Securities Industry Commentator by Bill Singer Esq

November 25, 2020

Louisiana Woman Indicted in $4.8M Elder Fraud Scheme (DOJ Release)

SEC Settles with Investment Adviser Who Failed to Disclose Conflicts of Interest and Misled Advisory Clients About the Terms of Their Investments (SEC Release)

Commissioner Stops Fraudulent Scheme Promoted to Reddit Users (TSSB Release)

SEC Proposes Amendments to Modernize Framework for Securities Offerings and Sales to Workers (SEC Release)

OCC Assesses $250 Million Civil Money Penalty Against JPMorgan Chase Bank, N.A.
As set forth in  part in the OCC Release:

The Office of the Comptroller of the Currency (OCC) today assessed a $250 million civil money penalty against JPMorgan Chase Bank, N.A.

The OCC took this action based on the bank's failure to maintain adequate internal controls and internal audit over its fiduciary business.

The OCC found the bank's risk management practices were deficient and it lacked a sufficient framework to avoid conflicts of interest. These deficiencies constituted unsafe or unsound practices and resulted in a violation of 12 CFR 9.9, which requires a suitable audit over all significant fiduciary activities. The bank has remediated the deficiencies that led to this action.

READ the full-text Consent Order As to the specifics of OCC's findings, well, there ain't a lot of meat on those bones:

The Comptroller finds, and the Bank neither admits nor denies, the following: 

(1) The Bank maintains one of the world's largest and most complex fiduciary businesses with total fiduciary and related assets of $29.1 trillion, including $1.3 trillion in fiduciary assets and $27.8 trillion of non-fiduciary custody assets. The Bank provides a broad range of investment strategies to its fiduciary clients through a variety of investment vehicles. 

(2) For several years, the Bank maintained a weak management and control framework for its fiduciary activities and had an insufficient audit program for, and inadequate internal controls over, those activities. Among other things, the Bank had deficient risk management practices and an insufficient framework for avoiding conflicts of interest. 

(3) As a result of the foregoing misconduct, the Bank violated 12 C.F.R. § 9.9 and engaged in unsafe or unsound practices that were part of a pattern of misconduct. 

(4) The Bank has remediated the deficiencies that led to this Order.
Guest blogger Aegis Frumento reminds us about the old joke goes that you bang your head against a wall because it feels so good when you stop. As Aegis sees it, this Thanksgiving has that feel to it. There are now three highly effective vaccines against the coronavirus in production. But we shouldn't have been so hard-hit by the pandemic to begin with. And maybe it's great that the stock market just hit a new high, but all that does is prove yet again that what is down must go up -- until it comes down again. Ah yes, another cheerful holiday message from Wall Street's ever ambivalent cynic!

Louisiana Woman Indicted in $4.8M Elder Fraud Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the Eastern District of Texas, Monica Ruiz was charged with wire fraud. As alleged in part in the DOJ Release:

[R]uiz enlisted a variety of false and fraudulent pretenses, representations, and promises in a scheme to defraud an elderly victim from Bullard, Texas.  Among the various misrepresentations Ruiz made in order to obtain money from the victim were the following:

                - That Ruiz had been in a coma;

                - That Ruiz had brain surgery;

                - That Ruiz was falsely arrested and imprisoned;

                - That Ruiz had bribed a judge and prosecutor;

                - That Ruiz's son died in a car accident in Pennsylvania;

                - That Ruiz was in a car accident;

                - That Ruiz had a kidney transplant;

                - That Ruiz's daughter was committed to a mental institution;

                - That Ruiz was incarcerated; and

                - That Ruiz's grandmother died.

