Securities Industry Commentator by Bill Singer Esq

March 30, 2021

The Great FINRA Hand Sanitizer Caper!!! ( Blog)
In the midst of a pandemic, FINRA got out its hammer and its tongs, and went after a Respondent, who had decided not to invest in a company and prepared to engage in a business that never materialized. Sort of like pretending that we launched a satellite into orbit despite the fact that the rocket exploded on the launching pad. I'm sure that you and I will both sleep safer tonight knowing that Wall Street's self-regulatory-organization is so vigilant and walking the industry beat.
Kazi Pervez pled guilty to bank fraud in the United States Court for the District of New Hampshire. As alleged in part in the DOJ Release:

[P]ervez was a branch manager for a bank in Salem, New Hampshire.  From at least April of 2016 until September of 2017, Pervez used his position as branch manager to steal or attempt to steal more than $560,000 from the bank.  For example, Pervez opened or instructed bank employees to open accounts in the name of deceased bank customers.  Pervez then withdrew funds from the accounts that exceeded the balance of the accounts and used his authority as branch manager to authorize the overdraft from the account.  Pervez also identified inactive bank accounts of deceased bank customers and transferred money out of those accounts to other accounts that he controlled.

Pervez sometimes transferred the stolen or overdrawn funds directly to accounts at other banks that he controlled or to pay his bills.  Other times, Pervez transferred the funds he stole or overdrew between several accounts in the bank that he controlled before transferring the money to accounts at other banks or to pay his bills.  In total, Pervez stole or fraudulently overdrew about $564,590.02 from other peoples' bank accounts.  Of that amount, Pervez successfully transferred more than $450,000 to other accounts outside the bank for his personal use.    

SEC Charges New Hampshire Issuer of Digital Asset Securities with Registration Violations (SEC Release)
In a Complaint filed in the United States District Court for the District of New Hampshire, the SEC charged blockchain company LBRY with 
The Securities and Exchange Commission today charged LBRY, a blockchain company, with 
violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act. As alleged in part in the SEC Release:

[F]rom at least July 2016 to February 2021, LBRY, which offers a video sharing application, sold digital asset securities called "LBRY Credits" to numerous investors, including investors based in the US. The complaint alleges that LBRY did not file a registration statement for the offering, and that the offering failed to satisfy any exemption from registration. The complaint further alleges that by failing to file a registration statement, LBRY denied prospective investors the information required for such an offering to the public. As alleged, LBRY received more than $11 million in U.S. dollars, Bitcoin, and services from purchasers who participated in its offering.
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, Securities America, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Securities America, Inc. has been a FINRA member firm since 1981 with 4,200 registered representatives at 2,400 offices. The AWC alleges that Securities America "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Securities America violated FINRA Rules 3110 and 2010; and the self regulator imposed upon the firm a Censure, a $10,000 fine, $235,979.77 in restitution, and required a certification of the implementation of policies, procedures, and internal controls. The "Overview" portion of AWC alleges that:

Between August 17, 2016, and February 8, 2018, SAI failed to reasonably supervise representatives' recommendations of an alternative mutual fund-the LJM Preservation & Growth Fund (LJM).1 SAI permitted the sale of LJM on its platform without conducting reasonable due diligence and without a sufficient understanding of its risks and features, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options. SAI also lacked a reasonable supervisory system to  review representatives' LJM recommendations. SAI representatives sold more than $616,000 in LJM to thirty-three customers. LJM's value dropped 80% during an extreme volatility event in February 2018 and the fund ultimately liquidated and closed, resulting in hundreds of thousands in losses for SAI's customers. By virtue of the foregoing, SAI violated FINRA Rules 3110 and 2010.
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Footnote 1: Ticker symbols were LJMIX, LJMCX and LJMAX. 

Bill Singer's Comment: I note with approval that the above Securities America AWC was not signed by sitting FINRA Board of Governor James D. Nagengast, as was the case in the recent AWC noted below: Blog publisher, Bill Singer, is no fan of Wall Street's version of self regulation, as spearheaded by the Financial Industry Regulatory Authority ("FINRA"). At best, FINRA comes off as a glorified trade group on steroids; at worst, as a lap dog for its larger member firms. Pointedly, the industry's small fry -- the mom-and-pop brokerages and their hundreds of thousands of associated persons -- never quite seem to get the mercy, the benefit of the doubt, or the concessions that seem afforded to the industry's big fish. In today's featured FINRA regulatory settlement, it could be that FINRA has pulled its punches because of Covid. It could be that what's a "relevant" prior disciplinary history is open to broad interpretation. Maybe FINRA got it right and Bill is being overly sensitive. So . . . why don't you take a smell and see if you would eat this sushi?

Unfortunately, FINRA only seems to have attended to one regulatory miscue by having Securities America's "Interim Chief Compliance Officer" Dori Hammond execute the most recent AWC instead of Governor Nagengast. Still a troubling issue in the recent AWC is FINRA's assertion that the firm has no relevant disciplinary history. In response to that assertion, I re-post the extract from the March 2, 2021, Blog cited above:

A Matter of Relevance

The 2021 AWC asserts that Securities America "does not have any relevant disciplinary history." 


