Securities Industry Commentator by Bill Singer Esq

March 15, 2022







http://www.brokeandbroker.com/6340/sec-crs-denial/
After a whistleblower files a Form WB-APP with the SEC in order to secure a Whistleblower Award, far too much time elapses until the issuance of a Preliminary Determination by the Claims Review Staff. SEC Chair Gensler needs to reform the manner in which the CRS handles its docket, which seems to have mushroomed into somewhat unmanageable dimensions given the growing chorus of complaints from Claimants and their lawyers. Before you buy into the recent spate of self-serving press about the SEC Whistleblower Program, consider a recent case in which one deserving whistleblower was jerked around by the process.

https://www.sec.gov/news/statement/tm-staff-statement-20220314
With the major Wall Street indices gyrating hundred of points intraday, with a war raging in Ukraine, with Covid still extant, and with the markets unnerved by what the Fed may or may not do, the SEC imposes upon our time with yet another useless Statement. As to the substance of this officious nonsense, there is none; the Statement urges vigilance (oh my!) and counsels mindfulness (how deep -- how very deep!!). In this latest iteration of federal regulators having nothing better to do and thinking it's a wonderful idea to waste everyone's time with their half-assed views, I offer this garbage of an SEC Statement below -- oh, and don't forget to note the Staff's admonition that their pronouncement has no legal force or effect, doesn't alter or amend any law, and creates no obligations. What a sad example of folks sittin' around tryin' to come up with more ways to gild and embellish make-work!:

Staff of the Division of Trading and Markets ("Staff") urges broker-dealers and other market participants to remain vigilant to market and counterparty risks that may surface during periods of heightened volatility and global uncertainties.  It is always prudent that broker-dealers have strong risk management practices.  In particular, broker-dealers should be mindful of the following.
  1. Broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements. 

  2. Concentrated positions of prime brokerage counterparties pose particular concerns.  Staff urges broker-dealers to seek sufficient information to determine counterparties' aggregate positions in any markets that may experience liquidity concerns and work with the counterparties to mitigate risk. 

  3. Staff urges broker-dealers to stress test positions with the proper severity in light of current events and potential market movements, and act to manage the risk of the positions, particularly those that are concentrated, appropriately.

  4. Staff urges broker-dealers to monitor risk management limits, calibrated to the financial resources of the broker-dealer, closely intraday and escalate any breaches promptly to senior management.

This statement represents the views of the Staff.  It is not a rule, regulation, or statement of the Securities and Exchange Commission ("Commission"). The Commission has neither approved nor disapproved its content.  This statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
My term as Commissioner expires in June of this year, and I have notified President Biden that I intend to step down from the Commission once my successor has been confirmed. Serving investors and the public as a Commissioner and as Acting Chair has been an extraordinary honor. My fellow Commissioners and the Commission staff are dedicated and tireless public servants, and working alongside them has been the privilege of a lifetime. Over the coming weeks and months, I will remain actively engaged in the Commission's critically important work, and I look forward to continued progress in advancing the Commission's regulatory agenda.

Bill Singer's Comment: I do not always receive announcements of an SEC Commissioner's departure with sadness. Far too many folks appointed to the role were not up to the task and sleep-walked through their tenure. In the case of Commissioner Lee, I am saddened to learn of her departure. She was a valuable voice at the SEC.

This case involves libel claims arising out of blog posts about plaintiff Harvey J. Kesner ("Kesner") by defendant Teri Buhl ("Buhl"). Kesner is an attorney who represented public companies embroiled in an alleged pump~and-dump stock-selling scheme that became the subject of an investigation by the Securities and Exchange Commission ("SEC"). Kesner's role in his clients' misdeeds was the subject of various unflattering media reports. These led Kesner to bring this libel suit against Buhl, a frequent blogger and investigative journalist focused on financial reporting, Dow Jones & Company, Inc. ("Dow Jones"), and William Alpert ("Alpert"). Kesner's claims against the latter two were based on an October 2018 article Alpert wrote for the Dow Jones magazine Barron's. 

