The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

February 1, 2022










http://www.brokeandbroker.com/6256/robinhood-finra-arbitration/
By now, you'd think that Wall Street's regulatory community would want something akin to full disclosure to the investing public about successful public customer lawsuits against Robinhood. Certainly, you'd think that FINRA Dispute Resolution Services is mindful of the clamor surrounding Robinhood: meme stocks, gamification, payment for order flow, systems outages. Going by the lack of a fact pattern and rationale in a recent public customer arbitration against Robinhood, FINRA seems to think that disclosing nothing is sound public advocacy. Ah yes, FINRA, the Sheriff of Nothing-ham, and a modern-day Robinhood!

In re: JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION (This Document Relates to the Robinhood Tranche) (Order, United States District Court for the Southern District of Florida ("SDFL"), 21-02989 / January 27, 2022)
https://brokeandbroker.com/PDF/RobinhoodShortSDFL220127.pdf
SDFL granted Defendants' Motion to Dismiss the Robinhood Tranche Complaint, and, accordingly, dismissed with prejudice the Amended Consolidated Class Action Complaint. In part the SDFL Order offers this background;

ORDER 

THIS CAUSE came before the Court on the Motion to Dismiss the Robinhood Tranche Complaint [ECF No. 421] filed by Defendants Robinhood Markets, Inc.; Robinhood Financial LLC; and Robinhood Securities, LLC (collectively, "Defendants" or "Robinhood") on October 15, 2021. Plaintiffs filed a Response in Opposition [ECF No. 436], and Defendants filed a Reply [ECF No. 439]. The Court has carefully considered the Amended Consolidated Class Action Complaint [ECF No. 409], the parties' written submissions, the record, and applicable law.

INTRODUCTION 

This case is about meme stocks.1 In January 2021, scores of retail investors rushed to purchase stocks that hedge funds and institutional investors had bet would decline in value, causing a dramatic increase in those stocks' share prices. The mass rush to purchase these "meme stocks" led to a highly volatile securities trading market, with the prices of certain stocks varying wildly by the hour. 

For securities brokers who execute investor trades, the regulatory environment became correspondingly unpredictable. In the securities trading industry, registered clearing brokers must meet daily deposit requirements set by self-regulatory organizations. The amount clearing brokers must deposit each day depends on the level of volatility in the securities they trade. The purpose of deposit requirements is to stabilize the marketplace and reduce the risk that market participants will prove unable to meet financial obligations related to securities trades. 

When meme stock share prices took off in January 2021, regulators reacted. In a span of three days, Robinhood Securities, a clearing broker, incurred both a deposit surplus of $11 million and a deposit deficit of over $3 billion. These oscillating collateral requirements were driven primarily by Robinhood customers' concentrated positions in meme stocks. Robinhood Securities proved able to meet its daily deposit requirements each day up to January 28, 2021. 

Still, it and its affiliates - parent company Robinhood Markets and introducing broker Robinhood Financial - grew concerned about the rapidly changing circumstances. It then made the fateful decision to restrict purchases of the meme stocks on the Robinhood platform for a week. That decision helped fix Robinhood's compliance quandary. But, Robinhood customers say, it also forced share prices of the meme stocks into a steep decline. 

Several of those customers sued Robinhood, and their suits were consolidated into this Multi-District Litigation. 2 Robinhood now moves to dismiss. The Motion to Dismiss challenges whether any of Plaintiffs' seven claims is viable. 
= = = = =
Footnote 1:  The Securities and Exchange Commission ("SEC") recently defined "meme stocks" as stocks that "experienced a dramatic increase in their share price in January 2021 as bullish sentiments of individual investors filled social media." SEC, Staff Report on Equity and Options Market Structure Conditions in Early 2021, at 2 (Oct. 28, 2021), https://www.sec.gov/files/staff-report-equity-options-market-structionconditions-early-2021.pdf

Footnote 2: The Plaintiffs are Andrea Juncadella, Edward Goodan, William Makeham, Mark Sanders, Jaime Rodriguez, Patryk Krasowski, Cody Hill, Sammy Gonzalez, Joseph Daniluk, Jonathan Cornwell, Paul Prunean, and Julie Moody. (See Am. Compl. ¶¶ 29-84).

