Securities Industry Commentator by Bill Singer Esq

June 29, 2022

A FINRA Panel of Arbitrators found Citigroup Global Markets, Inc. ("CGMI"), Citigroup, Inc., and Citibank, N.A. guilty of discrimination, harassment, hostile work environment, and retaliation. All of which cost the Respondents $1.4 million in damages and attorney's fees. What's Wall Street's leading self-regulatory-organization, FINRA, going to do about those horrific arbitration findings? If past is prologue -- NOTHING. Actually, that's not entirely correct . . . FINRA's lackluster Board of Governors will likely create task forces and call for summits and hold conferences and develop an exam and propose to implement some initiative that will likely never quite get off the ground but, hey, the whole point is giving the appearance of action rather than actually acting, right? Why fix anything when you can just issue a press release! In part the Report concludes that:

Lowenstein conducted its review from February to June 2022. After careful consideration of the evidence obtained during that review, Lowenstein does not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss's cases. The evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the Leggett Arbitration were intended to be fair and reasonable at each step. Based on historic and anticipated enhancements that were reviewed by Lowenstein, it is clear that FINRA is continually striving to make the arbitration selection processes more transparent for arbitration participants. Overall, notwithstanding the proposed potential enhancements, DRS is continuing to function as intended - as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.

at Page 2 of the Report

In setting out its "Conclusions And Recommendations," the Report states in part that:

After careful consideration of the evidence obtained during the investigation, Lowenstein does not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss's cases. All current and former FINRA personnel who could conceivably have been a part of such an agreement were interviewed and denied the agreement's existence, noting that it would be contrary to DRS's culture of neutrality. Lowenstein found them all to be credible. Likewise, no documentary evidence - including any emails or other material - suggested in any way that such an agreement existed. Nonetheless, through this investigation, Lowenstein identified a series of potential improvements to the FINRA arbitrator selection process intended to increase transparency and ensure neutrality in the work undertaken by DRS. 

The evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the Leggett Arbitration were intended to be fair and reasonable at each step. Based on historic and anticipated enhancements that were reviewed by Lowenstein, it is clear that FINRA is continually striving to make the arbitration processes more transparent and uniform for arbitration participants. Overall, notwithstanding the proposed potential enhancements, DRS is continuing to function as intended - as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.

at Page 35 of the Report

Bill Singer's Comment

Among those of us in the FINRA Dissident community and among advocates for Wall Street reform, the Report's findings seem pre-ordained and will likely be received as little more than whitewash. 

Notably, the Report does not seem to fully address the most critical aspect of this issue which is that Judge Belinda E. Edwards, Superior Court of Fulton County, Georgia found that the FINRA arbitration was fundamentally unfair. See, 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) 

If we are to believe FINRA's Report, Judge Edwards got it all wrong. There was no fundamental unfairness in the Leggett Arbitration. There was no agreement between Weiss and FINRA regarding the panels for Weiss's cases. Pointedly, I read nothing in the Report that directly refutes Judge Edwards' finding that:

The Court's factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors' their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.

at Page 25 of the Superior Court Order

Interesting, ain't it, how a Court and a law firm both conduct reviews and come away with such diametrically opposed findings. Judge Edwards called "into question the entire fairness" of FINRA's arbitral forum but FINRA's chosen outside law firm, well, not so much -- as the law firm puts it, FINRA just needs to do some housekeeping in the form of improvements. Yeah, that's it -- this is all about improving. It's not about unfairness. As to the chasm between the Court and the law firm, consider this finding by Judge Edwards:

Ensure that the arbitration process is fundamentally fair

Judicial review of arbitration awards, while limited in nature, ensure that the arbitration process is fundamentally fair to all parties involved. In this case (1) Wells Fargo and its counsel manipulated the arbitrator selection process; (2) the Arbitrators refused to postpone the hearing and provided no basis for their decision despite the Investors providing ample cause for postponement; (3) the Arbitrators denied the Investors their statutory right to present testimony from two relevant, noncumulative witnesses; (4) Wells Fargo witnesses and its counsel introduced perjured testimony, intentionally misrepresented the record, and refused to turn over a key document until after the close of evidence; and (5) the Arbitrators improperly and without legal justification imposed costs and fees on the Investors in violation of the contractual framework that bound the parties. The Court finds that each of these violations provides separate, independent grounds to vacate the Award in its entirety. Accordingly, the Panel's award is VACATED .

at Page 37 of the Superior Court Order

The Report says that the author "does not believe" the allegations are substantiated. Is not believing the same standard as concluding or as finding, or has the author carefully chosen his words? 

Moreover, the Report somewhat painfully states that FINRA Staff "generally adhered" to DRS policies and procedures -- "generally?" Generally as in not always . . . as in some instances Staff went astray?

