The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 18, 2019

UBS Hit With $9 Million in Damages in FINRA Arbitration Amid Allegations that Firm Had Raided Credit Suisse. In the Matter of the Arbitration Between Credit Suisse Securities (USA) LLC, Claimant, v. UBS Financial Services Inc., Respondent (FINRA Arbitration Decision 15-03186) 
https://www.finra.org/sites/default/files/aao_documents/15-03186.pdf
In a FINRA Arbitration Statement of Claim field in November 2015, FINRA member firm Claimant Credit Suisse asserted  unfair competition, raiding, aiding and abetting, breach of fiduciary duty and duty of loyalty, tortious interference with contract, misappropriation of trade secrets. As set forth in part in the FINRA Arbitration Decision, Claimant Credit Suisse alleged that:

Respondent UBS Financial Services Inc.'s unfair competition and raiding, aiding and abetting of Credit Suisse Securities (USA) LLC employees' breaches of fiduciary duty and duty of loyalty, tortious interference with contract and misappropriation of trade secrets, in an amount to be ascertained at a hearing; punitive damages and such other and further relief as the Panel deems just and proper. Total damages are expected to be far in excess of ten million dollars (10,000,000.00).

Respondent UBS generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting violation of FINRA Rule 2010 and a breach of the Broker Protocol. Without offering any rationale whatsoever, after 94 hearing sessions, the FINRA Arbitration Panel found Respondent UBS liable to and ordered the firm to pay to Claimant Credit Suisse $9 million in compensatory damages.

Raymond James Agrees to Pay $15 Million for Improperly Charging Retail Investors (SEC Release)
https://www.sec.gov/news/press-release/2019-178
Without admitting or denying the findings in an SEC Order  https://www.sec.gov/litigation/admin/2019/33-10689.pdf, three Raymond James entities settled SEC charges that: 
  • Raymond James & Associates, Inc. and Raymond James Financial Services Advisors, Inc. violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7, and
  • Raymond James & Associates, Inc., and Raymond James Financial Services, Inc. violated Sections 17(a)(2) and (3) of the Securities Act of 1933.  
The three Raymond James entities agreed to be censured and to disgorge approximately $12 million representing inappropriate client advisory fees and unit investment trust commissions, together with prejudgment interest, and to pay a $3 million civil penalty.  The three Raymond James entities have agreed to make distributions to harmed investors. As set forth in part in the SEC Release:

The SEC order finds that Raymond James & Associates, Inc., and Raymond James Financial Services Advisors, Inc., failed to consistently perform promised ongoing reviews of advisory accounts that had no trading activity for at least one year.  According to the order, because they did not conduct the reviews properly, they failed to determine whether the client's fee-based advisory account was suitable.  The order further finds that the entities also misapplied the wrong pricing data to certain UIT positions held by advisory clients, causing them to overpay fees.

In addition, the order finds that Raymond James & Associates, Inc., and Raymond James Financial Services, Inc., recommended that their brokerage customers sell UITs before their maturity and buy new UITs without adequately determining whether these recommendations were suitable.  According to the order, the recommendations for early sales and purchases resulted in customers incurring (and the Raymond James entities receiving) greater sales commissions than would have been charged had the customers held the UITs to maturity and then purchased new UITs.  The order further finds that Raymond James also failed to apply available sales discounts for brokerage customers that rolled over their proceeds after selling a maturing UIT to purchase another one.

Of course, no sooner is the proverbial ink dry on the SEC settlement then Raymond James sends a letter to the SEC Division of Corporation Finance  https://www.sec.gov/divisions/corpfin/cf-noaction/2019/raymond-james-financial-091719-405.pdf that notes, in part:

By virtue of the entry of the Order, Raymond James Financial will be an "ineligible
issuer" pursuant to Rule 405 promulgated under the Securities Act of 1933 (the "Securities Act"). Raymond James Financial hereby requests that the Division of Corporation Finance (the "Division") recommend, and that the Commission determine, that for good cause shown it is not necessary under the circumstances that Raymond James Financial be considered an "ineligible issuer" under Rule 405. Raymond James Financial requests that the Commission consider this waiver request simultaneously with the offer of settlement regarding the underlying enforcement recommendation. Raymond James Financial requests that this determination be effective upon
the issuance of the Order. 

http://www.brokeandbroker.com/4811/eeoc-finra-jams/
For those of you playing the at-home version of "Lawsuit," the $500 question is how do you think the federal court ruled when its Order begins with this observation: "In a brief essentially devoid of any legal analysis or citations, Plaintiff's counsel claims the parties' arbitration agreement is inapplicable or void."

