Securities Industry Commentator by Bill Singer Esq

June 2, 2020

FINRA Censures, Bars, Suspends, and Fines Former Bayes Capital CEO/CCO. In the Matter of John Grifonetti, Respondent (FINRA AWC)
As our nation grapples with racism, an African American investment advisor's charges of retaliation made their way through the federal courts. It started with his complaints to the EEOC that TIAA had racially discriminated against him. Then TIAA filed a Form U5, which the former employee believed contained an inaccurate narrative. After EEOC mediation, it appeared that the parties had reached a settlement whereby an Amended U5 would better explain the circumstances of termination. In fact, the revised language was received as little more than a breach of the parties' settlement and viewed by the former employee as a weaponized U5 employed in retaliation.
As set forth in the "Syllabus" to the Supreme Court's Opinion:

In 2016, in response to a fiscal crisis in Puerto Rico, Congress invoked its Article IV power to "make all needful Rules and Regulations respecting the Territory . . . belonging to the United States," §3, cl. 2, to enact the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). PROMESA created a Financial Oversight and Management Board, whose seven voting members are to be appointed by the President without the Senate's advice and consent. Congress authorized the Board to file for bankruptcy on behalf of Puerto Rico or its instrumentalities, to supervise and modify Puerto Rico's laws and budget, and to gather evidence and conduct investigations in support of these efforts. 

After President Obama selected the Board's members, the Board filed bankruptcy petitions on behalf of the Commonwealth and five of its entities. Both court and Board had decided a number of matters when several creditors moved to dismiss the proceedings on the ground that the Board members' selection violated the Constitution's Appointments Clause, which says that the President "shall nominate, and by and with the Advice and Consent of the Senate, shall appoint . . . all . . . Officers of the United States . . . ." Art. II, §2, cl. 2. The court denied the motions, but the First Circuit reversed. It held that the Board members' selection violated the Appointments Clause but also concluded that any Board actions taken prior to its decision were valid under the "de facto officer" doctrine. 

1. The Appointments Clause constrains the appointments power as to all officers of the United States, even those who exercise power in or in relation to Puerto Rico. The Constitution's structure provides strong reason to believe that this is so. The Appointments Clause reflects an allocation of responsibility, between President and Senate, in cases involving appointment to high federal office. Concerned about possible manipulation of appointments, the Founders both concentrated the appointment power and distributed it, ensuring that primary responsibility for important nominations would fall on the President while also ensuring that the Senate's advice and consent power would provide a check on that power. Other, similar structural constraints in the Constitution apply to all exercises of federal power, including those related to Article IV entities. Cf., e.g., Metropolitan Washington Airports Authority v. Citizens for Abatement of Aircraft Noise, Inc., 501 U. S. 252, 270-271 (MWAA). The objectives advanced by the Appointments Clause counsel strongly in favor of applying that Clause to all officers of the United States, even those with powers and duties related to Puerto Rico. Indeed, the Clause's text firmly indicates that it applies to the appointment of all "Officers of the United States." And history confirms this reading. Congress' longstanding practice of requiring the Senate's advice and consent for territorial Governors with important federal duties supports the inference that Congress expected the Appointments Clause to apply to at least some officials with supervisory authority over the Territories. Pp. 5-9. 

2. The Appointments Clause does not restrict the appointment or selection of the Board members. Pp. 9-21. 

(a) The Appointments Clause does not restrict the appointment of local officers that Congress vests with primarily local duties. The Clause's language suggests a distinction between federal officers-who exercise power of the National Government-and nonfederal officers- who exercise power of some other government. Pursuant to Article I, §8, cl. 17, and Article IV, §3, Congress has long legislated for entities that are not States-the District of Columbia and the Territories. In so doing, Congress has both made local law directly and also created local government structures, staffed by local officials, who themselves have made and enforced local law. This suggests that when Congress creates local offices using these two unique powers, the officers exercise power of the local government, not the Federal Government. Historical practice indicates that a federal law's creation of an office does not automatically make its holder an officer of the United States. Congress has for more than two centuries created local offices for the Territories and District of Columbia that are filled through election or local executive appointment. And the history of Puerto Rico-whose public officials with important local responsibilities have been selected in ways that the Appointments Clause does not describe-is consistent with the history of other entities that fall within Article IV's scope and with the history of the District of Columbia. This historical practice indicates that when an officer of one of these local governments has primarily local duties, he is not an officer of the United States within the meaning of the Appointments Clause. Pp. 9-14. 

