Securities Industry Commentator by Bill Singer Esq

August 19, 2021

PIABA Wanted Live FINRA Arbitration (But Covid Had Other Plans) ( Blog)

SEC Obtains Final Judgment Against Securities Lawyer and Microcap Agent and Bars Lawyer from Practicing or Appearing Before the SEC (SEC Release)

Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Extend the Expiration Date of the Temporary Amendments set forth in SR-FINRA-2020-015 and SR-FINRA-2020-027 (SEC Release)

Sanjay Wadhwa Named Deputy Director of Enforcement Division (SEC Release)

Florida Woman Convicted Of Damaging Her Former Employer's Computers After She Was Fired (DOJ Release)

SEC Charges Netflix Insider Trading Ring (SEC Release)

Evanston Woman Charged With Insider Trading (DOJ Release)

SEC Charges IIIinois Resident with Insider Trading (SEC Release)

SEC Orders Award to Whistleblower and Denies Award to Second Claimant
Order Determining Whistleblower Award Claim

The Unsecured Convertible Note, The FINRA CMA, The Pro Se Plaintiff, The Federal Complaint, and the Legal Clinic ( Blog)
About four months ago in April 2021, the Public Investors Advocate Bar Association ("PIABA") was angered by FINRA's decision to extend the ongoing postponement of in-person arbitrations. Apparently, PIABA believed that FINRA's shut-down of live arbitrations was unfairly benefitting industry interests to the detriment of victimized public investors. As a general proposition, PIABA had a point; however, as to acknowledging the horrors of Covid, PIABA came off as tone deaf and reckless. Let's revisit the April 28, 2021 Blog that reported about this issue, and let's consider the update.

In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC charged attorney William Scott Lawler with engaging in schemes to fraudulently transfer control over the shares of two publicly-traded shell companies to a client. As alleged in the SEC Release:

[L]awler represented his client on the purchase of Broke Out Inc. (BRKO) and the predecessor to Immage Biotherapeutics Corp. (IMMG). Microcap agent Natalie Bannister allegedly participated in the BRKO scheme by assisting in the sale of BRKO to the client. The complaint alleged that, among other deceptive conduct, Lawler drafted false attorney-opinion letters, one of which Bannister submitted to a broker, to falsely represent that the stock of BRKO and IMMG could be immediately sold publicly once his client took control of the companies. Further, Bannister allegedly placed phony bids and offers for the BRKO stock at Lawler's direction in order to ensure a market for the stock.

Lawler and Bannister have consented to the entry of final judgments in the SEC's action. The judgments permanently enjoin Lawler and Bannister from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, and Section 10(b) Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act, and enjoin Lawler from violating the market manipulation provision of Section 9(a) of the Exchange Act. The judgments also bar Lawler and Bannister from participating in an offering of penny stock. Lawler is ordered to pay $386,790, consisting of $186,594 in disgorgement, $13,602 in prejudgment interest and a civil penalty of $186,594. Bannister is ordered to pay $21,781, consisting of $10,000 in disgorgement, $1,781 in prejudgment interest and a civil penalty of $10,000. Separately, the SEC instituted settled administrative proceedings against Lawler in which, without admitting or denying the findings, Lawler consented to an order barring him from appearing or practicing before the SEC.
FINRA proposed to extend the expiration of the temporary amendments enabling various Covid-related regulatory procedures from the August 31, 2021, expiration to December 31, 2021. As set forth in part in the SEC Release [Ed: footnotes omitted]:

In response to the COVID-19 global health crisis and the corresponding need to restrict in-person activities, FINRA filed proposed rule changes, SR-FINRA-2020-015 and SR-FINRA2020-027, which respectively provide temporary relief from some timing, method of service and other procedural requirements in FINRA rules and allow FINRA's Office of Hearing Officers ("OHO") and the National Adjudicatory Council ("NAC") to conduct hearings, on a temporary basis, by video conference, if warranted by the current COVID-19-related public health risks posed by an in-person hearing. In April 2021, FINRA filed a proposed rule change, SR-FINRA2021-006, to extend the expiration date of the temporary amendments in both SR-FINRA-2020- 015 and SR-FINRA-2020-027 from April 30, 2021, to August 31, 2021. 

While there are signs of improvement, much uncertainty remains for the coming months. The emergence of the Delta variant, dissimilar vaccination rates throughout the United States, and the uptick in transmissions in many locations indicate that COVID-19 remains an active and real public health concern. Based on its assessment of current COVID-19 conditions and the lack of a clear timeframe for a sustained and widespread abatement of COVID-19-related health concerns and corresponding restrictions, FINRA has determined that there is a continued need for temporary relief for several months beyond August 31, 2021. Accordingly, FINRA proposes to extend the expiration date of the temporary rule amendments in SR-FINRA-2020-015 and SRFINRA-2020-027 from August 31, 2021, to December 31, 2021.

