Securities Industry Commentator by Bill Singer Esq

August 5, 2021

Attorney Sentenced for Conspiracy to Commit Wire Fraud and Money Laundering (DOJ Release)

Jury Finds Broker-Dealer, Transfer Agent and Two Key Principals Liable in Microcap Shell Factory Fraud (SEC Release)

In September 2020, the Commission adopted amendments to the SEC's whistleblower program rules.[1] Various members of the whistleblower community, as well as Commissioners Lee and Crenshaw, have expressed concern that two of these amendments could discourage whistleblowers from coming forward. One of these amendments[2] would preclude the Commission in some instances from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if a second, alternative whistleblower award program might also apply to the action. The second amendment[3] could be used by a future Commission to lower an award because of the size of the award in absolute terms.

I have directed the staff to prepare for the Commission's consideration later this year potential revisions to these two rules that would address the concerns that these recent amendments would discourage whistleblowers from coming forward. In particular, the staff is considering whether our rules should be revised to permit the Commission to make awards for related actions that might otherwise be covered by an alternative whistleblower program that is not comparable to the SEC's own program, and to clarify that the Commission will not lower an award based on its dollar amount.
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[1] Amendment was made to Rule 21F-3(b)(3). See Commission Adopting Release for Whistleblower Program Rules, 85 Fed. Reg. 70,898 (published in the Federal Register on November 11, 2020).

[2] Amendment was made to Rule 21F-6. See 17 CFR § 240.21F-3(b)(3).

[3] 17 CFR § 240.21F-6.
Today the Commission issued a statement announcing new procedures for addressing certain issues under Exchange Act Rule 21F-3(b)(3) and Exchange Act Rule 21F-6 (the "Whistleblower Rules").

The Commission, of course, is within its authority to engage in notice and comment rulemaking to amend its rules at any time-even when, as with the Whistleblower Rules, they are less than one year old.  Indeed, the Chair already has signaled his intention to do so with respect to Rules 21F-3(b)(3) and 21F-6.[1]  The Commission's action today, however, announces and adopts (via a Commission statement) new procedures designed to ensure that two rule provisions, which are subject to litigation, are substantively ignored while proposed amendments are formulated and considered.  This effectively nullifies standing Commission rules under the guise of changes to "agency procedures."

This course of action is unwise and continues a troubling and counterproductive precedent:[2]  If a rule challenge is pending in court when the presidential administration changes, the Commission believes it may immediately abandon proposed, noticed, and adopted rules at the majority's will via public statements.  Abandonment of duly-adopted rules without notice and request for comment raises the prospect that the rules that the Commission adopts in compliance with the Administrative Procedure Act may be interim at best, and transitory at worst.  This reduces the certainty of the law, a consequence that does not bode well for the Commission or those it regulates.
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[1] See, e.g., SEC's Spring 2021 Regulatory Agenda (publicly available at: /do/eAgendaViewRule?pubId=202104&RIN=3235-AN03); see also Statement in Connection with the SEC's Whistleblower Program (publicly available at:

[2] See Response to Chair Gensler's and the Division of Corporation Finance's Statements Regarding the Application of the Proxy Rules to Proxy Voting Advice (publicly available at:
FINRA's expungement process seems more toll-booth than a fair alternative to the courtroom from the perspective of many industry claimants. In contrast, consumer advocates and industry regulators often complain that FINRA's expungement process is a dangerous laundromat. Sometimes you just can't please anyone. A recent FINRA expungement offers an example of how things work best from an associated person's perspective.

SEC Charges Issuer for Conducting Fraudulent and Unregistered Digital Asset Security Offering (SEC Release)
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged Uulala, Inc. and co-founder Oscar Garcia with violating the registration and antifraud provisions of Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Also, the SEC Complaint charged co-founder Matthew Loughran with violating Section 5 and Section 17(a)(3) of the Securities Act. Without admitting or denying the allegations, Uulala, Garcia, and Loughran consented to final judgments ordering injunctive relief and undertakings aimed at permanently disabling the UULA and EUULA tokens and removing them from digital asset trading platforms, and the payment of civil penalties in the amount of $300,000 as to Uulala, $192,768 as to Garcia, and $50,000 as to Loughran. As alleged in part in the SEC Release:

[F]rom December 2017 through January 2019, Uulala sold UULA tokens, which were allegedly to be used to record transactions in a financial application ("app") that Uulala was developing and promoting to those without access to traditional banking services. According to the SEC's complaint, Uulala, Garcia, and Loughran made materially false and misleading statements to investors throughout their offering of UULA about having "patent pending" technology that had been incorporated into their app and having a proprietary algorithm to assign credit scores to users of their app. The complaint further alleges that Uulala and Garcia then made materially false and misleading statements about Uulala's financial performance in the convertible notes offering. The SEC also alleges that Uulala did not register its offers and sales of UULA tokens with the Commission.
Former attorney David Kaplan pled guilty to an Information filed in the United States District court for the District of Colorado to conspiracy to commit wire fraud and money laundering; and was sentenced to 36 months in prison. As alleged in part in the DOJ Release;