Ultimately, the Report is what it is, and, from my perspective, it's wholly unpersuasive. The larger question is how FINRA's lackluster Board of Governors will receive the Report, which, as I anticipate, will be with a large rubber stamp. 

As I have long and loudly proclaimed, Wall Street's system of self-regulation is a morally bankrupt construct. Further, it is reprehensible that on top of its tepid self-policing, that the industry forces mandatory arbitration upon public customers and hundreds of thousands of associated persons. How nice it is that we are asked to take comfort that such a system is policed by Staff who "generally adhere" to the organization's policies and procedures.


Court Finds FINRA Arbitration Process Not Fundamentally Fair ( Blog / February 4, 2022)

122 Days And Counting For FINRA's Independent Review Of Its Arbitration Selection Process ( Blog / June 20, 2022)
Robert Louis Cirillo pled guilty in the United States District Court for the Central District of California to one count of securities fraud, one count of filing a false tax return, and one count of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

[F]rom 2014 to 2021, Cirillo deceived more than 100 victims by lying to them that he would be investing their funds in short-term construction loans that would pay large return rates that ranged from 15% to 30% for a period of up to 90 days. As part of the scheme, Cirillo showed actual and prospective victim-investors fabricated bank statements that purported to show the investments' growth.

In reality, Cirillo never invested the victims' money and instead used it for his own personal expenses, including credit card payments, a trip to Las Vegas, and two automobiles - a Jeep and an Alfa Romeo.

Cirillo admitted to targeting members of the Hispanic community, many of whom were of limited means, for his fraudulent scheme. One victim invested her life savings of $20,000 in Cirillo's scheme.

In the spring of 2021, Cirillo was part of a scheme that deceived a senior citizen into believing that his grandson had been arrested for possession of illegal narcotics, which was false. Cirillo's co-conspirators convinced the victim to send a total of nearly $400,000 for his grandson's "bail." Cirillo used some of that victim's money for his own personal benefit.

Finally, Cirillo admitted to filing false income tax returns for the years 2015, 2016 and 2017 by failing to report a total of more than $3 million in income. For example, on his 2017 federal income tax return, Cirillo reported a total income of $30,985, which failed to include more than $1.9 million in income he received from his investment fraud scheme.

Cirillo's investment fraud resulted in a total loss of $3,237,262; his conspiracy to defraud the senior citizen resulted a total loss of $399,550; and the total tax loss incurred was $675,898.
Paulette Carpoff, 51, pled guilty in the United States District Court for the Eastern District of California to ; and she was sentenced to 11 years and three months in prison for conspiracy to commit an offense against the United States and money laundering. As alleged in part in the DOJ Release: 

Between 2011 and 2018, DC Solar manufactured mobile solar generators (MSG) that were mounted on trailers. The company touted the versatility and environmental sustainability of the mobile solar generators and claimed that they were used to provide emergency power to cellphone towers and lighting at sporting and other events. A significant incentive for investors were generous federal tax credits due to the solar nature of the MSGs. Investors would buy the MSGs without ever taking possession of them, paying a percentage of the sales price and financing the balance with DC Solar. Then the investors leased the MSGs back to DC Solar, which in turn purported to lease them to third parties. A portion of the lease revenue was supposed to go to the investors and a portion would be used to pay the investors' debts to DC Solar.

But in fact, when the third‑party leases generated little income, the company paid early investors with funds contributed by later investors, and DC Solar became a Ponzi-like scheme. They sold solar generators that did not exist to investors, making it appear that solar generators existed in locations that they did not, creating false financial statements, and obtaining false lease contracts, among other efforts to conceal the fraud.

In reality, at least half of the approximately 17,000 solar generators claimed to have been manufactured by DC Solar did not exist. Contrary to what investors were told, approximately 94% of the revenue claimed by DC Solar Distribution from supposed third-party leasing actually came instead from transfers of new investor cash.

Paulette Carpoff controlled the Ponzi-like payments that hid the company's lack of third-party lease revenue, caused fake engineering reports for MSGs that the company sold but never built, and helped fool investors into thinking that DC Solar was a success. Eventually, DC Solar simply stopped building the mobile-solar generators that it claimed to be selling to investors.

While carrying out the fraud, Carpoff and her husband enjoyed an excessive accumulation of wealth that included luxury real estate in Lake Tahoe, Las Vegas, the Caribbean, and Cabo San Lucas, over 150 luxury and collector vehicles, a private subscription jet service, and lavish jewelry. When search warrants were executed in this case in December 2018, law enforcement found over $18,000 cash in Carpoff's purse, another over $18,000 cash in the master bedroom, over $22,000 cash in a safe in the master bedroom closet, and over $9,000 cash in the Carpoffs' vehicles parked at their residence.
. . .

On Nov. 9, 2021, Jeff Carpoff was sentenced to 30 years in prison and ordered to pay $790.6 million in restitution for conspiracy to commit wire fraud and money laundering.