In offering its rationale, in part, SDFL summarizes that:

The result in this case comes down to a simple truth: both California and Florida law require courts to respect and enforce the terms of valid contracts, even when one party to a contract boasts greater bargaining power. Plaintiffs have not argued or alleged that the Customer Agreement is unenforceable. Thus, both California and Florida law require holding Plaintiffs to the Agreement's terms. Those terms permitted Defendants to do precisely what they did.

Plaintiffs' request to enlarge Defendants' obligations beyond those contained in the Agreement is understandable but misguided. California and Florida law each carve out a vital gatekeeping function for courts faced with novel tort claims. Indeed, both California and Florida recognize that tort law is an imperfect - and often, an undesirable - mechanism for allocating financial risk and responsibility. Unlike contract law, which encourages parties to allocate risks related to future events, tort law concerns itself with after-the-fact determinations of fault. Expanding tort law at contract law's expense may cause uncertainty. And the uncertain threat of ruinous tort liability can discourage behavior that benefits society. That is why California, Florida, and virtually every other state in the nation make a point of setting "[m]eaningful limits" on tort liability. S. Cal. Gas Leak Cases, 441 P.3d at 896 (alteration added). One of those limits is a healthy skepticism of tort claims better suited for resolution by contract law - for example, claims for purely economic losses, like those asserted by Plaintiffs here.

No doubt, Plaintiffs were gravely disappointed when Robinhood suspended purchases of the meme stocks and their holdings declined in value. But the law does not afford relief to every unfulfilled expectation. Sometimes, it requires "denying recovery in negligence cases like this one even though purely economic losses inflict real pain." Id. Plaintiffs' claims fail because entertaining them would sanction a departure from the parties' own agreement and California and Florida tort-law principles. For that reason, the Amended Complaint must be dismissed.

at Pages 64 - 65 of the SDFL Order

https://www.justice.gov/usao-sdny/pr/british-citizen-sentenced-over-11-years-prison-helping-design-and-operate-fraudulent
After a week-long jury trial in the United States District Court for the Southern District of New York, James Moore was found guilty of wire fraud and conspiracy to commit wire fraud; and he was sentenced to 140 months in prison.  As alleged in part in the DOJ Release:

In late 2009, MOORE partnered with Renwick Haddow, who is also a British citizen, to sell investments in a hotel scheme in which investors lost money.  Haddow had been disqualified as a director of any U.K. company for eight years, and later sued by the Financial Conduct Authority, a British regulator, for operating investment schemes through misrepresentations that lost investors substantially all of their money.  These sanctions and lawsuit were publicized extensively online.

Beginning in 2015, MOORE chose to partner with Haddow again, this time to solicit investments into Bar Works through material misrepresentations concerning, among other things, the identity of Bar Works' management and the financial condition of that company. 

In order to conceal his role at Bar Works because of the negative publicity on the internet related to past investment schemes and government sanctions in the United Kingdom, Haddow adopted the alias "Jonathan Black."  Notwithstanding Haddow's control over Bar Works, Moore and others knowingly distributed the Bar Works offering materials listing Black as the chief executive officer of Bar Works and claiming that Black had an extensive background in finance and past success with start-up companies.  As MOORE well knew, "Jonathan Black," was an entirely fictitious person, created to mask Haddow's control of Bar Works. 

Among other things, MOORE helped devise and distribute pitch materials that contained the misrepresentations.  MOORE and an affiliated Spanish-based company, United Property Group, coordinated a substantial sales force to recruit investors knowing that the materials contained the falsehood.  MOORE advised Haddow as to how to continue to conceal the truth concerning the identity of "Jonathan Black," and affirmatively represented to potential sales partners that he was communicating with CEO "Jonathan Black."  MOORE also advised Haddow how to evade foreign law enforcement authorities.  MOORE personally received approximately $1.6 million from Bar Works before helping to launch a competing co-working space investment project. 

