Securities Industry Commentator by Bill Singer Esq

October 9, 2019

Does Your Brokerage Contract Bite? ( Blog)
In a recent federal lawsuit, the plaintiff public customer sues a brokerage firm for breach of contract. The thing is, the customer alleges that his signature on the contract was forged. The contract contains an arbitration clause. Moving along, the customer wants damages on his breach claims but also argues against being forced into arbitration.  All of which reminds our publisher Bill Singer of the classic comedy scene in the movie Pink Panther, when Inspector Clouseau looks down at a dog and asks an innkeeper: "Does your dog bite?" After being assured by the innkeeper that his pet doesn't bite, Clouseau bends down to pet it -- only to be bitten. Shocked, Clouseau complains that he was bitten by the man's pet after being told that the animal did not bite. To which the innkeeper protests, "That's not my dog." Does your brokerage contract bite?
Paul Andrews Rinfret, 70, pled guilty in the United States District Court for the Southern District of New York to one count of wire fraud and one count of securities fraud. As set forth in part in the DOJ Release:

From at least 2016 through 2019, RINFRET engaged in a scheme to defraud potential and actual investors in an entity called Plandome Partners L.P. for his own personal gain and for the gain of his family members.  RINFRET offered potential investors the ability to invest in Plandome Partners through the purchase of limited partnership interests.  In soliciting investments, RINFRET falsely represented to potential and actual investors (the "Victims") that he would use all of their investment funds to trade futures contracts tied to the Standard & Poor's 500 index using a propriety trading algorithm he had developed, taking for himself a fee equivalent to 25% of the net profits on the trades. 

Through his fraudulent scheme, RINFRET obtained approximately $19 million in total from approximately six Victims on the false claim that he would utilize their investment funds for trading.  RINFRET's lies and misrepresentations were varied and many.  For example, RINFRET claimed that Plandome Partners traded through certain brokerage accounts, one of which simply did not exist, and two of which were not open at a time when RINFRET claimed to be trading in those accounts. 

Further, RINFRET used only a small portion of the Victims' invested funds to engage in actual trading.  Instead, RINFRET used most of the Victims' money to purchase luxury goods and high-end vacation rentals for himself and family members.  For example, RINFRET used the Plandome Partners account to spend almost $50,000 on a luxury Hamptons vacation rental, more than $40,000 on jewelry, and tens of thousands of dollars on the event venue where his son held his engagement party. 

When RINFRET did actually engage in trading with Victims' funds, he generated losses.  But, to prevent his Victims from seeking a return of their money, and to induce additional investments, RINFRET falsely reported excellent investment performance results to the Victims through false and fraudulent monthly account statements that RINFRET typically emailed to the Victims.  RINFRET also sent fabricated brokerage account statements to the Victims.
As set forth in the Petitioner's Petition under "Statement of the Case":

The Eleventh Circuit Court of Appeals erroneously affirmed dismissal of Petitioner Gerald Lynn Bostock's case after refusing to recognize that this Court's decisions have abrogated old precedents which precluded him from maintaining a claim for sexual orientation discrimination in violation of Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq. ("Title VII"). This Court must grant the writ of certiorari to correct the Eleventh Circuit's error, resolve a split between the Circuit Courts of Appeals, and confirm the common sense proposition that discrimination against an employee because of sexual orientation is ipso facto discrimination "because of . . . sex" in violation of Title VII. 

The lower federal courts, including the Eleventh Circuit, previously held that Title VII did not prohibit sexual orientation discrimination. But this Court sounded the death knell for that myopic interpretation in Price Waterhouse v. Hopkins, which held that discrimination on the basis of an employee's failure to act in accordance with gender-based expectations violates Title VII. See 490 U.S. 228, 250-51 (1989) (plurality opinion), superseded by statute on other grounds as stated in Desert Palace, Inc. v. Costa, 539 U.S. 90, 94-95 (2003); 490 U.S. at 258-61 (White, J., concurring); 490 U.S. at 272-73 (O'Connor, J., concurring). The nail in the coffin was this Court's decision in Oncale v. Sundowner Offshore Srvcs., Inc., which held that Title VII should be interpreted broadly to prohibit the "entire spectrum" of sex-based discrimination, even forms like same-sex sexual harassment which were not the primary concern of Congress when it passed Title VII. 523 U.S. 75, 79 (1998). But because "statutory prohibitions often go beyond the principal evil to cover reasonably comparable evils," id., and because it is impossible to consider a person's sexual orientation without also considering that person's sex, Baldwin v. FoxxEEOC Decision No. 0120133080, 2015 WL 4397641 (July 15, 2015), there is no longer any doubt that Title VII forbids employers from considering an employee's sexual orientation when making employment decisions.