On Nov. 16, 2021, Joseph W. Bayliss, 46, of Martinez, was sentenced to three years in prison and ordered to pay $481.3 million in restitution for securities fraud and conspiracy in connection with the DC Solar scheme. On April 12, 2022, DC Solar CFO Robert A. Karmann, 55, of Clayton, was sentenced to six years in prison and ordered to pay $624 million in restitution. On May 31, 2022, former DC Solar employee Alan Hansen was sentenced to eight years in prison and ordered to pay $619 million in restitution.

Two defendants have pleaded guilty to criminal offenses related to the fraud scheme and are scheduled for sentencing: Ryan Guidry, 45, of Pleasant Hill, is scheduled to be sentenced on July 26, 2022, and Ronald J. Roach, 55, of Walnut Creek, is scheduled to be sentenced on Sept. 13, 2022. . . .
Vijay Reddy, 46, pled guilty in the United States District Court for the District of New Jersey to an Information charging him with one count of conspiracy to commit wire fraud and one count of wire fraud; and he was sentenced to 48 months in prison plus three years of supervised release and ordered to pay restitution of $5.93 million.  As alleged in part in the DOJ Release:

From December 2015 through November 2020, Reddy and his conspirators, David Weinstein and Kevin Brown, advertised business opportunities for sale on various websites. They purported to sell "blocks" of contracts with medical providers who allegedly wanted to outsource their medical billing, collections, appeals, answering, credentialing, or transcription functions. The buyers would then provide the contracted services to the medical providers and earn a profit. The conspirators promised to deliver a specified number of providers and pledged that their proprietary marketing efforts would provide a guaranteed client base to the buyers.

To induce buyers to purchase the business opportunities, the conspirators created fake references purporting to be buyers who vouched for their prior business purchases from the conspirators. In fact, the references were Reddy, Weinstein, and their friends and family members, and they used aliases and disguised phone numbers to speak with potential buyers.

After agreeing to purchase the blocks of medical providers, victims entered contracts with companies represented by Weinstein or Reddy and wired down payments ranging from $15,000 to $240,000 to accounts controlled by Weinstein or Brown. The remainder of each purchase price was payable when the conspirators fulfilled the contract by delivering the agreed-upon number of providers.

After receiving the down payments, Weinstein and Reddy typically delivered to each victim only a small number of medical providers. Despite not fulfilling the contracts of any of the buyers identified by law enforcement, the conspirators continued to sell blocks of medical providers to new buyers and refused to provide refunds for their failures to satisfy the terms of the contracts. The conspirators also periodically sold batches of previously signed contracts and disclaimed further responsibility for those contracts to insulate themselves from complaints or legal action from disgruntled buyers.

Brown acted as the business broker for most of the transactions and received a commission for the sales he brokered. Reddy or Weinstein acted as the seller and signed the contracts with the victims. At least 77 victims sent more than $5 million to accounts controlled by the conspirators. The conspirators spent the victims' money on personal expenses and business investments.

Weinstein was sentenced in December 2021 to 12 years in prison; Brown pleaded guilty in February 2022 and is scheduled to be sentenced on Sept. 8, 2022.
In an Indictment filed in the United States District Court for the District of South Dakota, Keyvon Hamilton Hogan Jr, 22, was charged for his role in bank fraud and money laundering conspiracies; previously charged were Co-Defendants Antyon Hamilton Hogan Jr., Marvin Antuon Williams, and Giovanni Hamilton. As alleged in part in the DOJ Release:

[I]n 2020 and continuing until April 2022, all of the defendants conspired and agreed with others to knowingly conduct and attempt to conduct bank fraud and financial transactions affecting interstate and foreign commerce. Specifically, the co-conspirators knowingly conspired to execute and attempt to execute a scheme and artifice to defraud financial institutions throughout the Sioux Falls area and elsewhere, including, but not limited to, First Premier Bank, Wells Fargo Bank, Levo Credit Union, First National Bank, First Bank and Trust, U.S. Bank, American Bank and Trust, American State Bank, Navy Federal Credit Union, Pima Federal Credit Union, JP Morgan Chase, and Security National Bank of South Dakota. These defendants, as alleged, schemed to obtain money, funds, and other property owned by, and under the custody and control of, the aforementioned financial institutions, by means of false or fraudulent pretenses, representations, and promises. 

