Securities Industry Commentator by Bill Singer Esq

July 19, 2021
Without admitting or denying the findings in an SEC Order, UBS agreed to cease and desist from violations of Rule 206(4)-7 of the Investment Advisers Act of 1940, a censure, and disgorgement and prejudgment interest of $112,274 and a civil penalty of $8 million, which will be distributed to investors harmed by the conduct at issue. As asserted in part in the SEC Release:

As described in the SEC's order, the ETP at issue is designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index.  According to the order, the issuer of the product warned UBS that it was not appropriate to hold the product for extended periods, and the product's offering documents made clear that the product was more likely to decline in value when held over a longer period.  The order finds that UBS prohibited brokerage representatives from soliciting sales of the product and placed other restrictions on sales of the product to brokerage customers, but did not place similar restrictions on certain financial advisers' use of the product in discretionary managed client accounts.  The order further finds that UBS adopted a concentration limit on volatility-linked ETPs, but failed to implement a system for monitoring and enforcing that limit for five years.  According to the order, UBS prohibited the financial advisers from making additional recommendations of this ETP prior to being contacted by the Commission staff.

The order also finds that between January 2016 and January 2018, certain financial advisers had a flawed understanding of the appropriate use of the volatility-linked ETP and failed to take sufficient steps to understand risks associated with holding the product for extended periods.  These financial advisers, the order further finds, purchased and held the product in client accounts for lengthy periods, including hundreds of accounts that held the product for over a year, resulting in meaningful losses.
In a Complaint filed in the United States District Court for the District of Nevada, the SEC charged Profit Connect Wealth Services Inc., Joy I. Kovar and her son Brent Kovar with violating the antifraud provisions of the securities laws; and further charged Joy Kovar as a control person for each of Profit Connect's violations under the Securities Exchange Act of 1934.  As alleged in part in the SEC Release)

[S]ince at least May 2018 the defendants have raised investor funds through Profit Connect while assuring investors that their money would be invested in securities trading and cryptocurrencies based on recommendations made by an "artificial intelligence supercomputer."  As alleged, Profit Connect claims that its supercomputer consistently generates enormous returns, which in turn allows Profit Connect to guarantee investors fixed returns of 20-30 percent per year with monthly compounding interest.  According to the complaint, however, over 90 percent of Profit Connect's funds came from investors.  The complaint further alleges that the defendants did not use funds received from investors to trade securities, buy cryptocurrencies, or do any of the things that Profit Connect promised its investors it would do with their money.  Instead, the complaint alleges that the defendants misused investor money by, among other things, transferring millions of dollars to Joy Kovar's personal bank account, paying millions of dollars to promoters, and making Ponzi-like payments to other investors.  The complaint alleges that Profit Connect actively encourages investors to use money from retirement funds and home equity, and targets investors looking to build educational funds for their family. 

. . .

On July 14, the court granted the SEC emergency relief against the Kovars and Profit Connect, including a temporary restraining order and an order freezing their assets.  A hearing is scheduled for July 26, 2021, to consider, among other things, whether to continue the asset freeze, issue a preliminary injunction, order an accounting, and appoint a receiver over Profit Connect., the SEC charged Aron Govil, controlling shareholder/executive director of Cemtrex Inc. with violations of antifraud provisions of the federal securities laws, as well as violations of Section 16(a) of the Securities Exchange Act which requires corporate officers, directors, and major shareholders to disclose their transactions in their company's stock.  Without admitting or denying the complaint's allegations in the SEC Complaint, Govil consented to the entry of a final judgment that enjoins him from violating the charged provisions; imposes officer and director and penny stock bars; imposes, in connection with certain violations, disgorgement in the amount of $626,782, plus prejudgment interest thereon in the amount of $76,693.95; and imposes a civil penalty in the amount of $620,000.  As alleged in part in the SEC Release, Govil:

misappropriated over $7 million of Cemtrex investor funds between April 2016 and January 2018 to finance his personal business ventures and to pay his personal expenses.  The complaint also alleges that Govil engaged in scalping - secretly selling Cemtrex stock while paying stock promoters to recommend that retail investors buy the company's stock - and insider trading.  The complaint alleges that Govil did not file with the SEC any of the required disclosures in connection with his Cemtrex trading.

The SEC's complaint also alleges that Govil, while serving as Telidyne's chief executive officer, made material misrepresentations to investors regarding the company's products.  According to the complaint, between at least April 2019 and May 2020, Govil falsely told investors that Telidyne, which purports to be a developer of mobile phone applications or "apps," had developed the "Teli App," which allowed users to transact in cryptocurrencies from their mobile phones, and also had started work on an app to detect COVID-19.  These statements allegedly were false because the Teli App did not have the stated cryptocurrency functionality and Telidyne had not started work on the COVID-19 detection app.

In response to the filing of a Complaint on July 19, 2019, by the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement, Respondents Wilson-Davis, Snow, Davis, and Barkley submitted an Offer of Settlement dated July 7, 2021, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, the settling Respondents consented to the entry of findings and violations and to the imposition of the sanctions.
FINRA Department of Enforcement, Complainant, v. Wilson-Davis & Co., Inc., James C. Snow, Jr., Lyle Wesley Davis, Byron Bert Barkley, and Craig Stanton Norton, Respondents (FINRA Office of Hearing Officers Order Accepting Offer of Settlement, Disciplinary Proceeding  No. 2016048837401
 / July 16, 2021)

As asserted in the "Summary" of the OHO Order:

Wilson-Davis is a self-clearing broker-dealer that specializes in microcap liquidation and trading. Despite the known risks associated with the firm's microcap liquidation business, from February 2015 through October 2015, Wilson-Davis and its "Designated Supervisors"- James Snow (the firm's President, Chief Compliance Officer ("CCO"), and Anti-Money Laundering Compliance Officer ("AMLCO")), Byron Barkley (the firm's head of trading), and Lyle Davis (the firm's Chief Executive Officer ("CEO") and Financial Operations Principal ("FIN OP"))- failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures ("WSPs"), reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules. 

