Securities Industry Commentator by Bill Singer Esq

May 19, 2020

Demand for Belgian Trappist Ale Soars After Coronavirus Lockdown (Bloomberg by Richard Bravo)
Over the years, I have chided, cajoled, and chastised FINRA for its woefully inconsistent approach to disclosing disciplinary histories. Beyond the simple act of disclosure, FINRA  has exacerbated the issue by resorting to such inconsistent characterizations as mere "prior disciplinary history," versus "relevant disciplinary history," versus "relevant formal disciplinary history" versus the inclusion or exclusion of specific prior disciplinary history at the SEC or with a state regulator or with any other regulator. In one of the most glaring examples of FINRA's dubious approach to disclosure, Wall Street's leading self-regulatory-organization pronounced in a recent regulatory settlement that Merrill Lynch Pierce Fenner & Smith, Incorporated "does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." 

SEC Charges Three Former KPMG Audit Partners for Exam Sharing Misconduct (SEC Release)
Without admitting or denying the findings in SEC Orders, former KPMG LLP audit partners Timothy Daly, Michael Bellach, and John Donovan agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies, with the right to apply for reinstatement after three years, two years, and one year, respectively:
  • Daly Order
  • Bellach Order
  • Donovan Order
As alleged in part in the SEC Release, the three audit partners violated a PCAOB Rule requiring them to maintain integrity in the performance of a professional service when they:
    each engaged in misconduct in connection with exams KPMG administered to test whether its audit professionals understood certain accounting and auditing principles. The orders against Daly and Bellach find that in October 2018, at Daly's request, Bellach texted Daly images of the questions and answers to a required training examination. After KPMG began investigating possible cheating by its professionals and required strict compliance with a document preservation notice sent to all KPMG personnel, Daly deleted the text messages from Bellach and falsely told KPMG investigators he had not received any answers to KPMG training exams. The orders further find that Daly encouraged Bellach to delete the text messages as well, which Bellach did after receiving KPMG's document preservation notice. 

    The order against Donovan finds that he also supported the sharing of exams and answers within his team. According to the order, between April and September 2018, Donovan received answers to training exams from subordinates on several occasions, and shared answers with his team three times. Donovan also falsely told KPMG investigators that he had not sent, received, or shared answers.

    SEC Charges Three Individuals for Offering and Selling Fraudulent Oil and Gas Investments (SEC Release)
    In a Complaint filed in the United States District Court for the Western District of Texas,, the SEC charged James Hurst Willingham, Paul Russell Montgomery, Jr., and Michael David Fisher with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the Complaint further charges Montgomery and Fisher with aiding and abetting Willingham's violations of the charged antifraud provisions. In response to the Complaint, Willingham agreed to be enjoined against future violations of the charged provisions, and to pay disgorgement, prejudgment interest, and a civil penalty. As alleged in part in the SEC Release, the Defendants:

    promised investors that they would drill and recomplete oil and gas wells in South Texas to generate returns of 32% or more. To bolster these promises, the defendants allegedly disseminated promotional videos that purported to show the wells defendants had drilled and included interviews with purported investors who were invested or interested in the projects. As alleged, the defendants also distributed written offering materials in which they promised to use investor funds only for specified purposes, with the vast majority going to actual drilling and recompletion activities. In addition, the defendants allegedly touted Montgomery's credentials and prior success as an oil and gas operator. According to the complaint, however, the defendants never drilled or recompleted any wells, and instead misappropriated investor funds, spending hundreds of thousands of dollars for a number of uses not permitted in the offering documents, such as undisclosed commissions, and payments to Montgomery and Willingham. The complaint further alleges that some of the purported "investors" identified in the defendants' promotional videos never invested, and that Montgomery's purported credentials and prior successes were fabrications.
    In a Complaint filed in the United States District Court for the Southern District of New York, the CFTC charged Casper Mikkelsen, a/k/a "Carsten Nielsen"  a/k/a "Brian Thomson" a/k/a "Thomas Jensen"  a/k/a "Casper Muller" with engaging in a $1.5 million foreign currency (forex) fraud scheme and registration violations, and for failking to register as a commodity trading advisor. As alleged in part in the CFTC Release:

    [F]rom at least 2015 to the present, Mikkelsen engaged in a fraudulent scheme to solicit at least $1.5 million from at least 101 individuals and entities to invest with a supposed company called GNTFX to trade retail leveraged or margined forex. According to the complaint, rather than using those funds for forex trading as promised, Mikkelsen instead misappropriated at least some clients' funds.  As alleged, most clients deposited their funds into bank accounts in the U.S., while others deposited their funds into an overseas account and/or with an American ecommerce company for the purpose of trading forex. Client funds were withdrawn from the U.S. bank accounts by Mikkelsen through his debit card, as well as transferred from the U.S. bank accounts to an overseas bank, and from there to a Bitcoin address for Mikkelsen's benefit. Mikkelsen then used the money to pay certain clients purported forex trading profits as is typical in a Ponzi scheme.