After obtaining funds through fraud, the co-conspirators and others engaged in depositing, transferring, wiring, and withdrawing currency, and funds at financial institutions, which involved the proceeds of specified unlawful activity - that is, the bank fraud identified above. These defendants knew that the transactions were designed in whole or in part to conceal and disguise the nature, location, source, ownership, or control of the proceeds of the fraud scheme. While conducting and attempting to conduct such financial transactions, it is alleged that the defendants knew that the property involved in the financial transactions represented the proceeds of some form of unlawful activity.
After pleading guilty in the United States District Court for the Southern District of New York to his role in a consumer fraud, Eugeni Tsvetnenkoa/k/a "Zhenya" was sentenced to 98 months in prison and ordered to pay forfeiture in the amount of approximately $15.4 million dollars, which he has repaid. As alleged in part in the DOJ Release:

From at least in or about 2012 through in or about 2013, TSVETNENKO, Wedd, Thompson, and others engaged in a multimillion-dollar scheme to defraud consumers by placing unauthorized charges for premium text messaging services on consumers' cellular phone bills through a practice known as auto-subscribing.  TSVETNENKO owned and operated several content provider companies and mobile industry companies in Australia that, among other things, created and sold premium text messaging content to consumers.  Wedd operated Mobile Messenger, a U.S. aggregation company in the mobile phone industry that served as a middleman between content providers (such as some of TSVETNENKO's companies) and mobile phone carriers.  Mobile Messenger was responsible for assembling monthly charges incurred by a particular mobile phone customer for premium text-messaging services and placing those charges on that customer's cellular phone bill.  

Beginning in or about early 2012, Wedd, Thompson, who was the Senior Vice President of Strategic Operations for Mobile Messenger, and two other senior executives of Mobile Messenger (CC-3 and CC-4) recruited TSVETNENKO to their auto-subscribing scheme to increase revenues at Mobile Messenger.  TSVETNENKO agreed and established two new content providers based in Australia, CF Enterprises and DigiMobi, to auto-subscribe on Mobile Messenger's aggregation platform.  CC-3 furnished lists of phone numbers to TSVETNENKO, along with an auto-subscribing "playbook," which provided TSVETNENKO with guidance on how to auto-subscribe without being caught.  The "playbook" described how to conceal the fraud scheme by making it appear as if the customers had, in fact, elected to purchase the text-messaging services, when in truth they had not.

The consumers who received the unsolicited text messages typically ignored or deleted the messages, often believing them to be spam.  Regardless, the consumers were billed for the receipt of the messages, at a rate of $9.99 per month, through charges that typically appeared on the consumers' cellular telephone bills in an abbreviated and confusing form, such as with nonsensical billing descriptors that often consisted of random letter and numbers.  The $9.99 charges recurred each month unless and until consumers noticed the charges and took action to unsubscribe.  Even then, consumers' attempts to dispute the charges and obtain refunds from CF Enterprises or DigiMobi were often unsuccessful.  Wedd, to whom CC-3, CC-4, and Thompson all reported, oversaw the scheme at Mobile Messenger.

TSVETNENKO, with the assistance of Wedd, Thompson, CC-3, and CC-4, started auto-subscribing consumers in approximately April of 2012.  TSVETNENKO's auto-subscribing activities, which continued into 2013, victimized hundreds of thousands of mobile phone customers, who were auto-subscribed through Mobile Messenger and charged a total of approximately $41,389,725 for unwanted text messaging services.  Wedd, Thompson, CC-3, and CC-4 agreed that TSVETNENKO would keep approximately 70% of the auto-subscribing proceeds generated by CF Enterprises and DigiMobi, and that the remaining 30% of the auto-subscribing proceeds would be divided evenly among Wedd, Thompson, CC-3, and CC-4.

After obtaining proceeds of the fraud scheme, TSVETNENKO worked with other co-conspirators to launder the proceeds.  TSVETNENKO and his co-conspirators distributed the proceeds of the fraud scheme among themselves and others involved in the scheme by, among other things, causing funds to be transferred through the bank accounts of a series of shell companies and companies held in the names of third parties.  This was done to conceal the nature and source of the payments and TSVETNENKO and his co-conspirators' participation in the fraud.
Aziz Choukri pled guilty in the United States District Court for the Northern District of Georgia to wire fraud. As alleged in part in the DOJ Release:

[I]n 2016, Choukri met the victim, then 79 years old, at a fitness facility in Alpharetta, Georgia. Choukri cultivated a close relationship with the elderly victim to gain his trust.  Choukri convinced the victim to invest almost $650,000 in his music management company.  Choukri convinced the victim that the investment carried no risk and was guaranteed to earn a return. 

Specifically, Choukri promised that the victim would be compensated the full amount of any investment, plus interest, and even told the victim that he would guarantee him a $1,000,000 return.  Choukri did not tell the victim that the money would be used to fund Choukri's lifestyle. 

Instead of using the money as an investment in a music business, Choukri used the victim's money largely on Choukri's own personal expenses, including, among other things, Choukri's activities of daily living (e.g., fast food, gas, and uber), payments for his daughter's college tuition and sorority expenses, dental work for his girlfriend, payments to his girlfriend for tutoring and babysitting, and repayment of a personal loan.  Choukri also transferred a significant amount of the victim's money to his children's accounts and withdrew thousands of dollars in cash.  Notably, Choukri's accounts show that almost all of Choukri's income in 2016 and 2017 was from the victim. 

