Securities Industry Commentator by Bill Singer Esq

June 14, 2022

Way back in 2019, former J. P. Morgan Securities customers filed a FINRA Arbitration Statement of Claim against the brokerage firm seeking about half a million dollars in damages. You remember 2019, that was just before the Covid pandemic. Of course, once the pandemic got under way, the customers found their case in limbo and, go figure, but, gee, JPMS just didn't seem in all that much of a rush to expedite things by videoconferenced hearings.
Joey Stanton Dodson pled guilty in the United States District Court for the Northern District of California to one count of wire fraud. As alleged in part in the DOJ Release, between November 2012 and May 2015, Dodson defrauded investors:

while serving as the executive chairman and managing partner of Citadel Energy Partners. In his role, Dodson had certain responsibilities for three limited partnerships, Fort Berthold Water Partners L.P., Citadel Watford City Disposal Partners L.P., and H20 Partners L.P., which included raising funds for the limited partnerships, controlling their bank accounts, and disseminating their financial information to investors. As part of the scheme, Dodson made materially false and misleading representations and omissions to prospective and existing investors regarding his receipt of compensation, the intended use of investor funds, and the status of a potential acquisition of the limited partnerships by a private-equity firm, among other things. 

After inducing investors to deposit their funds, Dodson pooled the funds from the limited partnerships and conducted multiple transfers between Citadel-related accounts that helped him divert investor funds for his own benefit and conceal his actions. In total, Dodson fraudulently raised over $15.6 million from 51 investors and misappropriated $1.3 million in investor funds, which he used to repay investors in an unrelated investment he operated under an entity known as Duke Equity and to pay other personal expenses. After Dodson's misappropriation was discovered, the limited partnerships were placed into bankruptcy and the investors suffered a total loss of their investments.
Jalen Ronald Stanford, 28, pled guilty in the United States District Court for the District of Rhode Island to conspiracy to commit bank fraud; and he was sentenced to 24 months in prison plus three years of supervised release, and orderd to pay $480,942.71 in restitution. As alleged in part in the DOJ Release, Stanford and others: 

created counterfeit checks generally in the amount of $2,000 or more. The checks were made payable to homeless individuals who agreed to be driven to banks in Rhode Island, Massachusetts, Connecticut, and Maine to cash them. These individuals were often paid approximately $100 per check that they successfully cashed. From October 2018 through February 2021, numerous homeless individuals were arrested at banks throughout the region as they attempted to cash some of the counterfeit checks.

A United States Secret Service investigation determined that approximately $677,687 worth of counterfeit checks were presented to banks throughout the four states, causing actual losses to financial institutions of nearly $481,000.

Without admitting or denying the findings in an SEC Order, Energy Capital Partners Management LP ("ECP") consented to the entry of the SEC Order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and 206(4)-8; and ECP agreed to a cease-and-desist Order, Censure, and a $1 million penalty. As alleged in part in the SEC Release:

According to the SEC's order, ECP led an investment consortium to acquire the stock of a public company in what is referred to as a take-private transaction. In connection with this transaction, which closed in March 2018, ECP agreed that third-party co-investors would not have to bear expenses related to a credit facility used to finance the transaction. As a result, the SEC's order found that ECP allocated a disproportionate share of these expenses to a private equity fund it advised without disclosure. The SEC's order found that, under the fund's organizational documents, these expenses should have either been disclosed or not allocated in this manner.
In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC charged Michael Mooney, Britt Wright, and Penny Flippen with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Additionally, the Complaint charges the Defendants with aiding and abetting previously charged violations of the federal securities laws by John J. Woods, Livingston Group Asset Management Company d/b/a Southport Capital, and Horizon Private Equity, III, LLC. As alleged in part in the SEC Release:

[M]any of the defendants' clients were elderly and inexperienced investors who communicated that they wanted safe investment opportunities for their assets, a large percentage of which were earmarked for retirement. Nevertheless, the defendants, who each received undisclosed compensation from Horizon, recommended that their clients invest in the fund based solely on Woods' unsubstantiated claims about Horizon's investment objectives, source of returns, and operations. The defendants also allegedly ignored significant red flags, such as Woods instructing the defendants not to use their Southport email addresses when communicating about Horizon. The complaint also states that the defendants falsely told their clients that Horizon would use the funds they invested to purchase safe investments; that Horizon would pay them a guaranteed rate of return; and that they could get their principal back without penalty. In reality, Horizon earned very few profits from investments, and investor proceeds were used primarily to make principal and interest payments to earlier Horizon investors and to fund Woods' personal projects, such as his purchase of a minor league baseball team.

