Securities Industry Commentator by Bill Singer Esq

August 9, 2022

Imagine that Joe, Jack, and Jim are charged with a criminal conspiracy, but Joe and Jack refuse to plead guilty. In contrast, Jim fully cooperates against Joe and Jack. After getting their days in court, Joe and Jack are convicted and sentenced to prison. Although Jim becomes a convicted felon via his plea, he serves only one-day in prison but has to pay a $1 million fine. On appeal, Joe and Jack's convictions are reversed. Is Jim still guilty of being part of conspiracy despite the fact that the other two co-conspirators are not guilty of fraud? Does Jim have his felony plea dismissed? Does Jim get his $1 million fine back?

ZF Micro Solutions, Inc., Plaintiff/Appellant, v. TAT Capital Partners, Ltd, Defendant/Respondent (Opinion, Court of Appeal for the State of California / August 8, 2022)
Submitted for your consideration, the "Introduction" from the California Court of Appeal's Opinion:

We are called upon here to determine whether a suit for compensatory damages is an action at law or in equity. While this is usually a straightforward call, fiduciary roles and responsibilities complicate it here. ZF Micro Solutions, Inc., the successor of now deceased ZF Micro Devices, Inc., alleges TAT Capital Partners, Ltd., murdered its predecessor by inserting a board member who poisoned it. We hold that while examining the performance of a board member's fiduciary duties will be required, resolution of this claim does not implicate the powers of equity, and it should have been tried as a matter at law. 

The sole issue in this appeal by ZF Micro Solutions is whether its cross-complaint against respondent TAT should have been tried to a jury. ZF Micro Solutions alleged that TAT, through its representative on the board of directors of ZF Micro Devices, had destroyed ZF Micro Devices while attempting to take it over and oust its management. 

The trial court decided the claim for breach of TAT's fiduciary duty as a director was equitable rather than legal and, after a court trial, entered judgment for TAT. ZF Micro Solutions asserts this was error. 

We agree. The "gist" of ZF Micro Solutions' claim against TAT is a request for compensatory damages for destroying its predecessor corporation. There are no equities to weigh, and no other relief is requested. Under settled law concerning the nature of an equitable claim and the nature of a claim at law, this case exhibits all the characteristics of a claim at law. The judgment is therefore reversed.

ZF Micro Devices is a "deceased" company; not to be confused with the apparently alive and well ZF Micro Solutions. ZF Micro Solutions alleges that the deceased ZF Micro Devices was "murdered" by TAT Capital Partners. The alleged murder occurred when TAT allegedly inserted a board member, who purportedly "poisoned" the dead firm. In the face of this alleged destruction-by-takeover-poisoning, the lower Superior Court had rendered a judgment in "equity" on behalf of the murdered company. Not so fast says the Court of Appeal. The higher courts doesn't see any equities at play but, in contrast, a "claim at law," or, as the Court of Appeal noted in pertinent part:

Accordingly, when there is an adequate legal remedy, there is no need for equity to step in and therefore no call for equity jurisdiction. Put another way, if the legal remedy of compensatory damages is adequate to do complete justice between the parties, "a proper exercise of equitable jurisdiction will not give equitable relief[.]" (Morrison v. Land (1915) 169 Cal. 580, 586.) 

Although it is true that a court of equity can award monetary damages, it generally does so in the course of resolving a case with equitable aspects as well as legal. For example, a court of equity can issue an injunction against trespass (equitable) and award damages for past trespass (legal), in the interest of winding up a dispute in one action. As the court put it in Watson v. Sutro (1890) 86 Cal. 500, 529, "Why have two suits when one is sufficient?"

at Page 8 of the Court of Appeal Opinion

In reversing the Superior Court, the Court of Appeals holds in part that [Ed: footnote omitted]:

In this case, there is but one cause of action - for breach of fiduciary duty - and the remedy requested is exclusively monetary damages. ZF Micro Solutions requests nothing in the way of equitable relief. There is, for example, no request to "disgorge ill-gotten gains" (Nationwide, supra, 9 Cal.5th at p. 293), no request to enjoin or unwind. The court is not called upon to balance or weigh the equities. If ZF Micro Solutions proves that TAT's activities destroyed ZF Micro Devices, there are no competing equities on the other side to weigh. TAT does not contend that it was somehow entitled to destroy ZF Micro Devices or that it would have been fair to do so; it contends it was not responsible for the destruction. 

