Securities Industry Commentator by Bill Singer Esq

UBS Sued in Federal Court Over Form 1099 Reporting (BrokeAndBroker.com Blog)

SEC Charges Former Business Development Executive and Two Friends with Insider Trading (SEC Release)

Federal Court Orders Texas Unregistered Commodity Pool Operator to Pay More Than $13 Million for Commodity Fraud (CFTC Release)

SEC Obtains Final Judgments Against Defendants in Netflix Insider Trading Ring (DOJ Release)

SEC Obtains Judgments Against Three Individuals for Participating in Multi-Million Dollar International Fraud Scheme (SEC Release)

The Nasdaq Stock Market LLC, et al., Petitioners, v. Securities and Exchange Commission, Respondent (Opinion, DC Cir)

Oppenheimer Customer Wins Over $200,000 in FINRA Arbitration for Something Involving Something

In the Matter of the Arbitration Between Gerald A. Fallon, Claimant, v. Oppenheimer & Co. Inc., Tom G. Thacker, II, and Ernest Sean Mishne, Respondents (FINRA Arbitration Award)

SEC Denies Award To Whistleblower Claimant

Order Determining Whistleblower Award Claims

CFTC Orders Swap Dealer to Pay $6 Million for Swap Reporting and Daily Mark Disclosure Violations (CFTC Release)

CFTC Orders J.P. Morgan to Pay $850,000 for Swap Reporting Failures (CFTC Release)

Statement of  CFTC Commissioner Christy Goldsmith Romero Regarding Enforcement Action Against JP Morgan Chase Bank, N.A., et al. for Swap Data Reporting Failures

FINRA Fines and Suspends Rep for Investment Property OBA

In the Matter of Wei Donald Tang Respondent (FINRA AWC)

The Flash Crash, Interactive Brokers, Two Hedge Funds, John Does, and Homer Simpson's Appetite for Donuts (BrokeAndBroker.com Blog)

Charles Schwab SIP Robo-Adviser Cited In FINRA Arbitration (BrokeAndBroker.com Blog)

[T]avlin tipped his friend Afshin Farahan regarding Mazor's impending acquisition by Medtronic. The complaint alleges that Farahan used the information to buy Mazor stock and also tipped his friend, David J. Gantman, who purchased Mazor stock and call options in advance of the September 20, 2018 acquisition announcement. The SEC alleges that Farahan made about $247,500 in illegal trading profits, and Gantman made approximately $255,600. According to the complaint, in October 2019, Tavlin asked Farahan for money in exchange for the Mazor information, and Farahan paid him a kickback of $25,000. The SEC's Market Abuse Unit used data analysis tools to uncover the defendants' timely and profitable trading.

As the court previously found, from March 2016 through April 2019, Seibert fraudulently solicited and accepted more than $10 million from 11 participants. At the time, Seibert claimed that he would use participant funds for short-term, high-interest, secured "bridge loans" made to third-party borrowers who purportedly would use the loaned funds to make property repairs as they sought permanent financing. Seibert told participants that he would find the lending opportunities, complete the due diligence to confirm that the borrower was qualified, and handle the closing and servicing of the loan. However, Seibert did not originate any loans. Seibert instead pooled and used most of the funds to trade commodity interests in his personal trading account, where he lost more than $8.3 million trading. He used other participant funds for personal expenditures.

Parallel Criminal Action

In a separate action, the U.S. Attorney's Office for the Western District of Texas filed a criminal complaint against Seibert on June 3, 2021, charging him with two counts of wire fraud and engaging in monetary transactions in property derived from unlawful activity. United States v. David Byron Seibert, No. 1:21-CR-00104-RP (W. D. Texas). Seibert pled guilty and was sentenced on December 7, 2021 to 70 months of incarceration and three additional years of supervised release. He was also ordered to pay restitution of $10,794,508 and was subject to a criminal forfeiture. 