SEC Charges Weiss Asset Management with Short Selling Violations (SEC Release)
Without admitting or denying the findings in an SEC Order, Weiss Asset Management LP agreed to cease and desist from violating Rule 105 and agreed to disgorge profits of $6,508,793 and to pay interest of $190,211 and a penalty of $200,000.  As alleged in part in the SEC Release:

The SEC's order finds that, on seven occasions between December 2020 and February 2021, Weiss Asset Management violated Rule 105, which prohibits short selling an equity security during a restricted period (generally five business days before a covered public offering) and then purchasing the same security through the offering, absent an exception. The rule applies regardless of the trader's intent and promotes offering prices that are set by natural forces of supply and demand rather than potentially manipulative activity.

According to the order, Weiss Asset Management's violations occurred because it repeatedly miscalculated the restricted period and dismissed a number of red flags raised by its internal controls that suggested possible violations of Rule 105. The order finds that Weiss Asset Management improperly benefited by participating in offerings covered by Rule 105, resulting in ill-gotten gains totaling over $6.5 million. The order also highlights the significant remedial efforts undertaken by Weiss Asset Management and the cooperation it provided in the investigation, including self-reporting the violations to the staff after conducting a review of its trading records, segregating the ill-gotten profits, and updating and revising its compliance and training efforts.

SEC Charges Tar Sands Mining Company and Former Executives with Fraud (SEC Release)
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged Petroteq Energy, Inc.'s former Chief Financial Officer Mark Korb with violations of the Securities Act Section 17(a)(3) and Exchange Act Section 13(b)(5) and Rules 13a-14 and 13b2-1 thereunder; and that he aided and abetted Petroteq's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a) thereunder. In addition to the CDCA Complaint, the SEC issued an Order charging Petroteq, Korb, and former Petroteq Chairm Aleksandr Blyumkin for their roles in making materially false and misleading disclosures in the company's SEC filings. As assserted in part in the SEC Release:

Petroteq is a publicly traded company engaged in developing tar sands mining and processing technology. An administrative order entered by the SEC against Petroteq and Blyumkin finds that, from September 2017 to May 2019, Petroteq raised $7.39 million through an unregistered offering of stock. Petroteq filed with the SEC Form D notices signed by Blyumkin that represented that Petroteq would not pay commissions in connection with the offering and that its officers or directors would not receive offering proceeds. The SEC's order finds, however, that Petroteq paid commissions totaling $2.89 million to two individuals retained to conduct the offering. The SEC's order further finds that Blyumkin personally received $68,623 of the offering proceeds.

Additionally, the SEC's order finds that Petroteq's SEC filings failed to disclose the related party nature of multiple transactions, including the company's payment of $23.8 million in cash and stock in January 2019 for rights to mine tar sands in Utah. The SEC's order finds that the companies from which Petroteq purchased these rights were "related persons" because they and their affiliates controlled large blocks of Petroteq stock. The SEC contends that these companies acquired the rights shortly before selling them to Petroteq, giving the seller just $275,000 in cash and an option to buy up to 20 million of their Petroteq shares. The SEC's order further finds that of the $1.8 million in cash that Petroteq paid for the rights, $1.39 million went back to Petroteq and $479,500 went to Blyumkin in round-trip transactions. None of these facts was disclosed in Petroteq's filings, according to the SEC.

As the SEC's order further finds, the rights are subject to various undisclosed risks, contingencies, and costs that may prevent Petroteq from ever exercising the rights. Yet Petroteq's filings on Form 10-K for 2019, 2020, and 2021 valued the rights at the full purchase price of $23.8 million.

The SEC's order also finds that Blyumkin directed undisclosed transfers of over $3 million of Petroteq funds to himself, his companies, his relatives, and his former domestic partner, thereby receiving financial benefits from Petroteq exceeding his compensation as described in Petroteq's SEC filings.

