Securities Industry Commentator by Bill Singer Esq

April 16, 2021
A public customer filed a FINRA arbitration claim citing nearly $6 million in losses in Puerto Rico municipal bonds. The Claimant took his place on a proverbial long, long line that winds around several blocks. After 20 FINRA hearing sessions, the arbitrators denied all the claims, which set the stage for a federal court appeal. Adding insult to injury, the Court wasn't all that impressed with Claimant's arguments or the manner in which some were presented.
This wonderful bit of reporting by CNBC's Mangan ranks up there among my all-time favorites articles! I would give you a brief tease about the content but there's no way that I could do so without a spoiler alert, and that would ruin everything. If you've ever wondered about the extent that mania could hit the markets or the limits on some investors' stupidity, Mangan's story may well convince you that mania and stupidity are boundless. Enjoy this wonderful read.
In December 2016, Braskem S.A. and Odebrecht S.A. each pleaded guilty in the United States District Court for the Eastern District of New York to separate one-count criminal Informations charging them with conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act ("FCPA"). Additionally, Braskem settled a related proceeding with the SEC. Former Braskem Chief Executive Officer Jose Carlos Grubisich pled guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA and one count of conspiracy to violate the books and records provision of the FCPA and to fail to accurately certify Braskem's financial reports. Grubisich agreed to pay approximately $2.2 million in forfeiture and awaits sentencing. As alleged in part in the DOJ Release:

[B]etween approximately 2002 and 2014, Jose Carlos Grubisich, 64, a citizen of Brazil - who served as the CEO and a member of the board of directors of Braskem as well as in various capacities for Braskem's parent company, Odebrecht S.A. (Odebrecht) - engaged in a scheme to bribe Brazilian government officials in violation of the Foreign Corrupt Practices Act (FCPA). As part of the scheme, Grubisich and his co-conspirators diverted approximately $250 million from Braskem into a secret slush fund, which Grubisich and others had generated through fraudulent contracts and offshore shell companies secretly controlled by Braskem.

Grubisich admitted that while CEO of Braskem, he agreed to pay bribes to Brazilian government officials to ensure Braskem's retention of a contract for a significant petrochemical project from Petroleo Brasileiro S.A. (Petrobras), Brazil's state-owned and state-controlled oil company. Grubisich also admitted that, as Braskem's CEO, he falsified Braskem's books and records by falsely recording the payments to Braskem's offshore shell companies as payments for legitimate services. Grubisich also signed false Sarbanes-Oxley certifications submitted to the U.S. Securities and Exchange Commission (SEC) that, among other things, attested that Braskem's annual reports fairly and accurately represented Braskem's financial condition, and that Grubisich, as Braskem's principal officer, had disclosed all fraudulent conduct by Braskem's management and other employees with control over Braskem's financial reporting.
In a Petition filed by Sustainable Holdings' Chief Executive Officer/President Vincent R. Molinari, his preamble explains the nature of his six-page proposal: [Ed: footnotes omitted]:

Arkonis Capital, LLC ("Arkonis") is a broker-dealer registered with the U.S. Securities and Exchange Commission ("SEC") and the Financial Industry Regulatory Authority ("FINRA"). Arkonis is a subsidiary of Sustainable Holdings, PBC, a financial technology ("FinTech") company focused on sustainability. The author of this petition is very familiar with blockchain technology and digital assets and has petitioned the SEC in the past to adopt rules on the regulation of digital assets that are securities, the remediation of initial coin offerings that violated the securities laws, and the regulation of the miners of digital assets. Arkonis believes the SEC needs to provide regulatory clarity with respect to the regulation of a new form of digital assets - non-fungible tokens ("NFTs"). 

Arkonis encourages the SEC to engage in a meaningful discussion of how to regulate FinTech companies and individuals that are creating NFTs that may be deemed digital asset securities and the platforms that facilitate the issuance and trading of NFTs. We believe in certain instances NFTs may be securities. We believe existing securities laws that were written in the 1930s provide a crude mechanism for the regulation of NFTs. We encourage the SEC to publish a concept release on the regulation of NFTs to provide suitable guidance to the industry followed by the adoption of a new regulation on the same.

The SEC Order Determining Whistleblower Award Claims treated Claimant 1 and Claimant 2 (who submitted a joint tip through common counsel) as a joint whistleblower for purposes of the Award in accordance with '34 act Section 21F(a)(6), and each claimant will be paid 50% of the over $50 million payout.  Claimant 3 was denied an Award by the Claims Review Staff ("CRS") based upon a finding that Enforcement had not received any information from nor had any communication with Claimant 3 prior to the filing of the Notice of Claim ("NoCA") as explained in part:

