Securities Industry Commentator by Bill Singer Esq

July 23, 2021

Everybody Knows ( Blog) aegis-frumento-trading-plans/
From 2006 to 2011, Aegis Frumento, Esq. headed the department at Smith Barney that administered Rule 10b5-1 plans for the firm's customers, and he still advises clients on trading plans today. On June 7, 2021, SEC Chair Gary Gensler announced that he had asked the SEC Staff to "make recommendations . . . on how we might freshen up Rule 10b5-1." Gensler's announcement gives Aegis the opportunity to revisit an old question: why exactly do corporate executives trading in Rule 10b5-1 plans outperform the market? 

U.S. Commodity Futures Trading Commission, Plaintiff/Appellee, v. Monex Credit Company; et al., Defendants/Appellants (Memorandum, United States Court of Appeals for the Ninth Circuit, 17-CV-01868 / July 19, 2021)
As set forth in part in the 9Cir's Memorandum:

Monex asserts that the record establishes that its practices satisfy the "actual delivery" exception. The district court considered the evidence and arguments Monex presses on appeal, and the court's factual findings were consistent with that evidence and not clearly erroneous, so we uphold its conclusion. See All. for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011). 

Monex also argues that the CFTC did not provide fair notice about how Monex could comply with the statute. But United States v. AMC Entertainment, Inc., 549 F.3d 760, 769-70 (9th Cir. 2008), is inapposite because the court in that case modified an injunction that remedied conduct occurring prior to when the 3 defendant had fair notice of regulatory requirements. This preliminary injunction ensures prospective compliance with the law. 

Monex finally contends that the preliminary injunction is overbroad. Given the district court's factual findings and its conclusion that Monex's leveraged Atlas transactions are likely unlawful, the court did not abuse its discretion in tailoring the preliminary injunction as it did.

Securities and Exchange Commission, Plaintiff/Appellee, v. Donald J. Fowler, Defendant/Appellant (Opinion, United States Court of Appeals for the Second Circuit, 20-CV-1081 / July 22, 2021)
As set forth in the 2Cir's "Syllabus":

In this enforcement lawsuit filed by the Securities and Exchange Commission (SEC), Donald Fowler appeals from a judgment of the United States District Court for the Southern District of New York (Woods, J.) entered after a jury found that he recommended an unsuitable trading strategy and made unauthorized trades in customer accounts. The District Court ordered disgorgement and the payment of civil penalties, among other sanctions. On appeal, Fowler argues that the applicable statute of limitations, 28 U.S.C. § 2462, is jurisdictional and cannot be tolled by agreement, that the SEC's suitability claim was improper, and that customer testimony was required to prove all of the SEC's claims of unauthorized trading. Fowler also claims that the civil penalties imposed against him are excessive. For the reasons that follow, and  because both parties agree that a modest change in the disgorgement award is warranted, the District Court's judgment is AFFIRMED as MODIFIED herein

During his jury trial before the United States District Court for the Southern District of New York ("SDNY"), it was found that Fowler had lied to his investors, recommended an unsuitable high-frequency trading strategy, and engaged in unauthorized trading. SDNY ordered a $132,076.40 disgorgement plus interest and $1,950,000 in civil penalties plus Fowler was permanently enjoined from further violations.

2Cir found in pertinent part that § 2462 is a non-jurisdictional statute of limitations, and, further, that the parties' tolling agreement was enforceable. In considering Fowler's appeals, 2Cir found that SDNY was not barred from treating each defrauded customer as a separate unit of violation when calculating and imposing civil penalties. Similarly, 2Cir did not find the imposed civil penalty to be so grossly disproportionate to the ordered disgorgement as to violated the Fifth and/or Eighth Amendments. Pointedly, 2Cir reiterated its position that a securities fraud civil penalty need not be proportional to the imposed disgorgement but that among the factors to be considered are the egregiousness of the defendant's conduct, his scienter, if "substantial" losses were incurred, if the conduct was isolated or recurrent, and whether the defendant's financial condition warranted a reduction of any proposed penalty. In reviewing the facts at hand, 2Cir did not find that the cited penalty fell outside constitutional bounds. Finally, 2Cir modified the disgorgement based in part upon the fact that:

[T]he parties agree that the District Court miscalculated the disgorgement award by ordering Fowler to disgorge more postage fees -- that is, the $65 and then $49.95 per trade fee, of which Fowler was to receive a portion -- than he actually received. The District Court found that Fowler received $27,498 in postage fees, and ordered him to disgorge that amount (along with his commissions) because it thought that Fowler received 50 percent of the postage fees charged to the thirteen customers, when in fact he received only $3,005 in postage fees. We need not remand to correct this agreed error. See SEC v. Palmisano, 135 F.3d 860, 863-64 (2d Cir. 1998). Instead, we modify the disgorgement award to $107,591.40, plus prejudgment interest in the amount of $25,891.17.
In a Complaint filed in United States District Court for the District of New Jersey, the SEC charged Outdoor Capital Partners LLC and its Director Samuel J. Mancini with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[D]efendants raised approximately $11.5 million from at least 40 investors beginning in late 2019 by selling membership units in an investment fund and short-term, high-interest loan contracts.  The complaint alleges that the defendants told investors that they had sufficient funds to acquire three Italian cycling-related companies and that Mancini had invested millions of dollars of his own money in the offerings when neither statement was true.  According to the complaint, Mancini misappropriated almost $400,000 of investor funds and made at least $800,000 in Ponzi-like payments to other investors.  The complaint also alleges that Mancini hid from investors that Outdoor Capital Partners had failed to make the cycling company acquisitions and created and sent investors numerous false documents in response to various redemption requests, including false fund financial statements, bank statements, and emails from banks.
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC charged Charlie Abujudeh with violating the antifraud and registration provisions of the federal securities laws. As alleged in part in the SEC Release:

According to the SEC's complaint, filed today in the U.S. District Court for the Eastern District of New York, Abujudeh worked with others from August 2019 to at least September 2020 to fraudulently sell several microcap companies' stock to investors by making misleading statements during high pressure sales calls and/or email promotions. The SEC alleges that, as part of the scheme, Abujudeh and his associates convinced investors to invest in the stock of Odyssey Group International, Inc., as well as other microcap companies, including Scepter Holdings, Inc., and CannaPharmaRx, Inc. Abujudeh paid stock promoters to tout Odyssey stock over the phone to unsuspecting retail investors who were recruited through false and misleading representations. Abujudeh also allegedly paid for email promotional campaigns and schemed to hide his control over and simultaneous sale of Odyssey, Scepter, and CannaPharmaRx stock into the increased demand that the promotions he paid for had generated. According to the complaint, Abujudeh generated over $9 million in illicit proceeds by selling Odyssey, Scepter, and CannaPharmaRx stock to investors during the promotions he funded. The SEC alleges that Abujudeh funneled hundreds of thousands of dollars of the illegal Odyssey stock sale proceeds to an Odyssey insider with whom he had been coordinating.
As alleged in part in the TSSB Release:

The Texas and Alabama orders accuse GSI Exchange of engaging in an illegal advisory scheme involving over $32 million. The scam involves 450 investors many of whom are senior citizens.  GSI Exchange allegedly told investors the holdings in their retirement portfolios were high risk and they may lose their assets.  GSI Exchange is accused of encouraging these investors to liquidate their securities portfolios and use the proceeds to purchase gold and silver coins to the benefit of GSI through high commissions.
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, D.H. Hill Securities submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that D.H. Hill Securities has been a FINRA member since 1996 and employs 45 registered representatives at 15 branches. In accordance with the terms of the AWC, FINRA imposed on D.H. Hill Securities. a Censure and $25,000 fine. As alleged in part in the AWC's "Overview":

Between August 2015 and December 2019, D.H. Hill sold interests in eight private placement offerings, each of which claimed exemption from registration pursuant to Rule 506(b) of Regulation D. During this period, D.H. Hill solicited 16 separate individuals to invest approximately $1.1 million in those offerings. However, D.H. Hill began participating in each offering well before the firm created a substantive relationship with any of these 16 individuals. The firm participated in those offerings by engaging in steps necessary to the distribution of securities, including but not limited to: conducting due diligence on the offerings; communicating with prospective investors; selling interests in the offerings; and executing placement agent agreements. 