An SEC Order found that Ernst & Young LLP ("EY"):
  • violated a Public Company Accounting Oversight Board ("PCAOB") rule requiring the firm to maintain integrity in the performance of a professional service, 
  • committed acts discreditable to the accounting profession, and 
  • failed to maintain an appropriate system of quality control. 
EY has admitted the facts underlying these findings and acknowledged that its conduct violated the integrity standard and provides a basis for the SEC to impose remedies. As alleged in part in the SEC Release:

EY admits that, over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients' financial statements comply with Generally Accepted Accounting Principles.

EY further admits that during the Enforcement Division's investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm's senior management. And as the Order finds, EY did not cooperate in the SEC's investigation regarding its materially misleading submission.

In addition to paying a $100 million penalty, the Order requires EY to engage in extensive undertakings, including retaining two separate independent consultants to help remediate its deficiencies. One consultant will review the firm's policies and procedures relating to ethics and integrity. The other will review EY's conduct regarding its disclosure failures, including whether any EY employees contributed to the firm's failure to correct its misleading submission.

I could have supported an enforcement action against Ernst & Young LLP ("EY") based on the cheating by EY audit professionals on various examinations necessary to earn and maintain their Certified Public Accountant ("CPA") licenses. Today's settlement, however, also quietly sets the precedent that failing to correct a response to a voluntary information request received from the Securities and Exchange Commission ("SEC" or "Commission") might be a strict liability offense punishable with outsized penalties and other costly remedial measures. Setting aside whether the remedies are commensurate to the alleged failure, the source and scope of this purported duty to correct-a duty that, if it exists, likely has profound consequences-is altogether unclear. Accordingly, I dissent.

Cheating by audit professionals on continuing education testing undermines the integrity that is core to their important role in our capital markets. Hundreds of EY personnel across multiple offices cheated over several years by, among other things, sharing answer keys and manipulating testing software. That some CPAs cheated on the ethics component of CPA examinations is particularly troubling. Moreover, despite an EY code of conduct requirement to report unethical conduct, many EY employees who knew of the cheating did not report it. Although the firm investigated reported misconduct and disciplined some cheaters, the cheating did not stop. EY also failed to have adequate policies and procedures to provide its audit staff with the ethical and technical training required and to monitor for, deter, and detect these violations. In sum, there is a solid case against EY based on the widespread cheating and failure of its quality control system, and I could have supported an enforcement action and settlement focused on that conduct.

This strong case involving plain misconduct, however, is paired with distinct allegations of wrongdoing by EY. The genesis of these distinct allegations requires some explanation. On June 17, 2019, a different large audit firm settled with the Commission based on cheating on CPA exams and improper information sharing by former PCAOB personnel.[1] On June 19, 2019, the SEC sent and EY received a voluntary request for information about "any ethics or whistleblower complaints regarding testing associated with any EY training program or continuing professional education course." The SEC requested that EY respond to the request by June 20, the next day. EY met this aggressive deadline, and on June 20 sent a submission to the SEC that disclosed five incidents responsive to the request.

On the same day the SEC sent its voluntary request, an EY employee reported to a manager that "a professional in the firm's audit group had emailed the employee answers to a CPA ethics exam." The manager, on the afternoon of June 19, relayed the report to "an EY human resources employee" who in turn, at some unspecified point in time, relayed it "to others in EY's human resources group." The "senior EY attorneys" who "reviewed EY's June 20" submission responding to the SEC's voluntary June 19 request "were apprised of the employee's June 19" report "[n]o later than June 21." (Emphasis added.) Given this sequence, it is unsurprising that EY's June 20 submission did not include the June 19 report. Yet according to today's Order, "EY's June 20 submission was materially misleading" because it did not include the June 19 report, the omission of which "created the impression that EY did not have current issues with cheating." The Order further faults EY for failing to correct the June 20 submission.

Yet EY did not simply sit on its hands after receiving the June 19 report; rather, it commenced an internal investigation and uncovered "significant misconduct" and "confirmed that audit professionals in multiple offices cheated on CPA ethics exams." Nine months later, once it had completed its internal investigation and developed a plan to address the problem, EY reported the results of its investigation to its primary regulator, the Public Company Accounting Oversight Board ("PCAOB"), which in turn notified the SEC.

It is quite evident, though, that EY's decision to undertake an internal investigation and self-report to the PCAOB without also correcting in the June 20 submission was not, in the Commission's view, the right course of action. The Order draws a direct link between the cheating and the failure to correct the submission to the SEC: "Just as many of its audit professionals failed to report their colleagues' cheating as required, EY withheld this misconduct from the SEC during an investigation about cheating at the firm." The Order further states that "despite the message from EY's U.S. Chair and Managing Partner only two days earlier about the importance of integrity and honesty, EY did not correct its submission to the SEC's Enforcement Division." EY's initial failure to correct, presumably combined with its conducting of an internal investigation without providing updates to Commission staff, metastasizes into "withholding information about misconduct that EY knew SEC staff was investigating" and "continued misrepresentations to the SEC's Division of Enforcement [that] significantly hindered the SEC's ability to take action that would protect investors" from cheating audit professionals.