These same "Designated Supervisors" failed to reasonably supervise registered representative and market maker Craig Stanton Norton's trading in NuGene International, Inc. (ticker, "NUGN") stock by ignoring various "red flags" of potentially suspicious or manipulative trading set forth in the firm's WSPs, which also failed to establish how the firm's trading activity should be supervised to detect and prevent such trading. In practice, no one at Wilson-Davis including Snow, Davis, and Barkley- was conducting a reasonable review of microcap liquidation and trading activity to detect and prevent potentially suspicious or manipulative trading, including Norton's trading activity in NUGN in 2015. As a result, Wilson-Davis, Snow, Davis, and Barkley violated FINRA Rules 31 l0(a), 31 IO(b), and 2010. 

Further, from February 2015 through October 2015, Wilson-Davis and Snow, who was responsible for the firm's anti-money laundering ("AML") program, failed to establish and implement AML policies and procedures reasonably designed to detect, investigate and report, if necessary, suspicious activity related to the firm's microcap liquidation business. As a result, numerous "red flags" of suspicious activity related to NUGN trading and liquidation activity went undetected and unaddressed. By failing to implement a reasonable AML program, WilsonDavis and Snow violated FINRA Rules 3310(a) and 2010. 

Finally, during the examination that led to this disciplinary proceeding, Wilson-Davis and Davis provided inaccurate or misleading information to FINRA in response to a Rule 8210 request in violation of FINRA Rules 8210 and 2010.

In accordance with the terms of the settlement, FINRA imposed the following sanctions:

Wilson-Davis & Co., Inc.: Censure, $500,000 fine, various Independent Consultant undertakings, and this "Business Line Restriction":

Wilson-Davis shall not accept for deposit for any firm customer account ( excluding clearing services for other broker-dealer customers and/or proprietary market making) any low-priced security (defined as any equity security that does not trade on a national securities or qualified foreign exchange and trades at a price of valess than $5.00 per share at the time it is submitted to Wilson-Davis for deposit) until the firm certifies to FINRA that it has implemented the Current Recommendations (defined below) of an Independent Consultant. However, Wilson Davis may accept for deposit and/or execute orders to sell such low-priced securities if: (1) Wilson-Davis obtains and retains a trade confirmation evidencing that the securities were purchased on the open market or documentation evidencing the securities were obtained pursuant to an effective registration statement under the Securities Act of 1933 or documentation evidencing that the securities have been listed in an effective resale registration statement under the Securities Act of 1933; (2) the securities were deposited at Wilson-Davis prior to the issuance of the Order Accepting the Offer of Settlement in this case, provided that all such sales otherwise comply with the firm's legal obligations, including under Section 5 of the Securities Act of 193 3; and (3) stocks that are issued by companies subject to the periodic reporting requirements of Section 13 or 15( d) of the Exchange Act and such companies have filed all periodic reports required during the preceding 12 months;

Snow: $30,000 fine and two-year suspension from associating with any FINRA member in all Principal capacities

Davis: $30,000 fine and three-month suspension from associating with any FINRA member in all capacities followed by a 21-month suspension in all Principal capacities

Barkley:  $30,000 fine and two-year suspension from associating with any FINRA member in all Principal capacities

Order Determining Whistleblower Award Claim ('34 Act Release No. 34-92416; Whistleblower Award Proc. File No. 2021-74)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of about $40,000 to Claimant. The Commission ordered that Claimant's application be approved. The Order asserts in part that the SEC [Ed: footnotes omitted]:

[B]ased on the facts and circumstances of this matter, we find that Claimant unreasonably delayed in reporting to the Commission. In particular, Claimant's information was submitted approximately 33 months from the date on which Claimant first believed that securities violations were occurring. Moreover, investors suffered harm during the period of delay. Given the impact of the delay, the CRS concluded that this criterion under Rule 21F-6(c)(1)(iii) should not be waived.
. . .

[W]e considered that (i) Claimant offered a detailed list of allegations for staff concerning the misconduct, (ii) Claimant provided information about the leadership structure of the relevant entity and the responsibilities of its personnel, which helped staff interpret and understand information received in document productions and testimony, (iii) Claimant provided substantial, ongoing assistance, including providing voluminous, important documents not otherwise available to staff, (iv) the charges brought by the Commission were based in significant part on conduct that was the subject of the information provided by Claimant and (v) Claimant unreasonably delayed reporting to the Commission for approximately 33 months while investors continued to be harmed.
As set forth in part in the FINRA Regulatory Notice [Ed: footnotes omitted]:

FINRA has amended Rules 5122 and 5123 to require firms to file with Corp Fin retail communications that promote or recommend a private placement offering subject to those rules' filing requirements, in addition to the currently required PPMs, term sheets and other offering documents. The amendments do not apply to any offerings that are currently exempt from filing, such as sales exclusively to institutional accounts. The amendments will require a member to file such retail communications with Corp Fin no later than the date on which the member must file the private placement offering documents under Rules 5122 and 5123. 

FINRA expects that members will file most retail communications with Corp Fin at the same time and in the same manner that they file their PPMs, term sheets and other offering documents. The rules' requirements that members file material amendments to offering documents also will apply to material amendments to retail communications. 

The amendments to FINRA Rules 5122 and 5123 become effective on October 1, 2021.