To resolve the SEC's charges, Petroteq and Blyumkin consented, without admitting or denying the SEC's findings, to the entry of the SEC order, which finds that:

  • Petroteq violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder; imposes a cease-and-desist order and remedial undertakings; and orders it to pay a $1 million civil penalty; and
  • Blyumkin violated Sections 5(a), 5(c), and 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and caused Petroteq's violations of Securities Act Sections 5(a), 5(c), and 17(a), and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder; imposes a cease-and-desist order; bars him from serving as an officer or director of a public company; orders him to pay a $450,000 civil penalty; and orders further proceedings to determine what disgorgement and prejudgment interest should be ordered against him.
Without admitting or denying the findings in an SEC Order, Charles Schwab & Co., Inc., Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., agreed to a cease-and-desist order prohibiting them from violating the antifraud provisions of the Investment Advisers Act of 1940, censuring them, and requiring them to pay approximately $52 million in disgorgement and prejudgment interest, and a $135 million civil penalty. Further, the Respondents agreed to retain an independent consultant to review their policies and procedures relating to their robo-adviser's disclosures, advertising, and marketing, and to ensure that they are effectively following those policies and procedures. As alleged in part in the SEC Release:

[F]rom March 2015 through November 2018, Schwab's mandated disclosures for its robo-adviser product, Schwab Intelligent Portfolios, stated that the amount of cash in the robo-adviser portfolios was determined through a "disciplined portfolio construction methodology," and that the robo-adviser would seek "optimal return[s]." In reality, Schwab's own data showed that under most market conditions, the cash in the portfolios would cause clients to make less money even while taking on the same amount of risk. Schwab advertised the robo-adviser as having neither advisory nor hidden fees, but didn't tell clients about this cash drag on their investment.

Schwab made money from the cash allocations in the robo-adviser portfolios by sweeping the cash to its affiliate bank, loaning it out, and then keeping the difference between the interest it earned on the loans and what it paid in interest to the robo-adviser clients.
Shawn Phillips, age 44, pled guilty in the United States District Court for the Middle District of Louisiana to wire fraud; and he was sentenced to 33 months in federal prison to run consecutively to his pending state charges, plus three years of supervised release and ordered to pay $50,718 in restitution. As alleged in part in the DOJ Release;

[P]hillips befriended the victim, then took advantage of that friendship to steal over $50,718 over a 16-month period, January of 2020 to May of 2021.  Phillips convinced the victim to loan him the money by claiming he needed to borrow money until his large inheritance came in.  Yet, unbeknownst to the victim, at no point was Phillips expecting any inheritance.

Even when Phillips left Baton Rouge and moved to Georgia, he continued his scheme, convincing the victim to send 43 wire transfers from Baton Rouge to Georgia to fund his lifestyle there.  Throughout the course of the scheme, Phillips continued his fraudulent assertion that he was waiting on an inheritance, even at points claiming to need additional money from the victim to get the 'inheritance' out of the court system.

Former local bakery owner arrested for stealing identity of deceased baby, $1.5M pandemic relief fraud (DOJ Release)
Yeah, I know . . . that's one hell of a headline: A local bakery owner steals a dead baby's identity. As if that's not weird enough, the bakery owner apparently used the dead baby's ID in order to scam $1.5 million in Covid relief funds. You'd like to think that such things don't go on. But they do. If they didn't, prosecutors and folks like me wouldn't have much to do in terms of practicing law. In any event, let's start with the basics. The Defendant, Ava Misseldine, 49, was charged in the United States District Court for the Southern District of Ohio with passport fraud, Social Security number fraud, aggravated identity theft and fraud in connection with an emergency. Moving along, the DOJ Release alleges in part that: 

[M]isseldine stole the identity of a baby who died in 1979 and is buried in a Columbus cemetery.

In 2003, Misseldine allegedly applied for an Ohio ID and later a Social Security card and driver's license using the stolen identity.

In 2007, Misseldine allegedly posed as the stolen identity to obtain a student pilot certificate and U.S. Passport. Misseldine submitted paperwork claiming she needed the passport to travel internationally in her occupation as a flight attendant for JetSelect. She was employed under the false identity.

Over the next 13 years, Misseldine allegedly continued to obtain identity documents in both her real and fake names. An investigation was launched in 2021 when she tried to renew the fraudulent passport.

Court documents allege Misseldine obtained approximately $1.5 million in fraudulent Paycheck Protection Program loans in 2020 using both her real and fake identities. Her loan applications list her businesses as various bakeries and catering companies, including her former bakeries Sugar Inc. Cupcakes & Tea Salon in Dublin and Koko Tea Salon & Bakery in New Albany and at Easton. She submitted forged documents to support her loan applications.

Misseldine used the pandemic relief loan money to purchase a home for $647,500 adjacent to Zion National Park in Utah and a home for $327,500 in Michigan.

