Securities Industry Commentator by Bill Singer Esq

September 27, 2019

featured in today's Securities Industry Commentator:

SEC Charges Three Individuals with Deceiving Main Street Investors Through the Sale of Binary Options (SEC Release)
In a Complaint filed in the United States District Court for the Central District of California, the SEC alleged that  Gil Beserglik, Raz Beserglik and Kai Christian Petersen violated the anti-fraud and registration provisions of the federal securities laws, and seeks disgorgement of ill-gotten gains, prejudgment interest, financial penalties and permanent injunctions against all three defendants.  As alleged in part in the SEC Release:

[T]he defendants conned U.S. and foreign investors out of tens of millions of dollars through three online binary options brokers, Bloombex Options, Morton Finance and Starling Capital, by the allure and promise of quick profits. The SEC alleges that defendants utilized call centers in Germany and Israel which operated as "boiler rooms," in which salespersons used high pressure sales tactics to offer and sell speculative binary options to vulnerable investors. Employees at these call centers allegedly persuaded investors to open binary option trading accounts and deposit large sums into those accounts. According to the complaint, call center employees lied to investors about their names, location and expertise in trading securities and they falsely told investors that the brokers only earned money if investors made money. In reality, the brokers earned money only from investor losses and thus had no incentive to advise investors on how to trade binary options profitably.  The complaint alleges that most investors who traded binary options through the three brokers lost money, and some individual retirees lost their entire savings amounting to hundreds of thousands of dollars. The SEC also alleges that the brokers largely refused to honor investor requests to withdraw money from their trading accounts.

Federal Courts Troubled by Punitive SEC Injunction. Securities and Exchange Commission, Appellant, v. Guy Gentile (Opinion, United States Court of Appeals for the Third Circuit ("3Cir"), No. 18-1242)
As set forth in the Syllabus to the 3Cir Opinion:

A five-year statute of limitations applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." 28 U.S.C. § 2462. In Kokesh v. SEC, 137 S. Ct. 1635 (2017), the Supreme Court held that "[d]isgorgement in the securities-enforcement context" is a "penalty" subject to that five-year limitations period. Id. at 1639. At issue in this appeal are two different remedies sought by the SEC: an injunction against further violations of certain securities laws and an injunction barring participation in the penny stock industry. The District Court held that those remedies-like the disgorgement remedy at issue in Kokesh-were penalties. We see these questions of first impression differently and hold that because 15 U.S.C. § 78u(d) does not permit the issuance of punitive injunctions, the injunctions at issue do not fall within the reach of § 2462. We will vacate the District Court's order dismissing the Commission's enforcement action and remand the case for the District Court to decide whether the injunctions sought are permitted under § 78u(d).

In enunciating its view of a properly grounded injunction, 3Cir notes that:

[I]njunctions may not be supported by the desire to punish the defendant or deter others, so courts abuse their discretion when they issue or broaden injunctions for those reasons. We therefore hold SEC injunctions that are properly issued and valid in scope are not penalties and thus are not governed by § 2462. If an injunction cannot be supported by a meaningful showing of actual risk of harm, it must be denied as a matter of equitable discretion-not held time barred by § 2462. 

at page 23 of the 3Cir Opinion

In setting the table for its analysis of punitive injunctions, the Court presents this premise:

The SEC itself agrees with this approach in principle. In Saad, Exchange Act Release No. 86751, 2019 WL 3995968 (Aug. 23, 2019), the Commission was asked to evaluate a disciplinary sanction barring an individual from associating with any FINRA member firm. Id. at *1. The Commission observed at the outset that "if a sanction is imposed for punitive purposes as opposed to remedial purposes, the sanction is excessive or oppressive and therefore impermissible." Id. at *3. The Commission went on to explain that a reasonable, well-grounded finding that the sanctioned party "posed a clear risk of future misconduct" such that "the bar was . . . necessary to protect investors" was what distinguished an "appropriately issued FINRA bar[]" from an impermissibly punitive bar. Id. at *4 (internal quotation marks and citation omitted). Conversely, "[a] sanction based solely on past misconduct . . . would be impermissibly punitive and thus excessive or oppressive." Id. at *5. 

