The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

May 24, 2022











ENDORSED BY BILL SINGER,
publisher of the BrokeAndBroker.com Blog and the Securities Industry Commentator

From Stephen A. Kohn, Candidate for 2022 FINRA Small Firm Governor:

THE BULLIES ARE OUT TO GET US . . . And they're doing a good job of it!

I've been in this business for a long, long time; just under four decades. With the exception of a few months at a wire-house, I've always been a small firm guy. And, in all that time, one would think things would change, get better, or at least, stay the same.  But the mantra has NEVER changed, "GET RID OF THE SMALL FIRMS."

And, between the large firms, FINRA and the SEC, the bullies are unrelenting and keep whittling away at our sisters and brothers.

So, where are we? The small firm community is on its death bed.  Biased regulators are trying to engineer us out of existence through overblown rulebooks and biased regulation.  Given that FINRA is a membership organization, one would have hoped for some energetic opposition to the inevitable decline of some of the 90% of FINRA's membership -- look it up, the so-called FINRA Small Firms account for 90%-plus, and dwindling of the total number of member firms.  Where is the voice of the FINRA Board of Governors?  Sadly, it is a whisper if anything at all.  The Board seems beholding to the anti-Small Firm agenda of large firms, FINRA and the SEC.  Almost no Governor appears to have the inclination or the guts to take a stand that offers some relief to the little guys.

I have served you before and now, I need to get back on the Board of Governors, to again be your voice and to finish my work.

I am asking for your petition.  Get me on the ballot in this upcoming BOG election.

I make no promises to change what's been done.

My goal is to stop things from getting worse!

Please click the PandaDoc link below and sign my petition, get me on the ballot and back on the BOG to work for our common survival. 


Let me be your voice.

Stephen Kohn 
(303) 880-4304  Cell Phone

Stephen Kohn has been employed in the financial services industry since 1984. In 1996, he founded FINRA member firm Stephen A. Kohn & Associates, Ltd. ("SAKL")  On January 2, 2020, he passed ownership of SAKL to DMK Advisor Group, Inc. ("DMK"), still a small, Independent broker/dealer, catering to the needs of forty-one independent representatives and their clients, with office locations in five states, registered in forty-one and Puerto Rico.  
 
Stephen holds Series 7, 24, 53, 63, 72, 73, 79 and 99 registrations. He has the honor of having been elected to the FINRA Board of Governors in 2017, representing the Small Broker/Dealer Community.  He was also twice elected to the National Adjudicatory Council ("NAC") in 2009 and 2014. He serves as an Industry Arbitrator and has been elected to the District 3 Committee. 
 
Stephen graduated from C.W. Post College in 1964 with a BA degree. He has the distinction of having served in the United States Coast Guard.
 
Well known to those in the NASD and now FINRA small-firm community as a passionate and persistent advocate for small broker/dealers, who comprise more than 90% of FINRA membership, Stephen continues to speak out on behalf of his industry constituents and colleagues. He intends to remain active in the FINRA reform movement and urges all like-minded industry participants to reach out to him in full confidence concerning any and all matters.  

https://www.cftc.gov/PressRoom/PressReleases/8534-22
Glencore International A.G. of Switzerland, Glencore Ltd. of New York, and Chemoil Corporation of New York (collectively, "Glencore") settled a CFTC Order
https://www.cftc.gov/media/7291/enfglencoreorder052422/download that found that from 2007 to 2018, Glencore defrauded its counterparties, harmed other market participants, and undermined the integrity of the U.S. and global physical and derivatives oil markets. Pursuant to the Order,  Glencore will pay $1.186 billion, which consists of the highest civil monetary penalty ($865,630,784) and highest disgorgement amount ($320,715,066) in any CFTC case. Two parallel criminal cases were announced by the United States Department of Justic, and additional criminal charges were filed by the United Kingdom' Serious Fraud Office. As alleged in part in the CFTC Release:

The order finds that from as early as 2007 through at least 2018, Glencore sought to increase profits from its physical and derivatives oil products trading by manipulating or attempting to manipulate U.S. price-assessment benchmarks relating to physical fuel oil products, and related futures and swaps, in order to benefit Glencore's trading positions. As stated in the order, Glencore personnel engaged in this conduct with the specific intent to manipulate the price of fuel oil products in interstate commerce and to create artificial prices, and could and at times did create artificial prices. Glencore engaged in this scheme on hundreds of days in order to manipulate Platts price assessments connected to four fuel oil products, and associated derivatives, in three different United States geographic markets. 