In August and September 2021, Misseldine, after relocating to Utah, allegedly obtained driver's licenses in both names.
Andre Deaveon Reese, 32, pled guilty in the United States District Court for the Western District of Louisiana  to conspiracy to commit wire fraud; and he was sentenced to 33 months in prison plus three years of supervised release, and ordered to pay $9,797.95 in restitution. So . . . sit down. Seriously, sit down. Get comfy. You comfy? Okay, now brace yourself because, in part, the DOJ Release states:

[W]hile serving time in the Autry State Prison (Autry) in Georgia in 2015, and continuing through July 2020, Reese participated in a scheme to defraud victims by telling them they had failed to appear for jury duty and a warrant had been issued for their arrest. To carry out this scheme, inmates used contraband cellular telephones from inside Autry to access internet websites to identify the names, addresses, and telephone numbers of potential fraud victims. Using the cellular telephones, inmates called the victims who name, and number had been obtained and made certain false misrepresentations to the victims. The inmates told the victims that they were law enforcement officials and that the victim had unlawfully failed to appear for jury duty. In addition, the victims were told that because they had failed to appear for jury duty, warrants had been issued for their arrest and the victim had a choice of being arrested on the warrant or pay a fine to have the arrest warrant dismissed.

To make the calls seem real, Reese, along with other inmates, created fictitious voicemail greetings on their contraband cellular telephones used by the inmates, identifying themselves as members of legitimate law enforcement agencies, including the U.S. Marshal Service. For those victims who wanted to pay a fine, the inmates instructed them to purchase pre-paid cash cards and provide the account number of the cash card or the victim could wire money directly into a pre-paid debit card account held by the inmates or one of the co-conspirators. Based on these false representations, the victims electronically transferred money to the inmates because they believe that the funds would be used to pay the fine.

After a victim provided an inmate with the account number of the pre-paid cash card, the inmates then used their contraband cellular telephones to contact co-conspirators, who were not incarcerated, to have those individuals transfer the money from the cash card purchased by the victims to a pre-paid debit card possessed by the co-conspirators. The co-conspirators would then withdraw the victim's money via an automated teller machine or at a retail store.

In August of 2016, two individuals, ages 75 and 78, living in the Western District of Louisiana, became victims of Reese's scheme. The victims believed the callers, who were inmates posing as legitimate law enforcement officers, and followed their instructions to pay them to have the alleged warrants for their arrest for failing to appear for jury duty dismissed. The two victims $9,797.95 to Reese and his co-conspirators.

Former Employee of PA-Based Gaming and Casino Company Charged with Insider Trading (DOJ Release)

In an Information filed in the United States District Court for the Eastern District of Pennsylvania, David Roda was charged with insider trading. As alleged in part in the DOJ Release:

The defendant was an employee of Penn Interactive, a wholly-owned subsidiary of Penn National Gaming, Inc., and served as its Director of Backend Architecture. The Information alleges that in this capacity, Roda learned in early July 2021 that Penn National was considering a potential acquisition of Score Media and Gaming, Inc., and knew that he had a duty to keep this information confidential. Nonetheless, on July 22, 2021, using this material, non-public information, Roda purchased 200 Score Media call option contracts for approximately $13,000.  Moreover, after a senior officer at Penn Interactive informed Roda in August 2021 that the acquisition would be announced within days, Roda allegedly purchased 300 more Score Media call option contracts for approximately $7,000. The following day, Penn National announced its agreement to acquire Score Media, and Score Media's stock price rose drastically.  The defendant then closed out his Score Media call option contracts for approximately $580,000, netting personal profits of approximately $560,000.

In a Complaint filed in the United States District Court for the Eastern District of Pennsylvania, the SEC charged David Roda and Roda's friend Andrew Larkin with violating the antifraud provisions of the securities laws. Roda agreed to be permanently enjoined from violating those provisions and to pay disgorgement, prejudgment interest, and a civil penalty to be determined by the Court at a later date. Without admitting or denying the allegations in the SEC's complaint, Larkin agreed to be permanently enjoined from violating the antifraud provisions of the securities laws and to pay over $11,000 in disgorgement and penalties. Parallel criminal charges were filed against Roda. As alleged in part in the SEC Release:

[W]hile employed at Penn Interactive, which provides online and mobile gambling experiences for Penn National, Roda was given confidential information about Penn National's interest in acquiring Score Media along with admonitions not to trade on that information. In breach of his duties, Roda purchased 500 out-of-the-money call options on Score Media in the weeks and days leading up to the announcement of the acquisition. Additionally, Roda tipped his longtime friend, Andrew Larkin, also charged by the SEC, who then purchased 375 Score Media shares. According to the SEC's complaint, Score Media's stock price increased nearly 80 percent after Penn National and Score Media publicly announced their deal, following which Roda and Larkin sold their holdings for unlawful profits of $560,762 and $5,602, respectively.