(b) The Board members here have primarily local powers and duties. PROMESA says that the Board is "an entity within the territorial government" that "shall not be considered a department, agency, establishment, or instrumentality of the Federal Government," §101(c), 130 Stat. 553, and Congress gave the Board a structure, duties, and related powers that are consistent with this statement. The Board's broad investigatory powers-administering oaths, issuing subpoenas, taking evidence, and demanding data from governments and creditors alike-are backed by Puerto Rican, not federal, law. Its powers to oversee the development of Puerto Rico's fiscal and budgetary plans are also quintessentially local. And in exercising its power to initiate bankruptcy proceedings, the Board acts on behalf of, and in the interests of, Puerto Rico. Pp. 14-17. 

(c) Buckley v. Valeo, 424 U. S. 1, Freytag v. Commissioner, 501 U. S. 868, and Lucia v. SEC, 585 U. S. ___, do not provide the relevant legal test here, for each considered an Appointments Clause problem concerning the importance or significance of duties that were indisputably federal or national in nature. Nor do Lebron v. National Railroad Passenger Corporation, 513 U. S. 374, or MWAA, 501 U. S. 252, help. Lebron considered whether Amtrak was a governmental or a private entity, but the fact that the Board is a Government entity does not answer the "primarily local versus primarily federal" question. And the MWAA Court expressly declined to address Appointments Clause questions. However, the Court's analysis in O'Donoghue v. United States, 289 U. S. 516, and Palmore v. United States, 411 U. S. 389, does provide a rough analogy. In O'Donoghue, the Court found that Article III's tenure and salary protections applied to judges of the District of Columbia courts because those courts exercised the judicial power of the United States. But the Court reached the seemingly opposite conclusion in Palmore, a case decided after Congress had altered the nature of the District of Columbia local courts so that its judges adjudicated primarily local issues. Pp. 17-21. 

3. Given the conclusion reached here, there is no need to consider whether to overrule the "Insular Cases" and their progeny, see, e.g., Downes v. Bidwell, 182 U. S. 244, 287, to consider the application of the de facto officer doctrine, see Ryder v. United States, 515 U. S. 177, or to decide questions about the application of the Federal Relations Act and Public Law 600. Pp. 21-22. 915 F. 3d 838, reversed and remanded. 

BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and GINSBURG, ALITO, KAGAN, GORSUCH, and KAVANAUGH, JJ., joined. THOMAS, J.

Robert D. Gordon, Receiver of Legisi Marketing, Inc., Gregory N. McKnight, and Legisi Holdings, LLC, Plaintiff, v. Royal Palm Real Estate Investment Fund I, LLLP, et al., Defendants (Order Denying in Part and Granting in Part Defendants' Motion for Summary Judgment - and - Denying Plaintiff's Partial Summary Judgment, United States District Court for the Eastern District of Michigan, 09-11770)
As set forth in the Syllabus:

This case concerns a receiver, appointed on behalf of a convicted Ponzi-schemer, who seeks to recover funds invested in an allegedly fraudulent investment scheme. From 2006 to 2008, Gregory McKnight operated a $72 million Ponzi scheme through his companies Legisi Marketing, Inc. and Legisi Holdings, LLC ("Legisi Companies"). In 2007, McKnight and the Legisi Companies invested nearly $10 million in Defendant Royal Palm Real Estate Investment Fund, LLLP (the "Fund"). The entire investment was derived from funds obtained through the Legisi Ponzi scheme. 

In May 2008, the Securities Exchange Commission ("SEC") commenced an action against McKnight and Legisi in this District. Gordon v. Mazu Publishing,Inc., Case No 09-13953; Sec. and Exch. Comm. v. Gagnon, Case No.10-11891. Plaintiff Robert Gordon was then appointed as the receiver of the estates of McKnight and Legisi. Plaintiff maintains that Defendants, persons and entities involved in the management and formation of the Fund, engaged in a fraudulent scheme and made material misrepresentations in connection with the sale of securities to McKnight and Legisi. Plaintiff filed this action alleging federal securities claims and claims under Michigan and Florida law. 

Before the Court is Plaintiffs' Motion for Partial Summary Judgment on breach of contract and statutory duties against the Fund and Bruce Rosetto [150], filed on July 11, 2019, as well as Defendants' Motion for Summary Judgment [153] on all claims, filed on July 5, 2019. On August 12, 2019, Defendants filed a Response [155] to Plaintiffs' motion and on August 26, 2019, Plaintiffs filed a Reply [160]. On August 13, 2019, Plaintiff filed a Response [153] to Defendants' motion and on August 26, 2019, Defendants filed a Reply [161]. On January 28, 2020, the Court held oral argument on the motions. For the reasons explained below, the Court DENIES Plaintiff's Motion for Partial Summary Judgment [150] and GRANTS IN PART AND DENIES IN PART Defendants' Motion for Summary Judgment [153]. 