The order further finds that Glencore's conduct also involved fraud and corrupt payments (e.g., bribes and kickbacks) to employees and agents of certain state-owned entities (SOEs), including in Brazil, Cameroon, Nigeria, and Venezuela, and misappropriation of confidential information from employees and agents of certain SOEs, including in Mexico. Glencore or its affiliates made the corrupt payments in exchange for improper preferential treatment and access to trades with the SOEs. Glencore's conduct was intended to and did secure unlawful competitive advantages in trading physical oil products and related derivatives to the detriment of its counterparties and market participants.

As reflected in the order, Glencore's unlawful conduct involved traders and other personnel throughout its oil trading group, including senior traders, desk heads, and supervisors up to and including the global head of the oil group, and resulted in hundreds of millions of dollars in improper gains.

Rockland County Man Sentenced To 7 Years For Ponzi-Like Securities Fraud Scheme Targeting Local Haitian Community (DOJ Release)
https://www.justice.gov/usao-sdny/pr/rockland-county-man-sentenced-7-years-ponzi-securities-fraud-scheme-targeting-local
After a jury trial in the United States District Court for the Southern District of New York, Ruless Pierre, 52, was convicted of securities fraud, wire fraud, and structuring offenses; and he was sentenced to 84 months in prison plus three years of supervised release and ordered to pay forfeiture in the amount of $3,701,893.91 and $2,030,337.32 in restitution. As alleged in part in the DOJ Release:

Investment Promissory Fraud

From at least November 2016 through October 2019, PIERRE solicited money from investors in Ruless Pierre Consulting Group ("RPCG") by falsely promising them that he would earn a 20% return on their initial investment every 60 days through stock trading (the "Promissory Note Fraud").  The investments were written down in documents known as "Investment Promissory Notes."  These investment contracts generally promised that the investor would be paid 20% interest every 60 days and that the investor could withdraw all funds from the investment with 30 days' notice.  Based on these documents and the false representations of PIERRE, the investors understood that their principal and interest were guaranteed.  

During the course of the investment fraud scheme, PIERRE fraudulently obtained over $2 million from approximately 100 investors.  After receiving money from investors, PIERRE deposited the money into one of his personal bank accounts or bank accounts of RPCG.  PIERRE then transferred the money to trading accounts, where he engaged in unprofitable day trading.  Despite his trading losses, PIERRE repeatedly and falsely represented to investors, including in investment statements containing fictitious balances, that the trading was profitable and that their investments were growing as promised.  In addition to losing their money, PIERRE also used investors' funds to pay for personal expenses, including luxury vehicles.  Additionally, PIERRE further concealed the truth from investors by using money obtained from new investors to make redemption payments to previous investors, in Ponzi-like fashion.

The Franchise Investment Fraud

Beginning in or about November 2018, PIERRE began to offer investors, including some individuals who invested in his Promissory Note Fraud, the opportunity to purchase partnership interests in a partnership that would run three fast-food franchise locations (hereinafter, the "Franchise Investment Fraud").   At the time, PIERRE did not own any of the fast-food franchises, but he was in discussions regarding purchasing them.  Each investment was memorialized in a document entitled "Silent Partnership Agreement." 

The Silent Partnership Agreements promised the investors a 5% monthly return on the investment, in addition to a 40% pro rata share of the quarterly gross operating profit.  The minimum investment was $5,000. 

The Silent Partnership Agreements further provided that PIERRE was the General Partner, and that he was responsible "for the complete management, control, and policies related to the operation and conduct of the business."

PIERRE received financial statements for the franchise locations, which showed minimal profits.  Nonetheless, PIERRE promised investors an unrealistic 5% monthly return on their investment.

In or about April 2019, PIERRE purchased one fast food franchise for approximately $50,000.  Pierre did not purchase the other franchises.

PIERRE deposited the fast-food franchise investors' money in various bank accounts, which commingled the funds from the Franchise Investment Fraud with the Promissory Note Fraud.  In Ponzi-like fashion, PIERRE fraudulently misappropriated some of the fast-food franchise investors' money to pay back investors in the Promissory Note Fraud.