TAT's position as a director's principal has somewhat obscured the fundamental nature or "gist" of this case. This is not the typical breach of corporate fiduciary duty case, in which a director or directors have misappropriated corporate funds or have done something or have made the corporation do something to advantage themselves at the expense of some or all of the shareholders. (See, e.g., Remillard Brick Co. v. Remillard-Dandini Co. (1952) 109 Cal.App.2d 405, 419-421 and cases cited.) In such cases, a court may well have to weigh the fairness of the disputed transaction to each side or factor the business judgment rule into the analysis. But in this case, TAT, through its representative, allegedly destroyed the corporation by disparaging its management and working behind the scenes to undermine its efforts to obtain financing. Granted, its position on the board of directors gave it a special platform to accomplish this goal, and its desire to replace Feldman gave it a special motivation for its actions. But TAT would be liable to ZF Micro Devices for its destruction by these means even if it were not a board member. The cause of action would simply have had a different label - trade libel or interference with prospective economic advantage, for example. Both of those torts are unquestionably matters for decision by a jury. (See CACI No. 1731 [trade libel instruction under "defamation" category]; CACI No. 2202 [intentional interference with prospective economic advantage instruction].) We believe this action was, too. 

We conclude ZF Micro Solutions' claim against TAT was a legal one and therefore required a jury trial as a matter of law.

at Pages 9 - 10 of the Court of Appeal Opinion

Former Investment Adviser Sentenced to Five Years for Defrauding his Clients of More than $7 Million (DOJ Release)
Lee D. Weiss, 51, pled guilty in the United States District Court for the Eastern District of Pennsylvania to investment adviser fraud, and he was sentenced to five years in prison plus three years of supervised release, and ordered to pay $7.5 million in restitution and a $250,000 fined. As alleged in part in the DOJ Release:

In March 2022, the defendant pleaded guilty to investment adviser fraud in connection with this scheme to defraud his clients. Weiss was the principal of Family Endowment Partners, LP, an investment adviser registered with the U.S. Securities and Exchange Commission, which had an office in West Chester, PA, before it was closed by order of the SEC. The defendant used his position to fleece his own clients of millions of dollars through purported investments in a now-defunct Florida tobacco company and a series of private securities offerings. Weiss told his clients that their money would be used for investment purposes when, in fact, he diverted it to make Ponzi payments and to fund his lifestyle, and further told his clients that they were making money when their funds had already been misappropriated. Weiss continued to lie to them about the value of their investments to prevent them from learning of his thefts and to convince them to continue paying him fees for "managing" their money. 
In a Superseding Indictment filed in the United States District Court for the District of Massachusetts, Christopher R. Esposito was charged with one count of conspiracy to commit securities fraud and sale of unregistered securities, and one count of securities fraud and one count of sale of unregistered securities. In April 2022, Esposito was indicted on one count of securities fraud and one count of wire fraud. As alleged in part in the DOJ Release:

[E]sposito and co-conspirator Anthony Jay Pignatello conspired between 2012 and 2015 to conceal their control over the Massachusetts-based microcap company Cannabiz Mobile, Inc. and to use backdated promissory notes to fraudulently obtain free-trading shares in the company. They then allegedly arranged for a promotional campaign in October 2015 to pump up Cannabiz Mobile's stock so that they could sell - i.e., dump - their shares into the market and make money. In so doing, they allegedly sold and offered to sell Cannabiz Mobile stock in violation of the securities laws because the securities were not registered with the SEC and no exemption from SEC registration was available.

In addition, between August 2019 and February 2020, Esposito allegedly sold shares in a separate company, Code2Action, Inc., based on material misstatements and omissions and then misappropriated much of the proceeds. More specifically, Esposito is alleged to have, among other things, deliberately misled prospective investors about Code2Action's plan and ability to complete a reverse merger, which Esposito touted would enable the investors to sell their shares at a profit, and spent over $57,000 of the investors' funds to pay himself and his personal expenses.
The United States Attorney's Office for the Northern District of Ohio announced that its Financial Litigation Program collected full restitution in the amount of  $624,122.15 from Justin Esposito, who had been convicted of participating in a securities fraud scheme that caused a $39 million loss to investors. As alleged in part in the DOJ Release:

[A] notice of judgment satisfaction was approved for Defendant Justin Esposito, of Thornwood, New York, on Saturday, August 6, 2022.  In 2016, Esposito and other codefendants were convicted of orchestrating a penny-stock fraud scheme that resulted in a $39 million loss to investors in the Northern District of Ohio and elsewhere.