. . .

[A]mong other things, the need for FINRA staff, with limited exceptions, to work remotely and restrict in-person activities - consistent with the recommendations of public health officials - have made it challenging to meet some procedural requirements and perform some functions required under FINRA rules. For example, working remotely makes it difficult to send and receive hard copy documents and conduct in-person oral arguments. The temporary amendments have addressed these concerns by easing logistical and other issues and providing FINRA with needed flexibility for its operations during the COVID-19 outbreak, allowing FINRA to continue critical adjudicatory and review processes in a reasonable and fair manner and meet its critical investor protection goals, while also following best practices with respect to the health and safety of its staff. 

FINRA staff, with limited exceptions, continue to work remotely to protect their health and safety. As indicated in its previous filings, FINRA has established a COVID-19 task force to develop a data-driven, staged plan for FINRA staff to safely return to working in FINRA office locations and resume other in-person activities. Based on its assessment of current COVID-19 conditions, FINRA does not believe the COVID-19-related health concerns necessitating this relief will meaningfully subside by August 31, 2021, and therefore proposes to extend the expiration date of the temporary rule amendments originally set forth in SR-FINRA-2020-015 from August 31, 2021, to December 31, 2021.

at Pages 2 - 4 of the SEC Release
Former Senior Associate Director of the Division of Enforcement in the SEC's New York Regional Office Sanjay Wadhwa was named as the SEC's Deputy Director of the Division of Enforcement.  As stated in part in the SEC Release:

Mr. Wadhwa joined the SEC as a staff attorney in 2003. As co-head of Enforcement in the SEC's New York office, he was responsible for the day-to-day functions of that office's enforcement program. He also previously served in additional roles in the Enforcement Division, including Deputy Chief of the Market Abuse Unit and Assistant Director in NYRO. Prior to joining the SEC in 2003, Mr. Wadhwa served as a tax associate at Cahill Gordon & Reindel LLP and Skadden, Arps, Slate, Meagher & Flom LLP.

Florida Woman Convicted Of Damaging Her Former Employer's Computers After She Was Fired (DOJ Release)
After a jury trial in the United States District Court for the Southern District of New York, Medghyne Calonge was convicted of one count of intentionally damaging computers and one count of recklessly damaging computers. As alleged in part in the DOJ Release:

In January 2019, CALONGE was hired by Employer-1, a Manhattan-based online provider of professional services, to serve as the head of human resources in their St. Petersburg, Florida, office.  On June 28, 2019, CALONGE was terminated for failing to meet the minimum requirements of her job after, among other things, she improperly downgraded a colleague's access to a computer system following an argument with the colleague.   

While she was being terminated, and just before she was escorted from the building, CALONGE was observed by two employees of Employee-1 repeatedly hitting the delete key on her desktop computer.  Several hours later, CALONGE logged into a system ("System-1") used by Employer‑1 to receive and manage applications for employment with the company, which the company had invested two years and over $100,000 to build.  During the next two days, CALONGE rampaged through System-1, deleting over 17,000 job applications and resumes, and leaving messages with profanities inside the system.  Ultimately, CALONGE completely destroyed all of Employer-1's data in System-1.  Employer-1 subsequently spent over $100,000 to investigate and respond to the incident and to rebuild System-1.  To this day, Employer-1 has been unable to recover all of its data.  

SEC Charges Netflix Insider Trading Ring (SEC Release) In a Complaint filed in the United States District Court for the Northern District of Washington, the SECcharged Sung Mo a/k/a "Jay" Jun, Joon Mo Jun, Junwoo Chon, Ayden Lee, and Jae Hyeon Bae with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Sung Mo Jun, Joon Jun, Chon, and Lee consented to the entry of judgments permanently enjoining them from violating the charged provisions, with possible civil penalties. Additionally, Sung Mo Jun agreed to an officer and director bar. Also, Bae consented to the entry of a final judgment permanently enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 and imposing a civil penalty of $72,875. A parallel criminal action was filed against Sung Mo Jun, Joon Jun, Chon, and Lee.  As alleged in part in the SEC Release:

[S]ung Mo "Jay" Jun was at the center of a long-running scheme to illegally trade on non-public information concerning the growth in Netflix's subscriber base, a key metric Netflix reported in its quarterly earnings announcements. The complaint alleges that Sung Mo Jun, while employed at Netflix in 2016 and 2017, repeatedly tipped this information to his brother, Joon Mo Jun, and his close friend, Junwoo Chon, who both used it to trade in advance of multiple Netflix earnings announcements.