In total, PIERRE raised at least $200,000 by selling the Silent Partnership Agreements to at least 18 investors.  Some of the investors were paid their five percent monthly distribution, but the vast majority of the investors were not been made whole.  The fast-food franchise went out of business in December 2019.

The Embezzlement Fraud Scheme and Structuring

In the another scheme, PIERRE embezzled money from his former employers.  From approximately 2007 until February 2016, PIERRE was the director of finance for two different hotels, which were owned by the same company ("Company-1").  One hotel was located in the Palisades, New York ("Hotel-1"), while the other was located in Armonk, New York ("Hotel-2") (collectively, "the Hotels").   As the director of finance, PIERRE was the signatory on several bank accounts held in the name of the management companies that managed the Hotels ("Management Companies"). 

After August 2018, PIERRE no longer worked at either Hotel-1 or Hotel-2, but he regularly wrote himself checks payable to cash from the Management Companies' bank accounts.  Specifically, from September 2018 through March 2019, PIERRE wrote over 70 checks to "cash" or "petty cash" from one of the bank accounts for Hotel-1, for over $300,000.

In addition, from March 2017 through 2019, PIERRE deposited large amounts of cash into his personal bank accounts in amounts that were generally less than $10,000.  The deposits were conducted at various bank locations and typically took place on the same day, consecutive days, or within a short period of time.  For example, in just seven months, from June 2018 through December 2018, PIERRE deposited approximately $225,612, through 138 cash deposits all under $10,000, into a bank account in the name of RPCG.

Former Art Dealer Sentenced To 7 Years For $86 Million Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-art-dealer-sentenced-7-years-86-million-fraud-scheme
Inigo Philbrick pled guilty in the United States District Court for the Southern District of New York to wire fraud; and he was sentenced to 84 months in prison plus two years of supervised release and ordered to pay a forfeiture of $86,672,790. As alleged in part in the DOJ Release:

From approximately 2016 through 2019, to finance his art business, PHILBRICK engaged in a scheme to defraud multiple individuals and entities in the art market located in the New York metropolitan area and abroad.  PHILBRICK made material misrepresentations and omissions to art collectors, investors, and lenders to access valuable art and obtain sales proceeds, funding, and loans (the "Fraud Scheme").  PHILBRICK knowingly misrepresented the ownership of certain artworks, for example, by selling a total of more than 100 percent ownership in an artwork to multiple individuals and entities without their knowledge; and by selling artworks and/or using artworks as collateral on loans without the knowledge of co-owners, and without disclosing the ownership interests of third parties to buyers and lenders. PHILBRICK furnished fraudulent contracts and records to investors to artificially inflate the artworks' value and conceal his scheme, including a contract that listed a stolen identity as the seller.

Over the years, PHILBRICK obtained over $86 million in loans and sale proceeds in connection with the Fraud Scheme.  Artworks about which PHILBRICK made these fraudulent misrepresentations in furtherance of the Fraud Scheme include, among others, a 1982 painting by the artist Jean-Michel Basquiat titled "Humidity," a 2010 untitled painting by the artist Christopher Wool, and an untitled 2012 painting by the artist Rudolf Stingel depicting the artist Pablo Picasso.  

By in or about the fall of 2019, PHILBRICK's Fraud Scheme began to come to light as various investors and lenders learned about the fraudulent records PHILBRICK had provided and the material misrepresentations and omissions he had made.  By in or about mid-October, a lender officially notified PHILBRICK that he was in default of approximately a $14 million loan, and by November 2019, various investors had filed civil lawsuits in multiple jurisdictions regarding PHILBRICK's Fraud Scheme in connection with various artworks.  At around the same time, PHILBRICK's art galleries in Miami and London closed, and PHILBRICK stopped responding to legal process.  PHILBRICK fled the United States shortly before public reporting began about the lawsuits.  A fugitive, PHILBRICK resided in Vanuatu from approximately October 2019 until he was arrested there on June 11, 2020, in connection with this case.   
https://www.sec.gov/litigation/litreleases/2022/lr25398.htm
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25398.pdf, the SEC charged Frank B. Glassner with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Parallel criminal charges were filed against Glassner. As alleged in part in the SEC Release:

[G]lassner, a long-time consultant to Kadmon, learned about Kadmon's impending acquisition by global biopharmaceutical company Sanofi S.A. in the course of his engagement to provide acquisition-related consulting services to Kadmon. According to the SEC's complaint, Glassner, within thirty minutes of first learning about the planned acquisition, reactivated access to a dormant brokerage account. Over the next three weeks, he used this confidential information to purchase Kadmon stock and call options in advance of the acquisition announcement on September 8, 2021, and to reap illicit profits totaling approximately $405,000. Glassner's alleged misconduct was detected by the SEC's Market Abuse Unit, which uses data analysis tools to uncover a variety of fraudulent trading schemes.

https://www.sec.gov/news/press-release/2022-86
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/ia-6032.pdf, BNY Mellon Investment Adviser, Inc. agreed to a Cease-and-Desist, a Censure, and to pay a $1.5 million penalty -- the sanctions reflect considerations of BNY Mellon Investment Adviser's prompt remedial acts and cooperation. The SEC Order found that BNY violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8, and Section 34(b) of the Investment Company Act. As alleged in part in the SEC Release:

[F]rom July 2018 to September 2021, BNY Mellon Investment Adviser represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case. The order finds that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.

https://www.finra.org/sites/default/files/fda_documents/2021069143901
%20Marcella%20Luz%20Cofre%20CRD%201507819%20AWC%20gg.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, Marcella Luz Cofre, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Marcella Luz Cofre was first registered in 2001, and by 2011, she was registered with Allstate Financial Services, LLC and also dually employed at an insurance affiliate.  In accordance with the terms of the AWC, FINRA imposed upon Marcella Luz Cofre a $5,000 fine and a two-month suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC: 

[A]llstate's written supervisory procedures prohibited employees from signing documents on behalf of another person, even to accommodate a customer. In October 2019, Cofre falsified a customer's signature on an application for life insurance by electronically signing the customer's name on the application, with the customer's consent, but without indicating that she was signing the application on the customer's behalf. Based upon the application, Allstate's insurance affiliate issued the customer a life insurance policy. 

Therefore, Cofre violated FINRA Rule 2010.

Bill Singer's Comment: Ummmm . . . okay, sure, I respect FINRA's concerns here and will not minimize the potential havoc so-called "accommodating signatures" could cause (and have caused). Is that clear enough for you? 
  Notwithstanding my full support for FINRA taking regulatory action, I dunno . . . I have to really, really wrap my head around how you "falsify" a signature when it is an electronic signature that was signed "with the customer's consent." Exactly what part of a consensual electronic signature rises to the level of "falsified?" Certainly nothing cited by FINRA even remotely rises to the level of a forgery, which, isn't even hinted at in the AWC, so compliments to FINRA for that concession. 
  Soooo, geez, okay -- I get the concern and I would grudgingly bless the imposition of a fine and/or suspension; but I don't think that Cofre did anything warranting a two-month suspension -- maybe 5 or 10 days, maximum one month. On top of that reduced suspension, I sure as hell don't see any misconduct warranting a $5,000 fine. Sorry, FINRA, but as much as you're on the side of the angels here, the double-barreled fine and suspension just don't seem balanced based upon the fact pattern that you set out in the AWC.

https://www.finra.org/sites/default/files/fda_documents/2019062612901
%20Blakely%20Page%20CRD%202922955%20%20AWC%20lp.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, Blakely Page, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Blakely Page was first registered in 1998, and by 2007, he was registered with Sprouting Rock Capital Advisors, LLC.  In accordance with the terms of the AWC, FINRA imposed upon Blakely Page a $5,000 fine and a six-month suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC:

In early 2017, Page formed a hedge fund (the Feeder Fund). The Feeder Fund was formed to pool investor funds and make an investment in another, unaffiliated hedge fund (the Master Fund). During the first two quarters of 2017, Page gathered information from the Master Fund, which he and others used to create marketing materials for the Feeder Fund. Specifically, the Master Fund provided unaudited financials claiming that the fund had realized, net of fees, a rate of return exceeding 80% in 2016. Page did not independently verify the accuracy of the performance results provided by the Master Fund, but asked others to conduct due diligence on the Master Fund. 

The marketing materials for the Feeder Fund included the performance numbers for the Master Fund that were provided by the Master Fund. However, the performance numbers provided by the Master Fund significantly overstated the Master Fund's historic rate of return, a material fact. 

Between October 2017 and October 2018, Page distributed the marketing materials for the Feeder Fund, which contained the materially inaccurate performance numbers for the Master Fund, to more than two dozen prospective investors. Page also exchanged emails with multiple prospective investors in which he affirmed the accuracy of the Master Fund's performance results as set forth in the Feeder Fund's marketing materials. He did so even after others at the Feeder Fund received information that called those performance results into question; Page did not review that information because he relied on others to do so. 

