Securities Industry Commentator by Bill Singer Esq

December 18, 2020
Without admitting or denying the SEC's findings in an SEC Order, Robinhood Financial LLC agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act and the recordkeeping provisions of the Securities Exchange Act, censuring it, and requiring it to pay a $65 million civil penalty; and the firm agreed to retain an independent consultant to review its policies and procedures relating to customer communications, payment for order flow, and best execution of customer orders, and to ensure that Robinhood is effectively following those policies and procedures. As alleged in part in the SEC Release:

[B]etween 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money - namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as "payment for order flow."  As the SEC's order finds, one of Robinhood's selling points to customers was that trading was "commission free," but due in large part to its unusually high payment for order flow rates, Robinhood customers' orders were executed at prices that were inferior to other brokers' prices.  Despite this, according to the SEC's order, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors.  The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.  Robinhood made these false and misleading statements during the time in which it was growing rapidly.

Also READ: "A History Of SOES, Daytrading, NASD, NASDAQ, DOJ, SEC, Congress, And Robinhood -- And A Massachusetts Complaint And Another FINRA Fine" ( Blog /  December 17, 2020)

Former Nomura RMBS Trader Who Defrauded Customers is Sentenced (DOJ Release)
On June 15, 2017, a jury in the United States District Court for the District of Connecticut found Michael Gramins, a former Executive Director on the Residential Mortgage Backed Securities ("RMBS") Desk at Nomura Securities International ("Nomura"), guilty of one count of conspiracy to commit securities and wire fraud, and not guilty of one count of securities fraud and five counts of wire fraud. The jury could not reach a verdict as to one count of securities fraud and one count of wire fraud. Gramins was sentenced to two years of probation with the first six months in home confinement, and he was ordered to perform 300 hours of community service.  In July 2019, the Nomura agreed to pay about $25 million in restitution to customers for its failure to adequately supervise traders in mortgage-backed securities, and an additional $1.5 million in penalties. As set forth in part in the DOJ Release:

[Gramins] principally oversaw Nomura's trading of bonds composed of sub-prime and option ARM loans.  Between 2009 and 2013, Gramins and others defrauded customers of Nomura by fraudulently inflating the purchase price at which Nomura could buy a RMBS bond to induce their victim-customers to pay a higher price for the bond, and by fraudulently deflating the price at which Nomura could sell a RMBS bond to induce their victim-customers to sell bonds at cheaper prices, causing Nomura to profit illegally.  Gramins trained subordinates to lie to customers, provided them with the language to use in deceiving customers, and encouraged them to engage in the practice.

The victims of this scheme included hedge funds, insurance companies, and asset managers from Connecticut and elsewhere.

( Blog)
A Morgan Stanley Wealth Advisor Associate alleged that she was the victim of discrimination and retaliation based, in part, on sex, race, and ethnicity in violation of the ADA, Title VII, and FMLA. In furtherance of her claims, she moved to compel a FINRA arbitration, which the firm contested. 

Connie E. Lee Living Trust, et. al., Plaintiffs, v. James B. Lebenthal, Alexandra Lebenthal, and DOES 1 to 10 inclusive, Defendants (Order, 
United States District Court for North Dakota
, 20-CV-00130)
As set forth in part in the Order of the United States District Court for North Dakota ("DND"):

Here, Alexandra contends the Court lacks jurisdiction over her because her only contact with the forum state of North Dakota was to attend an FINRA arbitration in Bismarck, North Dakota, in February 2020. Alexandra submits the Court lacks jurisdiction over her because she did not transact business with any of the Plaintiffs; she did not participate in the 2015 meeting with the Plaintiffs that is the subject of the complaint; she did not have a controlling interest in Holdings, and she did not have an agency relationship with James. The Plaintiffs contend personal jurisdiction is proper over Alexandra through principles of agency. From a careful review of the evidence in the record and pleadings, the Court finds Alexandra did not purposefully avail herself of North Dakota and her contact with North Dakota was random and merely fortuitous in nature.