In the Matter of the Application of Equitec Proprietary Markets, LLC for Review of Disciplinary Action Taken by CBOE Exchange, Inc.. (SEC Opinion, '34 Act Rel. No. 95083; Admin. Proc. File No. 3-19182)
As alleged in part in the SEC Opinion [Ed: footnote omitted]:

Equitec Proprietary Markets, LLC ("Equitec" or "the Firm"), a registered broker-dealer, appeals disciplinary action taken against it by the Cboe Exchange, Inc., f/k/a Chicago Board Options Exchange, Inc. ("Cboe"). Cboe found that Equitec violated Rule 15c3-5 under the Securities Exchange Act of 1934 (the "Market Access Rule" or the "Rule") and Cboe Rule 4.2 (which requires adherence to applicable laws) by failing to implement and maintain risk-management controls reasonably designed to prevent the entry of orders that exceeded its capital threshold and by failing to implement written supervisory procedures reasonably designed to ensure compliance with all regulatory requirements. For these violations, Cboe imposed a censure and $50,000 fine. We sustain Cboe's findings of violations and imposition of sanctions. 

Notably, the SEC offered this rationale in affirming the $50,000 fine, which Equitec challenged [Ed: footnotes omitted]:

In considering potential aggravating or mitigating factors, we find no mitigating factors. We find that aggravating that Equitec's violations were serious and extensive. The Market Access Rule was specifically designed to protect against "systemic risk" that "could potentially expose a broker or dealer to enormous financial burdens and disrupt the markets." Equitec's numerous deficiencies in its WSPs and its complete exclusion of executed trades for purposes of its capital threshold exposed itself and potentially the market to just such systemic risks. 

Further aggravating is Equitec's disciplinary history with respect to WSPs. In 2005, Equitec settled with the Pacific Stock Exchange by paying a $2,000 fine after that exchange alleged that Equitec failing to have adequate WSPs. In 2007, Equitec settled with the American Stock Exchange by paying a $90,000 fine after the exchange alleged that Equitec failed to maintain adequate supervisory systems and WSPs. And in 2012, Cboe issued a letter of caution against Equitec based on deficiencies in the Firm's WSPs similar to those at issue here, such as failing to specify how Equitec determined credit and capital thresholds, failing to specify the manner by which Equitec would prevent the entry of orders for securities from traders who were restricted from trading those securities, and failing to specify that Equitec's financial and riskmanagement controls were under Equitec's direct and exclusive control. Under these circumstances, we find that the $50,000 fine is remedial and not excessive or oppressive. 

at Pages 13 - 14 of the SEC Opinion
In a Complaint filed in the United States District Court for Eastern District of New York, charges A.G. Morgan Financial Advisors, LLC, AGM's owner Vincent J. Camarda, and AGM's former Chief Compliance Officer James McArthur with violating the registration provisions of the Securities Act and acting as unregistered broker-dealers in violation of the Securities Exchange Act, and, further charged AGM and Camarda with violating the antifraud provisions of the Investment Advisers Act of 1940. As alleged in part in the SEC Release:

[T]he defendants raised more than $75 million from more than 200 investors in connection with Par Funding's unregistered securities offering from at least August 2017 through July 2020, and received compensation of more than $7 million for doing so. The SEC alleges that the defendants offered and sold securities to investors without approval from the registered broker-dealer with whom they were associated. The complaint also alleges that in 2017, AGM and Camarda failed to inform advisory clients that AGM had borrowed, and had not fully repaid, approximately $750,000 from Par Funding.
As set forth in the "Introduction" portion of the FINRA OHO Decision [Ed: footnotes omitted]:

Respondent Megurditch Patatian recommended that 59 of his customers invest $7.86 million in non-traded real estate investments trusts ("REITs"). FINRA's Department of Enforcement alleges that Patatian committed several FINRA Rule violations in making those recommendations. Enforcement also alleges that Patatian made unsuitable recommendations for variable annuity surrenders and exchanges and impersonated a customer.