As part of his role in the scheme, Esposito cold-called potential investors and sold stock in public companies that he knew were being manipulated.  Esposito was paid commission from coconspirators for these sales.  

In January 2017, Esposito was ordered to pay $624,122.15 in restitution to the defendants for his role in the scheme.
Bitcoin Mercantile Exchange ("BitMEX") employee Gregory Dwyer pled guilty in the United States District Court for the Southern District of New York to one count of violating the Bank Secrecy Act and agreed to pay a $150,000 criminal fine representing his pecuniary gain. As alleged in part in the DOJ Release:

DWYER was one of the first employees of BitMEX, and served as its Head of Business Development.  BitMEX is an online cryptocurrency derivatives exchange that, during the relevant time period, had U.S.-based operations and served thousands of U.S. customers.  From at least September 2015, and continuing at least through the time of the Indictment in September 2020, DWYER, working with BitMEX's founders Arthur Hayes, Benjamin Delo, and Samuel Reed, willfully caused BitMEX to fail to establish and maintain an AML program, including a program for verifying the identify of BitMEX's customers (or a "know your customer" or "KYC" program).  As a result of its willful failure to implement AML and KYC programs, BitMEX was in effect a money laundering platform. 

DWYER aided and abetted BitMEX's failure to institute AML or KYC programs despite closely following U.S. regulatory developments that made clear the legal obligation to do so if BitMEX operated in the United States, which it did.  DWYER knew that BitMEX's purported withdrawal from the U.S. market after in or about September 2015 was a sham, and that purported "controls" BitMEX put in place to prevent U.S. trading were an ineffective facade that did not, in fact, prevent users from accessing or trading on BitMEX from the United States.  Among his other tasks at BitMEX, DWYER collected and circulated data evidencing that BitMEX users included traders, and that the company earned revenue, from the United States.

Trevor Murray, Plaintiff/Appellee/Cross-Appellant, v. UBS Securities, LLC, UBS AG, Defendants/Appelants/Cross-Appellees (Opinion, United States Court of Appeals for the Second Circuit ("2Cir"), 20-4202 and 21-56, August 5, 2022)
As set forth in the 2Cir's Syllabus:

Plaintiff Trevor Murray claims that UBS Securities, LLC and UBS AG (together "UBS") fired him in retaliation for reporting alleged fraud on shareholders to his supervisor. Murray sued UBS under the whistleblower protection provision of the Sarbanes-Oxley Act ("SOX"), 18 U.S.C. § 1514A, and he ultimately prevailed at trial. The district court (Failla, J.), however, did not instruct the jury that a SOX antiretaliation claim requires a showing of the employer's retaliatory intent. Section 1514A prohibits publicly traded companies from taking adverse employment actions to "discriminate against an employee . . . because of" any lawful whistleblowing act. 18 U.S.C. § 1514A(a). We hold that this provision requires a whistleblower-employee like Murray to prove by a preponderance of the evidence that the employer took the adverse employment action against the whistleblower-employee with retaliatory intent-i.e., an intent to "discriminate against an employee . . . because of" lawful whistleblowing activity. The district court's legal error was not harmless. We thus vacate the jury's verdict and remand to the district court for a new trial.
The SEC proposed new rules to establish new governance requirements on clearing agencies' board composition, independent directors, nominating committees, and risk management committees. Also, the rules call for new policies and procedures regarding conflicts of interest, board obligations to oversee relationships with service providers for critical services, and a board obligation to consider stakeholder viewpoints.

Dissenting from Stakeholder Governance for Clearing Agencies by SEC Commissioner Hester M. Peirce

Clearing agencies and other clearinghouses play a central role in our financial markets. That role continues to increase as market participants and regulators look to these entities to mitigate and manage risk. Accordingly, as the proposing release recognizes, how clearinghouses are governed and managed matters. The proposal takes an overly prescriptive, regulator-knows-best approach to these matters that risks diluting the duties of directors to the clearing agency and depriving clearing agencies of the flexibility and expertise needed for effective governance.

