Securities Industry Commentator by Bill Singer Esq

October 8, 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?

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.
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.

FINRA Department of Enforcement, Complainant, v. Jorge A. Reyes, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2016051493704)
As asserted in part in the NAC Decision:

Jorge A. Reyes appeals an Extended Hearing Panel decision. The Hearing Panel found that Reyes, a former registered representative of former FINRA member CP Capital Securities, Inc. ("CP Securities"), engaged in conduct that, in several ways, violated the federal securities laws and FINRA Rules. The Hearing Panel's findings include that Reyes fraudulently and negligently misrepresented and omitted material facts when he recommended and sold to customers of CP Securities promissory notes issued through private placements by three limitedliability companies affiliated with the broker-dealer-CP US Income, LLC ("CP Income"), CP Venture Capital, LLC ("CP Venture I"), and CP Venture Capital II, LLC ("CP Venture II"). The Hearing Panel's findings include further that Reyes improperly used and converted funds, made recommendations in violation of reasonable-basis and customer-specific suitability requirements, and used marketing materials that violated the standards that apply to the public communications of FINRA members and their associated persons. For his misconduct, the Hearing Panel imposed a succession of bars-three in total-prohibiting Reyes from associating with any FINRA member in any capacity, and it ordered that Reyes pay more than $4 million in restitution. 

After a thorough review of the record, we affirm the Hearing Panel's findings, in part, and modify the sanctions it imposed.

. . .

We find that Reyes fraudulently misrepresented and omitted material facts, in violation of Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010. We also find that Reyes made unsuitable recommendations to a particular customer, in violation of FINRA Rules 2111 and 2010. We further find that Reyes converted funds, in violation of FINRA Rule 2010. Finally, we find that Reyes created and used marketing materials that violated the standards that apply to the public communications of FINRA members and their associated persons, in violation of FINRA Rules 2210 and 2010. Accordingly, we bar Reyes from associating with any FINRA member in any capacity for each of the four causes of misconduct for which we find Reyes liable under the federal securities and FINRA rules. These four separate bars are effective immediately upon issuance of this decision. We also affirm the Hearing Panel's order that Reyes pay restitution in the sum of $4,009,000 and hearing costs of $14,226.97, and we impose appeal costs of $1,600.31. 

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

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.
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.