The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 7, 2022











https://www.brokeandbroker.com/6648/saliba-finra-sec/
Today's traveling regulatory circus makes its way back to FINRA's fairgrounds. The tents will be raised yet again. The lawyers hired. The festivities will begin. And then, after the tents come down and the animal shit swept up, yet again, this whole carnival will likely wind its way back to the SEC and, who knows, maybe back to the 9Cir. By that time, if past is prologue, maybe another five or so years will have come off the calendar. And who knows how many tens-of-thousands of dollars in legal fees will be paid by Respondent for a second bite at a rotten appeal. And who knows how much otherwise valuable regulatory time at FINRA and the SEC will be wasted on this nonsense. For the sake of argument, let's say that Respondent likely engaged in some misconduct and will likely find himself barred for something when this is all said and done. The question that I raise, like the aforementioned circus tents, is what is the consequence for FINRA's misconduct in failing to render an intelligible decision? What sanctions (likely none) will the SEC impose upon FINRA for not saying what it meant, and not meaning what it said? Of more import, how does this failed system of self regulation protect the public and the industry? 

https://www.financial-planning.com/news/finra-ex-board-member-kovack-settles-enforcement-cases
Saddled with a lackluster Board of Governors, Wall Street's self-regulatory-organization fails to enact necessary in-house reforms in order to proactively clean its own house. A few months ago, a state court found that FINRA's arbitration process was fundamentally unfair; and although an appellate court reversed the decision, the allegations were not without some merit. Recently, as industry reporter Tobias Salinger reveals, FINRA's regulatory settlements are not disclosing to the public the existence of conflicts (potential or otherwise) and whether steps were taken to internally protect an investigation's integrity.

https://www.sec.gov/litigation/litreleases/2022/lr25498.htm
Without admitting or denying the allegations in a Complaint filed in the United States District Court for the District of New Hampshire
https://www.sec.gov/litigation/complaints/2022/comp25498.pdf, Todd Christopher Doucette consented to a permanent injunction prohibiting him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and Doucette agreed to pay $348,689 in disgorgement, $30,793 in prejudgment interest, and a civil money penalty of $348,689. As alleged in part in the SEC Release, Doucette:

traded on two separate occasions in the securities of his employer, Align Technology, Inc., on the basis of confidential information he obtained as Align's Vice President of Business Transformation. According to the SEC's complaint, Doucette purchased thousands of shares of Align common stock in advance of its first quarter 2018 earnings announcement and third quarter 2020 earnings announcement while in possession of confidential information concerning the company's financial performance and operation of its Americas region. Additionally, the SEC's complaint alleges all of Doucette's trades at issue took place during blackout periods, when Doucette was expressly prohibited from trading in Align stock. As a result, Doucette allegedly realized profits of $348,689 from his trading.

https://www.finra.org/sites/default/files/aao_documents/22-00835.pdf
In a FINRA Arbitration Statement of Claim filed in April 2022, FINRA Member Firm Claimant Aspiration Financial asserted conversion and breach of contract. Claimant Aspiration Financial sought $23,214,36 in damages, interest, fees, and costs. Pro se customer Respondent Keith denied the allegations. As to the substance of Aspiration's lawsuit, the FINRA Arbitration Award characterizes it as follows:

[T]he causes of action related to Claimant's allegation that, on several occasions, Respondent received unauthorized ACH transfers into her deposit account from a third-party financial institution and quickly depleted the transferred funds in the account, which resulted in Respondent having a negative account balance.

The sole FINRA Arbitrator denied Claimant's claims. There is no explanation or rationale provided for the Award.