The Court previously dismissed in its entirety Kesner's libel claims against Dow Jones and Alpert, and in principal part Kesner's libel claims against Buhl, for failure to state a claim. See Kesner v. Dow Jones & Co., Inc., 515 F.Supp.3d 149, 158 (S.D.N.Y. 2021), appeal dismissed (2d Cir. Apr. 16, 2021). The Court left standing Kesner's claims only to the extent that Buhl, in three of her many blogs and tweets on the subject, had accused Kesner of criminal activity. Before the Court now is Buhl's motion for summary judgment as to the three surviving claims against her. Also before the Court is Kesner's motion to dismiss a counterclaim that Buhl brought during discovery, asserting a violation of New York Civil Rights Law § 70-a.

For the reasons that follow, the Court grants both Buhl's summary judgment motion and Kesner's motion to dismiss. 

Following a seven-day jury trial in the United States District Court for the Western District of Kentucky, Robert J. Bondonno was convicted of five counts of wire fraud, one count of mail fraud, one count of conspiracy to launder money, and 27 counts of promoting money laundering.  The jury found Bondonno not guilty on four counts of money laundering concealment. As alleged in part in the DOJ Release;

[B]ondonno, age 66, created and distributed investment materials to potential investors containing materially false statements and omissions regarding investment opportunities in the Wichita Project LLC and BHD International, Inc., also referred to as the Phoenix Project.  He and co-defendants contacted would-be investors and made false representations about returns on investment and how the investment funds would be used.  The materials purported to fund the rehabilitation for drug and alcohol in Wichita, Kansas and Phoenix, Arizona.  Between 2017 to 2019, Bondonno, John Ainsworth, Gregory Dawkins, and Courtland Van Oden, contacted investors to solicit investment funds, and they split the proceeds between themselves and Bondonno, with no money going toward the stated purpose of the investment.  Oden, Dawkins, and Ainsworth all previously pleaded guilty to felony offenses associated with the fraud. 

Court records showed that Bondonno controlled the incoming investment funds through bank accounts he created and controlled. Bondonno and co-conspirators used false names, fraudulent and misleading investment materials, and made false oral representations to investors in Kentucky, Maryland, and California.  Bondonno brought in more than $519,000 in connection with the investment and spent seventy percent of the funds on himself, with the remaining funds being used to pay co-conspirators through nominee entities and false names.  Bondonno used information associated with actual rehab centers operating in Kansas and Arizona to defraud investors.  No money was ever provided to those facilities or paid back to investors.

One of the investor victims was over 95 years old and resided in Kentucky.  Bondonno and co-conspirators convinced the investor and another investor to transfer their individual retirement accounts to his control to invest in the Wichita Project LLC.  Court records show that Bondonno and co-defendants split proceeds and used the remaining funds for personal use with, no money going to an investment.

https://www.justice.gov/usao-nj/pr/union-county-investment-advisor-arrested-stealing-client-money
https://www.justice.gov/usao-nj/press-release/file/1483156/download, Mario E. Rivero Jr. was charged with two counts of wire fraud, one count of investment advisor fraud, and one count of securities fraud. As alleged in part in the DOJ Release:

From April 2018 through November 2020, Rivero, while serving in his capacity as an investment advisor employed by a large brokerage firm, misappropriated at least $529,870 from four clients. Rivero, who had been entrusted to manage client funds responsibly, instead perpetrated a scheme to defraud multiple clients. He obtained his clients' money under the fraudulent pretense that he would invest the funds, but instead, Rivero unlawfully diverted the funds to enrich himself and others.

https://www.justice.gov/usao-or/pr/idaho-man-pleads-guilty-role-tribal-fraud-scheme
Roderick Ariwite, 66, the former Chief Executive Officer of the Warm Springs Economic Development Corporation ("WSEDC") pleaded guilty in the United States District Court for the District of Oregon to theft of funds from a tribal organization and interstate transportation of a security taken by fraud. As alleged in part in the DOJ Release:

[WSEDC], also known as Warm Springs Ventures (WSV), is a Tribal organization owned and operated by the Warm Springs Tribes. WSV operates as the management organization for several Tribal business entities, including the Warm Springs Construction Enterprise (WSCE).