The Commission's approach manifests a common regulatory tendency: market participants set up an effective market infrastructure on their own initiative because it will improve the market; the government, noticing the efficacy and importance of this private infrastructure, pulls it into the regulatory fold and forces all market participants to use it; regulatory mandates displace the market incentives that used to drive risk management and may sow the seeds for a shift away from member ownership; and the regulatory mandates get more prescriptive over time, or, as the proposing release puts it, an "incremental evolution of the . . . regulatory framework"[1] happens.

That evolution continues today with a proposed set of governance requirements. The proposal would require in most cases that a majority of a registered clearing agency's directors be independent.[2] A director generally would be independent under the proposed rules if she has no material relationship with the registered clearing agency, or any affiliate thereof. The proposal would require each registered clearing agency to have a nominating committee composed of a majority of independent directors and to have in place a written process for evaluating nominees against written fitness standards. The proposal also would require each registered clearing agency to have a risk management committee that may need to meet the independence requirements,[3] also has owner- and participant-affiliated members, is regularly reconstituted, and is "able to provide a risk-based, independent, and informed opinion on all matters presented to it for consideration in a manner that supports the safety and efficiency of the registered clearing agency."[4]

In addition to board composition requirements, the proposal would impose requirements intended to address other governance concerns. The proposal would require each registered clearing agency to have written policies to identify conflicts of interest so that the clearing agency can reduce or eliminate them. Directors would have a corresponding obligation to report potential conflicts without a materiality threshold. The proposal also would require each registered clearing agency to establish, implement, maintain, and enforce policies regarding critical service provider risk management. Each registered clearing agency would also have to implement, maintain, and enforce written policies and procedures reasonably designed to solicit, consider, and document its consideration of the views of participants and other relevant stakeholders of the registered clearing agency regarding material developments in its governance and operations on a recurring basis.

The proposal is puzzling for a number of reasons. First, in 2016, when the Commission finalized rules establishing standards for a subset of clearing agencies, it expressly rejected the suggestion from several commenters that it impose a director independence requirement.[5] It acknowledged that including public or independent directors on the board "could be one way" or "one possible approach" to achieve the fair representation requirement set forth in Section 17A of the Exchange Act but concluded that it was unnecessary to further specify requirements for the composition of clearing agency boards, noting that "these topics . . . are already addressed" in that paragraph (b)(3)(C) of that section.[6] Today's proposing release, attempting to explain the change, notes that:

given the growing concentration of clearing and settlement participants among a small number of firms and the concentration of differing perspectives into distinct groups of clearing agency stakeholders, the Commission believes it is appropriate to propose requirements on independent representation to facilitate the consideration and management of diverse stakeholder interests in the decision-making of the clearing agency.[7]

It is unclear what this observation means or how it relates to the proposed requirements. Moreover, the reference to facilitating the board's "consideration and management of diverse stakeholder interests" is ominous. An independent director mandate sounds good because it resembles what we require in many other contexts, but clearing agencies operate best when a visceral awareness of the consequences of failed risk management drives the board's decisionmaking. Focusing on stakeholder interests sounds expansive and inclusive, but an embrace of diffuse interests might distract the board from the dry but extremely important task of risk management. The Commission asserts that "The appearance of conflicts of interest can reduce confidence among direct and indirect participants, other stakeholders, and the public in the functioning of the clearing agency, particularly during periods of market stress when general confidence in market resilience may be low,"[8] but it seems more likely that a board distracted by a cacophony of stakeholders and hobbled by a lack of expertise will reduce market confidence during periods of market stress.

Second, Exchange Act Section 17A(b)(3)(C) suggests that the Commission's role with respect to the composition of the board extends to ensuring "fair representation of its shareholders (or members) and participants."[9] The proposed rule would impose requirements that go well beyond those contemplated by the statute while not even ensuring that clearing agencies satisfy the fair representation standard set out in Exchange Act Section 17A(b)(3)(C). Although an employee of a participant could serve as an independent director, the rule does not guarantee that any owners or participants have affiliates on the board.[10] The proposal turns what seems to be the statutory focus-ensuring that owners and participants are both key players in overseeing management-on its head by making it possible that directors drawn from owners and participants will represent only a minority of directors.