At times, Ruiz impersonated other people in communications with the victim.  At other times, she created and used false personas in communications with the victim.  Over the course of her scheme, Ruiz obtained more than $4.850 million from the victim., Craig Rumbaugh, Rumbaugh Financial, Inc. ("RFI"), and Desert Strategic Equity, LLC. ("DSE") agreed to pay $676,000 in disgorgement, with $137,808 in prejudgment interest, on a joint-and-several basis; and Rumbaugh consented to pay a civil penalty of $192,768. Also, the Defendants are permanently enjoined from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the broker-dealer registration provisions of Section 15(a) of the Exchange Act, and, further, Rumbaugh and RFI are enjoined from violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act. In a related administrative proceeding, Rumbaugh consented to the entry of an order that bars him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and bars him from participating in any offering of a penny stock.
As alleged in part in the SEC Release:

[R]umbaugh advised RFI's clients to invest in promissory notes offered by Susan Werth, who claimed to provide short-term high interest rate loans to real estate developers but, unbeknownst to Rumbaugh, was in fact operating a Ponzi scheme. According to the complaint, from August 2015 to June 2016, Rumbaugh persuaded eight clients to invest a total of over $3 million with Werth's companies. Three of those clients lost a total of more than $650,000 when Werth's Ponzi scheme collapsed. The complaint alleged that Rumbaugh and his entities concealed commissions totaling $140,000 that Werth paid Rumbaugh on funds raised from his clients. Rumbaugh and his companies also allegedly misrepresented the interest rates Werth's promissory notes offered, and retained the difference when the notes repaid interest at a higher rate.
The TSSB entered an Emergency Cease and Desist Order against Cryptobase a/k/a Crypt-Base and Aaron Maxwell seeking to stop an allegedly fraudulent scheme promoted through Reddit, a popular social media platform. As alleged in part in the TSSB Release:

[M]axwell is soliciting persons participating in r/stocks, a forum of reddit generally referred to as a subreddit, dedicated to the discussion of stocks.  According to the order, Maxwell is sending private messages to these users, offering them the opportunity to participate in a forex trading program through Cryptobase. 

The parties claim the forex trading program generates lucrative returns paid on a weekly or monthly basis.  Maxwell is telling users the investments are guaranteed, and investors will receive 300, 400 or even 500 percent on a weekly basis.  These statements are fraudulent, according to the order. 

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, Kevin Paul Rast submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Kevin Paul Rast entered the industry in 1987, and he was Chief Executive Officer/Executive Managing Director of CFG Capital Markets, LLC from 2011 to October 2019. The AWC asserts that Rast "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA imposed upon Rast a $7,500 fine and a four-month suspension from associating with any FINRA member in any and all capacities. The AWC asserts in the "Overview" that:

In response to FINRA requests for evidence of supervisory reviews of municipal securities trading, Rast altered and submitted documents to FINRA that gave the false appearance that he had contemporaneously reviewed those documents when he had not done so. As a result of this conduct, Rast violated Municipal Securities Rulemaking Board (MSRB) Rule G-17. 

Additionally, in two municipal bond transactions, Rast violated MSRB Rule G-17 through his failure to ensure that CFGCM made proper disclosures of certain potential material conflicts of interest.  

Bill Singer's Comment: Some folks are just snake bit. Having gotten himself into a mess with FINRA over altered documents, Rast's AWC has its own unintentional garbled disclosure. Under the signature of Rast's attorney, we are offered this printed statement: "ana Sir s9Gloor, ounsel for Respondent" Hmmm . . .  just a thought: C-3PO, R2-D2 & s9Gloor, Attorneys at Law.
As set forth in the "Summary" of the Proposed Rule

The Securities and Exchange Commission ("Commission") is proposing for public comment amendments to Rule 701 under the Securities Act of 1933 (the "Securities Act"), which provides an exemption from registration for securities issued by non-reporting issuers pursuant to compensatory arrangements, and Form S-8, the Securities Act registration statement for compensatory offerings by reporting issuers. The amendments are designed to modernize the exemption and registration statement in light of the significant evolution in compensatory offerings since the Commission last substantively amended these regulations, consistent with investor protection.