The SEC's complaint further alleges that after Sung Mo Jun left Netflix in 2017, he obtained confidential Netflix subscriber growth information from another Netflix insider, Ayden Lee. Sung Mo Jun allegedly traded himself and tipped Joon Jun and Chon in advance of Netflix earnings announcements from 2017 to 2019. The SEC alleges that Sung Mo Jun's former Netflix colleague Jae Hyeon Bae, another Netflix engineer, tipped Joon Jun based on Netflix's subscriber growth information in advance of Netflix's July 2019 earnings announcement. Sung Mo Jun, Joon Jun, and Chon allegedly used encrypted messaging applications to discuss their trading in an attempt to evade detection. According to the complaint, Sung Mo Jun, Joon Jun, and Chon made approximately $3 million in total profits from the illegal scheme. The SEC Market Abuse Unit's Analysis and Detection Center uncovered the trading ring by using data analysis tools to identify the traders' improbably successful trading over time.

Evanston Woman Charged With Insider Trading (DOJ Release)

In an Information filed in the United States District Court for the Northern District of Illinois, Denise Grevas was charged with one count of securities fraud. As alleged in part in the DOJ Release:

In August and September 2019, DENISE GREVAS made $286,960 in illegal profits from the purchase and sale of securities in a Washington state-based pharmaceutical company that was a target for acquisition and later acquired by an overseas-based pharmaceutical company that had an office in Deerfield, Ill., and employed Grevas's husband, according to a criminal information filed in U.S. District Court in Chicago.  Grevas used material, non-public information about the expected acquisition to purchase shares in the Washington company ahead of a public announcement of the acquisition on Sept. 16, 2019, the charge alleges.  After the announcement, the Washington company's stock price increased and Grevas sold her shares for the profit, the charge alleges.

In a Complaint filed in the United States District Court for the Northern District of Illinois, the SEC charged Denise Grevas with violating the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act and Rules 10b-5 and 14e-3 thereunder. The charges were in connection with Grevas' trading in the stock of Alder BioPharmaceuticals, Inc. prior to the announced tender offer by H. Lundbeck A/S Grevas agreed to be permanently enjoined from violations of these provisions, and to pay a civil penalty in an amount to be determined by the court at a later date. a parallel federal criminal action was filed against Grevas. As alleged in part in the SEC Release:

[G]revas learned material, non-public information about the planned tender offer during a telephone call with her spouse, who was a member of Lundbeck's due diligence team for the Alder tender offer, in August 2019. According to the complaint, after the call, and unbeknownst to her spouse, Grevas purchased 30,800 shares of Alder stock in five brokerage accounts under her control, trading nearly every trading day until Lundbeck's announcement. According to the SEC's complaint, after Lundbeck announced the tender offer on September 16, 2019, Alder's share price increased 84% from its prior day's closing price, and Grevas obtained gains of $286,960.

Order Determining Whistleblower Award Claim ('34 Act Release No. 34-92708; Whistleblower Award Proc. File No. 2021-83)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of a redacted percentage to Claimant 1, and recommending the denial of an Award to Claimant 4. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

Claimant 1 provided new information to the staff that caused the staff to open a new investigation, and Claimant 1 provided ongoing assistance to the staff during the course of its investigation. The charges brought by the staff were directly based on the information Claimant 1 provided.
. . .

[T]he investigation was opened before Claimant 4 provided his/her information. The information submitted by Claimant 4 also did not significantly contribute to the success of the Covered Action pursuant to Exchange Act Rule 21F-4(c)(2). Enforcement staff confirmed in a supplemental declaration, which we credit, that by the time Claimant 4 provided his/her information in Redacted Enforcement staff was already aware of the Additional Defendants, and the staff had already developed evidence supporting the allegations that would be added in the Amended Complaint. Accordingly, the information Claimant 4 provided did not significantly contribute to the Covered Action.
We got someone buying an unsecured convertible note that is not a securities offering and is dependent upon a timely approval by FINRA of a pending Continuing Membership Application. An unsecured note is often worth the paper that it's written on, if that. FINRA hardly does anything timely. FINRA CMAs are notorious for ramblin', amblin', and taking far more time than anyone involved ever expected. On top of all of that, we got a pro se Plaintiff filing his Complaint in one of the nation's most sophisticated federal courts. What could possibly go wrong?