Bruce Zipper is ineligible under Rule 102(b) to represent Dakota in this proceeding. Yet the briefs that Bruce Zipper filed on his own behalf, and purportedly on behalf of Dakota, suggest that Dakota wishes to pursue an appeal of FINRA's disciplinary action. As a result, additional briefing would be helpful to the Commission. We have determined to direct Dakota, through its attorney or bona fide officer, to file an additional written submission regarding its briefs in this case. Dakota should address why its officer who signed the application for review has not filed or joined any briefs, whether it requests that the Commission permit it to join Bruce Zipper's briefs and if so why the Commission should grant such a request, or whether it wishes instead to file replacement briefs signed by an attorney or bona fide officer of the corporation. 

FINRA Arbitrator Recommends Expungement of Withdrawn LPL Customer Complaint. In the Matter of the Arbitration Between Austin Frye, Claimant, v. LPL Financial LLC, Respondent (FINRA Arbitration Decision 19-00835)
In a FINRA Arbitration Statement of Claim filed in March 2019, associated person Claimant Frye sought the expugnement of a customer complaint from his Central Registration Depository record. Respondent LPL did not oppose the request and did not participate in the expungement hearing; and the customer was notified but did not submit any response or participate in the expungement hearing. In recommending expungement, the sole FINRA Arbitrator found the customer's claim, allegation, or information factually impossible or clearly erroneous, and false; and the Arbitrator offered this rationale in part:

On March 1, 2009, the underlying customer complained to Claimant and Respondent of investments made without her approval and investments ratios that were not in accordance with the customer's expectations. The customer withdrew the complaint on March 13, 2009, and stated that all concerns had been addressed. As set forth in the Claimant's response to the customer dated March 2, 2009, all losses at the time of the complaint were due to the market conditions and the customer had automated the investments.

Claimant still remains the customer's financial advisor as of the date of this hearing. The customer recognized that the claims were false and withdrew her complaint. No action was filed and there was no settlement and no monies were paid to the customer. 

Unscheduled Series 7 Examination Break Yields Cheat Sheet. In the Matter of Rawley Hallman, Respondent (FINRA AWC 2019061486601)
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Rawley Hallman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Hallman an 18-month suspension from associating with any FINRA member in any capacity. No monetary sanction was imposed pursuant to Respondent's demonstrated inability to pay. As set forth in part in the AWC:

On January 14, 2019, Respondent took the Series 7 qualification examination. Before Respondent started the test, he was shown and acknowledged the Rules of Conduct. After completing approximately 45% of the test, Respondent took an unscheduled break, visiting the restroom for approximately ten minutes. When Respondent returned to the testing room, a proctor searched him and found a sheet of paper in his pocket. It was titled "Starter Cheat Sheet" and contained formulas and facts about several topics on the test. The proctor confiscated the sheet of paper and Respondent finished the test, failing it. Respondent did not change any answers after his unscheduled break. 

By possessing study materials during a qualification examination, Respondent violated FINRA's Rules of Conduct for the test, thus violating FINRA Rules 1210 and 2010.