    As Fox' Manfredi reports in part in the article:

    Treasury Secretary Steven Mnuchin said it was "a complicated issue", and that while he was sympathetic, the Paycheck Protection Program is "for companies that were not necessarily quite as big."

    But Trump, who called Fertitta a long-time friend, said he had a "unique situation" and the administration would look into it.

    "If he had 600 owners and he franchised them out or something, but he had 600 owners, they qualify. If he has, you know, if he owns it, it's a different situation," Trump said. "I can understand what he's saying. So let's take a look at it."

    Landry's, which operates well-known restaurants like Del Frisco's, Rainforest Cafe and Bubba Gump Shrimp Co., owns 600 restaurants across 40 states.
    Yes, their is carnage in the markets. Yes, the so-called smart money didn't seem to be as smart as we were told and as they thought. On the other hand, there are always the outliers and those who march to a different beat. In a wonderful bit of reporting, Bloomberg sheds some light on those who managed to make money despite the world crumbling around them:

    Most hedge funds, including those run by industry titans such as Ray Dalio and Michael Hintze, failed in their mission to protect investors from the market turmoil. Three in every four hedge funds lost money, with some down as much as 40% in March, according to data compiled by Bloomberg.

    The outcome threatens to further disrupt the hedge fund industry, which in March saw assets plunge below $3 trillion for the first time since 2014. Although it was too early in May to gauge the eventual damage, initial fund-flow figures painted a grim picture. Clients withdrew a net $33 billion in the first quarter, the most in more than a decade, according to Hedge Fund Research Inc.
    Fox Business' Echo Wang reports in part that:

    The new rules will require companies from some countries, including China, to raise $25 million in their IPO or, alternatively, at least a quarter of their post-listing market capitalization, the sources said.

    This is the first time Nasdaq has put a minimum value on the size of IPOs. The change would have prevented several Chinese companies currently listed on the Nasdaq from going public. Out of 155 Chinese companies that listed on Nasdaq since 2000, 40 grossed IPO proceeds below $25 million, according to Refinitiv data.
    You might file this under a question of "timing," and it should also be fun to see how quickly China's regulatory authorities fast-tract Fidelity's applications. Regardless, as reported in party by Reuters:

    Obtaining a mutual fund licence would allow Fidelity to target China's individual investors, a client base coveted by the company. Currently, Fidelity sells private funds in China targeting mainly institutions and high-net-worth investors.

    Asset management giant BlackRock (BLK.N) and Neuberger Berman have also applied to set up mutual fund units in China. Schroders plans to apply for the licence, the Shanghai government has said.
    Truly, a compelling piece by Bloomberg's Perez that forces you to step back and reconsider the landscape. The trend -- without question -- was to shun sugary fruit drinks, which, had themselves forced out the once irrepresible carbonated cane-sugared soads. Then, the trend was not citrus' friend. All of a sudden, kids were told to avoid their morning OJ. Now, with the onslaught of COVID-19, the hunt is afoot for Vitamin C rich beverages. All of which reminds you about the need to diversify and hedge investments -- frankly, a perfect lesson for explaining how one day's investment trend becomes the next day's pariah.
    Speaking about OJ, did you see the article about the explosion in demand for Trappist Ale? In a fun piece by Bloomberg's Bravo, he notes in part that after:

    Like many businesses in Belgium -- site of the world's highest per-capita death rate from the coronavirus -- the abbey had to shut down sales of its fabled Trappist Westvleteren 12 ale, ranked one of the all-time best on the website.

    When the monks reopened last week -- for just four hours -- pent-up demand drove nearly four times the average number of shoppers to the website, crashing the online store.

    "We were confronted by a tsunami of visitors," the monks wrote in an emailed statement. "Unfortunately, the computer servers could not handle the massive visitor flow."