Securities Industry Commentator by Bill Singer Esq

December 17, 2020

In the Matter of Robinhood Financial, LLC, Respondent (Administrative Complaint, Docket No. E-2020-0047, Office of the Secretary of the Commonwealth of Massachusetts / Securities Division / December 16, 2020) 
The Complaint alleges in part that Robinhood has engaged in:  

1) aggressive tactics to attract new, often inexperienced investors; 2) failure to implement policies and procedures reasonably designed to prevent and respond to outages and disruptions on its trading platform; 3) use of strategies such as gamification to encourage and entice continuous and repetitive use of its trading application; 4) failure to follow its own written supervisory procedures regarding the approval of options trading; and 5) breach of the fiduciary conduct standard required by the Act and Regulations.
Ultimately, even if flawed by one of five claims, the innovative Massachusetts Complaint against Robinhood raises many valid points in furtherance of investor protection. I do not and will not fault the State for filing an edgy pleading when the press is daily filled with horror stories about recurring outages at Robinhood and other online firms. In this online brokerage sector, operational capacity does not seem able to keep pace with growth. At some point, as the Complaint suggests, in-house compliance loses containment, and unresolved problems cross over into sanctionable regulatory events. Like I said, I'm not going to criticize Massachusetts for its laudable efforts to seek redress for many allegedly victimized traders. To that extent, my comments are more critique than criticism. On the other hand, I am going to criticize FINRA for being an ineffective regulator but a very effective cash register. For FINRA, Wall Street regulation seems more about ringing up fines rather than pursuing innovative regulation.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Luckin Coffee Inc. had violated 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 that the company violated the reporting, books and records, and internal control provisions of Sections 13(a) and 13(b)(2) of the Exchange Act, and Rules 12b-20 and 13a-16 thereunder. Without admitting or denying the allegations, Luckin agreed to a settlement providing for a permanent injunctions and the payment of a $180 million penalty, which will be offset by certain payments Luckin makes to its security holders in connection with its provisional liquidation proceeding in the Cayman Islands. The transfer of funds to the security holders will be subject to approval by Chinese authorities. As alleged in part in the SEC Release:

[F]rom at least April 2019 through January 2020, Luckin intentionally fabricated more than $300 million in retail sales by using related parties to create false sales transactions through three separate purchasing schemes. According to the complaint, certain Luckin employees attempted to conceal the fraud by inflating the company's expenses by more than $190 million, creating a fake operations database, and altering accounting and bank records to reflect the false sales.

The complaint further alleges that the company intentionally and materially overstated its reported revenue and expenses, and materially understated its net loss, in its publicly disclosed financial statements in 2019. For example, Luckin allegedly materially overstated its reported revenue by approximately 28% for the period ending June 30, 2019, and by 45% for the period ending September 30, 2019, in its publicly disclosed financial statements. The complaint alleges that during the period of the fraud, Luckin raised more than $864 million from debt and equity investors. After Luckin's misconduct was discovered in the course of the annual external audit of the company's financial statements, Luckin reported the matter to and cooperated with SEC staff, initiated an internal investigation, terminated certain personnel, and added internal accounting controls.

FINRA's small firms elected Carrie Wisniewski, Chief Executive Officer and Founder, Bridge Capital Associates, Inc. to serve as the South Region Representative. Carrie has had a long and impressive career in the service of small firms and as an advocate for a sane industry regulatory agenda.

Uncontested petition candidate Robert Keenan, Chief Executive Officer and Chief Compliance Officer, St. Bernard Financial Services, Inc. will serve as the Small Firm Member of the NAC. Robert has been a vocal and energetic advocate for fairplay in our industry and his presence on the NAC will energize that panel.

We wish Carrie and Robert the best!

Ameriprise Customers Seek Damages from High Risk, Poor Performing Investments
In the Matter of the Arbitration Between Wei-Ming Liou and Yena Liou, Claimants, v. Ameriprise Financial Services, LLC and Li-Lin Hsu, Respondents (FINRA Arbitration Award 17-00102)

In a FINRA Arbitration Statement of Claim filed in January 2017, public customer Claimants asserted breach of fiduciary duty, misconduct; failure to supervise; and compliance failure. Claimants sought $930. 000 in compensatory damages, $93,000 in interest, $54,000 in attorneys' fee, $1,725 in filing fees, and punitive damages. As alleged in the FINRA Arbitration Award: 

[T]he causes of action relate to Hsu allegedly recommending the purchase of an unsuitable business, not disclosing the financial status of the business, not disclosing her commission on the sale of the business and soliciting a personal loan from Claimant.

Respondent Ameriprise generally denied the allegations, asserted various affirmative defenses, cross-claimed against Hsu for equitable indemnity and implied indemnity. As alleged in the FINRA Arbitration Award:

The causes of action relate to Hsu's alleged wrongdoing, which Ameriprise did not authorize, and Hsu's deliberate and intentional concealment of her wrongdoing from Ameriprise.

As set forth in the FINRA Arbitration Award:

Unless specifically admitted in her Statement of Answer and Crossclaim and Amended Statement of Answer and Crossclaim to Ameriprise, Hsu denied the allegations made in Ameriprise's Crossclaim and asserted various affirmative defenses. In her Crossclaim and Amended Crossclaim, Hsu asserted the following causes of action against Ameriprise: breach of contract as to pre-termination benefits; breach of the implied covenant of good faith and fair dealing; wrongful termination in violation of public policy; statutory violation of Labor Code §§201-218.6; equitable indemnity; implied indemnity; indemnity; and equitable contribution. The causes of action relate to Ameriprise allegedly wrongfully terminating Hsu and failing to pay her bonuses due and refusing to give Hsu access to the computer system in order to property return Claimants' funds.

Hsu's Employment-based Crossclaim Severed

As to various motions pending before the commencement of the evidentiary hearings, the FINRA Arbitration Award asserts in part that:

[O]n September 26, 2017, the Panel granted Ameriprise's Motion to Sever Hsu's employment related crossclaim.

SIDE BAR: As such we've whittled the case down to the customers' claims against Ameriprise and Hsu but removed Hsu's employment claims against Ameriprise.

Ameriprise Dropped by Claimants

As set forth in part in the FINRA Award:

On May 3, 2018, Claimants submitted notice of withdrawal of all claims against Ameriprise. On July 13, 2018, Claimants submitted notice of withdrawal of all claims against Hsu. Therefore, the Arbitrator made no determination with respect to any of the relief requests contained in the Statement of Claim.

SIDE BAR: As such the customers' claims against Ameriprise and Hsu. which is what started all this litigation, are now withdrawn; however, we're still left with Ameriprise's Crossclaim against Hsu. 

No-Show Hsu

As set forth in part in the FINRA Award:

Hsu did not appear at the evidentiary hearing on September 29, 2020. Upon review of the file, the Panel determined that Hsu received due notice of the hearing and that arbitration of the matter would proceed without Hsu present, in accordance with the Code. 

At the evidentiary hearing on September 29, 2020, Hsu failed to appear and failed to present a case in favor of her crossclaims against Ameriprise. On this basis the Panel ruled against her crossclaims pursuant to Rule 12603.


The FINRA Arbitration Panel of two Public Arbitrators and one Non-Public Arbitrator found Respondent Hsu liable and ordered her to pay to Respondent Ameriprise $100,000 in compensatory damages, $125,728.36 in attorneys' fee, and interest.