Securities Industry Commentator by Bill Singer Esq

October 7, 2021
Today's Blog presents a difficult scenario. Publisher Bill Singer offers rare and high praise for the efforts of a FINRA Office of Hearing Officers Hearing Panel and of the National Adjudicatory Council. The byproduct of those bodies' deliberations yielded two comprehensive Decisions of the highest caliber. Unfortunately, FINRA's Chief Hearing Officer stayed the proceedings after information had purportedly come to her attention and eventually compelled the hiring of outside counsel to conduct a review. Sadly, FINRA's lack of transparency about the underlying nature of the troubling information mars the proceedings. Quis custodiet ipsos custodes?

October 18, 2021 at 4 P.M. - 6 P.M. EDT
New York Law School Events Center
185 West Broadway
New York, NY 10013
Via Zoom

Registration Fee: $50 per person. Registrants attending in person must show proof of being fully vaccinated and agree to wear a mask at all times.

  • Robert Cook, President and CEO, Financial Industry Regulatory Authority (FINRA)
  • The Honorable Hester Peirce, Commissioner, U.S. Securities and Exchange Commission (SEC)
  • Thomas Sexton, President and CEO, National Futures Association (NFA)
  • The Honorable Dawn Stump, Commissioner, U.S. Commodity Futures Trading Commission (CFTC)
  • Ronald Filler, Professor of Law Emeritus, New York Law School 
  • The Honorable Scott O'Malia, Former CFTC Commissioner and currently the President and CEO of the International Swaps and Derivatives Association (ISDA)
  • The Honorable Jill Sommers, Former CFTC Commissioner and currently a Partner at Patomak Global Partners
A National Cryptocurrency Enforcement Team ("NCET"), under the supervision of Assistant Attorney General Kenneth A. Polite Jr. will tackle complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors; and will further assist with the tracing and recovery of assets lost to fraud and extortion, including cryptocurrency payments to ransomware groups.
The United States District Court for the Central District of California granted the SEC's request for a temporary restraining order against Defendants Ron Harrison and Global Trading Institute, LLC,  and Relief Defendant Irina Parfyonova. The Order freezes the assets of Harrison, Global Trading Institute, and Parfyonova, and orders them to provide an accounting, among other relief. As alleged in part in the SEC Release:

[H]arrison fraudulently collected over $900,000 in performance and other fees from twenty-two clients since 2016. The complaint alleges that Harrison collected these fees based on purported gains from his option trading in the clients' brokerage accounts when, in fact, almost all of the clients suffered substantial losses from Harrison's trading. The complaint also alleges that Harrison touted to his clients his experience as a Wall Street trader, but misleadingly failed to disclose that FINRA had barred him from associating with any member. The complaint also names Harrison's company, Global Trading Institute, LLC, as a defendant for allegedly participating in Harrison's fraud and names his girlfriend, Irina Parfyonova, as a relief defendant for allegedly receiving from Harrison more than $279,000 in proceeds from the fraud.
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, William A. Fochi, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that William A. Fochi, Jr. entered the industry in 1987 and was first registered in 1988 with Northwestern Mutual Investment Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Anderson a $10,000 fine and a four-month suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC:

In April 2005, Fochi obtained approval from the firm to sell and service insurance products outside of the firm's network. However, Northwestern explicitly prohibited Fochi from soliciting or selling EIAs. From March 2012 through December 2019, however, Fochi sold EIAs to at least nine customers, eight of whom were also his Northwestern clients. The value of the EIAs Fochi sold to these customers was approximately $3,900,000. Fochi's activities were not detected by the firm because his wife, who was an independent insurance agent, was listed as the selling agent. Fochi's wife was listed as the agent on the EIA applications even though certain customers only worked with Fochi in purchasing their EIAs. Fochi received approximately $3,000 personally in commissions and shared in the $350,000 to $400,000 in commissions earned in his wife's name for EIA sales Fochi made. 

Between 2012 and 2019, Fochi also made inaccurate statements to Northwestern regarding his participation in outside business activities and sales of EIAs on eight annual firm compliance questionnaires. 