Citigroup Customer Sues Over Delayed Sales of GBTC Bitcoin Trust. In the Matter of the Arbitration Between Rogelio Silva, Claimant, v. Citigroup Global Markets, Inc., Respondent (FINRA Arbitration Decision 19-01270) 
https://www.finra.org/sites/default/files/aao_documents/19-01270.pdf
In a FINRA Arbitration Statement of Claim field in May 2019, public customer Claimant Silva asserted  that Respondent Citigroup did not comply with the duty of best execution relating to Claimant's shares in Bitcoin Investment Trust ("GBTC") when the firm purportedly blocked his ability to sell his GBTC shares. Claimant sought $50,000 in compensatory damages. The sole FINRA Arbitrator denied Claimant Silva's claim and offered this rationale:

[C]laimant knew of GBTC trading account restrictions in July 2018 and that he left his shares with Respondent notwithstanding the restrictions. The Arbitrator further noted that Claimant ultimately sold all of his GBTC shares, albeit with minor time delays, and that Claimant has not established any losses that were the fault of Respondent. 

Bill Singer's Comment: As set forth on the Grayscale website https://grayscale.co/wp-content/uploads/2019/09/GBTC-Fact-Sheet-September-2019.pdf [Ed; footnotes omitted]:

Grayscale Bitcoin Trust / Symbol GNTC

Grayscale Bitcoin Trust is an investment vehicle1 that is publicly quoted on OTCQX, the top tier operated by OTC Markets, under the symbol: GBTC. Grayscale Bitcoin Trust's investment objective is for the value of its shares to reflect the price performance of bitcoin, less fees and expenses. Modeled on popular commodity ETFs, Grayscale Bitcoin Trust is solely and passively invested in bitcoin and was created for investors seeking exposure to bitcoin through a traditional investment vehicle. Shares of GBTC can be purchased on most major brokerage platforms that offer US-listed securities

About Gryascale Investments

Grayscale is the world's largest digital currency asset manager. With a proven track record and unrivaled experience, we give investors the tools to make informed investing decisions in a burgeoning asset class. As part of Digital Currency Group, Grayscale accesses the world's biggest network of digital currency intelligence to build better investment products. We have removed the barrier to entry so that institutions and investors can benefit from exposure to digital currencies. Now, forward-thinking investors can embrace a digital future within an institutional grade investment. Grayscale has assets under management of $2.4 billion.

Also, in teeny-tiny type that my old eyes couldn't read unless I magnified the webpage, is this Footnote 1:

Grayscale Bitcoin Trust (BTC) (the "Trust") issues shares on a periodic basis in a private placement that is currently closed. Freely tradeable shares of the Trust are publicly quoted under the symbol: GBTC. The Trust does not currently operate a redemption program and halts creations periodically. There can be no assurance that the value of the shares will approximate the value of the Bitcoin held by the Trust and the shares of GBTC may trade at a substantial premium over or discount to the value of the Trust's Bitcoin. The Trust may, but will not be required to, seek regulatory approval to operate a redemption program. The information herein is only provided with respect to GTBC shares quoted on the OTCQX. 