That an injunction is permissible only where necessary "to prevent . . . misconduct from occurring in the future," and not merely "to punish past transgressions," Saad, 2019 WL 3995968, at *12, is a standard to which the SEC must also hold itself. When it does not, the buck stops here: Lest we return to those days when only a modest showing was considered sufficient, Commonwealth Chem., 574 F.2d at 99, federal courts may not grant SEC injunctions except "upon a proper showing" of the likelihood of future harm. 

at page 20 of the 3Cir Opinion

The Court notes its disapproval of a district court becoming a mere puppet around the hands of the SEC, and, in yet another example of the federal courts' eroding reliance upon the doctrine of deference to administrative agencies, the following admonition is issued to the lower court:

[I]f the District Court, after weighing the facts and circumstances of this case as alleged or otherwise, concludes that the obey-the-law injunction sought here serves no preventive purpose, or is not carefully tailored to enjoin only that conduct necessary to prevent a future harm, then it should, and must, reject the Commission's request. We note that the District Court has already addressed some of the relevant concerns involved in its opinion. We are also troubled by the fact that the Commission appears to seek two injunctions that attempt to achieve the same result. 

at Pages 28 -29 of the 3Cir Opinion

In noting the parameters of its warning about SEC injunctions taking on the cast of a punitive remedy, the Court noted tht [Ed: footnotes omitted]:

SEC injunctions come with serious collateral consequences. Commonwealth Chem., 574 F.2d at 99; Am. Bd. of Trade, 751 F.2d at 535. They can lead to administrative sanctions and disabilities, see Thomas J. Andre, Jr., The Collateral Consequences of SEC Injunctive Relief: Mild Prophylactic or Perpetual Hazard?, 1981 U. Ill. L. Rev. 625, 643-68, and collaterally estop defendants in subsequent private litigation, see Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331-33 (1979). Enjoined defendants suffer harm to their personal and business reputations. See Sec. Inv'r Prot. Corp. v. Barbour, 421 U.S. 412, 423 n.5 (1975) ("The moment you bring a public proceeding against a broker-dealer who depends upon public confidence in his reputation, he is to all intents and purposes out of business." (quoting Milton V. Freeman, Administrative Procedures, 22 Bus. Law 891, 897 (1967))); Warren, 583 F.2d at 122; ABA Committee on Federal Regulation of Securities, Report of the Task Force on SEC Settlements, 47 Bus. Law. 1083, 1091, 1149-50 (1992). And when a court bans a defendant from his industry, it imposes what in the administrative context has been called the "securities industry equivalent of capital punishment." Saad v. SEC, 718 F.3d 904, 906 (D.C. Cir. 2013) (quoting PAZ Sec., Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007)). 

So we conclude by repeating Judge Friendly's warning: an SEC injunction "often is much more than [a] 'mild  prophylactic.' " Commonwealth Chem., 574 F.2d at 99. When the Commission seeks an injunction, "the famous admonitions in [Hecht] must never be forgotten." Am. Bd. of Trade, 751 F.2d at 535-36. 

at Page 31 - 32 of the 3Cir Opinion

FINRA Bars Rep Who Knew Someone ( Blog)
When it comes to settling allegations of industry misconduct, the Financial Industry Regulatory Authority often seems in a rush to get something on paper and publish it. In that flurry of activity to get it down in writing and get it signed, what emerges as the final draft isn't always as precise as it should be. Sometimes we need to infer what happened. Sometimes we don't have enough facts to infer and are forced to make our own assumptions, regardless of whether they are well-founded. Sometimes, no matter how often we read and re-read a FINRA settlement document, we are left puzzled by what happened or why certain cited conduct is deemed "misconduct." In a recent FINRA AWC settlement, it seems pretty clear that the registered rep engaged in misconduct -- all the more so because he entered into the settlement and signed off on it. In fact, some of FINRA's allegations make a strong case, however, other allegations don't. For starters, it just can't be a violation for anyone to simply "know" that someone is a corporate director, officer, or employee. Perhaps someone at FINRA might exercise just a tad of quality control before releasing these AWC's for publication?

Taking Significant Steps to Modernize Our Regulatory Framework (SEC Chair Jay Clayton)
SEC Chair Jay Clayton announced, in part, three new SEC initiatives in the form of new rules and amendments:

Modernizing the Approval Framework for ETFs.  We adopted a new rule that (1) sets forth a clear and consistent framework that will allow exchange-traded funds ("ETFs") meeting certain standardized conditions to come to market without obtaining an individualized exemptive order, and (2) amends certain forms to enhance disclosures for investors. 
Expanding "Testing-the-Waters" Communications to All Issuers.  We adopted a new rule that will extend to all issuers the flexibility provided by the JOBS Act to communicate with institutional investors about potential IPOs and other registered offerings to better gauge market interest.
Enhancing Regulation in the OTC Markets.  We proposed amendments to rules governing the publication of quotations for over-the-counter ("OTC") securities designed to better protect investors from fraud and manipulation, while at the same time facilitating more efficient OTC trading in certain well-capitalized issuers.

