Securities Industry Commentator by Bill Singer Esq

July 15, 2021
Richard E. Gearhart, 71, pled guilty in the United States District Court for the Northern District of Indiana to conspiracy to commit securities fraud, and he was sentenced to 60 months in prison plus three years of supervised release, and ordered to pay over $5.3 million dollars in restitution. As alleged in part in the DOJ Release:

[B]etween 2008 and 2013, Gearhart was a licensed insurance agent doing business as Gearhart & Associates in Schererville.  He represented himself as experienced in investments and financial services. He was also CEO of Asset Preservation Specialists, Inc. Gearhart and others devised a scheme where they promoted and sold unregistered securities to Gearhart's insurance clients. He promised them no risk to their initial deposit and a return of 6% to 8% on their investment. He also told them that upon request, their initial investment would be returned within thirty days. Neither Gearhart nor his co-conspirators were licensed to promote or sell the securities.

The victims of Gearhart's scheme were between 50 and 90 years old when they trusted him with their savings. Instead of investing the money, they used it to repay other investors and for their own personal use.  The money was wired from Gearhart's bank accounts to other investors and to businesses in which Gearhart and co-conspirators held an interest.

To keep the scheme afloat, Gearhart directly or indirectly sent fraudulent financial statements to investors showing gains when none existed. The victims learned that they had lost their savings when Gearhart filed for bankruptcy listing them as creditors rather than investors.
Without admitting or denying the findings in an SEC Order, Blotics Ltd. agreed to cease and desist from committing or causing any future violations of the anti-touting provisions of the federal securities laws, and to pay $43,000 in disgorgement plus prejudgment interest, and a $154,434 penalty. As alleged in part in the SEC Release:

[C] was accessible in the United States from 2016 to August 2019, during which time U.S. visitors comprised a significant portion of its web traffic.  Visitors to were presented with details about each profiled digital token offering in so-called "listing" profiles, which also included links to the token issuers' own websites and a "trust score" that Coinschedule claimed reflected its evaluation of the "credibility" and "operational risk" for each digital token offering based on a "proprietary algorithm."  In reality, the token issuers paid Coinschedule to profile their token offerings on, a fact that Coinschedule failed to disclose to visitors. published many of the profiles after the SEC issued its DAO Report in 2017 warning that coins sold in ICOs may be securities and that those who offer and sell securities in the U.S. must comply with federal securities laws, and also after the SEC's Division of Enforcement and Division of Examinations advised that, in accordance with the anti-touting provisions of the federal securities laws, those who promote a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.

In the Matter of Coinschedule (Statement by SEC Commissioner Hester M. Peirce and SEC Commissioner Elad L. Roisman)

Blotics, Ltd., formerly known as Coinschedule Ltd. and referred to herein as Coinschedule, was a company based in the United Kingdom that operated a popular website,  The website publicized more than 2,500 current and upcoming digital token offerings.  Token projects and token purchasers based in the United States availed themselves of the platform.  The order states that "[t]he digital tokens publicized by Coinschedule included those that were offered and sold as investment contracts, which are securities pursuant to Section 2(a)(1) of the Securities Act."  Accordingly, Coinschedule was obligated under Section 17(b) of the Securities Act to disclose that it was compensated for profiling and publicizing those token offerings, but did not do so. 

We agree with our colleagues that touting securities without disclosing the fact that you are getting paid, and how much, violates Section 17(b).  We nevertheless are disappointed that the Commission's settlement with Coinschedule did not explain which digital assets touted by Coinschedule were securities, an omission which is symptomatic of our reluctance to provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities. 

There is a decided lack of clarity for market participants around the application of the securities laws to digital assets and their trading, as is evidenced by the requests each of us receives for clarity and the consistent outreach to the Commission staff for no-action and other relief.  The test laid out in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), is helpful, but, often, including with respect to many digital assets, the application of the test is not crystal clear.  Although the Commission staff has provided some guidance,[1] the large number of factors and absence of weighting cut against the clarity the guidance was intended to offer.  Market participants have difficulty getting a lawyer to sign off that something is not a securities offering or does not implicate the securities laws; they also cannot get a clear answer, backed by a clear Commission-level statement, that something is a securities offering.  The industry, through efforts like the Crypto Rating Council's framework "to consistently and objectively assess whether any given crypto asset has characteristics that make it more or less likely to be classified as a security under the U.S. federal securities laws,"[2] has sought to play a constructive role in providing clarity.  But the Commission has to engage more.

