The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

August 27, 2021












(BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/6027/finra-arbitration-defamation/
Given my advanced age and decades of lawyering, there isn't much that surprises me anymore. Be that as it may, I came across a FINRA intra-industry arbitration in which an associated person was pitted against another associated person, a non-associated person, and a non-associated company. Get yer scorecards here! At the heart of the dispute was an apparently nasty break-up with allegations of defamation. The former employee won. The former employee lost. It's a long story. There's a surprising twist involved.

VOTE for FINRA Small Firm Governor Paige W. Pierce
On September 1, 2021, FINRA will conduct its annual meeting to elect individuals to fill one small firm seat, one mid-size firm seat and one large firm seat on the FINRA Board of Governors (FINRA Board or Board). 

Bill Singer's Comment: In 1998, I was one of a slate of four petition candidates to run in the first contested Board election against the NASD's hand-picked slate of nominees. In what was then an incredible upset, two of the contested candidates won seats on the NASD Board. In the ensuing years, as a founder of the NASD and the FINRA Dissident Movements, I have continued my efforts to reform our industry and to support candidates in various FINRA elections. 

I have known sitting Small Firm Governor Paige W. Pierce for several years, and I wholeheartedly endorse her Board candidacy and urge eligible voters to cast a proxy in her favor. Paige has earned a second term by her continued advocacy for regulatory reform and fairness. 

IF YOU HAVE NOT MAILED IN YOUR BALLOT FOR PAIGE PIERCE BY TODAY, PLEASE GO ONLINE TO VOTE OR TELEPHONE YOUR VOTE. FOR THOSE WORKING REMOTE, YOU CAN TELEPHONE FINRA'S OFFICE OF THE CORPORATE SECRETARY at (202) 728-8949 AND OBTAIN YOUR VOTING CODE, THEN USE THAT CODE TO CAST YOUR ONLINE/CALL-IN VOTE. 
The Securities and Exchange Commission (the "Commission" or the "SEC") is requesting information and public comment ("Request") on matters related to: broker-dealer and investment adviser use of "digital engagement practices" or "DEPs", including behavioral prompts, differential marketing, game-like features (commonly referred to as "gamification"), and other design elements or features designed to engage with retail investors on digital platforms (e.g., websites, portals and applications or "apps"), as well as the analytical and technological tools and methods used in connection with these digital engagement practices; and, investment adviser use of technology to develop and provide investment advice. In addition to or in place of responses to questions in this release, retail investors seeking to comment on their experiences may want to submit a short Feedback Flyer.
Today, the Commission published a request for public comment on the use of new and emerging technologies by financial industry firms.[1] 

While these new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice.  These apps use a host of features that have come to be familiar in our increasingly online world. Digital engagement practices (DEPs), including predictive data analytics, differential marketing, and behavioral prompts (such as gamification), are integrated not only into streaming platforms and fitness apps, but also in robo-advising, wealth management platforms, brokerage platforms, and other financial technologies.

Many of these features encourage users to engage more with a digital platform. In the last few years we've seen a proliferation of trading apps, wealth management apps, and robo-advisers that use these practices to develop and provide investment advice to retail investors.  In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.  Predictive analytics and other DEPs often are designed, in part, with optimization functions to increase platform revenues, data collection, and customer engagement, leading to potential conflicts between the platform and investors.

I'm interested in the answers to the many questions included in the request for comment, but I'm particularly focused on policy questions about how we protect investors engaging with technologies that use DEPs:

How might we protect investors in light of the potential conflicts of interest that may exist when DEPs' optimization practices have a statistically significant impact on platform revenues, data collection, or investor behavior?
To the extent that DEPs' underlying predictive data analytics use "optimization functions" that, at least in part, optimize on revenues, data collection, or investor engagement - and to the extent that optimization leads to statistically significant changes in investor behavior - how does that affect the determination of whether DEPs are making a recommendation or providing investment advice?
With all this in mind, the Commission would like to hear from you about your experiences with these platforms and their digital engagement practices.  Your comments will help us better understand how firms are approaching new technologies and how these practices affect retail investors.  Thank you for your feedback.  
= = = = = 
[1] https://www.sec.gov/rules/other/2021/34-92766

https://www.sec.gov/rules/other/2021/34-92777.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of about $1.2 million to Claimant 1 but recommended the denial of a Related Action Award. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

Claimant provided new and useful information to Commission staff based on Claimant's "independent analysis," by creating and applying a complex algorithm to publicly available data and sharing Claimant's own knowledge and experience using the publicly available data. Claimant's information, provided early in the investigation, allowed the staff to conserve time and resources and assisted the staff during settlement negotiations with the company, which significantly contributed to the success of the Covered Action. Claimant also provided ongoing assistance to the staff during the investigation through multiple phone calls and emails. 

