Securities Industry Commentator by Bill Singer Esq

April 7, 2020

Key Food Prices Are Surging After Virus Upends Supply Chains (Bloomberg by Agnieszka de Sousa, Ruth Olurounbi, and Pratik Parija)

Wayfair shares surge 37% as coronavirus drives sales of office furniture and home decor (CNBC by Lauren Thomas)

Former Investment Adviser Settles Fraud Action (SEC Release)

According to my sources, some FINRA Staff is "demanding" that FINRA Rule 8210 On-The-Record interviews ("OTRs") be conducted by ZOOM or teleconferencing during the COVID-19 pandemic.  In some matters, the Staff is proposing to have a court reporter at a remote site, but in other situations, the parties are told that no reporter will be online. As noted in FINRA Rule 8210:

(f) Inspection and Copying
A witness, upon proper identification, may inspect the official transcript of the witness' own testimony. Upon written request, a person who has submitted documentary evidence or testimony in a FINRA investigation may procure a copy of the person's documentary evidence or the transcript of the person's testimony upon payment of the appropriate fees, except that prior to the issuance of a complaint arising from the investigation, FINRA staff may for good cause deny such request.

Given the importance of creating a reliable transcript, which a witness is entitled to inspect or procure, the poor sound quality of a teleconference being conducted over a number of cellphones, tablets, laptops, and computers that have been forced into service from home locations, may seriously impact the integrity of the court reporter's work-product. Similarly, Staff's "offer" to dispense with an OTR transcript would likely render the undertaking as a dubious pursuit in the absence of the ability to prove what was asked and what was answered -- which would become all the more critical should the filing of a Complaint be threatened based upon statements made during the OTR. If a witness is willing to voluntarily waive the presence of a court reporter or to participate in a teleconferenced OTR, that's one thing; however, if a witness prefers to participate in a traditional OTR conducted at a FINRA office with a court reporter and an attendant transcript, then FINRA must respect that preference and not impose undue pressure during this health crisis.

As the COVID-19 death rate grows, there are local, state, and federal directives against non-essential public transport and mandating social distancing. Accordingly, it is  ill-advised if not illegal for some witnesses to travel to their lawyers' offices, or for the lawyer to travel to a witness's home in order to facilitate a teleconferenced OTR. Further, it is not sensible for a lawyer to be in her home, physically separated from a client, who is in his home, during the conduct of a teleconferenced OTR. Moments often arise during an OTR when a lawyer and client need to go off the record and to consult privately. During such a moment, the lawyer and client may need to review, together, a document, or the lawyer may need to look the client in the face in order to assess the client's state of mind and comprehension of a point. That scenario is not satisfactorily addressed by temporarily going offline during a  ZOOM session and having the lawyer and client communicate via cellphone -- which I am told was suggested by one FINRA lawyer to one of my sources. 

Lawyers representing witnesses during FINRA OTRs are, as officers of the court, subject to Ethical Considerations and Disciplinary Rules that obligate them to provide "zealous" advocacy to their clients and to avoid engaging in malpractice. In consideration of such professional obligations, lawyers may have legitimate objections  to FINRA Staff's request to voluntarily agree to a ZOOM OTR. After some four decades lawyering on the Street, I'm not about to agree to FINRA Staff posting page after page of a multi-page document on ZOOM in lieu of passing a copy of that same document across an OTR table and allowing for a confidential consultation between me and my client.  More to the point, it is disgraceful for FINRA to conduct non-essential OTRs during a time when that same self-regulatory organization is posting updates about governmental orders to "shelter in place;" see

Under FINRA Rule 8210(e): Electronic Interface, FINRA may resort to an electronic interface but such a medium should be a proprietary platform subject to encryption and enhanced security. As the use of ZOOM expands during the pandemic, questions have arisen about the extent of the platform's encryption and overall security. Consider the FBI's recent warning about the ZOOM platform 

With all due respect to FINRA -- which is NOT a government regulator and does not afford any constitutional protections to those caught up in its investigations or proceedings -- this is not the time for a bum's rush approach to conducting OTRs. You don't get to use a health crisis as a convenient excuse to cut corners. If there are, in fact, cases in which it is an emergency and the public interest requires immediate action, then it's probably best for FINRA to reach out to the Securities and Exchange Commission or the Department of Justice. 