Third, the proposal would send boards running off in multiple directions, rather than keeping them singularly focused on the clearing agency's well-being. The proposal seems to expect that directors will make decisions to further the interests of a constituency that they represent.[11] That notion seems at odds with the fiduciary duty of a director to the entity on the board of which she sits. Just as with any company, a director of a clearing agency should not be "motivated by the needs of" any stakeholder other than the clearing agency. The proposal also explicitly would require clearing agencies "to obtain and consider the views of a diverse cross-section of their participants and stakeholders, who will likely bear any of the losses incurred as a result of the clearing agency's decisions with respect to its governance and operations."[12] The release identifies participants' customers and securities issuers as stakeholders that should be consulted.[13] The Commission likewise requires that "the nominating committee consider[] the views of other stakeholders who may be impacted by the decisions of the registered clearing agency, including transfer agents, settlement banks, nostro agents, liquidity providers, technology or other service providers."[14] As already noted, Exchange Act Section 17A(b)(3)(C) appropriately focuses on governance by those who have a direct interest in effective operation of the clearing agency-its "shareholders (or members) and participants." The Commission's attempt to "complement"[15] the statute with its solicitude toward "stakeholders" blurs this appropriately narrow focus established by Congress by insisting that the boards look to the interests of a diffuse group of stakeholders who may be only indirectly affected-if they are affected at all-by clearing agency operations.

Finally, compliance with the requirement that risk management committees be able to provide risk-based, independent, and informed opinions will be difficult to examine and enforce. A better way to facilitate the formation of competent risk management committees would be to avoid constraining unnecessarily boards' ability to constitute their risk management committees. As one example, the proposed requirement to reconstitute the risk management committee periodically could be dropped.

Designing effecting clearinghouse governance is a difficult task. While I do not support the proposal, I welcome the thoughts of commenters on the proposal and the issues I have raised. I will take the comments into account as I continue to think about what effective clearinghouse governance looks like and what the role of the Commission should be in shaping it. These questions are not easy to resolve and have been a matter of debate for many years.

Thank you to staff throughout the Commission. In addition to their hard work on the proposal, the staff in the Office of Clearance and Settlement in the Division of Trading and Markets and the Division of Examinations work hard every day to ensure that registered clearing agencies are fulfilling their important function in the markets.

[1] Clearing Agency Governance and Conflicts of Interest, Exchange Act Rel. No. 95431 (Aug. 8, 2022) ("Release"), at 23.

[2] The proposed rules would establish a lower threshold for the number of independent directors for clearing agencies that are majority owned by participants. See Release at 56.

[3] The policy discussion in the release and the proposed rule text are not entirely clear on this point. Proposed Rule 17Ad-25(c) clearly requires a majority of the nominating committee to be independent directors, and the release discusses these requirements. See Release at 66-67. Paragraph (d) of the proposed rule addresses requirements applicable to the risk management committee, but the only requirement related to composition of the committee is that it must "include representatives from the owners and participants of the registered clearing agency." Paragraph (e) imposes a minimum independent director threshold on any committee that "has the authority to act on behalf of the board of directors." Request for Comment 24 asks whether the Commission should exclude the risk management committee from paragraph (e) "so that a registered clearing agency would not be required to include independent directors on the committee." Release at 81.

[4] Release at 73.

[5] Standards for Covered Clearing Agencies, Exchange Act Rel. No. 78961 (Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016) ("CCA Standards").

[6] CCA Standards, 81 FR at 70804.

[7] Release at 36.

[8] Id. at 40.

[9] In 2016, the Commission concluded that a clearing agency could fulfill the requirements of this provision in part by including public or independent directors on its board, but as noted above it did not assert that the statute required their inclusion. See CCA Standards, 81 FR at 70804.

[10] The release is silent on this question, but the proposed rule does include a provision, as noted above, that would require owner and participant representation on the risk management committee. See proposed Rule 17Ad-25(d)(1).

[11] See, e.g., Release at 46 ("As long as a majority of directors are not solely motivated by the needs of one category of stakeholders, this structure can help ensure that the board addresses the full set of owners and participants, even smaller participants, in fulfilling these statutory objectives.").