https://www.sec.gov/rules/other/2021/34-92778.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of a redacted percentage to Claimant 1, Claimant 2, and Claimant 3, which the SEC Release asserts will collectively amount to over $1 million. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

[C]laimant 1 provided the most significant and comprehensive information about the conduct to staff that proved vital to the success of the Covered Action. Claimant 1 also provided extraordinary assistance during the course of the investigation. In determining that Claimant 2 should receive an award of *** % of monetary sanctions collected or to be collected in the Covered Action, we considered that Claimant 2 was the first claimant to report to the Commission, and Claimant 2's information provided a framework for developing information requests. Claimant 2 also provided continuing assistance. In determining that Claimant 3 should receive an award of ** % of monetary sanctions collected or to be collected in the Covered Action, we considered that while helpful, Claimant 3's information was not as significant to the overall success of the Covered Action as the information submitted by Claimants 1 and 2. Claimant 3 also provided continuing assistance. 

https://www.sec.gov/rules/other/2021/34-92780.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of over $350,000 to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

[C]laimant voluntarily provided original information to the Commission that caused Enforcement staff to inquire concerning different conduct as part of a current investigation, and the Commission brought the Covered Action based in part on conduct that was the subject of Claimant's information. Claimant satisfied the original information requirement by providing independent analysis based on publicly available information. Claimant identified a microcap company (the "Company") whose stock was the subject of a suspicious promotional campaign. Claimant's information, including a comparison of the language in touting emails with emails in other promotional campaigns, was the product of unusual effort and expertise developed over many years and helped establish the connection between the Company and previous or ongoing promotional campaigns that were suspicious in nature. . . .

Order Determining Whistleblower Award Claim ('34 Act Release No. 34-92767; Whistleblower Award Proc. File No. 2021-84)
https://www.sec.gov/rules/other/2021/34-92767.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of 30% percent to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that:

[C]laimant provided more than limited assistance, as Claimant spoke with and provided documents to Commission staff, and application of the presumption would not be inconsistent with the public interest, the promotion of investor protection, or the objectives of the whistleblower program. Rather, Claimant was a harmed investor who provided the Commission with important information about misrepresentations made to induce Claimant's investment. Based on the lack of collections, a 30% award would not result in any payment to Claimant.

Bill Singer's Comment: I'm gonna ask ya to do me a favor -- I want you to go back a re-read the above paragraph. So . . . lemme see if we can agree on what it says. The SEC has prepared a Press Release. Someone at the SEC supposedly read the Press Release. Someone at the SEC approved the publication of the Press Release. And, what, pray tell, does that Press Release state? Oh, well, let's see -- we're told that the CRS recommended that a whistleblower be paid a bounty equal to 30% of the collected fines; and, in case you were unaware, that 30% is the maximum the SEC can award, so this particular whistleblower apparently did all that could be expected. If you read the Press Release, you likely came away impressed. If you read it carefully, however, you would have noted this qualification: "Based on the lack of collections, a 30% award would not result in any payment to Claimant." In the plain English that Wall Street's federal regulator favors, the SEC awarded a meaningless award to a Claimant because as of the date that the award was recommended and as of the date when the award was approved, no fines have been collected. And the press is filled with stories about disenchanted whistleblowers whose applications for awards languish for years at the SEC, and in response to queries for just where the hell in the SEC's processing pipeline those applications have come to rest, those same whistleblowers and their counsel are effectively told to drop dead and stop asking. Nice to see that the SEC has the time available to render meaningless awards while claims are piling up for award where fines have been FULLY paid and collected. Great sense of triage!

https://www.justice.gov/usao-or/pr/west-linn-man-pleads-guilty-role-real-estate-agriculture-and-mining-investment-schemes
David A. Shelofsky plead guilty in the United States District Court for the District of Oregon to one count each of wire fraud and money laundering, and, as part of the plea agreement, he agreed to pay no less than $3.3 million in restitution and to forfeit any criminally derived proceeds. As alleged in part in the DOJ Release:

[B]eginning in 2013, in Oregon and elsewhere, Shelofsky knowingly and intentionally devised several different investment fraud schemes. Shelofsky falsely told prospective investors and lenders that he had successful real estate development projects in Bend, Oregon and West Linn and a successful hemp seed cultivation and distribution venture in West Linn. During the same time period, Shelofsky and two other individuals formed a precious metals mining operation that purportedly used a proprietary mining technique to extract precious metals from the sand tailings of other mining operations. While the group made minimal efforts to operate the venture, Shelofsky misled several investors about the status of the operation to fraudulently obtain funds.