By engaging in an outside business activity without providing prior written notice to Northwestern, Fochi violated FINRA Rules 3270 and 2010.
In a FINRA Arbitration Statement of Claim filed in May 2021, public customer Claimant Naser asserted violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraudulent misrepresentation, and negligent misrepresentation. Claimant sought $1,667 in damages, punitive damages, costs, fees, injunctive relief, and a declaratory judgment. The FINRA Arbitration Award states in part that:

[T]he causes of action related to allegations that, on January 28, 2021, Claimant was restricted from purchasing AMC Entertainment Holdings (AMC) stock and his position in Nokia Oyj (NOK) was harmed as a result, and the restriction illustrates the false, deceptive, and misleading nature of Respondent and RMI's marketing regarding unlimited trades.

Because Robinhood Markets, Inc. is not a FINRA member firm and did not voluntarily submit to arbitration, no determination was made as against that Respondent. The sole FINRA Arbitrator denied Claimant's claims. 

In a FINRA Arbitration Statement of Claim filed in August 2020, associated person Claimant Randolph sought the expungement of customer dispute information from the Central Registration Depository ("CRD"). Respondent UBS denied wrongdoing but did not oppose the requested relief. Sole FINRA Arbitrator Phillip J. Glick found pursuant to FINRA Rule 2080 that the customer's ("DG's") claim, allegation or information is false and recommended expungement. The Arbitrator's rationale is a classic rendering of the various issues that typically arise in connection with tax issues pertaining to various transactions (contemplated or otherwise):

DG blamed Claimant for failing to notify him of the regulatory approval that would trigger the need to timely transfer securities to a charity, thus enabling a tax deduction. Claimant testified that he was not a tax advisor and Respondent did not provide any advice about regulatory approval, thus he was unable to provide such advice to DG. Relying on Claimant for such important information was not appropriate. DG, a lawyer himself, should have sought tax advice from a tax attorney or accountant. Moreover, I find credible Claimant's testimony that he advised DG to obtain a tax expert. DG is incorrect in concluding that Claimant's recommendation to consult with a tax expert constituted tax advice. Further, I note that the complaint was dropped by DG, even though he was offered a small settlement.

In a FINRA Arbitration Statement of Claim filed in September 2020, associated person Claimant Brough sought the expungement of customer dispute information from the Central Registration Depository ("CRD"). Respondent Wedbush generally denied the allegations, asserted various affirmative defenses, and opposed Claimant's requested expungement. Sole FINRA Arbitrator Phillip J. Glick found pursuant to FINRA Rule 2080 that the customer's claim, allegation or information is false and recommended expungement. The Arbitrator offered a thoughtful, compassionate, and compelling rationale:

The Customers were financially successful business owners who understood the guidance they were given by Claimant. His guidance was consistent with the risks the Customers found acceptable after being fully briefed on the risks attendant to the Customers' investment decisions. When the market crashed, the Customers' account also declined. Claimant could not anticipate the market decline. Claimant acted in good faith at all times.

Respondent presented a case that if true, would assess much fault against Claimant. However, in the underlying arbitration case, the Answer to Statement of Claim ("2010 Answer") agreed with Claimant's case, as now presented. This 2010 Answer was an analytical and thorough defense of Claimant. When asked how this apparent paradox could exist, Respondent's counsel replied that the 2010 Answer was a general denial, awaiting discovery and proof. On the contrary, the 2010 Answer was detailed and well researched. The attorney who filed it was duty bound, as are all attorneys, to only file documents in good faith. It is not credible that the 2010 Answer was not reflective of Respondent's actual belief at the time. Nothing presented at the expungement hearing contradicted that belief. 

Further, Rule 13206 of the Code has no application here. Simply put, the matter for which expungement is sought is still on Claimant's BrokerCheck® report. Also, many cases, including Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (U.S. 2002), leave it up to arbitrators to determine this issue. There is no need to analyze the issue. The fact that Claimant's BrokerCheck® Report still shows the case is enough to establish eligibility. 

Bill Singer's Comment: As my readers know, I am no fan of mandatory FINRA arbitration, and have long argued that expungements ought not be adjudicated in an arbitration forum but before a regulatory panel. That being said, compliments to FINRA Arbitrator Glick, who is cited twice in today's column for his rendering of two superb rationales -- a winning Daily Double! As a personal aside, given the facts as set out in the Awards, I applaud UBS's decision to not oppose the requested expungement in Johnson; and, with equal fervor, I find Wedbush's opposition in Brough to be particularly dickish.
READ the FULL-TEXT of SEC Chair Gensler's Published Testimony
FINRA's NAC affirmed an OHO Decision's findings that Respondent had engaged in undisclosed PSTs, made false statements to his employer, and willfully caused the employer to file a misleading initial Form U4 and four misleading amendments. The NAC affirmed all OHO sanctions but eliminated the heightened supervision requirement. 

