Securities Industry Commentator by Bill Singer Esq

February 12, 2021

Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (SEC Release)

Amazon seller blasts the company's forced arbitration policy in congressional hearing on antitrust (CNBC by Lauren Feiner and Annie Palmer)

SEC Suspends Trading in Inactive Issuer Touted on Social Media (SEC Release)
The SEC announced that it had issued an Order suspending trading in SpectracScience (Symbol: "SCIE"), which, as it turned out, was an inactive company that had become the darling of social media pumping. Pointedly, the Order asserts that SpectraScience is delinquent in its reporting since 2017, and that its most recent website and phone number are non-functional. But, other than that, why not put your life-savings into something like this, right?

As and Securities Industry Commentator readers know, I detest the SEC's unprincipled history of sanctioning corporate fraudsters in one breath, and then, in the next breath, granting them exemptions from "Bad Boy" provisions. In recent months, when asked about who I would like to see installed as the next SEC Chair, my list of candidates tended to include Preet Bharara, Gary Gensler, and Kara Stein. As such, I welcomed Gensler's selection. That being said, former SEC Commissioner Kara Stein would have been a wonderful choice because of her staunch opposition to the SEC's policy of granting knee-jerk-like exemptions to a slew of corporate miscreants; see, for example:

President Biden designated SEC Commissioner Allison Herren Lee as Acting Chair of the agency. Chair Lee has served with distinction since July 2019 after previous service, in part, as counsel to Commissioner Kara Stein and as Senior Counsel in the Division of Enforcement's Complex Financial Instruments Unit. While awaiting the confirmation of Gary Gensler as the next Chair, the SEC will be in very capable hands under Chair Lee. . . .

In keeping with her distinguished service as Commissioner and now as Acting Chair, Lee issued this: Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (SEC Release) 
I reprint below Chair Lee's full Statement and applaud her dramatic intervention into a tawdry process by which too many settlements were conditioned on the grant of a waiver. Even if Chair Lee's service is measured in a few weeks duration, she has already left her mark on the federal regulator. Bravo!!!:

In consultation with the Divisions of Enforcement, Corporation Finance, and Investment Management, today I am taking action to reinforce the critical separation between the Commission's enforcement process and its consideration of requests for waivers from automatic disqualifications that arise from certain violations or sanctions. To ensure that these processes remain fair and serve investors' interests, the Division of Enforcement will no longer recommend to the Commission a settlement offer that is conditioned on granting a waiver. This return to the division's long-standing practice ensures that the consideration of waivers is forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.

Violations of certain provisions of the federal securities laws give rise to automatic disqualification from exercising certain privileges, including being considered a Well-Known Seasoned Issuer (WKSI), engaging in certain private securities offerings under Rule 506 of Regulation D, and serving in certain capacities for an investment company.[1] The relevant statutory and regulatory authorities contemplate that the Commission generally may, in its discretion, grant waivers from these disqualifications. These waivers, however, should not be used as a bargaining chip in settlement negotiations or regarded as an obstacle to be overcome on the way to a settlement. A waiver is not the default position under the law, and should not be considered one under our processes.

Waiver requests are received and reviewed by the Divisions of Corporation Finance and Investment Management using standards that are separate and distinct from our law enforcement mandate. Although in many instances a waiver, either in full or with conditions, may be appropriate, this determination should be made separately, as a policy matter, from considerations related to the settlement of an enforcement case.

The staff responsible for reviewing waiver applications do so with diligence, professionalism, and independence, as do those working to bring and settle enforcement cases. Today's action is meant to enshrine best practices and ensure that our policies and procedures are designed to eliminate the potential for any structural conflicts or pressures. This is the same standard expected of entities regulated by the Commission, and will help preserve the independence of these separate processes and better protect investors and markets.
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[1] For example, WKSI status under Rule 405 of the Securities Act permits companies certain communication and registration flexibilities, and Rule 506 of Regulation D allows issuers to engage in certain securities offerings exempt from Securities Act registration requirements. Another privilege from which a company may be disqualified is the use of the statutory safe harbor for forward looking statements. These privileges allow companies to raise money from investors more quickly, and often with less expense, than would be possible without the flexibility these privileges afford, while also potentially providing less information to investors. While they are available to companies that use them responsibly, they can expose investors and markets to risk when used by those who cannot or will not follow the rules. In addition, individuals or entities that have been subject to certain sanctions, such as a criminal conviction pertaining to investment related activities or injunctive relief barring them from certain roles in the securities industry, are automatically disqualified from serving in certain capacities at registered investment companies under Section (9)(a) of the Investment Company Act.