MOORE repeatedly lied to the United States Securities Exchange Commission (SEC) and federal law enforcement agents to cover up his role in the Bar Works scheme. On August 11, 2016 - while the Bar Works scheme was still operating - MOORE participated in a recorded phone interview with the SEC and reiterated that Jonathan Black was a real person who he understood to be the CEO of Bar Works, notwithstanding knowing that Black was fake. MOORE claimed that he never asked to speak to Jonathan Black, even though in the prior months, MOORE had been misrepresented to multiple agents that he was working closely with Black.

On February 15, 2017, MOORE was interviewed by Internal Revenue Service (IRS) agents following his arrest for a separate investment scheme in connection with a development project he was promoting in Florida. In a videotaped interview, MOORE lied and told agents he had not done anything for money since 2010, even though he had gotten approximately $1.6 million from Bar Works alone.

Moore's conviction is his second federal felony conviction related to property investments.  He was previously convicted in 2018 of misprision of a felony for his role in a property investment fraud in Florida, for which he was sentenced to 18 months in prison.

In addition to the prison term, MOORE, 60, was sentenced to 3 years of supervised release.  MOORE was also ordered to pay restitution of $57,579,790.00, forfeiture of $1,599,257.46, and a fine of $50,000.

Renwick Haddow, 53, pled guilty on May 23, 2019, to one count each of wire fraud and wire fraud conspiracy relating to the Bar Works scheme, and one count each of wire fraud and wire fraud conspiracy relating to a separate investment scheme involving Bitcoins.  Haddow's sentencing is scheduled for April 8, 2022.

Savraj Gata-Aura, 35, pled guilty on November 18, 2019, to one count of wire fraud conspiracy for his participation in the scheme, and was sentenced to 48 months in prison on July 27, 2020, by Judge Jed. S. Rakoff

The United States District Court for the Southern District of Florida entered a Restraining Order to preserve records and freeze assets controlled by defendants Rajiv Patel, a/k/a Ravi Patel, a/k/a/ Raj Patel (Patel) and Bluprint LLC (Bluprint). 
https://www.cftc.gov/media/6931/enfpatelcompliant011822/download In a Complaint filed on January 18, 2022, the CFTC alleged that, from approximately June 2019 to the present, Bluprint and Patel, its owner and managing director, defrauded at least 16 pool participants of approximately $9.8 million through a commodity pool that purported to trade commodity futures and options. On January 28, 2022, the Court cancelled a preliminary injunction hearing for January 31, 2022 due to the death of Patel.  As alleged in part in the CFTC Release:

According to the complaint, the defendants misappropriated pool participants' funds and used the funds to pay personal expenses and to trade, among other things, commodity futures and options in personal trading accounts. The trading was unprofitable and resulted in significant losses of the pool participants' funds. The defendants, however, falsely reported to pool participants that their investments were accruing interest. The complaint also alleges that in order to conceal their fraud, the defendants made false statements to an introducing broker and to futures commission merchants that held the defendants' trading accounts and pool participants' funds. The complaint further alleges that the defendants failed to comply with CFTC registration requirements and disclosure and reporting requirements. 

https://www.justice.gov/usao-ma/pr/cardinal-health-agrees-pay-more-13-million-resolve-allegations-it-paid-kickbacks
Pursuant to a Settlement Agreement filed in the United States District Court for the District of Massachusetts https://www.justice.gov/usao-ma/press-release/file/1467046/download pharmaceutical distributor Cardinal Health, Inc. agreed to pay $13,125,000 to resolve allegations that it had violated the False Claims Act by paying "upfront discounts" to its physician practice customers, in violation of the Anti-Kickback Statute. The False Claims Act settlements resolve allegations originally brought in lawsuits filed by qui tam whistleblowers, and those relators will receive about $2.6 million of the recovery. As alleged in part in the DOJ Release:

The Anti-Kickback Statute prohibits pharmaceutical distributors from offering or paying any compensation to induce physicians to purchase drugs for use on Medicare patients. When a pharmaceutical distributor sells drugs to a physician practice for administration in an outpatient setting, the distributor may legally offer commercially available discounts to its customers under certain circumstances permitted by the Office of Inspector General for the Department of Health and Human Services (HHS-OIG). HHS-OIG has advised that upfront discount arrangements present significant kickback concerns unless they are tied to specific purchases and that distributors maintain appropriate controls to ensure that discounts are clawed back if the purchaser ultimately does not purchase enough product to earn the discount. According to facts that the company has acknowledged in the settlement agreement, Cardinal Health, Inc. failed to meet these requirements because the upfront discounts it provided to its customers were not attributable to identifiable sales or were purported rebates which Cardinal Health's customers had not actually earned.  