As set forth in the "Highlights" portion of the SEC Release:

With respect to Rule 701, the proposed amendments would:
  • Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million, including how the disclosure threshold applies, the type of financial disclosure required, and the frequency with which it must be updated;
  • Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;
  • Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and
  • Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer's subsidiaries, whether or not majority-owned.
With respect to Form S-8, the proposed amendments would:
  • Implement improvements and clarifications to simplify registration on the form, including:
    • Clarifying the ability to add multiple plans to a single Form S-8;
    • Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
    • Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
  • Implement improvements to simplify share counting and fee payments on the form, including:
    • Requiring the registration of an aggregate offering amount of securities for defined contribution plans;
    • Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and
    • Conforming Form S-8 instructions with current IRS plan review practices.
  • Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.
With respect to both Rule 701 and Form S-8, the proposals would:
  • Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and
  • Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.
As set forth in the "Summary" of the Proposed Rule

The Securities and Exchange Commission ("Commission") is proposing for public comment amendments to the exemption from registration under the rules of the Securities Act of 1933 ("Securities Act") for securities issued by non-reporting companies pursuant to compensatory arrangements and to Form S-8, the registration statement for offerings by reporting companies pursuant to employee benefit plans. The amendments would establish a temporary provision under Securities Act rules that, on a trial basis, would permit a nonreporting issuer to offer and sell securities for a compensatory purpose to an expanded group of workers without having to register the offers and sales under the Securities Act, as long as certain conditions are met. Specifically, the proposed amendments would permit the issuer to offer and sell securities to those workers who provide services available through the issuer's internet-based marketplace platform or through another widespread, technology-based marketplace platform or system ("platform workers"). The amendments would similarly, on a trial basis, permit a reporting issuer to include such workers in compensatory offerings registered on Form S-8. These proposed rule amendments would expire, absent further action by the Commission, five years from the date of their effectiveness. We are also proposing to amend the 2 rules under the Securities Exchange Act of 1934 ("Exchange Act"). The amendment would extend the exclusion from the definition of "held of record" and corresponding safe harbor, which currently applies to securities held by persons who received them pursuant to an employee compensation plan, to securities held by persons who received them pursuant to a compensation plan for platform workers under the proposed Securities Act rule amendment. The proposed exclusion and safe harbor for securities issued to platform workers under Exchange Act rules would not be temporary.

As set forth in the "Highlights" portion of the SEC Release:

The proposed rules would amend Rule 701 by adding a temporary rule provision that, for five years, would enable issuers to use Rule 701 to compensate certain platform workers, subject to specified conditions. Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:
  • the issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and conditions by which the platform worker receives payment for the services provided through the platform, and by its ability to accept and remove platform workers participating in the platform;
  • the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer's securities;
  • no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;
  • the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker's ability to elect between payment in securities or cash; and
  • the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.

The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.

The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.

The Commission is proposing these amendments on a temporary basis to allow it to assess whether issuances of securities to platform workers under Rule 701 or Form S-8 are being made for legitimate compensatory purposes, and not for capital-raising purposes. The Commission would also be able to assess whether such issuances have the expected beneficial effects for issuers in the "gig economy" and their investors, including those platform workers who have received securities as compensation, and whether such issuances have resulted in any unintended consequences. These assessments, in turn, should help the Commission determine whether to modify or expand the scope of Rule 701 and Form S-8 on an extended or permanent basis. In order to help in the evaluation of the proposed expanded scope of Rule 701 and Form S-8, the proposed amendments would require an issuer that sells securities to platform workers to furnish certain information to the Commission at six-month intervals.

Opening Doors for Gig Workers to Receive Stock Compensation (by SEC Commissioners Hester M. Peirce and Elad L. Roisman)
In voicing their shared support for the proposed rules, Commissioners Peirce and Roisman assert in part that [Ed: footnote omitted]:

Today the Commission voted to propose rules that, on a trial basis, would allow public and private companies to offer equity compensation to their gig workers. Taking a cue from the flexibility that the gig economy provides to its platform workers, the proposal demonstrates the Commission's willingness to open the door to opportunities for gig workers to participate in the growth of the companies that sign their checks.  As our economy and work arrangements evolve, we must be willing to experiment with concomitant changes to our regulations.