https://www.sec.gov/litigation/litreleases/2019/lr24596.htm
In a Complaint filed in the United States District Court for the Western District of Texas  https://www.sec.gov/litigation/complaints/2019/comp24596.pdf, the SEC charged Jay Daniel Seinfeld, his firm Traditions Capital Management LLC, and the Hospice Patient Aid Program (a charity purportedly founded by Seinfeld), and social worker Sara Beth Postma with violating the anti-fraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the charges. the Defendants settled the Complaint.  In addition to permanent injunctive relief, Seinfeld agreed to a 3-year officer-and-director bar and to pay $412,750 in disgorgement and prejudgment interest and a $256,287 penalty. and he consented to securities-industry and other bars, with a right to apply for readmission after three years. Postma agreed to a 2-year officer-and-director bar and to pay $93,750 in disgorgement and prejudgment interest and a $50,000 penalty. As set forth in part in the SEC Release:

[B]etween 2010 and 2012, Seinfeld and Postma induced over a dozen such patients to provide their personal information and sign transaction documents as purchasers of corporate bonds that would pay out upon their deaths while simultaneously relinquishing most of the bonds' anticipated proceeds. Using documents supplied by Seinfeld, Postma allegedly led the patients to believe that the Hospice Patient Aid Program would use bond proceeds to assist hospice patients in need of financial assistance; instead, when patient-purchasers died, Seinfeld allegedly redeemed the bonds and split a large majority of the profits - hundreds of thousands of dollars in the aggregate - with other wealthy investors.

https://www.sec.gov/litigation/litreleases/2019/lr24597.htm
In a Complaint filed in the United States District Court for the Northern District of Illinois  https://www.sec.gov/litigation/complaints/2019/comp24597.pdf, the SEC charged Global Resources Leadership LLC and its founder, President, and Chief Executive Officer John Henderson with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and violations of the registration provisions of Sections 5(a) and 5(c) of the Securities Act. The complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and civil penalties. As set forth in part in the SEC Release, the Defendants:

engaged in an offering fraud, in which they solicited investments in a purported joint venture focused on buying and selling Nigerian crude oil through a false and misleading email solicitation. Among other alleged misstatements, defendants' email falsely claimed that GRL had obtained $200 billion in gold bullion from a purported Native American tribe that also had its own commercial bank, and that GRL's assets would be "monetized and matched" by the governments of Ghana, Rwanda, Uganda, and Ethiopia. Defendants' solicitation, the complaint alleges, targeted individuals associated with a Christian college, Christian church, and other religious organizations with which Henderson was associated, including a church he founded, by employing numerous religious references. The complaint alleges that defendants raised $10,000 through the fraudulent offering, a portion of which Henderson used for personal expenses.

South Florida Securities Lawyer Charged with Securities Fraud Relating to 1 Global Capital Investment Scheme (DOJ Release)
https://www.justice.gov/usao-sdfl/pr/south-florida-securities-lawyer-charged-securities-fraud-relating-1-global-capital
- and -

In a criminal Information filed in the United States District Court for the Southern District of Florida, Jan Douglas Atlas, Jan Douglas Atlas, securities lawyer and former outside counsel for 1 Global Capital, LLC, was charged with one count of securities fraud. The SEC filed a parallel civil enforcement action against Atlas. As set forth in part in the DOJ Release:

1 Global Capital LLC (1 Global) was a commercial lending business based in Hallandale Beach, Florida, that made the equivalent of "pay day" loans to small businesses at high interest rates.  To fund these merchant cash advance loans, 1 Global obtained funds from investors nationwide, offering short-term investment contracts.  The investors would supposedly receive a proportionate share of the principal and interest payments as the loans were repaid.  1 Global raised money using investment advisors and other intermediaries, with promises of significant commissions.  In many cases, the commissions were not fully disclosed to investors.   According to court records, 1 Global operated from early 2014 through approximately July 27, 2018, when it filed for bankruptcy.  As of that time, 1 Global had more than 3,600 investors and had raised more than $330 million, and its own internal documents showed a $50 million cash deficit. 

Substantial questions arose during 1 Global's operations as to whether 1 Global was offering or selling a security and subject to federal and state securities laws, and whether the offering was required to be registered with the U.S. Securities and Exchange Commission.  These questions were raised by investors, investment advisors, and regulators.  Atlas acted as outside counsel for 1 Global and allegedly knew that if 1 Global's investment offering were determined to be a security, it would undermine the ability of 1 Global to raise funds from retail investors and to continue to operate without substantial additional expenses and reporting requirements.  Such a classification would undermine the profits and fees that 1 Global and its principals would be able to obtain from 1 Global's operations.