Former SCANA Corporation Chief Executive Officer/Chairman of the Board of Directors Kevin B. Marsh, 66, pled guilty in the United States District Court for the District of South Carolina to conspiracy to commit mail and wire fraud, and he was sentenced to 24 months in federal prison plus three years of supervision and fined $200,000; and per his Plea Agreement, he will pay $5 million in forfeiture.  As alleged in part in the DOJ Release:

Evidence presented to the Court showed that Marsh intentionally defrauded ratepayers while overseeing and managing SCANA's operations - including the construction of two reactors at the V.C. Summer Nuclear Station - so the company could obtain and retain rate increases imposed on its rate-paying customers and qualify for up to $2.2 billion in tax credits.  In late 2016, confronted with information that the project was delayed and that the tax credits were at risk, Marsh and others withheld that information from regulators in an effort to keep the project going.  Marsh's false and materially misleading statements, as well as other false and materially misleading statements made by his coconspirators, allowed SCANA to obtain and retain rate increases imposed on SCANA's rate-paying customers.
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According to evidence presented to the Court, Marsh has no prior criminal history, and has cooperated with federal and state investigators for more than a year in the ongoing investigation into criminal wrongdoing related to the V.C. Summer nuclear project.  Marsh's sentence reflects credit for his assistance in the ongoing investigation and prosecution of wrongdoing related to the failed nuclear construction project.

Marsh is the first defendant in the case to be sentenced in the investigation.  The United States Attorney's Office has additionally obtained felony guilty pleas from Stephen Byrne, former Executive Vice President of SCANA and former Chief Operating Officer of South Carolina Electric & Gas Company (SCE&G), and Carl Churchman, former Westinghouse Electric Corporation Vice President and the Project Director of the V.C. Summer Nuclear project. The United States Attorney's Office has also executed cooperation agreements with Dominion Energy and Westinghouse Electric Company, which together provide over $4 billion in ratepayer relief; and it has charged Jeffrey Benjamin, former Westinghouse Electric Company Senior Vice President, in a sixteen-count felony criminal indictment.
The CFTC issued an Order against ICE Clear Europe Limited ("ICEU") filing/settling charges for violating regulations requiring derivatives clearing organizations ("DCOs") to obtain written acknowledgment letters from a depository. The CFTC Order requires ICEU to pay a $450,000 civil monetary penalty and to cease and desist from any further violations of the CFTC regulations, as charged. As alleged in part in the CFTC Release:

[F]rom February 17, 2015 through August 12, 2019, ICEU, a DCO, opened six customer segregated accounts, each clearly titled to identify them as futures customer funds, without obtaining executed acknowledgment letters from the depository prior to or contemporaneously with the opening of those accounts, or at any time thereafter, and thus failed to meet the requirements of CFTC regulations. ICEU also failed to have adequate standards and procedures designed to protect and ensure the safety and assets belonging to clearing members and their customers, as required by CFTC regulations. 

Two of the accounts ICEU opened in April 2018 and May 2019 held customer funds in connection with tri-party reverse repurchase transactions pursuant to an investment services agreement. In aggregate, the two funded accounts collectively held more than $500 million at one time.

PLI Broker/Dealer Regulation and Enforcement 2021 (Speech by Gurbir Grewal, Director, SEC Division of Enforcement)
SEC Director of Enforcement Grewal offers his views on regulation and highlights some areas of likely priority. Notably, he recognizes the troubling issues involving Wall Street's recordkeeping practices [Ed: footnotes omitted]:

Recordkeeping violations may not grab the headlines, but the underlying obligations are essential to market integrity and enforcement. Take for example an enforcement action the Commission brought last year against a California broker-dealer for failing to preserve business-related text messages. The SEC's order found that some of the firm's registered representatives used their personal devices when communicating with each other, with firm customers, and with other third parties concerning, among other things, the size of orders, the timing of trades, and the pricing of certain securities. These messages were potentially responsive to a records request SEC staff made to the firm in an unrelated investigation and the firm's failure to retain and produce them directly impacted that investigation. 