Bill Singer's Comment: What the hell? The customer purportedly received transfer into her account, which she then "quickly depleted." For starters, oh how I wish the Arbitrator provided some explanation as to why the ACH transfer were sent into Respondent's account, and, what exactly transpired a la "quickly depleted." Was the depletion pursuant to a transfer of funds out of Respondent's account? Did Respondent spend the funds? Did Respondent invest the funds in a losing options position? Like I said, what the hell? Then there's the whole issue of how Claimant permitted Respondent to posture her account, such, that it resulted in a negative balance -- as in less than zero. Finally, let's not lose sight of the fact that Respondent represented herself and Claimant had a law firm, and . . . I dunno, I truly don't get anything about this case.

https://www.finra.org/sites/default/files/fda_documents/2022073871001
%20James%20Gingles%20CRD%201332507%20AWC%20gg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, James Gingles submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that James Gingles was first registered in 1985, and by 2005, he was registered with Okoboji Financial Services, Inc. until 2010, after which time he was associated with other firms. In accordance with the terms of the AWC, FINRA imposed upon Gingles a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC: 

Between May 2007 and November 2009, Gingles received a total of $16,500 in loans from two customers at Okoboji. Gingles was the assigned representative on these firm customers' accounts. None of the loans fit within the five circumstances specified in NASD Rule 2370. 

Between May 2007 and March 2008, Gingles accepted two loans, totaling $4,500, from DM, a senior customer who held a brokerage account at Okoboji. Neither of these loans was documented by a promissory note or other agreement. To date, Gingles has failed to repay $4,400 owed to DM for the loans. 

Between February 2008 and November 2009, Gingles accepted three loans, totaling $12,000, from a senior firm customer, SJ. Each loan was memorialized by a promissory note, setting forth an interest rate between ten and 12 percent and establishing a due date for repayment from six months to one year. To date, Gingles has failed to repay $11,585.10 owed to SJ in principal and interest for the loans. 

Gingles did not provide prior notice to or obtain written approval from Okoboji for any of the loans from DM or SJ.

Therefore, Gingles violated NASD Rules 2370 and 2110 and FINRA Rule 2010

Bill Singer's Comment: Sigh . . . I mean, geez, it's 2022 and FINRA is only now fining and suspending Gingles for alleged misconduct going back to 2007. Then again, this tidbit in the AWC should be noted: "This matter originated from a tip made to FINRA in January 2022 prior to the filing of a Form U5 reporting Gingles's termination." I'm not feeling much (if any) sympathy for Gingles given his alleged failure to repay the loans and his failure to disclose them to his firm as required by FINRA Rule 3240. As such, maybe it's just me (and it often is) but I'm not quite understanding why FINRA imposed such relatively light sanctions given that "senior" customers were involved and the loans have not been fully repaid.

https://www.justice.gov/usao-cdca/pr/former-stockbroker-sentenced-6-years-prison-32-million-investment-fraud-cheating-taxes
After pleading 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, former stockbroker Robert Louis Cirillo, 61, was sentenced to 78 months in prison and ordered to pay $3,948,835 in restitution. As alleged in part in the DOJ Release:

From 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 fact, 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 targeted 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.

Cirillo admitted in his plea agreement to threatening his victims once they began to realize that he had defrauded them. For example, in July 2019, Cirillo said that if one of the victims tried to sue him, that victim could go "for the [expletive] hole in the [expletive] desert. Tell him to test me," according to court documents.

In a separate scheme that occurred in the spring of 2021, Cirillo participated in a "grandparent scam" in which a senior citizen was tricked into believing that his grandson had been arrested for possession of illegal narcotics, which was false. Cirillo's co-conspirators convinced the 82-year-old victim to send $400,000 for his grandson's "bail" to a bank account that Cirillo had opened and controlled. Cirillo used some of that victim's money for his own personal benefit.

Cirillo also filed 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 $400,000; and the total tax loss incurred was $675,898.

In a sentencing memorandum, prosecutors argued, "[Cirillo's] behavior was despicable, particularly because he was engaging in an affinity crime by exploiting members of the Hispanic community, most of whom were of modest means, and some of whom lost their life savings to [him]."

https://www.sec.gov/news/press-release/2022-155
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/34-95673.pdf, Perceptive Advisors LLC consented to the entry of finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8, as well as Section 13(d) of the Securities Exchange Act of 1934 and Rule 13d-1; and Perceptive agreed to a cease-and-desist order, a Censure, and a $1.5 million penalty to settle the charges. As alleged in part in the SEC Release:

[I]n 2020, Perceptive formed multiple SPACs whose sponsors were owned both by Perceptive personnel and by a private fund that Perceptive advised. The Perceptive personnel were entitled to a portion of the compensation the SPAC sponsors received upon completion of the SPACs' business combinations. The SEC's order finds that Perceptive repeatedly invested assets of a private fund it advised in certain transactions that helped complete the SPACs' business combinations and did not timely disclose these conflicts.