In the Matter of Horter Investment Management, LLC and Drew K, Horter (SEC Order, Invest. Adv. Act Rel. No. 5953, Admin. Proc. File No. 3-20531)
https://www.sec.gov/litigation/opinions/2022/ia-5953.pdf
The SEC Division of Enforcement requested the issuance of a subpoena compelling the appearance of an employee of the Respondents at a scheduled Deposition; however, Enforcement also represents that Respondents had agreed to make the employee available for said Deposition. All of which seems to render Enforcement's subpoena request a tad superfluous. Since bureaucracies tend to revel in superfluousness, it was surprising to see that the Commission denied Enforcement's request. In a reassuring display of pragmatism and commonsense, the SEC Order explains in part that [Ed: footnotes omitted]: 

Rule 233 of the Commission's Rules of Practice provides that a deposition may be taken in proceedings under the 120-day timeframe, as is this matter, "upon written notice." The rule also states that attendance at such a deposition "may be ordered by subpoena issued pursuant to" Rule 232. Thus, the Rules of Practice provide for a procedure to compel attendance at a deposition, but do not require that a subpoena be issued for every deposition. Where, as appears to be the case here, the witness has been made available and there is no dispute over taking the witness's deposition, written notice without a request "for issuance of a subpoena made to the Commission, or any member thereof" is sufficient.  

https://www.sec.gov/news/press-release/2022-15
The SEC issued its annual "Staff Report on Nationally Recognized Statistical Rating Organizations" ("NRSROs"), which purports to provide a summary of the SEC staff's examinations of NRSROs and discussing the state of competition, transparency, and conflicts of interest among NRSROs. In reality, as is the case with far too many similar reports emanating from the federal regulator, it's beautifully prepared with graphics and charts but, ultimately, the effort comes off as disappointingly generic and offering little more than broad brushstrokes of non-specific issues. In part, the SEC Report asserts:

In past years, the SEC's Office of Credit Ratings (OCR) covered these subject areas in two separate annual reports. The combined report includes a variety of substantive and organizational changes to provide greater transparency about NRSROs and their credit ratings businesses, and the market more broadly.

"The oversight of Nationally Recognized Statistical Rating Organizations is critical to the Commission's focus on investor protection," said SEC Chair Gary Gensler. "The Office of Credit Ratings' work contributes to our efforts to promote accuracy in credit ratings and help ensure that credit ratings are not unduly influenced by conflicts of interest."

"OCR's examinations protect investors by scrutinizing NRSRO compliance with applicable laws and rules and identifying instances of non-compliance," said OCR Director Ahmed Abonamah. "The report provides a comprehensive and integrated overview of OCR's activities, demonstrating the exceptional work of my colleagues in their efforts to protect investors."

The report highlights the risk-based approach of OCR's examination program. As described in the report, in addition to the eight statutorily mandated review areas, OCR staff examined the NRSROs':
  • Consideration of ESG factors and products;
  • COVID-19 related risk areas;
  • Activities related to collateralized loan obligations, commercial real estate, and consumer asset-backed securities;
  • Adherence to policies, procedures, and methodologies with respect to rating low-investment grade corporate securities; and
  • Controls, policies, and procedures for ratings of municipal securities. . . .