No relevant prior disciplinary history at all? 

And by what FINRA guidelines was that determination made? 

52 Final Regulatory Events on BrokerCheck

As of March 2, 2021, FINRA's online BrokerCheck discloses that Securities America has 52 "Final" regulatory events. Of those 52 final regulatory events, the oldest goes back to 1992 and the most recent (other than the 2021 AWC cited in this article) is In the Matter of Securities America, Inc., Respondent (FINRA AWC 2016048243101 / September 7, 2018) (the "Securities America 2018 AWC")

In the Securities America 2018 AWC, FINRA imposed upon Securities America a Censure and $175,000. As set forth in the 2018 AWC's "Overview":

Between August 4, 2014 and January 28, 2016 (the "Relevant Period"), SAl failed to establish, maintain and enforce a supervisory system and written supervisory procedures reasonably designed to ensure that representatives' recommendations of variable annuities complied with applicable securities laws and regulations and FINRA Rules. As a result, SAI violated FINRA Rules 2330(d), and (e), NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on and after December 1, 2014) and FINRA Rule 2010.  

How could the failed supervisory system cited in the Securities America 2018 AWC not be a prior, relevant issue for disclosure in the Securities America 2021 AWC?  

I admit that the Securities America 2018 AWC involved recommendations of variable annuities and the 2021 AWC involved the onboarding of new reps BUT the underlying failure was that Securities America did not maintain and enforce a supervisory system satisfactory to FINRA -- that's not my conclusion but, to the contrary, the allegations of FINRA in both the 2018 and the 2021 AWCs. Notably, both AWCs alleged violations of the same FINRA Rule 2010. 

You may argue that in the Securities America 2021 AWC, the issue was that Securities America "caused the other broker-dealers to violate Regulation S-P" and that then triggered the Rule 2010 violation. In contrast, you could point out that the Securities America 2018 AWC involved a failure of supervision, which triggered the Rule 2010 violation. Argue that distinction all you want. You won't convince me. The core issue in the 2021 AWC is NOT what went on at the third-party vendor but whether Securities America had an obligation to monitor -- to supervise -- that outside party's conduct and to maintain reasonable oversight of its onboarding process. 

As I often note, FINRA has a very odd sense of what is and what isn't a prior "relevant" disciplinary history. See, for example: "For FINRA, Relevant Is A Large Gray Pachyderm" ( Blog /  September 9, 2020)

In an Order Determining Whistlebower Award Claim, the SEC awarded over $500,000 to a whistleblower Claimant in both the SEC's Covered Action and a Related Action. As asserted in part in the Order:

Claimant reported the alleged securities violations internally to his/her employer's REDACTED which in turn, REDACTED who reported the information to REDACTED. The REDACTED then made a referral to Commission staff, prompting the opening of the Commission's investigation. Within 120 days of reporting the violations internally, Claimant submitted a tip via fax to the Commission. As such, Claimant satisfies the Rule 21F-4(b)(7) safe-harbor provision and, thus, in making awards to the Claimant for the Covered Action and the Related Action, we have Redacted treated the Claimant's submission to the Commission as though it had been made on the Redacted date that the Claimant provided that same information to his/her employer's REDACTED

As asserted in part in the SEC Release:

The whistleblower's information prompted an internal investigation by the company, which then reported to an outside agency, which in turn provided the information to the SEC. Separately, the whistleblower also reported to the SEC within 120 days of reporting the violations internally to the company. Under the "safe harbor" provision of the SEC's whistleblower rules, the SEC treats the whistleblower's information as though it had been submitted to the SEC at the same time it was internally reported as long as the whistleblower also reports the information to the SEC within 120 days of the internal report.

SEC Order Determining Whistleblower Award Claims
In an Order Determining Whistleblower Award Claim, the SEC awarded  Claimant 1 20% of the monetary sanctions collected/to-be-collected, and Claimant 2 10% -- the actual dollar amounts of the awards are not disclosed. As asserted in part in the SEC Order:

Further, in determining that Claimant 1 should receive the higher award allocation, we considered that Claimant 1's information was submitted earlier in time, prompting a significant expansion of a then ongoing examination. Claimant 1, a harmed investor, identified multiple fraudulent schemes that were charged in the Commission's action. Claimant 2, also a harmed investor, submitted information approximately eight months after Claimant 1, and certain of Claimant 2's information was duplicative of the information previously provided by Claimant 1. We further observe that both Claimant 1 and Claimant 2 provided substantial, ongoing assistance that helped the Commission halt an ongoing fraudulent scheme. 

Investing in a SPAC (FINRA Investor Insights)
FINRA offers a very nice, tight overview of special purpose acquisition companies or "SPACs," which the regulator's "Investor Insights" newsletter assert raised over $80 billion in 2020, and in the first nine weeks of 2021 SPACS raised over $70 billion.
In a recent FINRA regulatory settlement, we got a stockbroker who goofed. We got a customer, who paid a price for the stockbroker's goof. In the spirit of let's just move on and put this behind us, the stockbroker dug into his pocket, came out with a wad of cash, tried to settle with the customer, and -- hey, you look like a smart person, if I'm writing about it, ya think things worked out for the best?