For Details about the above rulemakings, READ:

>ETF (Final Rule)
>ETF (Exemptive Order)

>Expanding "Testing-the-Waters" Communications (Final Rule)

>Enhancing Regulation in the OTC Markets (Proposed Rule)
In a five-count Indictment, filed in the United States District Court for the Southern District of New York ("SDNY"), Ruja Ignatova was charged with wire fraud, securities fraud, and money laundering offenses in connection with an alleged international pyramid scheme that involved the marketing of a purported cryptocurrency called "OneCoin."  Co-defendant Konstantin Ignatov entered a not guilty plea to a one-count Information charging him with conspiracy to commit wire fraud in connection with the OneCoin scheme.  Finally, Co-Defendant Mark S. Scott was charged in a one-count Indictment with conspiring to launder proceeds of the OneCoin scheme. SDNY District Court entered an Order directing OneCoin Ltd., OnePayments Ltd., OneNetwork Services Ltd., OneAcademy, OneLife, RavenR, Ruja Ignatova, Frank Ricketts, Manon Hubenthal, Irina Dilkinska, International Marketing Services GmBH, International Marketing Services Pte, International Marketing Strategies Ltd., and B&N Consult EOOD (collectively, the "Affected Parties") to Show Cause why the Court should not enter an Order finding that any privilege the Affected Parties may have in communications with counsel falls within the crime-fraud exception to the attorney-client privilege, or has otherwise been waived for failure to assert or defend such privilege.  READ the Order to Show Cause -AND- Mark Scott Order

Former CEO Pleads Guilty In Scheme To Defraud Elderly Victims In The Sale Of Worthless Stock (DOJ Release)
Keith Orlean a/k/a "Jack Allen" pled guilty in the United States District Court for the Southern District of New York to one count each of conspiracy to commit securities securities fraud. As alleged in part in the DOJ Release:

For several years, ORLEAN and his co-defendants operated a fraudulent scheme in which a salesman named "Mike Palmer" would call elderly persons on the phone and offer them what he claimed was a time-sensitive opportunity to buy stock in certain companies.  In fact, there was no "Mike Palmer," and the salesman was actually one or the other of ORLEAN's two co-defendants, who were taking turns using the fake alias.  The purported time-sensitive investment opportunity was also fabricated by the defendants, as the companies in which they solicited investments were actually companies under their control.  In one intercepted phone conversation, Co-defendant-1 described to ORLEAN his strategy for a successful investor sales pitch as:  "You ram it down their fucking throat."  In another intercepted call between Co-defendant-1 and ORLEAN, upon learning that a particular victim investor died, Co-defendant-1 remarked:  "I knew I should have pulled the last $10,000 out of him."   

The most recent version of the defendants' phony sales pitch included false representations about an impending initial public offering, or "IPO," for their company, Digital Donations Technologies, Inc.  For example, in April 2018, one of the defendants assured a victim investor that "our company is doing great," that the company had an offer for an IPO valued at approximately $300 million, and that defendant KEITH ORLEAN was considering a private sale of the company for more than $1.5 billion.  In truth, however, the defendants knew that the company had little or no actual commercial value and that no such IPO or sale was taking place.  

The Federal Bureau of Investigation ("FBI") estimates that since April 2014, the defendants have convinced more than approximately 50 elderly persons to purchase stock in companies controlled by one or more of the defendants based on false representations.  The defendants appear to have solicited more than $2 million in stock purchases from victims.
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, Newbridge Securities Corporation and Bruce H. Jordan (Newbridge's Director of Investment Banking since February 2015) submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC found that Newbridge violated Section 15(c) of the Exchange Act and Rule 15c2-4 thereunder, and violated NASD Rule 3010, and FINRA Rules 2111, 31101 , and 2010; and that Jordan violated FINRA Rules 3110 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Newbridge a Censure, $225,000 fine; and the firm agreed to engage in independent consultant to revise its supervisory systems. Additionally, pursuant to the terms of the AWC, FINRA imposed upon Jordan a $5,000 fine and a two-month suspension from association with any FINRA member in a Principal-only capacity. As set forth in part in the "Overview" section of the AWC [Ed: footnotes omitted]:

At various times between July 2013 and July 2016, Newbridge failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures (WSPs), concerning the sale of complex securities such as structured notes and leveraged, inverse and inverse-leveraged exchange-traded funds ("Non-Traditional ETFs") that were reasonably designed to achieve compliance with FINRA's suitability rule.