For decades, the Commission has provided a limited exemption from registration for private companies (Rule 701) and a specialized form for public companies (Form S-8) for certain compensatory securities transactions with employees.  The proposed rules would expand these well-understood and widely used vehicles for compensatory securities transactions to certain gig-workers for a five-year time period.  During that period, participating issuers would furnish information to the Commission so that we can assess the utility of the rules and determine whether such changes should expire, be extended, or be made permanent.  The proposal includes guardrails to ensure that issuances to gig workers are compensatory in nature and not conducted for capital-raising purposes.  We look forward to the input of gig workers and other interested parties. 

As proposed, only platform workers that provide services through an issuer's marketplace platform are eligible to receive equity compensation.  Should we permit platform workers that sell goods through an issuer's marketplace platform to participate?  Consider, for example, the many individuals who have begun offering artfully sewn (and even custom designed) masks during this pandemic, selling them to customers on third-party platforms.  Is sewing custom clothing similar enough to driving that mask-makers ought to be allowed to participate in a program like this?

The gig economy is here to stay. We are proposing to tweak one discrete area of our securities laws to allow the many Americans who engage in gig work because it provides a much-needed source of current income also build longer-term investments.  As our nation's economy heals from the pandemic, many under- or un-employed individuals will be attracted to the flexibility and income opportunities that gig work can offer.  We view today's proposal as a way to improve benefits for these important workers and to introduce them to the powerful role that our capital markets can play in building a nest egg for retirement and for passing along to the next generation.

Joint Statement on the Proposal to Facilitate Non-Cash Compensation for Certain Gig Workers (by SEC Commissioners Allison Lee and Caroline A. Crenshaw)
In voicing their shared support for the proposed updates to Rule 701/Form S-8 and their shared dissent for the internet-platform-workers pilot program, Commissioners Lee and Crenshaw note that [Ed: footnotes omitted]:

The changes proposed today concern Rule 701 and Form S-8, two mechanisms through which companies may issue securities as a form of compensation without being subject to the usual registration requirements. The exemptions afforded by Rule 701 and Form S-8 recognize that different issues arise from the issuance of securities as compensation than for capital raising purposes, and seek to balance the potential benefits of equity compensation to an employment relationship with appropriate investor protections. In 2018, the Commission issued a concept release seeking public comment on potential updates to these rules. Today the Commission is publishing two proposals that flow from that concept release - one we support, and one we do not.

First, the Commission proposes a package of technical updates to Rule 701 and Form S-8 in response to specific issues identified by the staff and commenters. We support the publication of that proposal for comment because it appears to include tailored adjustments designed to enhance the functioning of our rules for all market participants. We hope that commenters will weigh in and help make sure we get those technical adjustments right, and maintain or enhance appropriate investor protections where we should.

Second, the majority proposes a pilot program that would create an exemption for the issuance of equity compensation to a newly defined category of workers: so-called internet "platform workers." Unfortunately we cannot support this proposal because there is no sound policy justification for singling out a subtype of alternative workers for this exemption - those who provide services through internet- or technology-based platforms.

The Proposing Release discusses the "gig" economy generally and explains that the proposal is meant to accommodate this evolving feature of our employment landscape. But the data cited in support of this proposition is broadly inclusive of all manner of alternative work arrangements, discussing independent contractors, freelancers, temporary help agency workers, on-call workers, contract workers, and other types of informal paid activities. These various types of alternative workers have been a feature of our economy for a long time. The category proposed for this exemption, however, singles out platform workers, a narrowly defined sub-category of alternative workers.  

The release does not reconcile the discrepancy between the broader data set analyzed, and the more narrow subset of workers identified for this new treatment under Rule 701 and Form S-8, except to assert broadly there has been an increase in the use of internet or technology-based platforms in the last few years. Indeed we cannot find any principled basis for the policy choice to single out a specific platform-based business model for a particular competitive advantage.