The Complaint contains five causes of action. First, Enforcement contends that Patatian's recommendations to his customers to purchase non-traded REITs were unsuitable, violating FINRA Rules 2111 and 2010. Second, Enforcement asserts that Patatian made five unsuitable recommendations to customers to surrender their variable annuities to invest in non-traded REITs, in violation of FINRA Rules 2111 and 2010. Third, Enforcement contends that Patatian made six unsuitable recommendations to customers to exchange their variable annuities, violating FINRA Rules 2330(b) and 2010. Fourth, Enforcement alleges that Patatian impersonated a customer in a telephone call with an insurance company, violating FINRA Rule 2010. Fifth, Enforcement asserts that Patatian created inaccurate forms to facilitate his sale of non-traded REITs, causing his firm to create and maintain inaccurate books and records, in violation of FINRA Rules 4511 and 2010. 

After a seven-day hearing, we find that Enforcement proved each cause of action. Because Patatian's actions were egregious, we impose a bar. We order Patatian to provide restitution of $262,958.73 plus interest to his 20 customers who sold their REITs at a loss, and to offer rescission to the customers who still hold their REITs. We also order that Patatian disgorge $458,418.07 in commissions he earned from his unsuitable non-traded REIT recommendations. 

FINRA Censures and Fines Insight Securities for WhatsApp Usage
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, Insight Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Insight Securities, Inc. has been a FINRA member firm since 1971 with 70 registered representatives at 16 branches. In accordance with the terms of the AWC, FINRA imposed upon Insight Securities a Censure and $50,000 fine. As alleged in part in the AWC:

Insight Securities' written procedures prohibited the use of instant messages for business purposes unless the firm granted an individual permission to use them. If permission were granted to any individual, the firm's procedures would have obligated it to capture that individual's instant messages and review and retain them, consistent with the firm's procedures related to the review and retention of email communications. However, the firm never granted anyone permission to send or receive instant messages for business purposes. 

Nonetheless, the firm had no procedures to ensure that its representatives were complying with this prohibition and no procedures for capturing, reviewing, or retaining business-related communications sent or received via instant message. In fact, Insight Securities was aware that multiple representatives were communicating with their customers via WhatsApp and that these communications were often business-related. Yet, the firm failed to take any action to either stop this practice or capture, review, and retain business-related communications sent or received in this manner. 

As a result, between 2016 and 2019, Insight Securities failed to capture, review, or retain more than 10,000 business-related WhatsApp instant messages sent or received by twenty different Insight Securities representatives. The messages were business-related in that they included information about customers' accounts, investments, or other aspects of the firm's securities business. 

Therefore, Insight Securities violated Section 17(a) of the Exchange Act, Rule 17a-4 of the Exchange Act, and FINRA Rules 4511, 3110, and 2010. 

Bill Singer's Comment: FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

I am no fan of Corrective Action Statements and rarely, if ever, advocate their use.  Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would prepare a statement that tends to typically make admissions, promises to correct situations that have not necessarily been acknowledged, and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then you may want to pause before signing the AWC and ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal afterwards.  

If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it. There's no need whatsoever to engage in a post-game, public analysis. Some think that this after-the-fact statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. Keep in mind that a Corrective Action Statement may actually set you and your firm up for heavier sanctions down the road if you acknowledge wrongdoing and propose a set of remedial actions.  If during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in the statement, or, it is alleged that you failed to  implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. 

Notwithstanding my opinion, Insight Securities apparently determined that it was advisable to submit a Corrective Action Statement and hopefully that step will prove favorable to the firm:

Corrective Action Statement 

Beginning in 2019, Insight enlisted the third-party provider TeleMessage to assist monitoring WhatsApp communications. TeleMessage places software on an individual's cell phone that captures any instant messages, including those sent via WhatsApp, sending the instant message to an email address specified by Insight. The instant messages, now in email form, are achieved and then reviewed using the same criteria as that used for standard email review through the use of a lexicon of keywords to identify communications. Tagged messages are then exported to Outlook where rules inputted to Outlook filter out spam messages. The remaining messages are then manually reviewed by compliance to determine if any tagged communication violate Insight's communications policy or reveal possible customer complaints, employee misconduct or malfeasance, or a violation of FINRA rules. Insight also reviews the messages captured by the TeleMessage software on a real-time, random basis. When further investigation is required regarding a flagged message, a questionable transaction, or some other triggering event, compliance can recall all instant messages for an individual representative for a given time period. 

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.

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.