Seven different investments were made in the Feeder Fund totaling approximately $1.7 million. When the Master Fund stopped providing continuing performance information and other customary investment materials to the Feeder Fund, the Feeder Fund redeemed its investors' investments, and the investors received full redemptions. 

By making negligent misrepresentations of material fact to prospective investors, Page violated FINRA Rule 2010. 

In a FINRA Arbitration Statement of Claim filed in July 2021, member firm Claimant Schwab alleged that public customer Respondent Dusza "fraudulently transferred funds to his account with Claimant that he did not have and then traded with imaginary money, resulting in an unsecured debit balance and a loss to Claimant." Claimant Schwab sought $77,088.29 plus interest, fees, and costs. Respondent did not appear or respond, and the sole FINRA Arbitrator barred Dusza from presenting defenses in response to Claimant's motion. The Arbitrator found Respondent Dusza liable to and ordered him to pay to Respondent Schwab $77,088.29 plus interest and $1,000 in FINRA filing fees.
Bill Singer's Comment: Okay, sure, I'll bite: What the hell is "imaginary money?" We talkin' crypto? The currency from a Monopoly game? And why did Schwab allow a customer to begin trading before deposited funds had actually cleared? Ah yes, the mysteries of Wall Street.

https://www.brokeandbroker.com/6457/finra-leggett-audit/

On February 18, 2022, FINRA announced that it had hired a law firm to conduct an independent review of how FINRA Dispute Resolution Services complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge. Three months have passed. Not a sound. Not a peep. On the other hand, brick by brick, a lovely stonewall seems to be getting built. 

February 18, 2022 FINRA Press Release

Ninety-four days ago, FINRA published: "FINRA Hires Firm to Conduct Independent Review of Arbitrator Selection Process" (FINRA Press Release / February 18, 2022)
https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selection. The February 18th FINRA Press Release stated in part that:

FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

"We take this matter very seriously. FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner," said FINRA President and CEO Robert Cook. "In keeping with that commitment, FINRA's Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public."

February 22, 2022 BrokeAndBroker.com Blog

In response to FINRA's February 18th Press Release, I published: "Cynical FINRA Press Release Lacks Urgency In Response To Arbitration Fiasco" (BrokeAndBroker.com Blog / February 22, 2022)
https://www.brokeandbroker.com/6302/finra-leggett-audit/ In my article, I offered this rebuke:

[W]hat one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.

FINRA's Regulatory Deadlines

As to my suggested deadline for the issuance of a final investigative report "within no more than 90 days," today is now 94 days after the publication of FINRA's announced hiring of a law firm to conduct an independent review. Is 90 days too short a period of time -- is it too arbitrary a deadline? Keep in mind that an ample record has already been developed during the underlying FINRA arbitration proceeding and at the state court. Moreover, FINRA narrowed the scope of the investigation to how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge. The law firm hired by FINRA has a very focused question to investigate involving the selection of arbitrators in one arbitration. Consider these deadlines imposed by FINRA upon Respondents enmeshed in the self-regulator's disciplinary process:

  • FINRA Code of Procedure Rule 9264: Motion for Summary Disposition provides that "All pre-hearing motions for summary disposition and supporting papers shall be filed at least 21 days before the time set for the hearing, or at such earlier time as ordered by the Hearing Officer. "

  • FINRA Code of Procedure Rule 9215: Answer to Complaint provides that a Respondent named in a FINRA Disciplinary Complaint "shall serve an answer to the complaint on all other Parties within 25 days after service of the complaint on such Respondent . . ." 

  • FINRA Code of Procedure Rule 9311: Appeal by Any Party; Cross-Appeal  provides that a "Respondent or the Department of Enforcement may file a written notice of appeal within 25 days after service of a decision." 

  • FINRA Code of Procedure Rule 9222: Extensions of Time, Postponements, and Adjournments, which states in pertinent part that "Postponements, adjournments, or extensions of time for filing papers shall not exceed 28 days unless the Hearing Officer states on the record or provides by written order the reasons a longer period is necessary." 