Some lower federal courts have recognized this inescapable truth, but there is a pronounced division among the United States Circuit Courts of Appeals. The Second and Seventh Circuits recently issued en banc opinions overruling their old precedents to hold firmly that sexual orientation discrimination is prohibited as a form of sex discrimination under Title VII. See Zarda v. Altitude Express, Inc., 883 F.3d 100, 131 (2d Cir. 2018); Hively v. Ivy Tech. Comm. Coll. of Indiana, 853 F.3d 339, 351-52 (7th Cir. 2017). But older decisions in the other Circuits still confuse the lower courts, which are unsure whether Zarda, Hively , or the Equal Employment Opportunity Commission's decision in Baldwin mean that sexual orientation discrimination is actionable under Title VII, or whether they should follow prior conflicting precedents, some decided decades before this Court's decisions in Price Waterhouse, Oncale, Lawrence v. Texas, 539 U.S. 558 (2003), and Obergefell v. Hodges, 135 S. Ct. 2584 (2015). 

Petitioner Bostock is a gay man who was employed as the Child Welfare Services Coordinator for the Clayton County Juvenile Court System. He alleges that his former employer, Respondent Clayton County, Georgia, fired him because of his sexual orientation. App. 26-27. He asserts that, after the County learned of his sexual orientation, his participation in a gay recreational softball league, and his promotion of volunteer opportunities with the County to league members, the County falsely accused him of mismanaging public funds as a pretext for terminating his employment because of his sexual orientation. Id. at 27-28. He asserts a single claim for sex discrimination in violation of Title VII, and prays that this Honorable Court will correct the error of the Eleventh Circuit for his sake and the sake of all the gay and lesbian workers across this country.
As set forth in Respondent's Brief in the "Introduction":

This case is not about whether Congress should enact a statute prohibiting employment discrimination on the basis of sexual orientation as a matter of desirable public policy. Instead, the issue presented in this Petition is whether Congress did so more than 50 years ago when it enacted Title VII of the Civil Rights Act of 1964 that prohibited employment discrimination on the basis of "sex" and other protected classes, including race, color, religion and national origin. The United States Court of Appeals for the Eleventh Circuit, following established circuit precedent, correctly answered "no" to this question. 

The inconvenient reality for Petitioner is that the text of Title VII does not include sexual orientation as a protected class. Undeterred, Petitioner advances various novel legal theories in hopes of persuading the Court to grant certiorari to extend discrimination on the basis of "sex" under Title VII to also prohibit discrimination on the basis of sexual orientation. The novel legal theories advanced by Petitioner, however, are solely intended to entice the Court to seize legislative power from Congress and do what Congress has declined to do for more than 50 years: amend Title VII by adding sexual orientation as a protected class. 

The Court should decline Petitioner's invitation and deny certiorari in this case. 

Cert. Granted April 22, 2019. Question Presented

Whether discrimination against an employee because of sexual orientation constitutes prohibited employment discrimination "because of . . . sex" within the meaning of Title VII of the Civil Rights Act of 1964, 42 U.S.C.
§ 2000e-2.

READ the Transcript of the Oral Argument October 9, 2019

An excerpt of Pamela S. Karlan, Esq.: 

MS. KARLAN: Thank you, Mr. Chief Justice, and may it please the Court: 

When a employer fires a male employee for dating men but does not fire female employees who date men, he violates Title VII. The employer has, in the words of Section 703(a), discriminated against the man because he treats that man worse than women who want to do the same thing. And that discrimination is because of sex, again in the words of Section 703(a), because the adverse employment action is based on the male employee's failure to conform to a particular expectation about how men should behave; namely, that men should be attracted only to women and not to men. 