The Order concludes that the sum of EY's conduct-the widespread cheating, policies and procedures deficiencies, and the failure to correct the June 20 submission-violated PCAOB Rule 3500T, constituted a failure to comply with AICPA Code of Professional Conduct 1.400.001, and contravened the requirements of PCAOB Quality Control Standard 20 ("QC 20"). While there is a logical connection between each of these provisions and the cheating by audit professionals and related policies and procedures deficiencies, it is not at all clear which of these provisions relate to EY's failure to correct the June 20 submission. As the Order notes, QC 20 requires EY to "have a system of quality control for its accounting and auditing practices." This standard seems inapposite given the lack of any apparent logical nexus between EY's "accounting and auditing practices" and its processes for responding to voluntary requests for information from the SEC, particularly when those requests are not related to any specific audit. Similarly, PCAOB Rule 3500T applies only to conduct undertaken "[i]n connection with the preparation or issuance of any audit report." Again, the Order does not explain how and why senior EY attorneys responding to a voluntary request for historical information unrelated to any particular audit constitutes conduct related to the preparation or issuance of an audit report.[2] Also unexplained is how failing to correct the June 20 submission violated AICPA Code of Professional Conduct 1.400.001, which simply states that "[a] member shall not commit an act discreditable to the profession." Indeed, other than its curt references to compliance "with ethics standards" and "maintain[ing] integrity", the Order fails to offer any analysis of whether and how EY's failure to correct the June 20 submission violated any of the cited provisions. One is simply left adrift in a sea of accounting standards, wondering how lawyers responding to voluntary requests for information are to navigate using the polestars of ethics and integrity.

Aside from the lack of clarity regarding the particular law EY violated by failing to correct the June 20 submission, I have a number of concerns that prevent me from supporting today's settlement. First, I am concerned that the duty to correct that the Order implicitly imposes on EY lacks sound legal grounding and is ill-defined in scope. I am aware of no legal basis for the proposition that by responding to a voluntary request for information, a firm takes on itself a duty to correct its response based on later-learned information. The Order faults EY for "withholding information about misconduct that EY knew SEC staff was investigating," but the applicable standard cannot be that a firm must disclose information related to misconduct the SEC is investigating, otherwise a firm would be required to report information whenever it knew of an investigation. Granted, EY knew of the investigation here because it received a voluntary request for information, but are voluntary inquiries from the staff now sources of mandatory, continuing reporting obligations on par with those imposed by the Federal Rules of Civil Procedure?[3] Notably absent from today's Order is any explanation of when, why, and for how long after responding to a voluntary, backward-looking request for information a firm must continue reporting to the SEC's Division of Enforcement.

Ought EY to have disclosed the one incident that awkwardly appeared on the firm's radar nearly simultaneous to its report to the SEC? Given the benefit of hindsight that I have, I would have preferred that EY do so. And, as a prudential matter, cautious legal counsel might say yes; however, what I might prefer and what one might do as a matter of prudence should not be confused with what one must do as a consequence of a legal obligation. Treating the failure to take the prudent and cautious path as though it is a strict liability violation of some affirmative legal obligation is not supported by the law. If we do intend responses to voluntary information requests to carry with them an ongoing obligation to correct and supplement the information provided, let us spell it out.

Second, the assertion that the June 20 submission was materially misleading is woefully misguided and patently unfair. The Order contends that the June 20 submission was "materially misleading" because it did not include a tip that came in the same day EY received the voluntary request for information, and thereby gave the staff the misimpression that EY "did not have any current issues with cheating." But expecting tips to instantaneously traverse the distance from tipper to the firm's headquarters in a single day is objectively unreasonable. A system designed to take tips in and process them in an orderly, but not instantaneous, manner is reasonable. Here, the tip made it to headquarters within two days. Not bad. That a tip received in one corner of a large firm was not included in a submission hurriedly put together in response to a request with an SEC-imposed 24-hour deadline does not make the resulting submission materially misleading. To the extent the Order means to assert that the June 20 submission became materially misleading as a consequence of EY's failure to correct it (and thereby dispel the staff's misimpression), it seems questionable for two reasons: (1) it assumes that EY was under some duty to correct, an assumption that is problematic for the reasons already discussed; and (2) it effectively requires EY to predict what impression the staff would take away from the June 20 submission.