Ariwite and an accomplice, Thomas Valentino Adams, 49, a Nevada resident and the former manager of WSCE, created a construction company called Warbonnet Construction Services LLC. While drawing tribal salaries and travel reimbursements, Ariwite and Adams engaged in work projects for Warbonnet. In 2018, Ariwite and Adams used tribal funds to hire a subcontractor for a Warbonnet project and submitted vouchers for expenses they incurred on behalf of themselves and Warbonnet, which were reimbursed with tribal funds. In total, Ariwite and Adams' scheme cost the Warm Springs Tribes more than $50,000.

On September 24, 2020, a federal grand jury in Portland returned a six-count indictment charging Ariwite and Adams with conspiracy and theft of funds from a Tribal organization. In a separate indictment, Ariwite was charged with one count of interstate transportation of a security taken by fraud.

Ariwite faces a maximum sentence of 15 years in prison, a $500,000 fine and three years' supervised release. He will be sentenced on June 6, 2022 before U.S. District Court Judge Michael W. Mosman.

As part of his plea agreement, Ariwite has agreed to pay $39,613 in restitution to the Warm Springs Tribes and $3,000 to an unnamed adult victim.

On August 23, 2021, Adams pleaded guilty to theft of funds from a Tribal organization. He will be sentenced on March 29, 2022 before Judge Mosman.

https://www.finra.org/sites/default/files/fda_documents/2019060648701
%20StockKings%20Capital%20LLC%20CRD%20164445
%20Gregory%20Antonius%20Lewis%20CRD%202793976
%20Order%20Accepting%20Offer%20jlg.pdf
In response to the filing of a Complaint on June 28, 2021, by the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement, Respondents StockKings Capital LLC and Gregory Antonius Lewis submitted an Offer of Settlement dated March 3, 2022, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, settling Respondents consented to the entry of findings and violations and to the imposition of the sanctions; and, accordingly FINRA imposed upon StockKings a Censure and a $15,000 fine; upon Lewis a seven-month suspension from association with any FINRA member in any capacity; and upon the Respondents in a joint and several manner a $85,000 fine. As set forth in the "Summary" portion of the FINRA Order:

Since 2013, Gregory Antonius Lewis has been the founder, majority owner, and Chief Executive Officer (CEO) of FINRA member StockKings Capital LLC ("StockKings Capital" or the "Firm"). From the time he formed StockKings Capital, Lewis has maintained financial and decision-making control over the Firm.

In 2015, Lewis began raising funds for a business that he told potential investors would aggregate and analyze investor portfolios on a financial technology platform. In a series of unregistered, private securities offerings from 2015 through 2019, Lewis raised more than $2.7 million for this business. However, Lewis never launched this platform. 

In connection with his solicitation efforts, from November 2016 to December 2018, Lewis and the Firm created and transmitted investment materials that made false, exaggerated, misleading, promissory, and unwarranted claims about StockKings Holdings, Inc. ("StockKings Holdings"), StockKings Capital, and StockKings.com-the platform they were purportedly developing. (StockKings Holdings and StockKings Capital are referred to collectively as "StockKings.") In these documents, Lewis and StockKings: falsely claimed they had received a patent; overstated the progress StockKings had made toward bringing its platform to market; falsely claimed the StockKings.com platform was stalled due to a FINRA materiality consultation; and made baseless and unwarranted valuation claims and revenue projections. As a result, StockKings Capital and Lewis violated FINRA Rules 2210(d)(1) and 2010. 

Separately, from January 2017 through September 2019, Lewis used over $42,000 of StockKings Capital funds to pay for personal expenses. Lewis directed the Firm's FINOP to misclassify those expenses as business expenses of the Firm. As a result, Lewis caused the Firm to maintain inaccurate books and records, which were in turn used to create FOCUS reports that inaccurately understated Lewis's compensation and overstated the Firm's expenses. By causing StockKings Capital to maintain inaccurate books and records, Lewis violated FINRA Rules 4511 and 2010. By failing to maintain accurate books and records, StockKings Capital violated Section 17(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 17a-3 and 17a-5 thereunder, and it violated FINRA Rules 4511 and 2010. 