[12] Id. at 100.

[13] See id.

[14] Id. at 64.

[15] Id. at 69

Statement on Clearing Agency Governance and Conflicts of Interest by SEC Commissioner Mark T. Uyeda

Clearing agencies form critical components of the U.S. financial market infrastructure by facilitating the securities transaction lifecycle. The 2017 U.S. Department of the Treasury Report on Capital Markets emphasized that clearing agencies, and financial market utilities generally, serve a core function in financial market infrastructure:

[b]ecause of the level and concentration of financial transactions handled by [financial market utilities] and their interconnectedness to the rest of the financial system, [financial market utilities] represent a significant systemic risk to the U.S. financial system. Much of this systemic risk is the result of inherent interdependencies, either directly through operational, contractual, or affiliation linkages or indirectly through payment, clearing, and settlement processes.[1]

The Commission's challenge is achieving the appropriate regulatory framework for clearing agencies.[2] The potential systemic implications flowing from these marketplace functions and financial interdependencies of participants means that a reactive regulatory approach is insufficient. The Commission must proactively identify current and future marketplace risks and work to build a regulatory framework designed to mitigate such risks.

An effective regulatory framework is particularly important given that clearing agencies impact, directly or indirectly, each element of the Commission's tripartite mission.[3] Earlier this year, the Commission proposed to shorten the standard settlement cycle for equity transactions in the United States to one business day, down from two business days, to further mitigate risks in the clearance and settlement process.[4]

Any clearing agency governance rules, however, should foster competition, promote entry of new firms, reduce concentration of risk, accommodate any differentiating factors between types of clearing agencies, and provide appropriate flexibility for each clearing agency to tailor aspects of its governance provisions to its specific business model. I have concerns that the proposal does not achieve these goals.

First, the rules may limit competition. The release's economic analysis acknowledges that "registered clearing agency activities exhibit high barriers to entry and economies of scale. These features of the existing market, and the resulting concentration of clearing and settlement services within a handful of entities, informs the Commission's examination of the effects of the proposed rules on competition, efficiency, and capital formation."[5] However, the rules proposed today may have the effect of fostering an environment that further limits the number of firms providing clearing and settlement services. The proposed rules may disincentivize new firms from entering this market due to their cumulative effects. For example, the proposed rules include prescriptive provisions related to board composition, risk management functions, and how boards of clearing agencies oversee relationships with service providers for critical services.[6]

Second, the proposal may further increase market concentration risks. The release notes that "registered clearing agencies currently feature specialization and limited competition" and that "there is only one registered clearing agency serving as a central counterparty for each of the following asset classes: exchange-traded equity options (OCC), government securities (FICC), mortgage-backed securities (FICC), and equity securities (NSCC)."[7] To the extent that the proposed rules, if implemented, deter new entrants, then the sole clearing agency handling a particular asset class will be required to take on additional risk as trading volumes grow and become enshrined as a "too big to fail" institution.

Third, the proposal appears overbroad. The proposed rules would generally set governance requirements for all registered clearing agencies, irrespective of status as a covered clearing agency.[8] The proposal supports this approach by stating "[b]ecause all clearing agencies would face these [governance] tensions, the Commission believes it is appropriate to have this governance proposal apply to all registered clearing agencies."[9] The Commission could have proposed a bifurcated approach with more stringent requirements on the dominant incumbents, while providing more scaling and flexibility for new entrants. This approach, however, was not considered in the release.

Fourth, the prescriptive nature of the proposal does not adequately reflect differences in a clearing agency's organizational structure or services provided. I am concerned that a "one size fits all" approach to corporate governance, by mandating specific governance structures for all registered clearing agencies, may not take into account current or future differences in the underlying business models of these firms. I am concerned that the proposal rules will result in a "check the box" approach to clearing agency governance that does not effectively address the underlying concerns.

While I am unable to support the proposal, I look forward to the public's comments, including responses regarding the economic analysis, and whether we can reduce potential systemic risks associated with clearing agencies through governance structural requirements. I thank the staff in the Division of Trading and Markets, Division of Economic and Risk Analysis, Division of Examinations, Division of Corporation Finance, Division of Investment Management, and the Office of the General Counsel for their efforts on the proposal.