Shelofsky made repeated and deliberate misrepresentations and false promises about the status and success of his various ventures, the purported returns investors would receive, and the existence of collateral pieces of real estate supposedly backing investments. Shelofsky employed the services of others to further his schemes and establish his credibility, including a lawyer to create legal documents and an assistant to open bank accounts in the names of several limited liability corporations. Shelofsky used investor funds for personal expenses and to support his own high standard of living. Dozens of individual investors and lenders lost millions of dollars as a result of Shelofsky's schemes.

https://www.sec.gov/news/press-release/2021-166
Without admitting or denying the findings in SEC Orders, Crews & Associates Inc. and the company's former Chief Executive Officer Rush F. Harding III, agreed that they had willfully violated fair dealing and supervision provisions of certain Municipal Securities Rulemaking Board ("MSRB") Rules, that Crews willfully violated Section 15B(c)(1) of the Securities Exchange Act, which prohibits broker-dealers from effecting transactions in municipal securities in contravention of MSRB rules, and that Harding caused that violation. The Orders censure Crews and Harding and order Crews and Harding to cease and desist from violating Exchange Act Section 15B(c)(1); and, further, Crews is ordered to pay disgorgement and prejudgment interest of $44,072 and a civil penalty of $200,000, and Harding is ordered to pay disgorgement and prejudgment interest of $46,481 and a civil penalty of $100,000. Finally, Harding agreed to certain undertakings and limitations on activities.
In part the SEC Release alleges that:

[C]rews, at Harding's direction, recommended to a county in West Virginia that the county attempt to reduce the amount of its outstanding debt service expense through a tender offer for bonds it had issued years earlier.  According to the orders, in the months following the discussions of the tender offer, Crews, with Harding's approval, purchased millions of dollars of the county's outstanding bonds and sold them to an entity affiliated with Crews and to Crews' customers. Almost all of the bonds Crews acquired were eventually sold to its affiliate and tendered back to the county at a price that Crews had recommended, resulting in a net profit to the affiliate. In recommending the purchase price, Crews did not disclose to the county that Crews' affiliate had acquired bonds to be tendered, or the resulting conflict of interest created by its affiliate's financial interest in the tender offer.

https://www.cftc.gov/PressRoom/PressReleases/8419-21
The CFTC issued an Order against Cody Malosi Wilson 
https://www.cftc.gov/media/6326/enfwilsonorder082621/download filing and simultaneously settling charges for failing to register as a commodity pool operator ("CPO") and failing to comply with CFTC regulations regarding CPOs. Wilson is ordered to pay a $150,000 civil monetary penalty and to cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations, as charged. As alleged in part in the CFTC Release:

[F]rom approximately August 2015 to October 2018, Wilson operated commodity pools that he ran under various names, including Young Millionaires, Simple Wealth, and Simple Wallet. In connection with those pools, Wilson solicited and accepted funds from pool participants for the purpose of trading binary options on foreign currency pairs. Wilson used interstate commerce to operate the pools and solicit and accept funds from pool participants, but failed to register as a CPO as required.

The order also finds that Wilson violated CFTC regulations by receiving funds from pool participants via accounts in his name, commingling pool funds with his own property, and failing to operate each commodity pool as a separate legal entity from himself.

http://www.brokeandbroker.com/6026/fisher-pnc-arbitration/
Motion practice is about as bland as it gets with civil litigation. As we come upon today's courtroom drama  in the United States District Court for the Southern District of Florida, the Defendants have filed a Motion to Compel Arbitration in response to a Complaint. From here, it's a matter of who signed what, what was or was not delivered or attached, and whether a federal magistrate or a federal judge got whatever it is right. 

http://www.brokeandbroker.com/6024/deutsche-bank-awc-oba/
A recent FINRA AWC regulatory settlement looks like a case where an employer threw an employee under the bus, and the regulator gunned the engine and drove over him with relish and delight. There was a time when Wall Street's employers had their employees' backs. Some say that was a problem. Some look back upon those days with wistfulness. Be that as it may, there's no going back, but if this regulatory settlement is any indication, we're not necessarily moving forward but going off the rails. 

http://www.brokeandbroker.com/6014/finra-expungement-rationale/
BrokeAndBroker.com's publisher, Bill Singer, is no fan of FINRA's expungement process. When wearing his white hat as an investor's advocate, Bill sees FINRA's expungement process as little more than a profitable drive-in car wash that cleans dirty records and polishes undeserving reputations. When wearing his black hat as an industry advocate, Bill sees FINRA's expungement process as a cudgel with which broker-dealer employers pound their former employees via mandatory intra-industry arbitration replete with high fees and enervating delays. Notwithstanding Bill's reservations and concerns, a recent FINRA Arbitration Award presented a compelling case for expungement that was deftly handled by a very competent arbitrator. 

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