FINRA Fines and Suspends Firm for Private Placement Suitability Information and Email Review
In the Matter of CIM Securities, LLC, Respondent (FINRA AWC 2019060957101)
https://www.finra.org/sites/default/files/fda_documents/2019060957101
%20CIM%20Securities%2C%20LLC%20CRD%20120852%20AWC%20sl.pdf
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, CIM Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that CIM Securities, LLC has been a FINRA member firm since 2002 with 11 registered employees and two branches. As alleged in part in the AWC's "Overview":

Between September 1, 2018, and February 23, 2020, CIM Securities failed to establish, maintain, and enforce written procedures (WSPs) reasonably designed to achieve compliance with FINRA Rules 2111 and 4512(a)(1)(D). As a result, Respondent failed to obtain required suitability information for customers investing in three private placement offerings and failed to document principal acceptance of customer accounts opened to invest in those offerings. Therefore, Respondent violated FINRA Rules 3110(a), 3110(b), 4512(a)(1)(D), and 2010. 

Between September 1, 2018, and February 23, 2020, CIM Securities also failed to establish a reasonable supervisory system for email review, including WSPs. Respondent also failed to enforce its WSPs for documenting email reviews between September 1, 2018, and July 31, 2019. As a result, Respondent violated FINRA Rules 3110(a), 3110(b), and 2010.   

In part, the AWC alleges that [Ed: footnotes omitted]:

Between September 1, 2018, and February 23, 2020, after receiving warnings from FINRA about its supervisory systems for obtaining and maintaining suitability information about customers and about documenting principal acceptance of new account forms for customers investing in Respondent's private placement offerings, Respondent's WSPs required that the underwriting principal or a designee "review each subscription agreement for the purchase of privately placed securities" and evidence the review with a signature. However, Respondent's WSPs. cited NASD Rule 2310, instead of FINRA Rule 2111, even though FINRA Rule 2111 superseded NASD Rule 2310 on July 9, 2012, and differs from Rule 2310 by requiring member firms to exercise reasonable diligence in ascertaining each customer's investment profile, including investment experience, investment time horizon, liquidity needs, and risk tolerance. Respondent cited NASD 2310 in the WSPs despite previous warnings from FINRA that the rule had been superseded by FINRA Rule 2111.
. . .  

Additionally, although there were no customer complaints or harm, two of the above-described customers and 15 additional customers, who collectively invested approximately $1.3 million in the private placements, provided information that suggested that the private placements may not he suitable for those customers. Specifically, ten of these customers stated that they had a moderate risk tolerance, six customers Stated that liquidity was "somewhat important," and 13 customers specified that they had limited time horizons for investing. 

In accordance with the terms of the AWC, FINRA imposed upon CIM Securities a Censure and $35,000 fine.

FINRA Fines and Suspends Rep for Outside Business Activities
In the Matter of Mark Giordano, Respondent (FINRA AWC 2019063042401)
https://www.finra.org/sites/default/files/fda_documents/2019063042401
%20Mark%20Giordano%20CRD%204052216%20AWC%20sl.pdf
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, Mark Giordano submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Mark Giordano entered the industry in 1999 and has been registered since January 2000 with Cetera Financial Specialists LLC. As alleged in part in the AWC:

Between 2002 and 2019, Giordano engaged in five non-securities related outside businesses activities for which he received compensation. He did not provide written notice or receive prior approval from the firm for any of those outside business activities. Two of the outside business activities relate to horse racing: since 2002, he has served as a part owner and Vice President of a company involving horse racing and breeding; and from 2016 to 2019, he was a part owner of a company involving horse racing. Three of the outside business activities relate to real estate: since 2005, he has served as a part owner and Vice President of a real estate rental company; from 2006 to 2019, he owned a real estate-flipping company; and between February 2017 and October 2018, Giordano engaged in a house-flipping venture to purchase, renovate, and sell two residential properties. Firm customers were involved in all but one of the outside business activities. 

These outside business activities were outside the scope of his relationship with Cetera. Giordano has never disclosed one of the ventures to Cetera and did not disclose the other four until September 2019. 

By virtue of the foregoing, Giordano violated NASD Rules 3030 and 2110 and FINRA Rules 3270 and 2010.  

In accordance with the terms of the AWC, FINRA imposed upon Giordano a $5,000 fine and a two-month suspension from associating with any FINRA member in all capacities.

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