Securities Industry Commentator by Bill Singer Esq

June 5, 2020
Without admitting nor denying the charges in a FINRA AWC, but consenting to the entry of FINRA's findings, FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Inc. agreed to pay over $7.2 million in restitution and interest to customers who incurred unnecessary sales charges and paid excess fees in connection with mutual fund transactions. As alleged in part in the FINRA Release:

Between April 2011 and April 2017, Merrill Lynch did not have reasonably designed supervisory systems and procedures to ensure that all eligible mutual fund investors received sales charge waivers or fee rebates available through rights of reinstatement. Instead, the firm relied on its registered representatives to manually identify and apply such waivers and rebates, an unreasonably designed system given the number of customers involved, the complexity of determining which customers were due sales charge waivers or fee rebates, and difficulty in calculating the amount of the waiver and rebate. In addition, Merrill Lynch did not reasonably monitor for missed reinstatements. Firm alerts were designed to capture only recently executed mutual fund transactions while, in fact, fee waivers were available in connection with some fund purchases for up to a year after initial sales.

Because Merrill Lynch's procedures placed the responsibility on representatives to determine if clients were eligible for reinstatement privileges and because firm alerts did not reasonably surveil for missed reinstatements, it failed to detect that its advisors did not provide over 13,000 accounts with sales charge waivers and fee rebates totaling more than $7.2 million, including interest.

Note that the AWC asserts that:

In determining the appropriate monetary sanction, FINRA recognized Merrill Lynch's extraordinary cooperation, which included engaging an outside consulting firm to identify potentially disadvantaged customers and calculate total remediation; promptly paying restitution to affected customers; promptly remediating related supervisory deficiencies; and providing substantial assistance to FINRA in its investigation.

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, Robert Silverman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Robert Slverman was first registered in 2002, and by 2004 he was registered with FINRA member firm Cetera Financial Specialists LLC. The AWC alleges that Silverman "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Silverman had violated FINRA Rules 4511 and 2010; and the self regulator imposed upon him a $10,000 fine and an four-month suspension from association with any FINRA member in all capacities. As alleged in part in the AWC:

Respondent was the registered representative of record for accounts held by his customer. The customer's son-in-law had no authorization over the customer's accounts. During the Relevant Period, Respondent effectuated withdrawals from the customer's accounts at the son-in-law's instruction without receiving customer authorization. Respondent also facilitated the son-in-law's own direct withdrawals from the customer's accounts by providing to the son-in-law the withdrawal request form. Each withdrawal request caused sales of securities in the customer's accounts in order to fund the withdrawal. Respondent effectuated or facilitated 18 unauthorized withdrawal requests totaling $228,679. By virtue of the foregoing conduct, Respondent violated FINRA Rule 2010.
. . .

During the Relevant Period, Respondent used an email account that was not disclosed to or approved by the Firm to communicate with the son-in-law regarding the customer, which included the son-in-law's instructions to Respondent to withdraw funds from the customer's accounts. The Firm was unaware of the electronic communications Respondent sent or received regarding the customer's account, and thus did not retain those communications. By virtue of the foregoing conduct, Respondent violated FINRA Rules 4511 and 2010.
In the Matter of the Claim for Award in Connection with Notice of Covered Action [REDACTED} (Order Determining Whistleblower Award Claim, '34 Act Rel. No. 89002, Whistleblower Award Proc. File No. 2020-20), the SEC awarded about $50 million to an individual whistleblower, which is the largest amount awarded to an individual under the Dodd-Frank program. The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the payout to Claimant 1 but recommending the denial of an award to Claimant 2, who allege3d that Claimant 1 filed a WB-APP (the application for an Award) "for both of them, as there was no space for them to both sign." Moreover, Claimant 2 argued that the joint filing was purportedly necessitated in part because Claimant" Claimant 2 does not have the resources, such as a computer or internet access, to monitor the SEC's website for the postings of Notices of Covered Action. . ." Unfortunately for Claimant 2, the SEC found that "there is no evidence in the record to support a finding that Claimant 2 was a participant in any manner in Claimant 1's tip . . ."

Concorde Investment Services, LLC, Plaintiff, v. Everest Reinsurance Company, Defendant (Opinion and Order Denying Defendant's Motion to Dismiss and Motions for Protective Orders, United States District Court for the Eastern District of Michigan, 19-13203)
As set forth in the Syllabus:

In the summer of 2016, an investment advisor embezzled $545,000 from a client. After his fraud was discovered, his firm paid a cash settlement to the victim. This case is about who will be left holding the bag for the advisor's fraud and the firm's failure to prevent it. The investment firm contends that the settlement it reached with the victim is a covered loss under its insurance policy. For nearly three years, its insurance company has failed to either deny or accept its claim, so the firm filed this lawsuit for breach of contract and other contractual duties. 

The insurance company has moved to dismiss the case, arguing that, under the two-year contractual limitations period provided for in the insurance policy, the investment firm waited too long to file its lawsuit. In response, the firm argues that most of its claims are not dependent on this limitations period, and that the insurance company is estopped from raising this defense (or has waived it) because of its dilatory tactics in investigating the claim. 

The Court concludes that one of the firm's claims (Count II) is not controlled by the two-year limitations period. As for the other claims, the Complaint adequately pleads estoppel and waiver, and factual development is needed to properly resolve these issues. Thus, the Court will deny the motion to dismiss. 

The insurance company has also filed two motions for protective orders. Because these motions are tied to the resolution of the motion to dismiss, the Court will deny them as moot. 