It is unconscionable for FINRA Staff to use this health crisis as a convenient way to eliminate the few rights that witnesses have during a FINRA investigation. Further, it is more than a bit ironic that FINRA would conduct an OTR involving questioning about a client's confidential finances and transactions via ZOOM when FINRA files charges against firms and associated persons who short-circuit the confidentiality requirements of Reg SP by transmitting client data via email or other unencrypted modalities. Additionally, as is currently being litigated in Robert Cullen, individually and on behalf of all others similarly situated, Plaintiff, v. ZOOM Video Communications, Inc., a Delaware corporation, Defendant (Complaint, 20-CV-02155, United States District Court for the Northern District of California,  / March 30, 2020)

2. Zoom, however, has failed to properly safeguard the personal information of the increasing millions of users of its software application ("Zoom App") and video conferencing platform. Upon installing or upon each opening of the Zoom App, Zoom collects the personal information of its users and discloses, without adequate notice or authorization, this personal information to third parties, including Facebook, Inc. ("Facebook"), invading the privacy of millions of users. 

In these dire times, FINRA must ensure that Staff is not unfairly pressuring pro se witnesses or threatening witnesses represented by counsel for refusing to participate in a teleconferenced OTR during the COVID-19 pandemic. With many industry professionals working from home and unable to go to their branches or offices, this is not the time for FINRA to strong-arm smaller firms and individual men and women into waiving their meager rights when answering Staff questions during an OTR. In my various communications with associated persons and industry counsel on this issue, I am urging them to communicate with FINRA senior staff and Board members in the event that investigative Staff unreasonably refuses to reschedule an OTR during the COVID-19 pandemic. By way of a reference point, FINRA might want to note that the SEC is regularly extending its own deadline dates for a whole host of regulatory matters; e.g.: 

CNN's Chris Cuomo talks about advice given to him by a pulmonary expert on how to fight Covid-19 and says you have to fight back against the virus to beat it:
In an Indictment filed in the United States District Court for the Southern District of Texas, Summer Worden was charged with making false statements. Truly, I can't make this up, so, here's how it is alleged in part in the DOJ Release:

The charges allege Worden made false statements to NASA - Office of Inspector General (OIG) and the Federal Trade Commission (FTC).

According to the indictment, Worden maintained multiple bank accounts at USAA Federal Savings Bank. She allegedly shared access to her online accounts with a commissioned officer in the U.S. Army on detail to NASA's Johnson Space Center who had access until at least Jan. 31, 2019. 

The indictment alleges Worden filed a complaint with the FTC, alleging the officer had improperly accessed her bank account. She claimed she had opened a new account in September 2018 and reset her login credentials in order to prevent the individual from accessing her accounts, according to the charges. However, the indictment alleges she actually opened the account in April 2018 and did not change her login credentials until January 2019. 

The indictment charges Worden with making false statements on two occasions. She allegedly filed the false complaint March 19, 2019, with the FTC and later made a false statement in an interview with NASA-OIG July 22, 2019.
Cantor Fitzgerald & Co. entered into a settlement with the SEC whereby it agreed to be Censured and to pay $3.2 million for having submitted incomplete and inaccurate electronic blue sheets ("EBS"). According to the SEC Cease-and-Desist-Order, Cantor Fitzgerald willfully violated the broker-dealer books and records and reporting provisions.  As set forth in pertinent part in the SEC Order:

6. From at least January 1, 2014 through September 14, 2019, Cantor submitted 14,868 EBS to the Commission, containing trade data for 34,884,409 transactions, all of which were deficient in one or more ways. 

7. Cantor's submissions contained inaccurate or missing EBS fields relating to firm or customer identifying information such as name and address fields, contra party identifiers, registered representative numbers, and opposing broker numbers. For example, of the 34,884,409 deficient transactions, Cantor reported incorrect name and address fields for 99%. In addition, Cantor reported approximately 30.6 million transactions (87% of all transactions reported) with incorrect contra party identifier codes and approximately 30.2 million transactions (86% of all transactions reported) with incorrect registered representative numbers. These deficient securities transaction fields resulted from an undetected coding error, software issues, and human error in maintaining certain EBS data files. 

8. Cantor's submissions also contained inaccurate or missing data in EBS fields related to information such as average price account, exchange codes, and order execution time. For example, of the 34,884,409 deficient transactions, Cantor misreported approximately 25.9 million securities transactions (74% of all transactions reported) in which the average price account data field (e.g., house accounts used to incrementally execute orders over time and then transfer the shares between the customer's account and the average price account in one transaction) was left blank. Cantor further reported incorrect exchange code identifiers for approximately 25.5 million securities transactions (73% of all transactions reported). Finally, Cantor reported incorrect or blank order execution time data for approximately five million securities transactions (14% of all transactions reported). Cantor's failure to provide correct exchange codes, average prices, and order execution time data also resulted from undetected coding errors and software issues. 

