The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

January 15, 2020



Advisor's $2.2M recruiting deal dissolved into $1.8M arbitration loss (plus interest) (On Wall Street by Andrew Welsch)

Retirement Plans Committee of IBM, et al., Petitioners, v. Larry W. Jander, et al., (Opinion, United States Supreme Court, 589 U. S. ____ (2020))
http://brokeandbroker.com/PDF/RetirementPlansSupCtOp200114.pdf
As set forth in the Supreme Court Syllabus:

In Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. 409 (2014), we held that "[t]o state a claim for breach of the duty of prudence" imposed on plan fiduciaries by the Employee Retirement Income Security Act of 1974 (ERISA) "on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." Id., at 428. We then set out three considerations that "inform the requisite analysis." Ibid. 

First, we pointed out that the "duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law." Ibid. Accordingly, "ERISA's duty of prudence cannot require" the fiduciary of an Employee Stock Ownership Plan (ESOP) "to perform an action-such as divesting the fund's holdings of the employer's stock on the basis of inside information-that would violate the securities laws." Ibid. We then added that, where a complaint "faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for failing to disclose that information to the public so that the stock would no longer be overvalued, additional considerations arise." Id., at 429. In such cases, "[t]he courts should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws." Ibid. We noted that the "U. S. Securities and Exchange Commission ha[d] not advised us of its views on these matters, and we believe[d] those views may well be relevant." Ibid. 

Third, and finally, we said that "lower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases-which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment-or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund." Id., at 429-430. 

The question presented in this case concerned what it takes to plausibly allege an alternative action "that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." Id., at 428. It asked whether Dudenhoeffer's " 'more harm than good' pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time." Pet. for Cert. i. 

In their briefing on the merits, however, the petitioners (fiduciaries of the ESOP at issue here) and the Government (presenting the views of the Securities and Exchange Commission as well as the Department of Labor), focused their arguments primarily upon other matters. The petitioners argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information. And the Government argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would "conflict" at least with "objectives of " the "complex insider trading and corporate disclosure requirements imposed by the federal securities laws . . . ." Dudenhoeffer, 573 U. S., at 429. 

The Second Circuit "did not address the[se] argument[s], and, for that reason, neither shall we." F. Hoffmann-La Roche Ltd. v. Empagran S. A., 542 U. S. 155, 175 (2004) (citation omitted); see Cutter v. Wilkinson, 544 U. S. 709, 718, n. 7 (2005) ("[W]e are a court of review, not of first view"). See also 910 F. 3d 620 (CA2 2018). Nevertheless, in light of our statement in Dudenhoeffer that the views of the "U. S. Securities and Exchange Commission" might "well be relevant" to discerning the content of ERISA's duty of prudence in this context, 573 U. S., at 429, we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance. For this reason we vacate the judgment below and remand the case, leaving it to the Second Circuit whether to determine their merits, taking such action as it deems appropriate. 

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2019/18-1165_986b.pdf

https://www.supremecourt.gov/oral_arguments/audio/2019/18-1165

BREAKING STORY: Supreme Court FULL TEXT Opinion On ESOPs Fifth Third Bancorp V. Dudenhoeffer (BrokeAndBroker.com Blog / June 25, 2014)
http://www.brokeandbroker.com/2455/esop-supreme-court-fifth-third/

FINRA Imposes $1 Million Fine On Prudential Investment Management Services For Retirement Plans' Supervisory Issues. In the Matter of Prudential Investment Management Services LLC, Respondent (FINRA AWC 2015047966801)
https://www.finra.org/sites/default/files/fda_documents/2015047966801
%20Prudential%20Investment%20Management%20Serivces%20LLC
%20CRD%2018353%20AWC%20sl.pdf
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, Prudential Investment Management Services LLC ("PIMS") submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon PIMS a Censure, $1,000,000 fine, and the firm agreed to undertake to retain independent consultants to review the firm's compliance, in part, with communications to plan participants and the firm's supervisory systems attendant to said investments. As set forth in part in the "Overview" section of the AWC:

During at least the period January 2010 to June 2017, PIMS provided employer sponsors and employee participants, in retirement plans administered and/or maintained by the Prudential Retirement business unit ("Prudential Retirement"), with inaccurate expense ratio information and historical performance information for numerous investment options in defined contribution plans (i.e., retirement plans) offered through a Group VA. In addition, from at least October 2003 to December 2018, PIMS provided inaccurate third-party ratings for investment options in retirement plan Group VAs. PIMS made these misstatements in nine different types of communications, including customer statements and quarterly fact sheets. Finally, from at least January 2004 to September 2019, in multiple client-facing publications, PIMS provided performance data for money market funds available as investment options in retirement plans, but failed to provide "Seven-Day Yield" information as required by Rule 482(e) under the Securities Act of 1933 ("SEC Rule 482"). Throughout the period of these violations, PIMS did not have supervisory systems or written supervisory procedures ("WSPs") reasonably designed to achieve compliance with the content standards of FINRA's advertising rule by ensuring that its communications to customers about retirement plan investments and related investment options were accurate. By virtue of the foregoing, PIMS violated NASD Rules 2210(d)(1)(A) & (B), 3010(a) & (b), and 2110, and FINRA Rules 2210(d)(1)(A) & (B), 3110(a) & (b), and 2010. 