[1] U.S. Department of the Treasury, A Financial System that Creates Economic Opportunity: Capital Markets (Oct. 2017), at 152, available at The Treasury Report provides a historical perspective into the development of clearing houses: "[t]he existence of clearinghouses dates back to the late 19th century when they were used to net payments in commodities futures markets. In the United States, the New York Stock Exchange (NYSE) established a clearinghouse in 1892; outside the United States, securities exchanges established clearinghouses later in the 20th century. Central securities depositories, which facilitate the safekeeping of securities, have existed in the United States since at least the 1970s." Id.

[2] Certain of these challenges were identified in a recently published article tackling the challenges associated with clearinghouse governance, noting that clearing members are the ultimate risk bearers of the business, but could be a different group than the clearinghouse shareholders for large publicly-listed for-profit financial infrastructure groups. See Paolo Saguato, Financial Regulation, Corporate Governance, and the Hidden Costs of Clearinghouses, 82 Ohio State L.J. 1071 (2022), available at

[3] The mission of the SEC is to (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. See

[4] Shortening the Securities Transaction Settlement Cycle, Release No. 34-94196, 87 FR 10436 (Feb. 24, 2022), available at

[5] Clearing Agency Governance and Conflicts of Interest, Release No. 34-95431 (Aug. 08, 2022), at 109 (Clearing Agency Governance Proposal).

[6] Id. at 4.

[7] Id. at 109.

[8] Covered clearing agencies are a subset of registered clearing agencies that provide the services of a central counterparty or central securities depository. See 17 CFR 240.17Ad-22(a)(5).

[9] Clearing Agency Governance Proposal, at 11.

After the SEC filed an Order Instituting Administrative Proceedings ("OIP") against Haynes in 2020, its Division of Enforcement moved in 2021 to find Haynes in default and to bar him from the industry. Haynes did not respond to an Order to Show Cause, and, well, you'd like to think that the SEC was smoothly moving forward to barring Haynes but then we got this mess to deal with:

The Division's brief acknowledges that the OIP contains an error, as Haynes was convicted of several counts of violating Michigan Compiled Laws ("MCL") § 750.174a, whereas the OIP erroneously alleges he was convicted of several counts of violating MCL § 750.174. 4 We note that the OIP also describes these convictions as being for "Embezzlement From a Vulnerable Adult,"5 even though MCL § 750.174a does not discuss embezzlement.6 

Regardless, the Division argues that amendment of the OIP is unnecessary because the error in referencing MCL § 750.174 rather than MCL § 750.174a was merely typographical and does not prejudice Haynes. However, in making this argument, the Division does not cite the Rules of Practice or any opinions or orders of the Commission. 7 Instead, the Division cites federal court cases and treatises that seem to explicitly or implicitly rely on Federal Rule of Civil Procedure 60(a), which provides federal district courts with explicit authority to "correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record." The Division does not point to any authority suggesting that Federal Rule of Civil Procedure 60(a) applies to administrative proceedings before the Commission or that any similar provision appears in our Rules of Practice. 8  

= = = = =
Footnote 4: See Haynes, 2020 WL 5766754, at *1.

Footnote 5:  Id

Footnote 6: The Division points out that both the criminal information and the judgment against Haynes referred to the convictions as "embez[zlement]" from a vulnerable adult. However, in the opinion affirming Haynes's convictions, the Michigan Court of Appeals stated that Haynes had been convicted of several counts of "obtaining or using a vulnerable adult's money or property through fraud, deceit, misrepresentation, coercion, or unjust enrichment (exploiting a vulnerable adult)," in violation of various provisions of MCL § 750.174a. People v. Haynes, __ N.W.2d __, No. 350125, 2021 WL 3573029, at *1 (Mich. Ct. App. Aug. 12, 2021). This shorthand description of the convictions as "exploiting a vulnerable adult" more closely tracks the language of MCL § 750.174a. However, we need not and do not address whether amendment of the OIP would be warranted if the OIP had provided the correct statute of conviction but had described the convictions as "Embezzlement From a Vulnerable Adult." 

Footnote 7: Cf. Rule of Practice 200(d), 17 C.F.R. § 201.200(d) (describing amendments to OIPs). 

Footnote 8 We note that the situation at issue here involves a known, substantive error in the OIP, which has been identified prior to the Commission's issuance of an opinion and order resolving the case. A different analysis may well apply in a different situation.