As more fully explained in the Court Opinion:

Concorde became aware of Cody's unauthorized withdrawals on December 16, 2016, when the defrauded client filed an arbitration claim against it with the Financial Industry Regulatory Authority (commonly known as "FINRA"). Id. at ¶ 18. "Concorde promptly commenced an investigation and gave written notification to Everest[.]" Id. Concorde's investigation revealed that "Cody [had] submitted signature-altered (i.e., forged) Letters of Authorization to Concorde for all three of these transactions, and Cody [had] contacted the same Concorde agent for all these transactions to process the wire transfers. The custom and practice of both Cody and the Concorde agent were the same for the three transactions. Concorde, via its agent, was under the false impression that the transfers were authorized by the customer, and Concorde was unaware of any forgery." Id. at ¶ 21. Once Concorde's investigation was complete, it "updated its notice of claim to Everest on or about January 13, 2017." Id. at ¶ 24. 

At Page 4 of the Opinion

Although Everest sent a coverage letter to Concorde on March 1, 2017, by December 2018, Everest had retained outside counsel to handle the claim's investigation -- as if often the case with these disputes, the insurance company never quite got around to concluding the investigation withint a timeframe deemed acceptable to the client:

Fed up with Everest's perceived foot-dragging, Concorde filed this lawsuit on October 31, 2019. (ECF No. 1). On January 7, 2020, Everest filed a motion to dismiss. (ECF No. 8). As is its usual practice, the Court entered an order, affording Concorde the opportunity to cure the purported defects by filing an amended complaint. (ECF No. 10). Concorde took advantage of this opportunity and filed its First Amended Complaint on February 6, 2020. (ECF No. 12). 

Concorde's Amended Complaint brings four claims: (1) breach of contract for Everest's failure to issue a timely payment for a loss covered by the Policy ("Count I"); (2) breach of Everest's implied contractual duty to act in good faith ("Count II"); (3) a request for interest on the unpaid insurance proceeds under Michigan's Uniform Trade Practices Act ("Count III"); and (4) a claim for declaratory relief ("Count IV").

At Page 18 of the Opinion

In response to Concorde's Complaint, Everest moved to dismiss based upon its arguments that   (1) most of its claims do not fall within a two-year contractual limitation provision; and (2) the equitable principles of waiver and estoppel prevent Everest from relying on this provision after it spent years investigating the claim. The Court found that those claims subject to the two-year limitations period will be allowed to proceed because Concorde alleged sufficient facts to  establish waiver and estoppel. 

SEC Obtains Judgment of More Than $30 Million Against Investment Adviser and Principal (SEC Release)
In a Complaint filed in the United States District Court for the District of Massachusetts,, the SEC charged investment advisory firm Navellier & Associates, Inc. and its Chief Investment Officer/Founder, Louis Navellier, with having breached their fiduciary duties and defrauded their advisory clients and prospective clients through the use of marketing materials that included false and misleading statements regarding the past performance of the firm's Vireo AlphaSector investment strategies. The Court granted final judgment to the SEC and over $30 million in monetary relief in its action. Previously, the Court had granted partial summary judgment to the SEC and found that:

[N]avellier & Associates and Mr. Navellier violated the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The court found that the defendants knew there were misleading statements in their marketing materials and that there had been inadequate due diligence, yet they failed to inform their clients. Instead, as the court determined, the defendants continued to sell the Vireo AlphaSector investment strategies despite their knowledge that representations about the strategies were false and misleading.

In addition to enjoining the defendants from violating Sections 206(1) and 206(2) of the Advisers Act, the final judgment entered on June 2, 2020 also orders defendants jointly and severally to pay disgorgement of $28,964,571, including $6,513,619 in prejudgment interest, as well as civil penalties against Navellier & Associates in the amount of $2,000,000 and against Mr. Navellier in the amount of $500,000.

Without admitting or denying the findings in an SEC Cease-and-Desist Order, insurance company Argo Group International Holding, Ltd consented to the Order, which charges the company with violating federal securities law provisions concerning proxy solicitation, reporting, books and records, and internal controls; and requires the company to pay a $900,000 civil penalty. As alleged in part in the SEC Release, the SEC found that Argo's:

proxy statements for 2014 through 2018, Argo disclosed that it had provided a total of approximately $1.2 million in perquisites and personal benefits, chiefly retirement and financial planning benefits, to its then CEO.  According to the order, Argo failed to disclose over $5.3 million it had paid on the CEO's behalf, including in filings for 2018 after a shareholder issued a press release alleging undisclosed perks to the CEO.  The order finds that the perks Argo paid for, but did not disclose, included personal use of corporate aircraft, helicopter trips and other personal travel, housing costs, transportation for family members, personal services, club memberships, and tickets and transportation to entertainment events.  The order finds that, as a result, Argo understated perks and personal benefits paid to the CEO over this period by more than $1 million per year, or 400%.  The CEO resigned from that position in November 2019.
It is said that the only certainties in life are death and taxes. In today's featured FINRA expungement arbitration, we get to deal with both of life's certainties. We have a deceased customer. We have a dispute over taxes. All of which makes for less-than cheerful reading in these times of plague.

The Expat Life Is Struggling to Survive Covid-19 /  Health fears and travel restrictions cause more globe-hopping workers to head home. (Bloomberg by Katrina Nicholas and Andrew Cadman)
In an interesting take on more of the ramifications of COVID, Bloomberg's Nicholas and Cadman note, in part, that:

Meanwhile, the optics of all-white-male leadership teams -- a common sight for decades at the offices of some Western companies in Asia -- have become less desirable, especially for businesses that have to deal with local governments or agencies. And headhunters say contracts that include hefty allowances for housing, cars, and international schools for an employee's children -- once de rigueur for many international postings -- are rarer than ever. With health fears now heightened, even countries where many companies offer extra hardship pay, such as India or China, aren't appealing