[S]ung Mo Jun, while employed at Netflix in 2016 and 2017, tipped his brother, Joon Mo Jun, and his close friend, Junwoo Chon, about Netflix's subscriber growth, a key metric Netflix reported in its quarterly earnings announcements, and that both tippees used the information to trade in advance of multiple Netflix earnings announcements. The complaint further alleged that after Sung Mo Jun left Netflix in 2017, he obtained confidential Netflix subscriber information from another Netflix insider, Ayden Lee. Sung Mo Jun then allegedly traded himself and tipped Joon Jun and Chon in advance of Netflix earnings announcements from 2017 to 2019. The SEC alleged that Sung Mo Jun's former Netflix colleague Jae Hyeon Bae, another Netflix engineer, tipped Joon Jun based on Netflix's subscriber growth information in advance of Netflix's July 2019 earnings announcement. According to the complaint, Sung Mo Jun, Joon Jun, and Chon made approximately $3 million in total profits from the illegal scheme.

Sung Mo Jun, Joon Jun, Chon, and Lee consented to the entry of final judgments that resolve all claims and permanently enjoin each of them from violating the antifraud provisions of Section 10(b) of the Securities Act of 1934 and Rule 10b-5 thereunder. Sung Mo Jun also agreed to an officer and director bar. The Court previously entered a final judgment against Bae, permanently enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 and imposing a civil penalty of $72,875.

In a parallel action brought by the U.S. Attorney's Office for the Western District of Washington, Sung Mo Jun, Joon Jun, Chon, and Lee each pleaded guilty to related criminal charges. Sung Mo Jun was sentenced to 24 months in prison and was ordered to forfeit $495,000. Joon Jun was sentenced to 13 months in prison and ordered to forfeit $1.11 million. Chon was sentenced to 14 months in prison and ordered to forfeit $1.58 million. Lee was sentenced to three years of probation.

[I]n at least 2016, Bahadoorsingh, Wilson, and Wall, working with defendant Luis Carrillo, concealed the fact that they controlled the securities of Aureus, Inc., whose stock was publicly traded in the U.S. securities markets. According to the complaint, Bahadoorsingh and Carrillo secretly sold millions of Aureus shares in violation of the securities laws after organizing promotional campaigns to encourage investors to buy the stock. Wilson and Wall allegedly worked with Bahadoorsingh and others to gain control of Aureus' securities and fraudulently sell them. According to the complaint, Wilson and Wall used false documents to get the company's shares deposited for sale in brokerage accounts. The complaint alleges that, as a result of these actions, what appeared to be ordinary trading by unaffiliated investors was actually a massive dump of shares orchestrated by Carrillo, Bahadoorsingh, Wall, and Wilson, who were seeking to profit at the expense of retail investors.

On June 30, 2022, the Court granted the SEC's motion for default judgment against Bahadoorsingh, permanently enjoining him from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, the registration provisions of Section 5 of the Securities Act, and the ownership reporting provisions of Section 13(d) of the Exchange Act. The Court also imposed a penny stock bar on Bahadoorsingh and ordered him to pay disgorgement of ill-gotten gains of $572,002, $149,299 in prejudgment interest thereon, and a civil penalty of $207,183.

The Court's judgment against Wilson, also entered on June 30, 2022, permanently enjoined him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the ownership reporting provisions of Section 13(d) of the Exchange Act. The Court also imposed a penny stock bar on Wilson and ordered him to pay disgorgement of ill-gotten gains of $28,107, and $3,173 in prejudgment interest thereon. The Court may determine a civil penalty amount at a later date.

The Court's judgment against Wall, entered on February 18, 2022, permanently enjoined him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the ownership reporting provisions of Section 13(d) of the Exchange Act. The Court also imposed a penny stock bar on Wilson and ordered him to pay disgorgement of ill-gotten gains of $7,870, and $1,597 in prejudgment interest thereon. The Court may determine a civil penalty amount at a later date.

The Court's judgment against the Trusts, entered on November 18, 2021, ordered the Trusts, jointly and severally, to pay disgorgement of ill-gotten gains of $565,000, and $79,455 in prejudgment interest thereon.