There is no analytic difference between this kind of discrimination and forms of discrimination that have been already recognized by every court to have addressed them. For example, discrimination against men who are a effeminate rather than macho. Like the discrimination here, that discrimination is because of non-conformity with an expectation about how men should behave. 

The attempt to carve out discrimination against men for being gay from Title VII cannot be administered with either consistency or integrity. In the words of the en banc Second Circuit, it forces judges to result -- resort to lexical bean counting where they count up the frequency of epithets, such as "fag," "gay," "queer," "real man," and "fem," to determine whether or not discrimination is based on sex or sexual orientation. 

That attempt is futile because when a man is discriminated against for being gay, he is discriminated against for not conforming to an expectation about how men should behave. Finally, the possibility that some employers, but not the employers here, may have policies of denying employment opportunities both to gay men and to lesbians does not change the unlawfulness of what was alleged by the employees here. 

Labeling those policies under an umbrella phrase like "sexual orientation discrimination" cannot hide the fact that such an employer is a double discriminator. It discriminates against men who do not conform to a male stereotype, and it discriminates against women who do not conform to an expectation about female --

An excerpt of Noel J. Francisco, Solicitor General/Department of Justice: 

GENERAL FRANCISCO: Mr. Chief Justice, and may it please the Court: 

The issue is not whether Congress can or should prohibit employment discrimination because of sexual orientation. The issue, rather, is whether it did so when it prohibited discrimination because of sex. 

It did not for two reasons. First, sex means whether you're male or female, not whether you're gay or straight. So if you treat all gay and men -- gay men and women exactly the same regardless of their sex, you're not discriminating against them because of their sex. 

Second, any doubt is removed by the history of Title VII and related statutes since, in the face of unanimous interpretation by the courts and the executive branch that persisted for decades, Congress has repeatedly extended other statutes to specifically cover sexual orientation, yet has refused to do so with respect to Title VII. 

The employee's position would nullify that conscious choice. 

And Justice Gorsuch, if I could first address your question about our -- my friend on the other side's argument about the literal meaning of the statute, well, there are essentially two responses to that argument. And they're related.

The first is that under that interpretation, you actually couldn't fire a man for using the woman's restroom because in some metaphysical sense, that man's sex is a but-for cause for his firing. The reason --
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, William George Davis submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Davis had violated FINRA Rules 4511(a) and 2010, and the regulator imposed upon William George Davis a $5,000 fine and a 15-calendar-day suspension from associating in any and all capacities with any FINRA member firm. As set forth in part in the AWC, during the relevant period from May 1, 2018, through June 29, 2018, while Davis was registered with FINRA member firm Ameriprise Financial Services, Inc.:

[F]irm policy prohibited Davis from soliciting certain categories of securities. Pursuant to Firm policy, these securities ("prohibited securities") could be purchased only on an unsolicited basis. Nonetheless, Davis recommended and purchased prohibited securities for seven of his customers. In order to circumvent the Firm's policy, Davis marked these trades as "unsolicited" on the order tickets. In total, Davis mismarked eight trades in seven customer accounts. As a result of mismarking these trades, Davis caused the Firm to maintain inaccurate books and records.  

Bill Singer's Comment: Online FINRA BrokerCheck records as of October 9, 2019, disclose that Davis was first registered in 1975 (Series 7), and by April 2016, he was registered with Ameriprise. The AWC asserts that "Davis first became registered with a FINRA member firm in 1988 as a General Securities Representative ("GSR")." BrokerCheck discloses that Ameriprise "discharged" Davis on July 30, 2018, based upon allegations that:
Registered representative was terminated for violations of company policy related to solicitation of securities not approved for solicitation, mis-marking trades, and failure to comply with supervision.
As asserted in part on Page 2 of the IG's Statement [Ed: footnote omitted]:

[T]he SEC's new Strategic Plan establishes goals and initiatives to ensure that, as the markets change rapidly and new technology, innovation, and global risks evolve, the SEC appropriately adapts its operational focus and remains an effective regulator. We describe further below challenges to the SEC's ability to (1) keep pace with changing markets and innovations; (2) ensure sufficient examination coverage of registered investment advisers and timely enforcement investigations; and (3) leverage technology and analytics to meet mission requirements, while operating with limited resources.