For example, D.H. Hill began participating in a private offering of securities on behalf of Issuer No. 1 in 2015. The firm executed the placement agent agreement for that offering on April 29, 2015, and first began selling interests in the offering to investors on February 25, 2016. On or before these dates, the firm did not have a substantive relationship with Investor A. D.H. Hill subsequently established such a relationship with and sold Investor A interests in Issuer No. 1's offering on July 12, 2017, but the firm's substantive relationship did not pre-date D.H. Hill's participation in that offering. 

Similarly, D.H. Hill began participating in a private offering of securities on behalf of Issuer No. 2 in 2017. The firm executed the placement agent agreement for that offering on May 19, 2017 and first began selling interests in Issuer No. 2's offering on April 10, 2018. On or before this date, the firm did not have a substantive relationship with Investor B. D.H. Hill subsequently established such a relationship with and sold Investor B interests in Issuer No. 2's offering on May 28, 2019, but the firm's substantive relationship did not pre-date D.H. Hill's participation in that offering. 

D.H. Hill solicited and sold the securities of six other private placement offerings to fourteen other investors in the manner similar to those described above. On each occasion, D.H. Hill failed to have a substantive relationship with each investor prior to the firm's participation in those offerings. 

Because D.H. Hill began participating in each of the eight private placement offerings prior to establishing a substantive relationship with Investor A, Investor B, and the fourteen other individuals noted above, the eventual solicitations and resulting sales of those offerings each constituted a general solicitation and resulted in the unregistered distribution of securities. 

Therefore, D.H. Hill violated FINRA Rule 2010 by acting in contravention of Section 5 of the Act.

As provided under Section III (D) of the AWC, D.H. Hill the following Corrective Action Statement, which states in part that:

While DH Hill did not have a substantive, pre-existing relationship with the 16 subject investors prior to engaging in the noted offerings, it did have a substantive relationship with such investors at the time the 8 offerings were shown to such investors. Our firm uses a financial planning and portfolio review process in working with our clients to ensure our recommendations are in line with the client's objectives and concerns. 

We have made some changes within our new business processing procedures that adds an additional step for any private offering business submitted. We now search the Selling Agreement date of any private placement offering and compare to the relationship of the investor date to ensue the investor relationship was established prior to the Selling Agreement date of the private placement. 

This Corrective Action Statement is submitted by D.H. Hill Securities, LLLP. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff.  

Bill Singer's Comment: I am no fan of Corrective Action Statements and rarely, if ever, advocate their use.  Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would prepare a statement that tends to typically make admissions, promises to correct situations that have not necessarily been acknowledged, and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then you may want to pause before signing the AWC and ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal afterwards.  

If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it. There's no need whatsoever to engage in a post-game, public analysis. Some think that this after-the-fact statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. Keep in mind that a Corrective Action Statement may actually set you and your firm up for heavier sanctions down the road if you acknowledge wrongdoing and propose a set of remedial actions.  If during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in the statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. Notwithstanding my opinion, D.H. Hill apparently determined that it was advisable to submit a Corrective Action Statement and hopefully that step will prove favorable to the firm.
A former Wells Fargo employee engaged in negligent conduct when he sought a COVID-related loan from the Small Business Administration. Although the loan was granted, it was never paid. On basketball courts all around the world, that falls under no-harm-no-foul. But FINRA is not a basketball court.
In a recent regulatory settlement, FINRA patiently presents its case -- and does so in compelling fashion. At issue is the supervision of a member firm's anti-money laundering compliance program and of the marketing of two private placements. FINRA alleges that the firm's CCO/AMLCO came up short. Based upon the allegations in the AWC, FINRA made its case and in a very thorough fashion. An excellent read for industry professionals.