Atlas was a long-time South Florida securities attorney who, in addition to his role as outside counsel for 1 Global, was a partner at Law Firm #1.  The information alleges that at the request of 1 Global's principals, Atlas authored two opinion letters in 2016 containing false information that Atlas allegedly knew would be used by 1 Global to operate the business unlawfully.  The opinion letters falsely described how the 1 Global investment actually worked, describing the 1 Global investment inaccurately in order to achieve the opinion that Individual #1 and others at 1 Global desired.  The opinion letters falsely described the duration of the investment, among other things, omitting the automatic renewal aspect and that the investment was being targeted toward retail, non-sophisticated investors (such as IRA account holders).  Atlas intentionally made false and misleading statements in these opinion letters, according to the information, to give 1 Global, and its employees and agents, false legal cover to continue to conduct business unlawfully.

Atlas's opinion letters were used and relied upon by 1 Global employees and agents to continue to raise money illegally.  At or around the time that Atlas executed these letters he received payments from Attorney #1, an attorney who worked at Law Firm #1 and also had a fundraising role at 1 Global.  Atlas allegedly understood that the payments he received from Attorney #1 constituted a percentage of commissions received by Attorney #1 of money raised by 1 Global from new investors.  The funds totaled approximately $627,000 and were paid to Atlas's personal checking account.  These funds were not disclosed to Law Firm #1, and Atlas and Attorney #1 allegedly knew that they were required to disclose and share all fees paid by clients of Law Firm #1, with Law Firm #1.

Previously, on August 23, 2019, former 1 Global Chief Financial Officer Alan G. Heide entered a guilty plea to one count of conspiracy to commit securities fraud in connection with the 1 Global fraud scheme . . .

In its Complaint filed in SDFL https://www.sec.gov/litigation/complaints/2019/comp24598.pdf, the SEC charged Atlas with aiding and abetting the cash advance company and its former CEO's violations of the antifraud provisions of Sections 17(a) of the Securities Act  and Section 10(b) of the Securities Exchange Act and Rule 10-b(5) thereunder. The SEC seeks a court-ordered injunction, disgorgement of ill-gotten gains and prejudgment interest, and a civil penalty.

https://www.sec.gov/litigation/litreleases/2019/lr24599.htm
https://www.sec.gov/litigation/complaints/2019/comp24599.pdf, the SEC charged Tom Simeo, the former Chairman/Chief Executive Officer of Viking Energy Group, Inc., with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The SEC seeks a permanent injunction against future violations, a penny stock bar, and a civil monetary penalty' and the federal regulator aseeks an order barring Simeo from serving as an officer and director of a public company. As set forth in part in the SEC Release, allegedly Simeo:

created the false impression to the public that Viking had an experienced financial professional involved in its operations and financial reporting as its CFO, when in reality, the Company had no CFO. According to the complaint, between November 2014 and May 2016, Viking's public filings falsely disclosed that Guangfang "Cecile" Yang was Viking's CFO. In addition, as alleged, certain SOX certifications accompanying these filings falsely represented that Yang, as Viking's CFO, had performed an evaluation of the Company's internal controls over financial reporting and reviewed Viking's annual and quarterly reports. The SEC alleges that Simeo created the false appearance that Yang served as CFO by repeatedly affixing Yang's signature to Viking's periodic reports and SOX certifications. The SEC alleges that, aside from Yang's purported signatures on Viking's filings, there is no evidence that Yang functioned as the Company's CFO from at least November 2014 through Yang's purported resignation in July 2016.

The SEC previously filed a subpoena enforcement action against Simeo, compelling him to testify and produce, among other things, communications relating to Yang. The U.S. District Court for the District of Columbia entered an order on January 30, 2018, directing Simeo to comply with subpoenas issued to him by SEC staff in connection with its investigation.

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