FINRA Fines Citigroup Global Markets Inc. For Reg SHO Supervisory Failures. In the Matter of Citigroup Global Markets Inc, Respondent (FINRA AWC 2015045325201)
https://www.finra.org/sites/default/files/fda_documents/2015045325201
%20Citigroup%20Global%20Markets%20Inc.%20CRD
%207059%20%20AWC%20va.pdf
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, Citigroup Global Markets Inc submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Citigroup a Censure, an $80,000 fine for the locate violations; a $40,000 fine for short-sale circuit breaker violations; a $25,000 fine for trade reporting violations; and an $80,000 fine for supervisory violations.; and the firm agreed to undertake revise its supervisory system/written supervisory procedures. As set forth in part in the "Overview" section of the AWC:

The Securities and Exchange Commission adopted Regulation SHO to address concerns regarding persistent failures to deliver and potentially abusive "naked" short selling, e.g., the sale of securities that an investor does not own or has not borrowed. SEC Rule 201(b) of Regulation SHO requires trading centers to establish, maintain and enforce written policies and procedures to prevent the execution of a short sale at or below the National Best Bid when a short sale circuit breaker is in effect. SEC Rule 203(b)(1) of Regulation SHO imposes requirements related to borrowing or locating stock before an equity short sale. FINRA Rules 6182 and 6624 require members to indicate on trade reports submitted to FINRA whether the transaction is a short sale or a short sale exempt transaction. 

Between June 2012 and September 2016, Citigroup failed to obtain locates for approximately 38,888 short sale transactions. During that period, Citigroup also failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the execution or display of a short sale order in a covered security subject to a short sale circuit breaker at a price at or below the national best bid. During that same period, the firm executed 4,757 orders in a covered security subject to a short sale circuit breaker at a price at or below the national best bid. Finally, from June 2012 through November 2016, Citigroup failed to report accurately 22,354 transactions to a FINRA trade reporting facility with a short sale or short sale exempt indicator. 

Between June 2012 and November 2016, Citigroup failed to establish, maintain and enforce a supervisory system, including supervisory procedures, with respect to SEC Rule 201(b) of Regulation SHO, SEC Rule 203(b)(1) of Regulation SHO, and accurate short sale transaction reporting. 

As a result of the foregoing, during the stated periods, Citigroup violated SEC Rules 201(b) and 203(b) of Regulation SHO, and FINRA Rules 6182, 6624, 3110 (and NASD Rule 3010 for conduct before December 1, 2014) and 2010. 

Bill Singer's Comment: This is 2020. The underlying CGMI misconduct took place in 2012 through 2016 -- some four to eight years ago (and, sure, okay, three to seven years ago if you want to argue that it is only just 2020). Notably, FINRA's docket number 2015045325201 indicates that the investigation commenced in 2015 -- as in five years ago. Pointedly, the AWC alleges that the last bit of misconduct at issue took place in September 2016 (for the fail-to-locates) and in November 2016 (reporting), which is over three years ago by any calculation. How the hell does it take that long for FINRA to sanction one of its largest and most important member firms? The AWC makes allegations about 40,000 short sales, just under 5,000 orders, and some 22,000 inaccurately reported transactions. The magnitude of the ongoing failure is stunning -- and FINRA's dilatory efforts to address the years of misconduct is just as appalling. What the hell is the point of FINRA imposing $225,000 in cumulative fines in 2020? It makes about as much sense as sending me a $100 ticket in 2020 for illegally double parking in 2012. 

https://www.sec.gov/news/press-release/2020-10
In a Complaint filed in the United States District Court for the Northern District of Illinois,
https://www.sec.gov/litigation/complaints/2020/comp-pr2020-10.pdf, the SEC charged Kenneth D. Courtright III and his company Today's Growth Consultant Inc. ("TGC") with violations of the antifraud and registration provisions of the federal securities laws involving the raising of over $75 million in funds from over 500 investors, and seeks certain emergency relief as well as permanent injunctions, return of ill-gotten gains with prejudgment interest, and civil penalties. On Dec. 30, 2019, the Court issued a temporary restraining order, ordered an asset freeze and other emergency relief, and appointed a receiver for TGC. As alleged in part in the SEC Release:

