Securities Industry Commentator by Bill Singer Esq

October 29, 2019

featured in today's Securities Industry Commentator:
In a FINRA Arbitration Statement of Claim filed in August 2017, associated person Claimant Smyth asserted : violation of Age Discrimination Employment Act, violation of the NY State Human Rights Law, violation of the New York City Human Rights Law, breach of contract, breach of the covenant of good faith and fair dealings, failure to pay compensation, breach of securities industry rules, regulation and standards of conduct, wrongful discharge, unjust enrichment, tortious interference with business relations, quantum meruit and other similar causes of action. Claimant sought at least $4.25 million in damages (reduced to $3.7 million at the close of the hearing) plus other forms of compensatory and punitive damages, interest, costs, and fees. 
Respondent Cantor Fitzgerald generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting recovery of promissory note, misappropriation of CF&CO's confidential information, breach of employment agreement, misappropriation of trade secrets, breach of fiduciary duty and/or duty of loyalty, and causes of action under the New York faithless servant doctrine. Respondent sought $58,406.97 in damages plus interest, costs, and fees. At the conclusion of its case, Respondent withdrew its breach of covenants cause of action in its Counterclaim. 
The FINRA Arbitration Panel found Respondent Cantor Fitzgeral liable to and ordered it to pay to Claimant Smyth in $594,944 in damages plus interest, $250,000 in attorneys' fee, $26,306.87 in costs, and $600 in FINRA filing fees. Pointedly, the Panel denied Claimant's statutory employment discrimination claim. In rendering the Decision, the Panel offered this Report:

The Panel determined that the Claimant did not misappropriate information or violate any covenants between the Claimant and the Respondent after the Respondent made a full presentation of those claims against the Claimant in counterclaim. The last minute withdrawal of any Counterclaim by Respondent, just before closing, after a full presentation of evidence, does not shield the Respondent from this final disposition of the Claims and Counterclaims.
In 2015, a former J.P. Morgan Securities associated person sought over $800,000 in damages arising from alleged harm to his book of business by his former employer. It all set up as a fascinating dispute. Unfortunately, it ended in what seems a 2017 fizzle of a FINRA Arbitration Decision in favor of JP Morgan. Julius Caesar famously said "I came, I saw, I conquered." In the FINRA arbitration, the Claimant and his counsel essentially said "I came, I couldn't come back, but I tried, but I couldn't make it, and asked for an adjournment, and, I lost." It just doesn't have the poetry of the older pronouncement. On the other hand, the case may well last two more millennia as it makes its way through the federal District and Circuit courts -- perhaps all the way to the Supreme Court.

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, Respondent submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Respondent had violated FINRA Rules 2510(b) and 2010, and imposed a $5,000 fine and a one-month suspension from association with any FINRA member firm in any capacity.  As set forth in part in the AWC, during the relevant period between May 16, 2018 and March 31, 2019, when Respondent was registered with FINRA member firm Joseph Stone Capital L.L.C. [Ed: Respondent's name has been redacted at the sole discretion of the Securities Industry Commentator:

[REDACTED] exercised discretion by placing 82 trades in two customer accounts. Although the customers had given [REDACTED] express or implied authority to exercise discretion in their accounts, neither of the customers had provided prior written authorization for [REDACTED] to exercise discretion. [REDACTED] also did not seek or obtain from Joseph Stone prior written acceptance of the accounts as discretionary. 