Bill Singer's Comment: In part, EDMich held that the Defendants did not participate in a fraudulent scheme per 10b-5(a) and (c). Further, the Court noted that Plaintiff primarily alleged that "Defendants made misstatements after the sale of securities in the fund," and this after-the-fact cited conduct seemed to weigh heavily on the analysis. Similarly, EDMich declined to elevate mere omissions and misrepresentations to a "fraudulent scheme," absent some proof of a scheme to defraud.
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, Mizuho Securities USA, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Mizuho has been a FINRA member firm since 1987 and "has no prior relevant disciplinary history."In accordance with the terms of the AWC, FINRA found that Mizuho had violated FINRA Rules 5210, 3110, and 2010; and the self regulator imposed upon the firm a Censure and a $150,000 fine. As alleged in part in the AWC under the heading "Summary":

From February 2015 through December 2016 (the "Review Period"), as a result of systemrelated issues connected to its third-party order management system ("OMS"), Mizuho overstated its trading volume in numerous securities it had advertised through Bloomberg, L.P. ("Bloomberg"), a private subscription-based provider of market data, in violation of FINRA Rules 5210 and 2010. For two of the Firm's trading desks, the Firm also failed to establish and maintain a supervisory system and written supervisory procedures ("WSPs") that were reasonably designed to achieve compliance with the regulatory requirements under FINRA Rule 5210 that govern the accuracy of advertised trading volumes in violation of FINRA Rules 3110 and 2010.
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, John Grifonetti submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that John Grifonetti entered the industry in 1998, and that he co-founded FINRA member firm Bayes Capital LLC in 2011. Bayes filed a Uniform REquest for Broker-Dealer Withdrawal (the "Form BDW") in 2018; and Grifonetti's registrations with the firm was terminated on July 2, 2018. The AWC alleges that Grifonetti "does not have any disciplinary history with the U.S. Securities and Exchange Commission ("SEC"), any state securities regulators, FINRA, or any other self-regulatory organization ("SRO")." In accordance with the terms of the AWC, FINRA found that Grifonetti had violated NASD Rule 3010 (for conduct prior to December 1, 2014) and FINRA Rules 3110 (for conduct on or after December 1, 2014) and 2010; and the self regulator imposed upon him a Censure; Principal-only Bar; a 12-month suspension in all capacities; and a $75,000 fine of which $8,333.33 shall be paid to FINRA and the balance to other exchanges and markets. As alleged in part in the AWC under the heading "Overview" [Ed: footnotes omitted]:

Between November 2014 and July 2, 2018 (the "Relevant Period"), Bayes was a small firm that had approximately five employees. Grifonetti, who served as the firm's Chief Executive Officer ("CEO") and Chief Compliance Officer ("CCO") from November 2014 through December 2016, and a business partner (the "Business Partner"), who succeeded Grifonetti as the firm's CEO and CCO, were two primary decision-makers at the firm. At all relevant times, Grifonetti delegated to his Business Partner responsibility for establishing and maintaining the firm's supervisory system in relation to achieving compliance with rules prohibiting manipulative trading and compliance with Rule 15c3-5 of Section 15(c)(3) of the Securities Exchange Act of 1934 (the "Market Access Rule"). Grifonetti, however, failed to take reasonable steps to ensure that his Business Partner was properly qualified to discharge these functions and failed to implement a reasonable system of follow-up and review to ensure that his Business Partner was reasonably discharging these functions. 

The firm's business was initially limited to agency trading on behalf of institutional customers. In November 2014, Grifonetti and his Business Partner expanded the firm's business to include providing direct market access for an unaffiliated broker dealer ("BD1"). BD1's customers included unregistered foreign day trading entities. One of BD1's customers was an unregistered foreign-day trading entity and non-FINRA/SRO member, Customer X, which was under common ownership and control with the firm's third-party, market access control vendor (the "Market Access Control Vendor"). Although this expanded business significantly changed Bayes's business activities and trading volume, the firm failed to reasonably enhance the firm's supervisory system, including its written supervisory procedures ("WSPs"), to achieve compliance with applicable federal securities laws and regulations and FINRA rules prohibiting manipulative trading. The firm also failed to establish and implement a system of risk management controls and WSPs reasonably designed to manage the financial, regulatory, and other risks of this business. As a result of these failures, Customer X, first through BD1, then through another introducing broker ("BD2"), and later as a direct customer of the firm, engaged in various forms of potentially manipulative trading, including, but not limited to, layering and spoofing.