Third, this settlement's remedies also set a troubling precedent. To conduct an "Independent Review of EY's Disclosure Failures," the Order mandates that EY "designate a three-person committee of EY senior personnel" to retain an independent consultant (the "Remedial IC"). The Remedial IC, who will have full access to EY's privileged information, will "conduct a review . . . of EY's conduct relating to the Commission staff's June 2019 Information Request, including whether any member of EY's executive team, General Counsel's Office, compliance staff, or other EY employees contributed to the firm's failure to correct its misleading submission." The Remedial IC's report shall "mak[e] recommendations, as the Remedial IC deems appropriate, as to employment actions or other remedial steps." While the three-person committee can object to the recommendations, ultimately, the Remedial IC has the final say. The upshot of this requirement is that the Remedial IC is vested with non-appealable authority to discipline or fire any EY personnel involved with responding the SEC's June 19 request. This implicit directive to find attorneys and compliance personnel to blame for not complying with a non-existent obligation to correct the June 20 submission is particularly troubling.

Lastly, a penalty of $100 million is puzzling given that the prior audit cheating case, which also involved "altering past audit work after receiving stolen information about inspections of the firm that would be conducted by the" PCAOB, only generated a $50 million penalty.[4] Each matter is, of course, unique, but comparisons are inevitable.

The unduly punitive terms of this settlement and its focus on imperfect compliance with a voluntary staff request for information with a one-day-turnaround detract from the central issue-pervasive cheating by audit firm employees. I am sorry that I could not support this settlement.

[1] In the Matter of KPMG, Rel. No. 34-86118 (June 17, 2019), available at

[2] The AICPA Code of Professional Conduct Rule, which provides the substantive requirements one must meet under Rule 3500T(a), states that "[i]n the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others." Even if one were to conclude that EY "knowingly" misrepresented facts in the June 20 submission-a finding the Order does not make-Rule 3500T's plain language defines the relevant "professional service[s]" as those performed "in connection with the preparation or issuance of any audit report."

[3] See Fed. R. Civ. P. 26(e)(1) ("A party who has made a disclosure under Rule 26(a)-or who has responded to an interrogatory, request for production, or request for admission-must supplement or correct its disclosure or response: (A) in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing . . .").

[4] KPMG Paying $50 Million Penalty for Illicit use of PCAOB Data and Cheating on Training Exams, (June 17, 2019), available at
In a Complaint filed in the United States District Court for District of Massachusetts, the SEC charged Bradley Moynes and Digatrade Financial Corp with violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Vancap Ventures, Inc. was named as  a relief defendant. As alleged in part in the SEC Release:

The SEC's complaint alleges that Moynes was the President, CEO and Director of two small and thinly traded companies, Formcap Corporation and Digatrade, whose stock was publicly traded in the U.S. securities markets. According to the complaint, Moynes used foreign nominee companies to hold stock in these microcap companies, thus concealing his ownership. The complaint alleges that he and his associates generated demand for his stock by paying promoters to tout the stock and then secretly sold his stock into that demand, generating substantial illicit profits from unsuspecting investors.

Moynes allegedly violated the U.S. securities laws because he defrauded investors by concealing information about his ownership and control over the stock he was selling. Moynes allegedly signed numerous filings with the SEC that contained misstatements about his ownership of Digatrade shares. Moynes allegedly misled investors, brokers, and transfer agents (companies that maintain records of stock ownership) in order to convince these parties that his stock shares were eligible for trading in the public markets. The complaint alleges that, as a result of Moynes' deceptive conduct, investors buying the stock he sold were deprived of important information-that the stock they purchased was being dumped by the President and majority shareholder of the company.

FINRA Department of Enforcement, Complainant, v. Worden Capital Management LLC, Respondent (FINRA Office of Hearing Officers Default Decision, Discip. Proc. No. 2019064746502)
As asserted in the Syllabus of the OHO Decision:

Respondent Worden Capital Management LLC is expelled from FINRA and ordered to disgorge ill-gotten gains for fraudulently omitting material information in connection with the sales of securities, failing to fulfill its supervisory responsibilities in the sale of securities, recommending investments without a reasonable basis to believe them suitable for at least some investors, and failing to submit to FINRA the offering materials it used in recommending the investments.
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, Paul Charles DeMark submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Paul Charles DeMark was first registered in 1985, and from 2009 to 2019, he was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon DeMark a $7,500 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

To authorize a check to be written from customer accounts, representatives were required to submit a "Verbal Client Instructions Form," which contained a space to identify the name of the person spoken to who had authorized the disbursement. One of DeMark's customers was a trust, with a designated trustee authorized to act on its behalf. After the trustee died, between January 2013 and July 2017, DeMark submitted, or caused to be submitted, 48 disbursement forms that inaccurately identified the deceased trustee ( or his son with a similar name) as having been the person who had authorized the disbursement. In fact, the disbursement had been authorized by a separate individual, the successor trustee. 

