Investors to Receive $37 Million from SEC Settlement with Stiefel Laboratories and Charles Stiefel (SEC Release)SEC Obtains Final Judgment Against Investment Adviser Charged with Fraud (SEC Release)FINRA Imposes Censure and Fine on ETC Clearing for Recordkeeping and Supervision.In the Matter of Electronic Transaction Clearing, Inc., Respondent (FINRA AWC)
[B]eginning in at least July 2017, Putnam operated a multilevel marketing business known as "Modern Money Team" and sold interests in a purported cryptocurrency mining operation to nearly two hundred investors. According to the complaint, Putnam misappropriated some of these investor funds and spent them on a condominium and other personal expenses. The complaint alleges that Putnam, Ramirez, and Rodriguez, then raised additional funds by offering so-called "cryptocurrency trading packages" to investors with the potential for high returns. In reality, as alleged, the defendants misappropriated investor funds for personal use and to make Ponzi-like distributions to earlier investors. According to the complaint, the defendants conducted these fraudulent schemes through two Utah companies controlled by Putnam, MMT Distributions, LLC and R & D Global, LLC.
[D]efendants Stiefel Laboratories, which at the time of the misconduct was the world's largest private manufacturer of dermatology products, and Charles Stiefel defrauded shareholders, who were mostly company employees, by having Stiefel Laboratories buy back their stock at severely undervalued prices. The SEC alleged that Stiefel Laboratories and Charles Stiefel used artificially low valuations for stock buybacks and failed to disclose information that would have alerted employee shareholders their stock was worth much more than the price the company paid them. For example, according to the complaint, the company failed to disclose negotiations for the sale of the company that ultimately resulted in GlaxoSmithKline PLC purchasing Stiefel Laboratories for a share price more than four times higher than the share price the company paid to employee shareholders.
During the period of April 1, 2015 through June 30, 2017, ETC failed to satisfy its customer protection requirements for its customer and proprietary business, including hindsight deficiencies in two instances; adhere to capital withdrawal rules specific to clearing firms in two instances; and, comply with its recordkeeping and supervision requirements. In particular:When calculating reserves in customer and proprietary accounts of broker-dealers (PAB), the Firm failed to make required reductions to certain debit balances. This caused the Firm's customer and PAB reserve accounts to be underfunded, resulting in hindsight deficiencies of $19.3 million and $23 million in the customer reserve account and $46.8 million and $12.8 million in the PAB reserve account, as of March 31, 2016 and August 26, 2016, respectively. The Firm also failed to timely notify the SEC and FINRA of these deficiencies. In addition, from February 2016 to April 2017, the Firm improperly overstated debits in its customer reserve calculations when it included an amount that was doubtful of collection. As a result, the Firm violated Rule 15c3-3 of the Securities Exchange Act of 1934 (Exchange Act) and FINRA Rule 2010.In November and December 2016, the Firm made unsecured advances to its parent company that exceeded 10% of the Firm's excess net capital for that period, without obtaining written permission from FINRA prior to doing so. As a result, the Firm violated FINRA Rule 4110 and FINRA Rule 2010.In 2016-2017, the Firm failed to comply with recordkeeping rules requiring the creation and maintenance of certain business records. Between January and June 2017, the Firm did not maintain an index of electronic records, store electronic records in the proper format, maintain an audit system for electronic records, or provide required notices and undertakings regarding its electronic records. Separately, throughout 2016, the Firm did not comply with recordkeeping requirements regarding payments made to its affiliated entities. As a result, the Firm violated Exchange Act Rule 17a-3 and 17a-4, and FINRA Rules 4511 and 2010.During the period April 1, 2015 through June 30, 2017, the Firm relied on proprietary electronic systems to help it calculate reserves, track margin calls, generate customer statements, and maintain position reconciliations. Although the Firm was aware of deficiencies in its electronic systems, it failed to replace or improve them. The Firm, as part of its supervisory system, at times developed back-up manual processes in an attempt to satisfy its obligations. However, these manual processes did not result in accurate calculations and records, given the volume of trading and number of accounts at the Firm, and the Firm failed to reasonably monitor these manual processes to ensure that they complied with regulatory requirements. The Firm also failed to reasonably supervise its affiliate that was operating the Firm's electronic storage systems and failed to reasonably supervise intercompany transfers between the Firm and its affiliates. It also failed to reasonably address deficiencies with respect to its margin model. Accordingly, the Firm failed to establish and maintain a supervisory system reasonably designed to achieve 3 compliance with the securities laws and FINRA rules in violation of FINRA Rules 3110(a) and 2010.
As a sanction for this rule violation, Merrill was censured, required to pay restitution to the affected customers, plus interest, totaling over $7.2 million. But . . .there was no fine imposed. Zero. Nada. Bupkis. Why? It appears that there were a couple of reasons, but principally it was because of what FINRA characterized as Merrill's "credit for extraordinary cooperation." . . .