Finally, StockKings Capital failed to make all of the required disclosures with respect to the intended use of proceeds, offering expenses, and the amount of selling compensation to be paid in its offering documents in 2015 and 2018 and, relatedly, failed to timely file offering documents with FINRA for two separate member private offerings in 2015 and 2018. As a result, StockKings Capital violated FINRA Rules 5122 and 2010.

Bill Singer's Comment: Compliments to FINRA on a beautifully written Settlement Offer. Frankly, a compelling read involving some very interesting issues. A must-read for lawyers and compliance staff involved with private placements. Also, the sanctions imposed seem appropriate balanced given the underlying issues and conduct. 
https://www.finra.org/sites/default/files/fda_documents/2020065149802
%20Vorpahl%20Wing%20Securities%20CRD%2047548%20
Tim%20James%20Vorpahl%20CRD%201457312%20AWC%20jlg.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, Vorpahl Wing Securities and Tim James Vorpahl submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Vorpahl Wing Securities has been a FINRA member firm since 1999 with about four registered representatives; and that Tim James Vorpahl was first registered in 1986, and has been registered with Vorpahl Wing Securities since 1999 and is the firm's Owner/President/Chief Compliance Officer. In accordance with the terms of the AWC, FINRA found that Vorpahl Wing and Vorpahl violated FINRA Rules 3110(a) and (b) and 2010. FINRA imposed upon Vorpahl Wing a Censure, $25,000 fine, and $35,223.82 restitution plus interest. FINRA imposed upon Time Vorpahl a $7,500 fine, a three-month suspension from associating with any FINRA member in all Principal-only capacities; and an undertaking to complete 20 hours of continuing education concerning supervisory responsibilities. As alleged in part in the AWC:

During the relevant period, Vorpahl Wing's WSPs required Vorpahl to establish and maintain a supervisory system and WSPs reasonably designed to achieve compliance with FINRA's suitability rule, including the obligation to detect and review for unsuitable and excessive trading. In accordance with the firm's system and WSPs, Vorpahl was the firm's designated principal responsible for supervising for potentially unsuitable and excessive trading, which included, but was not limited to: reviewing Daily Activity Reports containing trade blotter information, daily order tickets, and monthly exception reports, known as Monthly Active Account Reports. The Monthly Active Account Reports identified, among other things, accounts with: (i) greater than 10 trades per month; and (ii) commissions greater than $1,200 per month. 

The Monthly Active Account Reports included both the annualized turnover rates and the commission-to-equity ratios for the current month, the past three months, and the past 12 months. The reports also included the total number of trades, and total commissions for the same time periods. 

Notwithstanding the inclusion of turnover rates and commission-to-equity ratios, as well as other information contained in these reports, Vorpahl Wing and Vorpahl failed to establish WSPs reasonably designed to specify how Vorpahl, the firm's direct supervisor for the former registered representative and the firm's other registered representatives, should review transactions in customer accounts for potentially unsuitable and excessive trading. For example, during the relevant period, the firm had no WSPs: (i) addressing or establishing thresholds for annualized turnover rates and cost-to-equity ratios; (ii) specifying criteria for identifying and investigating active or potentially excessive trading; or (iii) addressing when the supervising principal (i.e., Vorpahl) should contact customers to verify whether trading in their accounts was acceptable.

. . .

During the relevant period, Vorpahl was the former registered representative's direct supervisor and was responsible for reviewing and supervising the former registered representative's trading activity. As set forth below, Vorpahl identified red flags indicating that the former registered representative was recommending unsuitable and excessive trading in two customer accounts but failed to reasonably respond to the red flags. Customers 1 and 2 were retired and Customer 1 was a senior customer. 