Bill Singer's Comment: Sigh . .  . oh well, back to the ol' drawin' board on this one. Enforcement has until August 22, 2022 to either file a Motion to Amend the OIP to specify Haynes' conviction on multiple "exploiting a vulnerable adult" counts; or, in the alternative, file a Supplemental Brief as to why the error in the OIP does not require redress by amended pleading. I'm willing to give Enforcement and the SEC the benefit of the doubt here -- after all, it's been hell for everyone the last couple of years with Covid. On the other hand, sure as hell seems like someone at Enforcement pissed off someone in the SEC's Office of General Counsel. Maybe not. Then again, it wouldn't be the first times that various SEC dogs were pissin' to mark their territory. Thankfully, it's not that big a deal. Just some case involving a stealing from a vulnerable adult. Not like we got anything here to move quickly with (he says with dripping sarcasm -- step back from that puddle, it's corrosive).

Wells Fargo Advisors Financial Network, Gregory T. Pease, John P. Rauch, and Rauch Pease Wealth Management, Respondents (FINRA Arbitration Award 17-02578)
In a FINRA Arbitration Statement of Claim filed in October 2017, public customer Claimants Edward and Wendy Pesicka asserted breach of fiduciary duty, fraud, securities fraud, negligence, unjust enrichment, breach of contract, breach of duty of good faith and fair dealing, violation of Rule 10b-5 and Section 10(b) of the Securities Exchange Act, aiding and abetting fraud, and conspiracy. At the FINRA Arbitration hearing, Claimants requested between $6,469,130.00 to $9,444,743.00 in damages; treble damages; and attorneys' fees and costs of suit in the amount of $1,206,234.60. The FINRA Award asserts that;

[T]he causes of action relate to allegations that Pease, while serving as a discretionary account benefit investor, and while working for WFCC and WFA and partnered with Rauch, unilaterally altered risk profiles on Claimants' account application forms, routinely churned Claimants' investments through various investment vehicles, and placed Claimants in many investments and portfolios that exceeded Claimants' stated risk tolerance. Claimants allege that many of these investments were made with the sole purpose of generating additional commission or fees in Pease's favor.

Respondents generally denied the allegations and asserted affirmative defenses; however, Respondent RPWM is not a FINRA member/associated person and did not voluntarily submit to arbitration. The Panel made no determination with respect to the claims against RPWM. The FINRA Arbitration Panel found Respondent WFCC and Pease jointly and severally liable to and ordered them to pay to Claimants $731,587 in compensatory damages plus interest.

Digital Signatures / FINRA Reminds Firms of Their Obligation to Supervise for Digital Signature Forgery and Falsification  (FINRA Regulatory Notice 22-18)
As set forth in part in the "Summary" portion of  FINRA Regulatory Notice 22-18:

FINRA has received an increasing number of reports regarding registered representatives and associated persons (representatives) forging or falsifying customer signatures, and in some cases signatures of colleagues or supervisors, through third-party digital signature platforms. Firms have, for example, identified signature issues involving a wide range of forms, including account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions. 

These types of incidents underscore the need for member firms that allow digital signatures to have adequate controls to detect possible instances of signature forgery or falsification. To help firms address the risks these signature forgeries and falsifications present, FINRA is sharing information in this Notice about: 
  • relevant regulatory obligations; 
  • forgery and falsification scenarios firms have reported to FINRA; and 
  • methods firms have used to identify those scenarios. . . .
If you are a FINRA Small Firm you don't need me to tell you how dire things have become in 2022. Year after year, the numbers of small firms have dwindled to the point where there are now more FINRA employees than FINRA member firms. In response to that changing landscape, the FINRA Large Firms have consolidated their grip on FINRA and continue to socially engineer their small competitors out of business. Each year, candidates for one of the three FINRA Small Firm seats seek your vote and promise to speak out and speak up on your behalf.  Once elected, however, your purported champions become complacent -- some might even say compliant. I have known Stephen Kohn for many years. Stephen has owned his own small firm. He has been in our biz for decades. Stephen sees the crisis that is upon us, and he knows that it's now or never.  He will take his seat at the FINRA Board, but he will not be told to sit down and shut up. VOTE FOR STEPHEN KOHN!