Bill Singer's Comment: Yes, Respondent entered 82 trades on behalf of two customers. We can all agree on that. Further, the two customers gave Respondent discretion to enter those trades on their behalf and there is NO allegation in the AWC that any of the customers complained or suffered losses. FINRA concedes that the customers gave Respondent "oral" discretion. Unfortunately, FINRA's rules do not countenance "oral" discretion (other than, perhaps, in the form of same-day Time and Price discretion). As such, FINRA charged Respondent with a violation because he exercised oral discretion when the rules required that his customers memorialize their authorization in writing and that the member firm accept that grant of discretion in writing. For my part, I understand the soundness of the written discretionary protocol; however, I'm not quite sure that Respondent's conduct required both a $5,000 fine and a one-month suspension. He was happy with those sanctions because he signed off on the regulatory settlement with FINRA, so, hey, if it's good enough for him then it's good enough for me. Given that the AWC asserts that Respondent had no prior "disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization," I'm not sure that the double-barreled fine and suspension were necessary. That being said, the sanctions fully comport with FINRA Sanction Guidelines. Sometimes I wonder if the folks who draft FINRA's Sanction Guidelines every stopped and fully considered how much $5,000 is these days and, while they're giving that some thought, also factor in the cost of one-month of production downtime. If, in fact, Respondent had used discretionary trading on behalf of even one customer who didn't grant "oral" authorization and there was a complaint attendant to that trade, I have no objection to imposing a fine and suspension. I'm just troubled by FINRA's knee-jerk reflex to hammering reps with what seems to have gained credence as a perfunctory $5,000 fine and a one-month sit-down in the penalty box. 

John Burton pled guilty in the United States District Court for the Northern District of Iowa to one count of conspiracy to commit wire fraud and he was sentenced to 22 months in prison; and he was ordered to forfeit over $1,000,000 and to pay a $100,000 fine. As alleged in part in the DOJ Release:

[B]urton grew grain that was not organic and sold it to Randy Constant, knowing that Constant was going to market and sell the grain as organic.  By selling his grain to Constant, Burton was able to receive a premium, selling the grain for more than he could have on the open market.  Burton also worked for Constant, raising grain on farm fields that Constant either owned or rented.  While doing this work, Burton often sprayed Constant's fields with chemicals and fertilizers, even though he knew those substances were not allowed on organic fields.  Burton either sold or raised over $5,000,000 in crops for Constant.  Overall, Constant's scheme involved at least $142,433,475 in grain sales, and the vast majority of those sales were fraudulent in that the grain he sold was not organic even though it was marketed as organic. 

The United States District Court for the Southern District of Florida entered a:
Pursuant to the default judgment, Defendants Omega Knight and Aviv Hen will pay a $11,442,771 civil monetary penalty and a $3,814,257 in disgorgement, and they are subject to permanent registration and trading bans. Pursuant to the consent order, Defendant Erez Hen will pay a $75,000 civil monetary penalty and a $275,000 in disgorgement; and he is subject to a five-year registration and trading ban and further subject to compliance with undertakings involving two Erez Hen-owned entities unrelated to Omega Knight. As alleged in part in the CFTC Release:

In its motion for default judgment, the CFTC presented evidence that from March 2013 through June 2017, Omega Knight, including Aviv Hen, engaged in a scheme to defraud customers located throughout the United States in connection with precious metals transactions. According to the default order, the defendants made numerous false statements to induce customers to enter into leveraged and fully-paid precious metals transactions, and Omega Knight received a minimum of $5.5 million from at least 90 customers in connection with these transactions.

The default order found that Omega Knight failed to use all of the customer funds it collected to purchase metal for its customers' precious metals transactions. Instead, Omega Knight and Aviv Hen misappropriated customer funds to pay personal expenses, to distribute purported "profits" and disbursements to other customers, and to fund Omega Knight's operations. Through the issuance of false trade confirmations, account statements, and other communications to customers, Omega Knight and Aviv Hen concealed their misappropriation and fraudulent scheme.

Moreover, the default order found that Omega Knight's leveraged or financed precious metals transactions constituted illegal, off-exchange retail commodity transactions. Notably, Omega Knight's leveraged or financed precious metals transactions never resulted in actual delivery of the full amount of metal purchased to customers. In addition, the default order found that Omega Knight accepted customer orders and funds in connection with those transactions and therefore acted as a futures commission merchant without being registered as required.