  • FINRA Code of Procedure Rule 9312: Review Proceeding Initiated By Adjudicatory Council  provides that a Hearing Panel Decision "shall be subject to a call for review within 45 days after the date of service of the decision. . ."
Compared to the FINRA deadlines cited above, requiring the submission of a final investigative report to the FINRA Audit Committee within no more than 90 days isn't unfair or unreasonable. To the contrary, it's nearly three times longer than deadlines that FINRA imposes upon Respondents in its regulatory proceedings, and twice as long as the period of time during which the NAC can call a Hearing Panel Decision for review. Sort of the old what's good for the goose is good for the gander, no?

Yet, here we are: May 23, 2022 -- 94 days after FINRA's February 18, 2022, Press Release. 

Not a sound. 

Not a peep. 

Heaven is unmoved. 

Earth remains in its orbit. 

Our trust was misplaced. 

We still look forward at nothing. 

The coming months keep coming.

= = = = =

FINRA has not been having a fun time in recent weeks when it comes to the purported integrity of its arbitration forum: 

Court Finds FINRA Arbitration Process Not Fundamentally Fair (BrokeAndBroker.com Blog / February 4, 2022)
http://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/

Brian Leggett and Bryson Holdings, LLC, Claimants, v. Wells Fargo Clearing Services, LLC and Jay Windsor Pickett III, Respondents (FINRA Arbitration Award / 17-01077 / July 31, 2019)
https://www.finra.org/sites/default/files/aao_documents/17-01077.pdf

Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Memorandum of Law in Support of Petitioners' Motion to Vacate Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)
https://brokeandbroker.com/PDF/LeggettMotVacFultonCo191030.pdf

Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Order Granting Motion to Vacate Arbitration Award and Denying Cross Motion to Confirm Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)
https://brokeandbroker.com/PDF/LeggettOrderFultonCo220125.pdf

Federal Court Can't Find Any Basis For FINRA Arbitration Decision In HSBC Managing Director Case (BrokeAndBroker.com Blog / February 10, 2022)
http://www.brokeandbroker.com/6280/finra-gross-expungement/

In the Matter of the Arbitration Between Adam Gross, Claimant, v. HSBC Securities (USA) Inc., Respondent (FINRA Arbitration Award 21-00392 / September 3, 2021) https://www.finra.org/sites/default/files/aao_documents/21-00392.pdf

Adam Gross, Plaintiff, v. HSBC, Defendant (Complaint, United States District Court for the Southern District of New York, 21-CV-08636 / October 21, 2021)
https://brokeandbroker.com/PDF/GrossSDNYComp211021.pdf

Adam Gross, Petitioner, v. HSBC, Respondent (Order and Opinion, SDNY, 21-CV-08636 / February 8, 2022)
https://brokeandbroker.com/PDF/GrossSDNYOrdOp.pdf

In response to a firestorm of criticism and rumblings from Congress about its arbitration process and forum, FINRA hired what it says is an independent outside law firm to conduct a review. Rather than stand in the way of FINRA's self-serving press, let me offer it to you in full bloom:

https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selection

WASHINGTON-FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

"We take this matter very seriously. FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner," said FINRA President and CEO Robert Cook. "In keeping with that commitment, FINRA's Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public."

Christopher Gerold, a partner in Lowenstein's Securities Litigation and Corporate Investigations & Integrity Practice Groups, will lead the independent review and report the firm's findings directly to the Audit Committee of FINRA's Board of Governors. Prior to joining Lowenstein in January, Gerold was Chief of the New Jersey Bureau of Securities from 2017-2021 and served as President of the North American Securities Administrators Association.

"We trust Lowenstein's ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.

DRS administers an arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees. Although securities firms and investment advisers often include mandatory arbitration clauses in their customer account agreements, FINRA rules do not require this practice. The arbitration forum operates in accordance with rules that have been approved by the SEC, after a finding that the rules are in the public interest. The SEC regularly examines DRS's operations.

About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry-brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

So, lemme see here: FINRA's Audit Committee has engaged an independent, outside law firm to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public. As set forth in part in  FINRA's By-Laws Article IX: Committees:
 
Audit Committee
Sec. 5.  (a) The Board shall appoint an Audit Committee. The Audit Committee shall consist of four or five Governors, none of whom shall be officers or employees of the Corporation. The Audit Committee shall include at least two Public Governors. A Public Governor shall serve as Chair of the Committee. An Audit Committee member shall hold office for a term of one year. . . .