Nothwithstanding Claimant 3's assertion that Claimant 3's information should have led to an investigation, the record in this matter conclusively demonstrates that none of the tips that Claimant 3 submitted to the Commission were provided to the investigative staff responsible for the Covered Action. Investigative staff provided a supplemental declaration, which we credit, addressing the principal arguments in Claimant's response. First, the record clearly shows that Redacted the investigation was opened in based on information provided by Claimants 1 and Redacted 2. As such, Claimant 3's claim that the investigation was opened in based on a self-report Redacted by the Company and close in time to Claimant 3's tips, submitted in late Redacted and early is factually incorrect. Second, the tips that Claimant 3 cites to in Claimant 3's award application were reviewed by staff in the Other Regional Office and were each closed with a disposition of "No Further Action," ("NFA"), and were not forwarded to Enforcement staff in connection with any Commission investigation.10 As such, contrary to Claimant 3's speculation, Claimant's information was not "lost" or otherwise ignored. Third, Enforcement staff responsible for the Covered Action investigation confirmed that they did not receive or otherwise learn of any information that Claimant 3 may have provided to other federal agencies or authorities. Finally, the information that Claimant 3 submitted to the Commission did not relate to the Company's Redacted the subject of the Covered Action.
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, Score Priority Corp. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Score Priority Corp. has been a member firm since 1983 with 15 registered representatives at two offices, and that the firm changed its name in January 2020 from Just2Trade, Inc.. The AWC asserts that Score Priority Corp. "does not have any relevant disciplinary history." As alleged in the AWC's "Overview":

From September 2016 through September 2020, Score Priority failed to develop and implement an anti-money laundering (AML) program reasonably designed to achieve and monitor the firm's compliance with the Bank Secrecy Act and the implementing regulations thereunder. In particular, the firm did not establish and implement policies and procedures tailored to the firm's business, which could be reasonably expected to detect and cause the report of suspicious activity arising from transactions and money movements in domestic and foreign-based retail accounts. The firm also failed to establish a risk-based customer identification program (CIP) that was tailored to the firm's business and a due diligence program reasonably designed to detect and report, on an ongoing basis, any known or suspected money laundering activity conducted through or involving correspondent accounts for foreign financial institutions (FFIs). 

As a result, the firm violated FINRA Rules 3310(a) and (b) and 2010.

Accordingly, FINRA imposed upon Independent Financial Group a Censure and $250,000 fine; and an undertaking to implement compliant supervisory procedures as specified, and to retain an independent consultant to redress the issues cited.

Bill Singer's Comment: Compliments to FINRA on an outstanding AWC replete with content and context so as to render the document intelligible and educational. Also, compliments on tailoring an extensive undertaking designed to further the true goals of self regulation beyond the mere imposition of a monetary fine. Be aware that my posting does no justice to this AWC, which spans some 13 pages and ranks among the finest such efforts that I have read in my career. As my readers know, this is truly rare praise from me -- and I'm guessing senior staff at FINRA is using smelling salts as we speak.
Another day and another dispute about whether an employment dispute is arbitrable before FINRA. In today's iteration, we got two former employees of a non-FINRA-member-firm but they are also employees of a FINRA member firm -- and both firms are subsidiaries of the same parent. After the employees resign to join Wells Fargo Advisors, only the non-FINRA employer sues them in federal court. In trying to get their case before a FINRA Arbitration Panel, the former employees argue that as FINRA registered representatives, their disputes are subject to the arbitration provisions of the Form U4 and FINRA Rule 13200, and if the Court ain't buyin' that, the employees further argue that the FINRA member firm is an indispensable party and must be joined, which would then give them another avenue to argue for FINRA arbitration.

These Foolish Things Remind Me of FINRA ( Blog)
Submitted for you disapproval is FINRA Regulatory Notice 21-15, which does nothing more than "reminds members" that they are required to do something. In case you missed it, the focal point of the reminder is about something that members are "required" to do. It's not something they may want to do. It's not something that they are musing about doing. It's something that's set out in many forms and iterations in FINRA's rulebook --  and the rules are mandatory (which is just another way of saying "required.") publisher Bill Singer was the third generation of his family in the wine and liquor business. Mounted on a wall in Bill's home is the framed First Dollar that his father got when he opened his liquor store in the 1950s. It's a "Silver Certificate" with its own unique serial number -- almost like cryptocurrency but for the fact that it is a legacy, paper currency with a physical manifestation but, hey, if my aunt were a man she'd be my uncle.  Also, someone (whose name is now lost to history) wrote on the First Dollar: "Best of Luck!" Imagine if Bill's father had transformed his First Dollar into an NFT way back in the 1950s. Why that First Dollar would be worth -- what? -- something like $2 or even $3? You would have doubled or tripled your investment.
If you file a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, a basic element of your proof must be to show that the defendant had acted with "scienter." What's scienter? Ahh, that's as easy as explaining what's cryptocurrency -- or what's "enough" or "a lot" or "frequently." In legalese, courts refer to "scienter" as a mental state embracing intent to deceive, manipulate, or defraud. Yeah, sure, that's helpful (not). Complicating things, in 1995, the Private Securities Litigation Reform Act imposed a further threshold upon plaintiffs in that they must plead a "strong inference" of scienter; and, as held in 2007 by the United States Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, LTD, a securities fraud complaint must allege facts establishing that the strong inference of scienter is "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Confused? Welcome to the club. See how all of this plays out in a recent Class Action.