In this void, litigated and settled Commission enforcement actions have become the go-to source of guidance.  People can study the specifics of token offerings that become the subject of enforcement actions and take clues from particular cases; however, applying those clues to the facts of a completely different token offering does not necessarily produce clear answers.  Providing guidance piecemeal through enforcement actions is not the best way to move forward; if the Commission intends to continue to do so, then we should at least be clear about which tokens we have identified to have been sold pursuant to securities offerings.  The Coinschedule Order tells us only that some unspecified quantity of the 2,500 tokens profiled on Coinschedule's website were offered or sold as securities.[3]  The Order therefore provides no useful information to market participants either about which or how many of the 2,500 listed token offerings the Commission has determined to be securities offerings or about the reasoning underlying those determinations. 

Recognizing that the digital landscape is evolving and decentralized finance is challenging financial products, intermediation, and financial markets, the only certainty we see is that people have questions about how to comply with the applicable laws and regulations.  It is incumbent on us to answer those often complicated questions thoughtfully and in a timely manner.  For example, providing clear insight outside of the enforcement context into the Commission's investment contract determinations and analysis for digital assets would serve everyone well.  If the Commission were to determine that every digital asset offering is a securities offering-let's be clear: we have not made such a determination-let us state it clearly in a rule or in an official piece of guidance and work through the implications of that conclusion for trading platforms and market participants engaged in digital asset transactions. 

One of the ways to help work through the issue might be to develop a safe harbor along the lines of that which Commissioner Peirce has proposed, which would allow token offerings to occur subject to a set of tailored protections for token purchasers.[4]  Whether we decide that all or a subset of token offerings are securities offerings, providing clear regulatory guideposts and then bringing enforcement actions against people who ignore them is a better approach than the clue-by-enforcement approach that we have embraced to date and that today's settlement embodies.  In short, we know folks have questions and confusion persists in the marketplace; it is important that we start providing clear and timely answers.

[1] Framework for "Investment Contract" Analysis of Digital Assets,  This staff statement represents staff views and is not a rule, regulation, or statement of the Commission. 

[2] Crypto Rating Council, About Us,

[3] Order at 2 ("The digital tokens publicized by Coinschedule included those that were offered and sold as investment contracts, which are securities pursuant to Section 2(a)(1) of the Securities Act.").

[4] Hester Peirce, Commissioner, SEC, Token Safe Harbor Proposal 2.0 (Apr. 13, 2021),
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, NEXT Financial Group, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that NEXT Financial Group, Inc. has been a FINRA member since 1999 and employs 540 registered persons. The AWC asserts by way of background that [Ed: footnote omitted]:

On December 5, 2017, FINRA issued a Letter of Acceptance, Waiver and Consent (No. 2015043319901), in which NEXT was censured, fined $750,000 and was required to retain an independent consultant for, among other things, systemic supervisory failures relating to excessive trading and variable annuities.

In accordance with the terms of the AWC, FINRA imposed on NEXT Financial Group, Inc. a Censure and $750,000 fine and an undertaking to implement reasonably designed supervisory systems and procedures to address unsuitable short-term trading of mutual funds and municipal bonds and the over-concentration of account invested in Puerto Rican municipal bonds. As alleged in part in the AWC's "Overview":

From January 2012 through February 2019, NEXT failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to detect and prevent unsuitable short-term trading of mutual funds and municipal bonds in customer accounts and over-concentration of customer accounts in Puerto Rican municipal bonds. As a result of the misconduct, NEXT violated NASD Rules 3010(a) and (b), FINRA Rules 3110(a) and (b), MSRB Rules G-27(b) and (c), and FINRA Rule 2010. 

In addition, from approximately March 2013 through February 2017, the firm failed to establish a reasonable system of supervisory controls to test and verify that its supervisory procedures were reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules. As a result, the firm violated FINRA Rule 3120, NASD Rule 3012, FINRA Rule 2010, and MSRB Rule G-27(f).
At the heart of many employment and post-employment disputes is the belief by an employee that his discharge was fomented by a mere pretext. At times, an employer may cite misconduct as a legitimate basis for termination; however, at times, the cited misconduct was so inconsequential that it raises questions as to what else may be prompting the termination. In a recent FINRA Arbitration, a former employee says that his termination was unreasonable and solely prompted by his employer's desire to reduce its salary expenses. Before the arbitrators was the issue of whether the former employer would be permitted to enforce a non-solicitation agreement. 

Wasted Time By FINRA Regulatory Notice ( Blog)
FINRA's lackluster Board of Governors demonstrates no interest in prompting a more aggressive and effective regulatory protocol. By design or default, FINRA's Board is socially engineering an industry dominated by fewer, large firms and endangered by too many shady, smaller ones. It is the worst of both worlds where power is unchecked and fraud tolerated. Instead of formulating an effective regulatory agenda that combines more timely retroactive enforcement with proactive antifraud efforts, FINRA persists in offering a simulacrum of regulation. Among FINRA's worst sins is that it is an organization for which everything, no matter how inconsequential or half-assed, prompts a press release or formal notice. Worse, the endless stream of useless communications are routed to compliance professionals, whose time is wasted by being forced to read about nothing of value.