The FINRA Audit Committee is appointed by the FINRA Board of Governors. Of course, I have long argued that FINRA's Board is a gerrymandered disgrace that is, at times, lackluster and lackadaisical; so, y'know, I'm just not all that encouraged to learn that a law firm hired by a committee appointed by FINRA's Board is likely to further any overdue Wall Street reforms. Why did it take a scathing Decision in Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Superior Court of Fulton County, Georgia, 2019CV328949 / January 25, 2022) to prompt FINRA's somnolent Audit Committee on February 18, 2022, to investigate festering rumors about FINRA's arbitration forum?  According to FINRA's Standing Committee webpage, the current Audit Committee comprises
https://www.finra.org/about/governance/standing-committees#ac:

https://www.finra.org/about/governance/finra-board-governors/lance-drummond

Jack B. Ehnes 
https://www.finra.org/about/governance/finra-board-governors/jack-ehnes

https://www.finra.org/about/governance/finra-board-governors/christopher-flint

Linde Murphy
https://www.finra.org/about/governance/finra-board-governors/linde-murphy

Eileen K. Murray
https://www.finra.org/about/governance/finra-board-governors/eileen-murray

And just where, exactly, were those five Audit Committee members the last few years when allegations of improprieties about FINRA's arbitration process were swirling around? 

Notably, FINRA's Chairman of the Board, Eileen K. Murray, is one of the five members of the Audit Committee -- not exactly a disinterested person with a likely burning desire to unearth embarrassing revelations about the self-regulatory-organization that she helms. As to the other sitting Audit Committee members, I see one is "retired," one is listed as a "former" CEO, and two are employed by FINRA member firms --  that's the composition of a robust, independent Audit Committee? Among the more disconcerting disclosures among the various Audit Committee's members' bios are multiple roles on other Boards, as if sitting on FINRA's Board of Governors -- and particularly that Board's Audit Committee -- should not require an exclusive service given that the organization is engaged in regulating the financial services community. 

As to that rousing call to action set out in the FINRA's February 18th Press Release , it was described by the Chair of FINRA's Audit Committee Lance Drummond (whose professional standing is preliminarily set forth on the FINRA website as Public Governor /Retired /Governor Since 2018 / Committees: Audit Committee (Chair), Conflicts Committee, Executive Committee, Management Compensation Committee): 

"We trust Lowenstein's ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.

Seriously Chair Drummond?  That's your direction? You "look forward to receiving their findings in the coming months?" You're merely looking forward -- as in hopeful and desirous but not much more? In the coming months as in maybe six or more or ten or eleven? And, no, I didn't miss the cynical attempt to confine the investigation to "this matter," as in the Leggett arbitration rather than allow the so-called independent, outside law firm free rein to consider the troubling issues raised by the court, no matter where that might take the investigators.

The February 18th FINRA Press Release is a clumsy effort to manage a public relations nightmare. Painfully, lacking in the Press Release is any sense of urgency. What I would have expected -- what industry reform advocates demand -- is accountability on a fast track. For starters, the Audit Committee should not merely express a desultory desire for some kind of findings in "coming months," but underscore the mission-critical aspect of this blot on FINRA's reputation. No, you don't get to go to the old delay-of-game playbook and select the option of a report in a few months and then grant an extension and then deliberate on the recommendations and then publish a sanitized report to the public for extended comment and then undertake a reconciliation effort and then publish a proposed rule and then extend all of that nonsense to a point where FINRA's Chair, and CEO, and all sitting Board members have long-since retired and left the mess to another generation of wannabe self-regulators.

Sadly, the February 18th FINRA Press Release engages in a bit of legerdemain by giving the impression that the desired outcome of the Lowenstein law firm's investigation is some sweeping reform of FINRA's belabored arbitration process; however, that's not what the release actually says:

FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

My guess is that we need to read that opening paragraph in the Press Release very, very literally. The Lowenstein law firm was hired to conduct a review limited to the arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge -- as in Leggett and only Leggett. What one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.