In addition, from November 2015 through March 2016, Newbridge failed to have a reasonable basis to recommend the sale of a private placement offering because it failed to conduct reasonable due diligence on the offering. In addition, Newbridge and Newbridge's Director of Investment Banking, Jordan, failed to reasonably supervise the offering because they allowed the firm to rely primarily on due diligence conducted by the issuer of the offering.

Also, at various times between November 2015 and March 2016, Newbridge failed to comply with Section 15(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 15c2-4 thereunder in that it deposited investor funds into a law firm trust account for a private offering instead of requiring that an independent bank be established as the escrow agent.

Tampa Man Sentenced To Nearly Four Years And Ordered To Pay Over $1.2 Million To Victims Of Dialing-For-Dollars Fraud Scheme (DOJ Release)
Richard Buffington pled guilty in the United States District Court for the Middle District of Florida to wire fraud; and he was sentenced to 46 months in prison, ordered to forfeit $1.2 million, and ordered to pay over $1.2 million in victim restitution. As alleged in part in the DOJ Release:

[F]rom at least January 2013 through August 29, 2018, Buffington defrauded approximately 28 investors, from Florida and across the United States, out of more than $1.2 million by selling unregistered, non-exempt securities in the form of preferred shares. He made false and fraudulent representations to victim-investors about the need for funding for Green Street Equities ("GSE"). Buffington, GSE's listed Chairman and President, pitched GSE as a company focused on investing in "green companies" (i.e., environmentally friendly projects). Buffington's misrepresentations to investors included that: (1) GSE would go public soon after the investors' stock purchase, and (2) that GSE would use investor money to acquire ownership interests in various companies in the "green energy" sector. Based on Buffington's misrepresentations, victim-investors sent funds believing that that Buffington would use such money to fund GSE and its investments or acquisitions. Investors accepted Buffington's misrepresentations about GSE because prior to 2013, he had successfully raised funds for a company that had gone public and from which investors had profited.

Buffington also made fraudulent representations to "green sector" companies, which he included on GSE's website and in its Private Placement Memoranda. Some of those companies appear to have been paper companies; others were legitimate companies towards which Buffington had promised any GSE-raised investor funding would be directed to fund their respective "green sector" projects.   

In the end, although Buffington marketed GSE as a company making meaningful investments or acquisitions in "green companies," neither GSE nor Buffington ever made any such investments or acquisitions. Instead, Buffington used any monies that he raised, including money wired by an undercover agent, for his personal benefit, which included drinking, gambling, and drug use.

Former Investment Banker Found Guilty of Insider Trading in Second Criminal Trial (DOJ Release)
A jury in the United States District Court for the Southern District of New York returned a guilty verdict against former investment banker Sean R. Stewart. Previously, Stewart was convicted on these charges in August 2016 and was sentenced to three years in prison in February 2017; however, the United States Court of Appeals for the Second Circuit overturned his conviction and ordered a new trial. The SEC's civil action against Sean Stewart on related charges is pending. As alleged in part in the DOJ Release:

[S]tewart illegally tipped his father, Robert K. Stewart, about future mergers and acquisitions involving clients of two investment banks for which Stewart worked. The complaint alleges that Stewart's father, a certified public accountant, cashed in on the tips by placing trades himself and by recruiting a partner to place trades ahead of the public announcement of these corporate transactions, generating approximately $1.1 million in illicit proceeds. In a related complaint, the SEC also charged Robert Stewart's trading partner, Richard Cunniffe, who cooperated in the investigation. Both Robert Stewart and Cunniffe pled guilty to criminal charges and agreed to settle the SEC's civil charges against them.

SEC Charges Marketing and Printing Services Provider with FCPA Violations (SEC Release)
Without admitting or denying the SEC's findings, Quad/Graphics Inc. consented to a cease-and-desist Order, and agreed to pay $6,936,174 in disgorgement, $959,160 in prejudgment interest, and a $2 million civil penalty. Further, Quad/Graphics agreed to self-report on its compliance program for a one-year period. In finding that Quad/Graphics violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act, the SEC alleged as set forth in part in the SEC Release that:

[F]rom at least 2011 to January 2016, Quad/Graphics' Peruvian subsidiary, Quad/Graphics Peru S.A., in violation of the FCPA, repeatedly paid or promised bribes to Peruvian government officials to win sales contracts and avoid penalties, and improperly attempted to influence the judicial outcome of a dispute with the Peruvian tax authority. Quad/Graphics Peru S.A. also created false records to conceal transactions with a state-controlled Cuban telecommunications company, which were subject to U.S. sanctions and export controls laws. In addition, the order finds that from 2010 to 2015, Quad/Graphics' China-based subsidiary, Quad/Tech Shanghai Trading Company, Ltd., used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.