Specifically, Vorpahl Wing and Vorpahl were aware of, but failed to respond to, the following red flags that should have alerted them to the former registered representative's trading recommendations involving potentially unsuitable and excessive trading: 
  • the accounts appeared on the firm's Monthly Active Account Reports (exception reports) and reflected high annualized turnover rates and commission-to-equity ratios; 
  • n-and-out trading occurred in the accounts-i.e., the sale of all or part of the securities in an account and the reinvestment of the sales proceeds in other securities, followed by the sale of newly acquired securities; 
  • the customers' investment objectives and risk tolerance were inconsistent with the short-term trading activity occurring in their accounts; and 
  • the customers were sustaining losses due to the former registered representative's unsuitable and excessive trading. 
Vorpahl Wing and Vorpahl failed to take any reasonable action in response to the red flags associated with the former registered representative's unsuitable and excessive trading in the customers' accounts. While Vorpahl sent certain form letters to customers, the letters did not reflect that the customers' accounts were being excessively traded, nor did the letters quantify the number of trades or the costs incurred as a result of the former registered representative's trading. 

The two customer accounts at issue had annualized turnover rates from 6.49 to 6.78 and cost-to-equity ratios ranging from 20.68% to 24.46%. And, as a result of the former registered representative's unsuitable and excessive trading, the customers collectively paid $35,223.82 in commissions and other costs. 

Based on the foregoing, Vorpahl Wing and Vorpahl failed to reasonably supervise the trading activities of the former registered representative by failing to reasonably respond to red flags indicative of unsuitable and excessive trading. 

Bill Singer's Comment: Compliments to FINRA on a very well-crafted AWC replete with content and context sufficient to make the published document intelligible and a useful lesson for industry compliance professionals. Really nice job!

https://www.finra.org/sites/default/files/fda_documents/2021069363301
%20Aegis%20Investments%2C%20Inc.%20CRD%2016033%20AWC%20jlg.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, Aegis Investments, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Aegis Investments, Inc. has been a FINRA member firm since 1985 with about seven registered representatives. In accordance with the terms of the AWC, FINRA found that Aegis Investments violated FINRA Rules 3310(c) and 2010. FINRA imposed upon the firm a Censure and $7,500 fine. As alleged in part in the AWC:

Although Aegis Investments conducted quarterly testing of its AML compliance program between 2011 and 2020, the test was performed by a registered representativewho was supervised by, and reported to, the firm's AML Compliance Officer and therefore was not "independent" as required by FINRA Rule 3310(c). Because the testing focused on reviewing transactions for unusual activity and did not evaluate the firm's written AML procedures or compliance program, Aegis Investments also failed to conduct a risk-based review of its AML program and its compliance with the Bank Secrecy Act. 
= = =
Footnote 2: The individual became registered as a General Securities Principal in 2014. 

In response to the AWC, Respondent Aegis submitted this:

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff.

Immediately upon learning from the FINRA examiners that the person assigned to conduct the AML test was not qualified to perform the independent AML test, Aegis hired a qualified outside independent firm to conduct the independent AML annual audit. A contract was signed on July 20, 2021 for the current year and each year going forward. The audit was completed in August 2021. The auditor's recommendations for the written supervisory procedures and training were implemented in September 2021. A date has already been determined for the 2022 audit.

Bill Singer's Comment: As close to "garbage" regulation as I have come across. As FINRA would have us believe, it has a member firm engaged in quarterly AML testing from 2011 to 2020 -- let's call that nine years time four quarters, or, 36 quarterly AML tests. How effective is FINRA's oversight of its membership? Apparently not all that much because the AWC asserts that "This matter originated from FINRA's 2021 cycle examination of Aegis Investments. " So, lemme see, Wall Street's largest self-regulatory-organization failed to notice that an unsupervised rep lacking the "independent" status promulgated under FINRA Rule 3310(c) was conducting the AML testing. Worse, FINRA is actually fining the member firm in 2022 for conduct going back 11 years to 2011 -- as if, what, that's effective regulation? All of which renders this AWC something more akin to a speed trap on Wall Street rather than effective, pre-emptive oversight of the industry.