KAREN LECRAFT HENDERSON, Circuit Judge: The Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq., directs the Securities and Exchange Commission (Commission) to facilitate the establishment of a national market system (NMS), a key component of which is the public dissemination of market data regarding quotations for and transactions in equity securities. Equity market data is collected, consolidated and disseminated pursuant to NMS plans governed and operated by "self-regulatory organizations" (SROs), groups comprising, in large part, the major national securities exchanges for equity securities. Beginning in 2020, the Commission issued two orders aimed at consolidating the existing NMS plans governing the dissemination of equity market data into a single, consolidated plan (CT Plan) and modifying the governance structure to increase efficiencies, mitigate conflicts of interest among the securities exchanges and facilitate greater involvement by nonexchange stakeholders. See Order Directing the Exchanges and the Financial Industry Regulatory Authority To Submit a New National Market System Plan Regarding Consolidated Equity Market Data, 85 Fed. Reg. 28,702 (May 13, 2020) (Governance Order); Order Approving, as Modified, a National Market System Plan Regarding Consolidated Equity Market Data, 86 Fed. Reg. 44,142 (Aug. 11, 2021) (CT Plan Order).

A group of national securities exchanges associated with Nasdaq, Inc. (Nasdaq), the New York Stock Exchange (NYSE) and Cboe Global Markets (Cboe) (collectively, petitioners) challenge the Commission's orders, arguing that several elements are arbitrary and capricious under the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq., or contrary to the text and goals of the Exchange Act. In particular, petitioners challenge three provisions of the final, Commission-approved CT Plan: (1) the inclusion of representatives of non-SROs as voting members of the CT Plan's operating committee; (2) the grouping of SROs based on corporate affiliation for voting; and (3) the requirement that the administrator of the CT Plan be "independent," meaning independent of any SRO that sells equity market data products. 

As detailed infra, we grant petitioners' three petitions as to the first challenged provision-non-SRO representation-and deny them in all other respects. Further, because the non-SRO-representation provision is not severable from the CT Plan Order, we vacate that Order in its entirety. We do, however, uphold in large part the Governance Order, which preceded the CT Plan Order and merely directed the SROs to propose an NMS plan that included the three challenged provisions. 

The Commission, for its part, pays little more than lip service to our concern that severing parts of the CT Plan Order would render the plan unworkable. It first makes the unsupported statement that, if one of the challenged provisions of the CT Plan is found to be unlawful, "the remaining provisions could 'function sensibly.'" Resp't Br. 56 (quoting Carlson, 938 F.3d at 351-52). As explained above, we struggle to see how that is the case. The Commission then invokes the severability provision included in the CT Plan itself, which states that "any determination that any provision of the CT Plan is invalid or unenforceable shall not affect the validity or enforceability of any other provisions of the CT Plan, all of which shall remain in full force and effect." CT Plan Order, 86 Fed. Reg. at 44,207. But "the ultimate determination of severability will rarely turn on the presence or absence" of a severability clause. Cmty. for Creative Non-Violence v. Turner, 893 F.2d 1387, 1394 (D.C. Cir. 1990) (quoting United States v. Jackson, 390 U.S. 570, 585 n.27 (1968)). Instead, we look to agency intent and whether the valid portions can function absent the invalid portions, id.; doing so, we conclude that the CT Plan, as currently constructed, would be unworkable if we simply severed the provision requiring non-SRO representation. 

At the hearing, Claimant requested $345,448 in damages, plus 1/3 for attorneys' fees ($115,137.82), plus expert fees of $35,167.50, plus $29,415.65, equaling $525,168.97, plus an award of appropriate punitive damages. Alternatively, if rescission of the unauthorized options trades is allowed instead, Claimant requested $427,312.69 in damages, plus 1/3 for attorneys' fees ($142,423.32), plus expert fees of $35,167.50, plus $29,415.65, equaling $634,319.16, plus an award of appropriate punitive damages.

The causes of action related to Claimant's allegation regarding the purchase of options, unspecified non-dividend paying stocks, over-concentration in many stocks, and repeated violations of Claimant's margin limits.

[C]laimant's submission of information to the Commission was not "voluntary," as required by Section 21F(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 21F-3 and 21F-4(a)(1) thereunder, because Claimant provided information in *** after Enforcement staff had already subpoenaed Claimant and taken Claimant's testimony in the *** Investigation on a subject matter related to his/her information. Second, the CRS determined that, under Rule 21F-8(c)(7), Claimant was ineligible for an award because Claimant had knowingly and willfully made false statements to Commission staff during Claimant's *** testimony.