Among some of the more troubling issues raised in the IG's Statement [Ed; footnotes omitted]:

Although in FY 2019, the SEC received an appropriation of about $1.675 billion-a $23 million (or 1.4 percent) increase over the FY 2018 appropriation-for several years, the SEC's annual appropriation was essentially flat, requiring a number of difficult operational choices, including cuts to contracts and a hiring freeze. The SEC implemented the hiring freeze in FY 2017, which resulted in a decrease of more than 400 positions over the last 2 FYs. In 2018 and 2019, divisions and offices reported specific challenges created by staffing levels that have fallen or have not kept pace with workload demands. For example, in its 2018 annual report, the Division of Enforcement (Enforcement) reported that the combined number of positions in the Division and the number of contractors supporting Enforcement's investigation and litigation efforts fell by about 10 percent between FY 2016 and FY 2018. Although the Division continued to exhibit significant enforcement-related activity, Enforcement management reported that, with more resources, the SEC could focus more on individual accountability, and support two key Enforcement priorities: (1) protecting retail investors, and (2) combating cyber-related threats. 

The Office of the Investor Advocate also reported that, because of the hiring freeze, efforts to devote additional resources to the organization's Ombudsman and research functions were hindered, which delayed the ability to build out these programs. Notably, in FY 2018, the Ombudsman-who, among other things, acts as a liaison in resolving problems that retail investors may have with the Commission or with self-regulatory organizations-received 449 new matters, which represented a 99-percent increase over the previous FY. 

at Page 3 of the IG Report

As we reported last year, the timeliness of Enforcement investigations remains a concern. Specifically, in FY 2018, the percentage of first enforcement actions filed within 2 years of the opening of the matter under inquiry or investigation was 49 percent. Once again, this did not meet the annual target of 65 percent. In addition, in FY 2018, the average number of months between opening a matter under inquiry or investigation and commencing an enforcement action was 25 months. This also did not meet the annual target of 20 months. To address the issue of timeliness in investigations, Enforcement has again reported "taking measures that include emphasizing expediency in quarterly case reviews, promoting best practices regarding efficiencies in various phases of the investigative process, leveraging data analytics capabilities, and conducting training on tools that expedite investigations."

at Page 4 of the IG Report
Bill Singer's Comment: Sadly, there is not a single reference in the IG Report to the reported delays attendant to the SEC's processing of Whistleblower TCRs and WB-APPs. Frankly, this is omission is not only shocking but as much a part of the federal regulator's failure to properly triage the problems that need to be addressed. While I fully appreciate the severe difficulties caused by the perceived staffing shortages, hiring freezes, and budget allocations, I am also aware that those three causes are not solely responsible for all the negative effects under scrutiny. As with far too many federal organizations, the SEC is burdened by unwarranted charges attendant to its use of contractors, many of who add impediments to the Staff's ability to timely complete projects. Not only do federal agencies tend to over-pay for the quality of work and services provided by contractor, but, in addition, many of those individuals fail to adhere to their work schedule via excessive absences or not observing the requisite hours of work. Finally, the IG Report does not satisfactorily address the frequent lack of effective management and supervision provided by those so charged. The turnover in managerial/supervisory roles and the unfortunate installation of individuals lacking in the necessary managerial/supervisory skills needs to be addressed and remediated.

Agencies Finalize Changes to Simplify Volcker Rule (SEC Release)
The Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission finalized revisions (effective January 1, 2010, with a January 1, 2021 compliance date) to simplify compliance requirements relating to the "Volcker rule."  As set forth in part in the SEC Release:

Under the revised rule, firms that do not have significant trading activities will have simplified and streamlined compliance requirements, while firms with significant trading activity will have more stringent compliance requirements.  Community banks generally are exempt from the Volcker rule by statute.  The revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law.  With the changes, the agencies expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies' 2013 rule.