Federal Register Volume 64, Number 198 (Thursday, October 14, 1999)]
[Notices]
[Pages 55793-55796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26793]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41971; File No. SR-NASD-99-21]

Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To 
Create a Dispute Resolution Subsidiary

September 30, 1999.
    On April 26, 1999, the National Association of Securities Dealers, 
Inc. ("NASD'' or "Association''), through its wholly owned regulatory 
subsidiary, NASD Regulation, Inc. ("NASD Regulation''), submitted to 
the Securities and Exchange Commission ("Commission''), pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 ("Act'') 1 
and Rule 19b-4 thereunder,2 a proposed rule change to create a 
dispute resolution subsidiary. The proposed rule change was published 
for comment in the Federal Register on June 17, 1999.3 The Commission 
received one comment letter on the proposal from the Securities 
Industry Association ("SIA'').4 This order approves the proposal.
---------------------------------------------------------------------------

    1 15 U.S.C. 78s(b)(1).
    2 17 CFR 240.19b-4.
    3 See Securities Exchange Act Release No. 41510 (June 10, 
1999), 64 FR 32575.
    4 Letter from Stephen G. Sneeringer, Chairman of the 
Arbitration Committee, SIA, to Jonathan G. Katz, Secretary, 
Commission, dated July 8, 1999 ("SIA Letter'').
---------------------------------------------------------------------------

I. Description of the Proposal

    The Association is proposing (i) to create a dispute resolution 
subsidiary, NASD Dispute Resolution, Inc. ("NASD Dispute 
Resolution''), to handle dispute resolution programs; (ii) to adopt by-
laws for the subsidiary; and (iii) to make conforming amendments to the 
Plan of Allocation and Delegation of Functions by NASD to Subsidiaries 
("Delegation Plan''), the NASD Regulation By-Laws, and the Rules of 
the Association.

A. Background

    The Association's arbitration and mediation programs were operated 
by the NASD Arbitration Department until 1996, when those functions 
were moved to NASD Regulation following a corporate reorganization. 
This reorganization in part grew out of recommendations of a Select 
Committee formed by the NASD and made up of individuals with 
significant experience in the securities industry and NASD governance 
("the Rudman Committee'').5 The Rudman Committee reviewed the 
Association's arbitration and mediation programs from December 1994 
through August 1995. The Rudman Report was issued in September 1995.
---------------------------------------------------------------------------

    5 Report of the NASD Select Committee on Structure and 
Governance to the NASD Board of Governors (September 1995) ("Rudman 
Report'').
---------------------------------------------------------------------------

    In September 1994, the NASD established the Arbitration Policy Task 
Force, headed by David S. Ruder, former Chairman of the SEC ("the 
Ruder Task Force''), to study NASD arbitration and recommend 
improvements. The Ruder Task Force, composed of eight persons with 
various backgrounds in the area of securities arbitration, met from the 
Fall of 1994 to January 1996, when its Report was issued.6
---------------------------------------------------------------------------

    6 Report of the Arbitration Policy Task force to the Board of 
Governors National Association of Securities Dealers, Inc. (January 
1996) ("Ruder Report'').
---------------------------------------------------------------------------

    Both the Rudman Committee and the Ruder Task Force made 
recommendations that affected the arbitration program. The Rudman 
Committee recommended that the NASD reorganize as a parent corporation 
with two relatively autonomous and strong operating subsidiaries, 
independent of one another. The resulting enterprise would consist of 
NASD, Inc., as parent, The Nasdaq Stock Market, Inc. ("Nasdaq'') as

[[Page 55794]]

one subsidiary to operate Nasdaq, and a new subsidiary, NASD 
Regulation, Inc., to regulate the broker-dealer members of the NASD.7 
The Ruder Report recommended that the dispute resolution program be 
housed either in the parent or in NASD Regulation.8 The Arbitration 
Department was placed in NASD Regulation in early 1996 based on the 
recommendation of the Rudman Committee,9 and the name of the 
department was changed to the Office of Dispute Resolution ("ODR'') 
shortly thereafter, to reflect the full range of dispute resolution 
mechanisms.
---------------------------------------------------------------------------

    7 Rudman Report at R-8.
    8 Ruder Report at 151-52.
    9 Rudman Report at R-8.
. . .

You notice the dates referenced in the above SEC Order? The Ruder Task Force and the Rudman Select Committee started their work in 1994. We got 1995 reports. We got 1996 reviews. Then we got more reports and recommendations and proposals. It was only in 1999, however, that the Ruder/Rudman work actually coalesced into the above SEC Order. If that's the course upon which FINRA has now embarked per the Lowenstein law firm's investigation, it may take until 2027 before anything of substance manifests. Which, like I noted above, may be the whole plan. Certainly, FINRA's Board of Governors doesn't give a damn.

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