But for Alexandra's presence at the mandated arbitration five years after the 2015 meeting at issue, there is nothing to suggest she "purposefully directed" her activities at the residents of North Dakota. The Court finds that the nature and quality of the contacts with North Dakota does not support the exercise of personal jurisdiction.

at Page 7 of the DND Order

FINRA NAC Sustains Bar for Unauthorized Credit Card Use
As set forth under the heading "Decision" in the NAC Opinion:

Robbi J. Jones and Kipling Jones & Company, Ltd. ("KJC" or the "Firm") (collectively, "Respondents") appeal a Hearing Panel decision issued on October 17, 2018. The Hearing Panel found that Jones caused KJC to willfully create and maintain inaccurate books and records and to file materially inaccurate Financial and Operational Combined Uniform Single Reports Part IIA ("FOCUS reports"). Specifically, between April 2014 and February 2016, Jones filed or caused to be filed materially inaccurate FOCUS reports in which she claimed a $70,000 certificate of deposit ("CD") as an "allowable asset" for the Firm, when the CD had been canceled by the bank. Rather than noting its cancellation, Jones continued to include the cancelled CD as a current asset in the Firm's FOCUS reports, general ledger, and net capital computations, which, in turn, caused KJC's books and records to be inaccurate. 

The Hearing Panel further found that Jones provided inaccurate and misleading information to FINRA staff and refused to respond to questions FINRA staff asked during her on-the-record testimony ("OTR"). In connection with a 2014 cycle examination, FINRA staff asked Jones to provide documentary support for the reported value of the allowable assets claimed by the Firm in its net capital computation and FOCUS reports. Knowing that the bank had canceled the CD, Jones nonetheless testified that she had never pledged or assigned the CD as collateral. In addition, FINRA staff learned that the City of Houston, a municipal securities client of KJC, was investigating Jones's apparent unauthorized use of a city credit card. In response to FINRA's requests concerning the city's investigation, Jones provided inaccurate and misleading information and documents, and, in certain instances, refused to provide the information.

On appeal, Respondents have conceded liability as outlined in the Hearing Panel's decision. Their appeal l therefore focuses on sanctions only. Respondents argue that the sanctions are too severe, punitive, and should be reduced. After an independent review of the record, we affirm the Hearing Panel's findings of liability and modify the sanctions imposed

In accordance with its findings, the OHO imposed the following sanctions:

For the first cause, the Hearing Panel fined KJC $38,000, suspended Jones from associating with any FINRA member firm in any capacity for two years, barred her from associating with any FINRA member firm in any supervisory or principal capacity, and fined her $35,000. Because KJC's violation was willful, the Hearing Panel found that the Firm is subject to statutory disqualification. For the second, third, and fourth causes of action, the Hearing Panel imposed a unitary sanction and suspended Jones from associating with any FINRA member firm in any capacity for two years and fined her $35,000. The Hearing Panel ordered that Jones's suspension under cause one run consecutively with the suspension imposed under causes two, three, and four. . . .

at Page 9 of the NAC Decision

After deciding to affirm the OHO's findings, the NAC also affirmed the fine on KJC but concluded that:

[D]ue to the egregiousness of Jones's misconduct, separate bars in all capacities for both Jones's books and records violations as well as for providing inaccurate and misleading information, documents, and testimony are appropriately remedial.

at Page 13 of the NAC Decision

FINRA Fines and Suspends Rep for Accepting Instructions from Customer's Mother
In the Matter of John D. Craft, Respondent (FINRA AWC 2019062964801)
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 D. Craft submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that John D. Craft was first registered in 1988 and since June 2000, he was registered with Cetera Financial Specialists, LLC. The AWC asserts that:

On June 18, 2019, Cetera filed a Form U5 stating that the firm had discharged Craft after "receiving a demand for payment . . . made pursuant to a client complaint." . . .

The AWC asserts that Craft "does not have any relevant disciplinary history."  In accordance with the terms of the AWC, FINRA deemed that Tomlinson had violated FINRA Rules 2010; and the self-regulator imposed upon him a $5,000 fine and a two month suspension from association with any FINRA member firm in any capacity.  The AWC alleges in part that:

From October 2016 through February 2018, Craft executed seven trades, with a total value of approximately $20,333, in a customer's IRA based on instructions Craft received from the customer's mother. These trades included three stock sales liquidating all investments in the customer's IRA in February 2018, which generated approximately $10,000 in proceeds that were distributed out of the account. Craft did not obtain the customer's prior authorization for the trades or a power of attorney authorizing the customer's mother to direct trading in the customer's IRA.