9. Cantor did not detect the errors in its EBS submissions, at least in part, because it did not have a reasonable process to verify that all of the fields required to be populated in EBS submissions included accurate values and information. For example, Cantor did not have presubmission controls to validate that the information in its EBS submissions was complete and accurate. Because Cantor lacked processes for validating the accuracy of the information reported in its EBS submissions, no one at the firm recognized the systemic issues that led to the firm's regular reporting of deficient EBS information. 

The SEC Release states that Lawrence D. Parrish, Paulina L. Jerez and Kingdon Kase of the Philadelphia Regional Office with Daniel L. Koster of the Complex Financial Instruments Unit with assistance from Jonathan Vogan of the Office of Compliance Inspections and Examinations Quantitative Analytics Unit conducted the investigation, which was supervised by Kelly L. Gibson. 

Protect Your Wallet -- and Your Health -- from Pandemic Scammers / FBI Exec Discusses COVID-19-Related Schemes (FBI Release)
The head of the FBI's Financial Crimes Section, Steven Merrill, discusses scams and crimes related to the COVID-19 pandemic.
The CFTC issued a Customer Advisory
informing the public to be on alert for frauds seeking to profit from recent job losses due to the COVID-19 (coronavirus) pandemic. As set forth in part in the CFTC Release:

Specifically, these frauds may seek to convince customers they can earn unrealistically high profits from home, but later force them to pay excessive "fees" and "taxes" to get their supposed earnings. These frauds typically involve unregistered brokers selling binary options, foreign exchange (forex) programs, and cryptocurrencies. The brokers primarily use social media and messaging apps to target people who have lost their jobs and are looking for replacement income.
FINRA member firm Newport Coast Securities, Inc. was charged in part with failing to reasonably supervise. After an Office of Hearing Officers Extended Hearing, the Panel's finding was harsh: The firm, through its management, had utterly failed to properly supervise. Not just failed but utterly so. Armed with that finding, the Panel expelled the firm. On appeal to the SEC, the firm (now out of business) argued that FINRA's expulsion was punitive, inappropriately disproportionate treatment, and constituted an undue burden on competition. The SEC would have none of it and affirmed the expulsion.

Key Food Prices Are Surging After Virus Upends Supply Chains (Bloomberg by Agnieszka de Sousa, Ruth Olurounbi, and Pratik Parija)
The Bloomberg article provides insights into the competing forces that, in some regions, are eroding demand and supplies, while, in some regions, increasing demand and supplies:

Rice and wheat -- crops that account for about a third of the world's calories -- have been making rapid climbs in spot and futures markets. For countries that rely on imports, this is creating an added financial burden just as the pandemic shatters their economies and erodes their purchasing power. In Nigeria, for example, the cost of rice in retail markets soared by more than 30% in the last four days of March alone.
. . .
While global grain inventories have been plentiful for several years, the response to the virus is unleashing ripple effects making it harder for staples to get where they're needed and helping drive the price gains. That's happening at the same time that demand has spiked with people loading their pantries while they stay home as much as possible.

Wayfair shares surge 37% as coronavirus drives sales of office furniture and home decor (CNBC by Lauren Thomas)
As part of my ongoing fascination with investment opportunities and trends in the wake of the COVID-19 pandemic, I came across this CNBC article. As reporter Thomas notes in part:

Much of the country has shifted to working from home, or remote learning, as offices and schools close to try to help curb the spread of COVID-19. Some consumers have needed to spruce up their home offices  and have been looking online for a more comfortable chair or a standing desk. With most bricks-and-mortar stores temporarily shuttered, Wayfair has benefited from fulfilling these needs., the SEC alleged that
International Investment Group, LLC ("IIG") had fraudlently concealed losses in its portfolio via the overstatement of the value of defaulted loans in its portfolio. The Complaint alleged that IIG had doctored the firm's records to show that the defaulted loans had been repaid and that the proceeds used to make new loans; however, the Complaint asserted that there had been no repayment and no new loans. Further, the Complaint alleged that IIG executives sold at least $60 million in fake trade finance loans to other clients via fake loan documentation to substantiate the non-existent loans, including fake promissory notes and a forged credit agreement. As set forth in part in the SEC Release:

Without admitting or denying the SEC's allegations, IIG consented to the entry of a final judgment, enjoining it from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Investment Advisors Act of 1940. The final judgment also requires IIG to pay more than $35 million is disgorgement and prejudgment interest. The SEC previously revoked IIG's registration as an investment adviser on November 26, 2019.