[F]rom at least 2017 through at least October 2019, TGC, which also operated under the name "The Income Store," and Courtright, the company's founder and current chairman, promised investors an endless minimum guaranteed rate of return on revenues generated by websites. In exchange for an investor's "upfront fee," TGC claimed that it would either buy or build a website for the investor, and develop, market, and maintain the website. As alleged, TGC falsely promised that it would use investors' funds exclusively for expenses related to the investor's website. In reality, as alleged, the sales were conducted through unregistered securities offerings, and TGC used new investors' funds to pay investor returns, in Ponzi-like fashion, and to pay Courtright's personal expenses, including his mortgage and private school tuitions for his family.

SEC Obtains Final Judgments Against Remaining Defendants in Fraudulent Stock Promotion Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2020/lr24716.htm
The United States District Court for the District of Washington entered final judgments against:

https://www.sec.gov/litigation/litreleases/2020/judgment24716-bjorlin.pdf

https://www.sec.gov/litigation/litreleases/2020/judgment24716-hodge.pdf

https://www.sec.gov/litigation/litreleases/2020/judgment24716-nichols.pdf

As alleged in the SEC Release:

According to the SEC's complaint, Bjorlin and Hodge hired writers like Nichols to publish hundreds of bullish articles on behalf of clients of Lidingo Holdings. The articles appeared to be independent research pieces but, in fact, were paid advertisements.

Without admitting or denying the allegations, Bjorlin, Hodge and Nichols consented to the final judgments, which permanently enjoin them from violating the antifraud and anti-touting provisions of Sections 17(a) and 17(b) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Bjorlin, Hodge and Nichols were ordered to pay disgorgement, prejudgment interest and civil penalties totaling $704,672, $466,578, and $133,703 respectively. The Court also imposed five-year penny stock bars against Bjorlin and Hodge, as well as a five-year officer and director bar against Bjorlin.

The Court previously entered a final judgment against the other writer defendant, Vincent Cassano, on April 10, 2018. With entry of the final judgments against Bjorlin, Hodge and Nichols, the SEC's litigation has concluded.

SEC Obtains Judgments Against Two Attorneys in Fraudulent Scheme to Issue False Legal Opinions (SEC Release)
https://www.sec.gov/litigation/litreleases/2020/lr24715.htm
The United States District Court for the District of Colorado entered a final default judgment against attorney Diane D. Dalmy, who in 2016 was permanently suspended from appearing/practicing before the SEC as an attorney. The default judgment against Dalmy orders her to pay $30,236 disgorgement and prejudgment interest; prohibits her from providing legal services pertaining to federal securities law exemptions from registration; and requires her to provide clients or potential clients seeking advice or representation in matters related to the federal securities laws with copies of the SEC's and the court's prior orders against her. Additionally, retired divorce lawyer Michael J. Woodford consented to the entry of a final judgment against him that orders him to pay $29,762 disgorgement and prejudgment interest but waives payment based on his financial condition.. Finally, Dalmy and Woodford are both enjoined from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and impose penny stock bars. As alleged in part in the SEC Release:

On March 13, 2019, the SEC charged Dalmy for concealing from transfer agents and brokerage firms her involvement in preparing legal opinion letters concerning the sale of certain microcap securities. According to the SEC's complaint, Dalmy had been placed on the prohibited attorneys list maintained by OTC Markets Group, Inc., which owns and operates the largest U.S. electronic quotation and trading system for microcap securities. To evade this prohibition, Dalmy allegedly recruited Michael J. Woodford, a retired divorce lawyer, to sign legal opinion letters drafted by Dalmy. Without performing due diligence or conducting any legal analysis, Woodford provided the opinion letters to transfer agents and brokerage firms. On June 28, 2019 the SEC charged Woodford for his role in the scheme.
https://onwallstreet.financial-planning.com/news/advisors-2-2m-recruiting-deal-dissolved-into-1-8m-arbitration-loss-plus-interest
As industry journalist Andrew Welsch teases us with his perfect lede:

Imagine this: You're an advisor with a T12 of $1.9 million. A competitor offers you a $2.2 million recruiting deal to switch firms. You take it. A year later, your new employer declares they are shuttering their wealth management business. And, oh, by the way, you need to repay that recruiting deal.

That in a nutshell is what advisor Neal Carlson says happened to him after he left Goldman Sachs for Credit Suisse in March 2014.

Also, read: "Federal Court Troubled By FINRA Arbitration Chair's Non-Disclosure Of Conflict" (BrokeAndBroker.com Blog / January 7, 2020)
http://www.brokeandbroker.com/5002/finra-arbitrator-disclosure/

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