[F]or more than five years, from 2016 through at least 2021, BNPP failed to correctly report numerous swap transactions to a swap data repository (SDR) as required by the CEA and CFTC regulations. BNPP did not report more than 6,000 swap transactions with U.S. persons, because the counterparties had been incorrectly classified as non-U.S. persons. As a result, BNPP failed to make more than 300,000 reports relating to these transactions. These reports are required by the CEA and CFTC regulations.

The order also finds that BNPP also entered into more than 3 million swap transactions during this period that were incorrectly reported under the CFTC's rules. From 2016 to 2018, the swap dealer also failed to correctly report thousands of bunched trades. Instead of correctly reporting them as allocations of trades, BNPP reported these transactions as new trades. In addition, from 2016 to 2020, BNPP incorrectly reported certain commodity swaps. These trades were reported, but were incorrectly described as equity trades rather than commodity trades. In total, approximately 3,000 transactions were incorrectly reported in this fashion. 

Moreover, during the period 2016 to 2017, as the order finds, BNPP adjusted daily mark disclosures for 82 swap transactions, which resulted in approximately 19,000 adjusted daily mark disclosures being made to the relevant swap counterparties, contrary to the requirements of the CEA and CFTC regulations.

In accepting BNPP's Offer of Settlement, the CFTC recognizes BNPP's substantial cooperation during the Division of Enforcement's investigation of this matter. The CFTC notes that BNPP's cooperation and remediation are recognized in the form of a substantially reduced civil monetary penalty.

The order specifically finds that, from September 2015 to February 2020, J.P. Morgan failed to report approximately 2.1 million short-dated foreign exchange (FX) swap transactions. These unreported short-dated FX swap transactions represented approximately fifty-one percent of the total number of FX swaps that J.P. Morgan executed during that same period. 

Short-dated FX swaps are transactions in which the parties exchange two currencies the day after execution and then reverse that exchange at a predetermined rate on the following business day. A short-dated FX swap is a reportable FX swap transaction because it involves an exchange of currencies and a reversal of that exchange on specific dates and at rates fixed at the inception of the contract. Consequently, J.P. Morgan was obligated to report its short-dated FX swaps under the relevant statutory and regulatory provisions, which it failed to do during the relevant period.

 J.P. Morgan has represented that it has reported all of the previously-unreported FX swaps transactions it was obligated to report. 

I strongly support this enforcement action against JP Morgan for violating CFTC swap data reporting requirements for years, and failing to report accurately more than 2.1 million swap transactions.  I am quite concerned by the duration and substantial nature of violations by JP Morgan.  I also note that JP Morgan has been the subject of several CFTC enforcement actions over the years, and the subject of many other federal agency enforcement actions.

Swap data reporting is fundamental to post-crisis financial regulation.  It is one of the key measures in the Dodd Frank Act to bring transparency to risk previously hidden.  This transparency is necessary for regulators to identify risk, and ultimately to reduce risk that could become systemic.  Transparency is also necessary for the CFTC to fulfill its mission to promote market resilience and integrity so that our markets remain the strongest and safest in the world.  This requires, among other things, the CFTC to conduct market and financial surveillance-surveillance that relies on swap dealers fulfilling their obligation to provide accurate and complete data.

This case should serve as a message to all swap dealers that the CFTC will bring justice for failures in swap data reporting.  It has been more than 10 years since the Dodd-Frank Act swap data reporting rules have been in place.  It is far past time for swap dealers to come into compliance with the law.

During the period February 2004 to May 2020, Respondent served as the managing member and owner of four limited liability companies (the LLCs) that each owned an investment property. Respondent hired property managers to manage three of the properties as rentals, from which he received combined annual income ranging from $100,000 to $200,000. Respondent also expected to profit from appreciation on the value of the fourth investment property. 

Respondent did not notify the firm that he was engaging in this business, which did not involve firm customers, until May 2020, after the firm received inquiries about the business from FINRA. 

Therefore, Respondent violated FINRA Rules 3270 and 2010. 

• Securities Industry Commentator
• Bill Singer