[B]etween approximately September 2014 through October 2015, Kaplan and two other individuals worked to defraud investors out of money and property through materially false and fraudulent representations. The co-conspirators obtained approximately $12 million from investors by claiming they could invest risk-free in offshore investments with an occasional 10% return on investment per month. As part of the scheme, Kaplan established and controlled business entities, including several charitable organizations, to deposit and transfer investor funds and pay himself for personal expenses. Using his position and attorney trust accounts, Kaplan was able to gain the trust of investors and create the pretense that investor monies were held in trust. Kaplan made payments to investors to lull them and encourage the recruitment of additional investors.
As alleged in the SEC Release:

On Friday, July 30th, after a three week trial in Federal Court in Tampa, Florida, a jury returned a unanimous verdict finding broker-dealer Spartan Securities Group, LTD., transfer agent, Island Capital Management LLC d/b/a Island Stock Transfer, and two of their principals, Carl E. Dilley and Micah J. Eldred, liable for fraud in connection with their roles in the creation of at least 19 purportedly legitimate public companies that were in fact shams.

Evidence at trial showed that Spartan Securities, Dilley, and Eldred made misrepresentations and omissions in the filing of 15c2-11 applications and submissions with Financial Industry Regulatory Authority (FINRA), which are required to publicly list the companies' common stock and ultimately enable the shares to become free-trading and available to public investors. The evidence also showed that Island Stock Transfer and Dilley, its President, made misrepresentations and omissions regarding the designation of the securities as free trading and when effectuating the bulk issuance and transfer of securities, including stock certificates without restrictive legends. Finally, the evidence revealed that Spartan Securities, Island Stock Transfer, and Dilley initiated and provided false information for applications filed with the Depository Trust Company (DTC), including misrepresenting the shell status of issuers.

The jury found Spartan Securities, Island Stock Transfer, Dilley and Eldred liable for fraud by violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5(b) thereunder. The jury found Spartan not liable for violating Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder and found Dilley, Eldred and defendant David D. Lopez not liable for aiding and abetting those alleged violations. The jury also found Spartan, Island, Dilley and Eldred not liable for violating or aiding and abetting alleged violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Rules 10b-5(a) and (c) of the Exchange Act, and not liable for violating Sections 5(a) and 5(c) of the Securities Act.
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, Piper Sandler & Co. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Piper Sandler & Co. has been registered with FINRA since 1936 and 1988 via its predecessors in interest, and the firm has about 1,200 registered representatives and 56 branches. In accordance with the terms of the AWC, FINRA imposed upon Piper Sandler a Censure and an aggregate $85,000 fine of which $28,000 is payable to FINRA. As alleged in part in the AWC [Ed: footnotes omitted]:

During the periods April 1, 2017 through June 30, 2018 and October 1, 2019 through December 31, 2019 (collectively, the review period), Piper participated in 34 distributions of securities in which it was late in filing, or failed to file, the notifications required under FINRA Rule 5190, which is in place to monitor compliance with the provisions of Regulation M of the Securities Exchange ct of 1934. These failures were caused by administrative errors, failures to monitor publicly available information that triggers requirements to provide notice, and misunderstandings as to the requirements to provide notice.

Piper also failed to establish, maintain, and enforce written supervisory procedures (WSPs) reasonably designed to achieve compliance with FINRA notification requirements. While the firm maintained operational procedures regarding what steps to take when filing Regulation M notifications, it did not conduct any supervisory reviews to ensure that the notifications were filed timely or accurately.

As a result, Piper violated FINRA Rules 5190(c)(1)(A), 5190(c)(1)(B), 5190(d), 3110(b) and 2010.
Another day and another FINRA regulatory case against a rep who applied for an Economic Injury Disaster Loan from the SBA. Ho hum. Yet again, FINRA seems to have the respondent dead to rights. The facts are what they are and FINRA makes its case. It's in the making of that case, however, that FINRA's choice of words and its highlighting of some facts gets awkward. Not only does FINRA appear to operate under a double standard when it comes to the industry's men and women versus the regulator's Large Member Firms, but we also see language in the settlement document that comes off as sexist. Boys will be boys but girls should act like proper ladies?
For decades, NASD and then FINRA have cozied up to the once-powerful market makers and, more recently, to what was once called a "wirehouse" but is now purportedly a "financial services company." Call it what you want. We're talking about a cluster of economic power and a consolidation of political influence that commands the waves to stop. And at FINRA, those waves do, indeed, stop. My expectation -- my fear -- is that FINRA will not fully apply the Restricted Firm Rule but will only focus on the usual suspects: The heirs to the sordid traditions of boiler-rooms and pennystock hustlers. What will not blip on FINRA's Restricted Firm radar are its Large Member Firms -- the newfangled financial services companies. No, those firms will never be deemed to to have a qualifying "history of misconduct."