Amazon seller blasts the company's forced arbitration policy in congressional hearing on antitrust (CNBC by Lauren Feiner and Annie Palmer)
CNBC's Feiner and Palmer cover the ongoing testimonies before House Judiciary Subcommittee on Antitrust, which is hearing complaints about the harmfulness of mandatory arbitration clauses. In covering the testimony of the Founder/President of OJ Commerce, Jacob Weiss, he complained about Amazon's forced arbitration clause that is embedded in its contracts with e-commerce vendors:

Weiss said that beyond limiting sellers' options to seek redress, forced arbitration makes it prohibitively expensive and difficult for them to get a favorable outcome. He argued arbitrators are financially incentivized to favor Amazon in order to retain their business and the limited scope of discovery means sellers are "left in the dark, but Amazon has all the information."

Bill Singer's Comment: Let's see how long it takes Congress to entertain similar grievances from the millions of investors who are subjected to mandatory arbitration as a prerequisite to opening a brokerage account on Wall Street, and the industry's hundreds of thousands of employees who are also deprived of a day in court.
In a Complaint filed in the United States District Court for the Northern District of California, the SEC charged Arrayit Corporation with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the reporting provisions of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Also, the Complaint charged Rene Schena with aiding and abetting Arrayit's violations and alleges that she is liable as a control person of Arrayit pursuant to Section 20(a) of the Exchange Act. Without admitting or denying the allegations in the complaint, Arrayit and Rene Schena agreed to settle the charges and to be enjoined from future violations of the charged provisions; and, further, Schena agreed to a 3-year officer and director bar and to pay a $50,000 penalty. Previously, the SEC charged Arrayit's President/Chief Science Officer, Mark Schena, and his case is pending. As alleged in part in the SEC Release:

[I]n March and April 2020, Arrayit falsely stated to investors that it had developed a COVID-19 blood test. In fact, as alleged, at the time, Arrayit had not yet purchased materials needed to make a test. The complaint further alleges that Arrayit falsely asserted to investors that it had submitted the test for emergency approval and that there was a high demand for the test. Additionally, the complaint alleges that, between October 2018 and March 2019, Arrayit issued a series of false and misleading statements to investors, including in a shareholder letter prepared by Rene Schena, claiming that it was preparing to file delinquent periodic reports and financial statements for the first time since November 2015. As alleged, Schena knew or was reckless in not knowing that these claims were untrue.
After pleading guilty in the United States District Court for the Western District of North Carolina to wire fraud, Aleksandr Musienko was sentenced to 87 months in prison and ordered to pay $98,751.64 in restitution. As alleged in part in the DOJ Release:

[F]rom 2009 to 2012, Aleksandr Musienko, 38, of Odessa, Ukraine, partnered with Eastern European computer hackers to obtain over $3 million from U.S. victims' bank accounts and launder the stolen funds from U.S. bank accounts overseas. Musienko's partners in the scheme hacked and stole information from victims in the United States and used that information to impersonate the victims. By deceiving the victims' banks into believing that withdrawals from the victims' accounts were requested by the victims, Musienko and others were able to steal large amounts of money from the victims' accounts.

Musienko was involved in recruiting, supervising, and directing a network of "money mules," or individuals who transmitted funds, with American corporate and individual bank accounts that could receive the stolen funds and transmit it overseas. Musienko, using an alias, recruited American "mules" by advertising on employment websites that he was hiring a financial assistant. Musienko instructed the mules, who believed they were working for a legitimate business, that they were to assist clients transfer funds overseas. In September 2011, Musienko's partners in the scheme hacked into the online accounts of a North Carolina-based company and transferred a total of $296,278 to two bank accounts controlled by Musienko's mules. Musienko instructed the mules to wire the funds to several European bank accounts, although the company's bank detected the fraud and deducted $197,526.36 in stolen funds from one of the mules before it was wired overseas.

Sealed charges were filed against Musienko in 2016 in the Western District of North Carolina. Musienko was arrested in South Korea in 2018 and extradited to the United States in 2019. In or about April 2019, the FBI searched Musienko's laptop and identified files containing approximately 120,000 payment card numbers and associated identifying information for persons other than Musienko.  

United States of America v. Gary Basralian, Appellant (Opinion, United States Court of Appeals for the Third Circuit / No. 19-3089 / February 11, 2021)
As set forth in the Syllabus to the 3Cir's Opinion:

Gary Basralian stole over $3.7 million from at least 10 of his clients, some of whom, elderly and widowed, had come to trust him with their life savings. After pleading guilty to wire and investment advisor fraud, the District Court sentenced him to 70 months' imprisonment and ordered him to pay $3.7 million in restitution. He appeals, alleging various errors at his sentencing hearing. None of his claims are persuasive. We thus affirm his sentence

NEWSFLASH: FINRA Observes Bad Actors In the Markets ( Blog)
A new FINRA Regulatory Notice asserts that there is a "long history of bad actors exploiting" microcaps and pennystocks. Sadly, FINRA thinks that merely urging its member firms to review their policies and procedures is going to weed out the bad actors. All of which makes you wonder what FINRA's 3,000-plus regulatory employees are doing each and every day?