Unfortunately, this is not an isolated example. We continue to see in multiple investigations instances where one party or firm that used off-channel communications has preserved and produced them, while the other has not. Not only do these failures delay and obstruct investigations, they raise broader accountability, integrity and spoliation issues. 

A proactive compliance approach requires market participants to not wait for an enforcement action to put in place appropriate policies and procedures to preserve these communications and anticipate these emerging challenges. Listen, many of these are not even new technological advances. After all, my 75 year-old mother has been texting my 13-year-old daughter for years, and I am certain many in this room have sent or received professional communications on personal devices or unofficial communications channels. You need to be actively thinking about and addressing the many compliance issues raised by the increased use of personal devices, new communications channels, and other technological developments like ephemeral apps.

New Jersey-based trader admits to involvement in options trading scheme (DOJ Release)

Mark Melnick pled guilty in the United States District Court for Northern District of Georgia to an Information charging him with conspiracy to commit wire and securities fraud. Previously in 2020, Bart Ross also pleaded guilty to conspiracy to commit wire and securities fraud. As alleged in part in the DOJ Release:

Between approximately October 2017 and January 2020, Melnick, Ross, and at least three other individuals, conspired to execute a scheme in which they traded securities-primarily short-term call options-in large, publicly traded companies (often Fortune 500 companies) based on materially false rumors about those companies that they generated and disseminated. These materially false rumors were intended to drive up the price of the securities (both the underlying stock and options).
. . .
Ross, who was formerly a registered broker with FINRA, and the co-conspirators generated the rumors. The conspirators would often refine a proposed rumor by exchanging drafts among themselves using the Trillian instant messaging application. Melnick was a day trader and T3 Live Senior Trading Strategist. Melnick often provided a "technical evaluation" on whether a particular false rumor would be successful. After a rumor was formulated and finalized, one of the co-conspirators, identified as Individual-1 in the criminal information, was responsible for disseminating the rumor via Trillian to multiple accounts, which would in turn result in the false rumor being disseminated over one or more market subscription services, including Trade The News, TradeXchange, and Benzinga, as well as various Twitter accounts.

Before Individual-1 disseminated the rumor, Melnick, Ross, and the other co-conspirators would acquire a position in the publicly traded company that was the subject of the materially false rumor. The co-conspirators typically purchased short-term call options before (sometimes just minutes or seconds before) Individual-1 disseminated the rumor. The conspirators often (but not always) purchased short-term call options because the price of such options is more sensitive than the price of the underlying stock. It was therefore possible for Melnick and the others to earn a greater percentage return by trading short-term call options rather than the underlying stock. Melnick and the conspirators profited from their scheme by selling the options (or other securities) after they increased in price. They would typically sell off their positions shortly after the rumor was disseminated (and after the price of the option or underlying stock had increased). Melnick also had an agreement with Individual-1 to share a portion of his profits from the scheme with Individual-1.

Melnick executed at least 102 trades based on the generation and dissemination of false rumors, including in March and April 2018, when Ross traded short-term call options in Disney and Ben Franklin Resources, respectively. Overall, Melnick earned approximately $374,000 in profits from the scheme.

In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC charged Mark Melnick 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. Melnick agreed to cooperate with the Enforcement Division and consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the federal securities laws and requiring him to pay $374,835 disgorgement plus prejudgment interest and a civil penalty; and, finally, he agreed to a penny stock bar and to be barred from the securities industry. Melnick pled guilty to to a parallel action. As alleged in part in the SEC Release:

[M]elnick received advance notice of companies about which another scheme participant planned to spread false rumors, and then shared the companies' names with subscribers to his online trading room. Melnick advised the subscribers that he had taken positions in the companies, while other scheme participants also spread the false rumors through real-time financial news services, financial chat rooms, and message boards. These false rumors caused the prices of the subject companies' securities to rise temporarily. Between January 2018 and January 2020, Melnick allegedly spread and/or traded around the false rumors over 100 times, generating more than $374,000 in illicit profits. The other scheme participants also traded around the false rumors, generating significant profits.