FINRA Arbitrators Sanction Spoliation of Evidence by Industry Respondents But Voice Displeasure with Claimant's ProductionIn the Matter of the FINRA Arbitration Between Guillermo Lopez Perez, Claimant, v. OFS Securities, Inc. and Oriental Financial Services Corp., Respondents (FINRA Arbitration Award)Foreign currency trader sentenced for investment fraud scheme (DOJ Release)
On September 16, 2020, following a telephonic conference with the parties, the Panel issued an Order rescheduling this matter as a virtual hearing. In making this decision, the Panel took into account that the hearing in this matter was cancelled over a year ago; Claimant is elderly; this case was filed in 2016; and Respondents obtained a Court Order requiring FINRA to stay this case back in November 2019 for what should have been a timely in-person hearing at that time.
There is no doubt this Panel feels strongly regarding Respondents' spoliation of evidence. As such, although this Panel did not find Respondents liable for Claimant's claims in this matter, it is clear that their conduct should not go unnoticed or unaddressed accordingly. One should not be rewarded for bad acts, and Respondents are no exception. At the same time, this Panel is puzzled by the inability of Claimant's accountants to produce all but one of his financial statements in discovery, which just happened to be the most pivotal of his financial statements - Claimant's 2013 Financial Statement. Claimant's failure to produce his 2013 financial statement was both curious and concerning, but not enough evidence was adduced at this arbitration to know whether such failure was intentional, in contrast to Respondents' conduct, which is no less than clear and convincing as to its spoliation of evidence. Interestingly, both parties failed to produce certain documents for the year 2013. There is no question it was a crucial time period for both parties in this case. Although the Panel does not know what it did not have the opportunity to see, it is satisfied that through testimony and evidence in this matter a rightful and just decision was reached. Having previously found gross negligence and willful misconduct by Respondents in connection with spoliating evidence and prolonged discovery abuse, the Panel hereby assesses sanctions pursuant to Rules 12511 and 12212 of the Code. Specifically, Respondents are jointly and severally liable and shall pay to Claimant the sum of $195,000.00 in attorneys' fees and $45,000.00 in costs for all work associated with Claimant's various motions to compel discovery and the August 28, 2020 Motion for Sanctions. As an additional penalty and in recognition of Respondents' flagrant discovery violations and spoliation of evidence, Respondents' are assessed all of FINRA's fees associated with this matter, including all prehearing and evidentiary hearing session fees, as set forth in the Fees section below.
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 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. 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.= = = = = 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.
Investigating and bringing civil enforcement actions for violations of the federal securities laws is integral to achieving the Securities and Exchange Commission's three-part mission of protecting investors, facilitating capital formation, and maintaining fair and orderly markets. Negotiated settlement of civil enforcement actions on just and fair terms often best serves this mission because it allows for prompt correction of unlawful conduct. For this reason, since July 2019, the Commission has considered and accepted contingent settlement offers, meaning offers that would resolve both the claimed violations of the federal securities laws and the collateral consequences that sometimes arise from the violations, most often by granting certain waivers. As then-Chairman Clayton explained, treating the offer to settle claimed violations and the related waiver requesting relief from collateral consequences as "two separate and unconnected events" created a "formulaic separation [that] often is inconsistent with appropriate consideration of the substance and interconnected nature of the matters at issue and undermines factors that drive appropriate settlements." Yesterday, the policy of considering settlement offers holistically abruptly changed when Acting Chair Lee issued a statement saying that "the Division of Enforcement will no longer recommend to the Commission a settlement offer that is conditioned on granting a waiver."We continue to support the policy of considering and accepting contingent settlement offers. Nothing in the policy altered the standards applicable either when the Division of Enforcement assessed the offer to settle the claimed violations or when the Division of Investment Management or Division of Corporation Finance assessed the appropriateness of granting requested waivers. The judgment of the Division of Investment Management and the Division of Corporation Finance remained fully independent of the Division of Enforcement, and the policy has not created structural conflicts or pressures between the settlement and waiver processes undertaken by the different operating divisions. In short, the policy worked well.Openness to contingent settlement offers acknowledges the reality that an entity's willingness to reach a prompt settlement on just and fair terms often is influenced by its concerns regarding the potential collateral consequences of entering into the settlement. The decision to disallow contingent settlement offers denies this reality-but it cannot change it. Insisting that an entity that is willing to settle be left in the dark about whether its waiver application will be granted significantly alters the entity's settlement calculus because it undercuts the certainty and finality that settlement might otherwise provide.For the reasons stated above, we disagree with Acting Chair Lee's attempt to rescind that policy by directing the Division of Enforcement to decline to recommend contingent settlement offers to the Commission for consideration. This change marks a return to an unwieldy process that treats as completely separate what is in fact interrelated. It re-introduces an artificial separation between the process by which an entity reaches a resolution on its violations of securities laws and the process by which it obtains clarity with respect to the collateral consequences of those violations. The result will be a longer period between the initiation and resolution of enforcement matters. We do not see how this outcome advances either the Commission's mission or serves the interests of investors.For example, a settlement that includes an undertaking to hire an independent compliance consultant carries with it collateral consequences for which we often grant waivers.https://www.sec.gov/news/public-statement/clayton-statement-regarding-offers-settlementhttps://www.sec.gov/news/public-statement/lee-statement-contingent-settlement-offers-021121
[F]rom late 2015 through September 2019, Stewart, Sewall, and a third business partner owned and operated Mediatrix Capital for the purpose of soliciting investor funds for algorithm-based trading in foreign currency exchange ("FOREX") markets. During the same time, Stewart, Sewall and the third business partner had majority ownership of, and operated, Blue Isle Markets for the purported purpose of acting as an intermediate broker between Mediatrix's investors and its brokerage firm where the FOREX trading took place. From early 2016 through September 2019, Stewart and Sewall allegedly caused the third business partner to provide false and misleading information to investors and potential investors. From early 2016 through late 2018, Stewart and Sewall falsely represented that Mediatrix had a history of successful FOREX trading dating back to December 2013 with no months in which Mediatrix incurred net losses when, in fact, Mediatrix never traded prior to 2015 and its trading history included many months in which net losses were incurred. Mediatrix's marketing materials falsely represented that Mediatrix's FOREX trading program offered "100% Transparency" and "World Class Returns." From March 2016 through September 2019, investors sent more than $129 million dollars to bank accounts held by Blue Isle and Mediatrix for the purpose of investing in algorithm-based FOREX trading. During that time, trade losses in excess of $32 million occurred, and Stewart, Sewall, and the third business partner spent more than $40 million on personal and business expenses.
[K]evin Perry led investors to believe that his investment company, Lucrative Pips, was successfully earning substantial profits by investing in the foreign currency (or "FOREX") market. Perry induced investors to send money by signing agreements that claimed the investors' initial investments were secure from loss.In actuality, Lucrative Pips was never registered as a commodity pool operator with the Commodity Futures Trading Commission (CFTC.) Also, Perry had never generated the historical returns represented to investors. Instead, he was using investor money to enrich himself or to pay off other investors, with the goal of enticing others to invest with him.Even after the CFTC filed a civil complaint against Perry, he continued to make fraudulent investment pitches to potential investors, which included falsely promising an undercover FBI agent that an investment of $10,000 would return a profit of $19,000 to $25,000 per month.