Therefore, DeMark violated FINRA Rules 2010 and 4511.
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, Gregory Andrews  submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Gregory Andrews was first registered in 1989, and by 2009, he was registered with UBS Financial Services Inc. In accordance with the terms of the AWC, FINRA imposed upon Andrews 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:

When Andrews joined Tellson in April 2020, his role at the firm was to provide investment banking services to corporate customers. At the time he joined the firm, he orally disclosed that he was the owner and principal of a company (the Company) that engaged in solar energy project development. In June 2020, Andrews submitted a written outside business activity disclosure form to the firm that stated that, through his outside business, he would "Provide CFO duties, management consulting and project development for renewable energy, transportation and pipeline projects." Tellson approved the outside business as Andrews described it in late July 2020. 

While registered with Tellson, Andrews provided consulting services to one technology start-up company and solicited work from a second technology start-up company through the Company. Neither of the technology start-ups were involved with renewable energy, transportation and pipeline projects. Andrews expected, but did not receive, compensation for this work. The services he provided, and solicited providing, were consistent with the kinds of services he was expected to perform through Tellson. Andrews did not adequately disclose his activities to Tellson or otherwise update or amend his outside business activity disclosure form. 

Therefore, Andrews violated FINRA Rules 3270 and 2010.

FINRA Fines and Suspends Former UBS for Rock Salt
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, Patrick Reid Murray submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Patrick Reid Murray was first registered in 1989, and by 2009, he was registered with UBS Financial Services Inc. In accordance with the terms of the AWC, FINRA imposed upon Murray a $5,000 fine and a one-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In March 2018, Murray and two other individuals established a company called Integrity Salt, LLC (Integrity) to buy and sell rock salt by filing articles of organization with the Ohio Secretary of State. Murray made capital contributions to Integrity and made at least one vendor payment on behalf of the company by wiring more than a million dollars from his personal account directly to the vendor. Murray also earned approximately $78,704 in compensation from his Integrity-related activities. Murray did not provide prior written notice to or obtain UBS's approval before commencing his outside activities with Integrity. In July 2018, Murray also inaccurately certified that he was in compliance with the firm's WSPs relating to outside business activities. 

Therefore, Murray violated FINRA Rules 3270 and 2010.

Bill Singer's Comment: Oh for godsakes, really? Consider this disclosure in the AWC:

In a Uniform Termination Notice for Securities Industry Registration (Form US) dated October 15, 2021, UBS reported that Murray had been discharged after a firm review determined that he exceeded the approved scope of an outside business activity. 

So . . . Murray got fired by UBS in 2021 because he went into the rock salt business in 2018. Okay, sure, whatever. Then, on top of losing his job, FINRA socks Murray with $5,000 in fines and a one-month suspension. 

Let's just make sure that we are all on the same page as things are spelled out in the AWC. 

First, Murray and two others filed articles of organization for a rock salt biz in 2018. One could argue that the filing does not rise to the level of "engaging" in an outside business as much as preparing to do so. 

Second, Murray made a capital contribution. Again, one could argue that funding a start-up is preparation to engage in a business and not the actual activity of being in business. 

Third, Murray took cash out of his own pocket and wired that to a vendor. Perhaps you need to buy $1 million of rock salt to be able to sell any rock salt, so, again, this could easily be characterized as the preparation to engage in a business, which seems all the more reasonable since the payment was not issued from the company but undertaken personally by Murray. 

Fourth, the AWC claims that Murray "earned" $78,704 in compensation from the company's "related" activities. That's an odd turn of a phrase. 

Missing from the AWC is any statement as to Murray's explanations. Perhaps Murray did not feel that he had engaged in an outside business because Integrity Salt hadn't actually moved forward to the point of being an ongoing business. Perhaps Murray covered up his activities. Perhaps Murray misunderstood what he needed to disclose to UBS and when. I dunno. The AWC sure as hell doesn't clarify anything. Did all of this amount to the basis for termination, suspension, and a fine? Perhaps -- but FINRA doesn't present any facts that convinces me of its case. Blog publisher Bill Singer Esq. is no fan of non-solicit/non-compete provisions. Sure, there could be . . . there are . . . compelling fact patterns when a departed employee may have really gone over the edge and deserves to have the crap sued out of him. On the other hand, given that Wall Street is the purported bastion of free enterprise and Capitalism, it's a tad cynical to exalt the benefits of free markets and competition but, you know, then go sue folks for practicing what you preach. Bill often counsels employer-brokerage-firms to handle departing employees with class and grace. Wish 'em well. Let 'em know how much you valued their contribution and how much you regret the departure. Shake hands. Send a bottle of champagne or something when they open their new shop. Let 'em know that if things don't work out, you would always welcome an opportunity to renew the professional relationship in the future. Not a lot of brokerage firms follow Bill's advice. A more popular option is the scorch-the-earth-and-send-'em-a-message gambit. Sometimes it works. Sometimes not. Read about a recent federal case involving Edelman Financial Engines, LLC.