The SEC's order also finds that Perceptive failed to timely file a required report on Schedule 13D concerning its beneficial ownership of stock in a public company. During the lapse in filing, through a private fund it advised, Perceptive improperly acquired beneficial ownership of additional stock in the public company.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95672; Whistleblower Award Proc. File No. 2022-78)
https://www.sec.gov/rules/other/2022/34-95672.pdf
The SEC's Office of the Whistleblower ("OWB") issued a Preliminary Summary Disposition recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[F]irst, Claimant misinterprets the eligibility criteria under Rule 21F-4(c)(1): contrary to Claimant's arguments in the Response, our rules do not provide for awards based upon the potential or theoretical use of a claimant's information. Instead, awards are based upon the actual use of a claimant's information by Commission staff. As we have stated, "the standard for award eligibility is not what the staff would have, or could have done in hypothetical circumstances but, rather, what impact the whistleblower's information actually had on the investigation." The Commission will not speculate on the supposed value of Claimant's information in the absence of its actual use during the Investigation. 

Accordingly, while Claimant may have submitted information to the Commission prior to the opening of the Investigation, the record here demonstrates that Claimant's information did not cause Enforcement staff responsible for the Investigation to open the Investigation or cause the staff to inquire into different conduct. A staff declaration, which we credit, confirms that the staff responsible for the Investigation opened the Investigation based upon a referral from REDACTED ("Other Agency 1"). A supplemental declaration from OWB staff, which we also credit, confirms that, after review of Claimant's information, other Enforcement staff referred Claimant's information to the REDACTED ("Other Agency 2") and the REDACTED ("Other Agency 3") and then closed Claimant's submission with a disposition of "no further action." Contrary to Claimant's contentions, there is no evidence in the record that Other Agency 2 or Other Agency 3 had any role in the referral to the Commission from Other Agency 1, and the record demonstrates that Other Agency 1 has no record of receiving any information from Claimant or that Claimant was the source of Other Agency 1's referral to the Commission. And while other Enforcement staff reviewed Claimant's tip and forwarded it to Other Agency 2 and Other Agency 3, there is no evidence in the record that Claimant's information was forwarded to staff assigned to the Investigation.

The record demonstrates that Claimant did not cause the Commission to inquire into different conduct and did not significantly contribute to the success of the action: Claimant's information was not used by staff assigned to the investigation, nor did Claimant ever communicate with staff assigned to the investigation.

https://www.cftc.gov/PressRoom/PressReleases/8581-22
https://www.cftc.gov/media/7606/enfnatixisorder090622/download, and in accordance with the terms of the Order, Natixis will pay a $2.8 million penalty, the bank will cease and desist from violating applicable provisions of the Commodity Exchange Act and CFTC regulations, and comply with certain conditions and undertakings. As alleged in part in the CFTC Release:

The order finds that Natixis failed to diligently supervise the activities of the IRD Desk.  Between January 2015 and at least April 2018, a trader on the bank's IRD Desk submitted false or misleading entries in the bank's internal recordkeeping and accounting system relating to the marking of the end-of-day USD LIBOR forward curve (Closing Curve), for the purpose of inflating the unrealized profit and loss (P&L) of the desk he managed and disguising significant trading losses. Specifically, the trader engaged in a pattern of marking the Closing Curve in a manner that varied from observed broker mid prices and in a manner that aligned with the risk positions of the IRD Desk, while generally staying within the limits of internal controls designed to detect mismarking. Although Natixis maintained certain controls relating to the marking of the Closing Curve, those controls were insufficient to detect the trader's misconduct for over three years. At its peak in early 2018, the trader's mismarking of the Closing Curve overstated the P&L of the IRD Desk by approximately $25 million.

As a result of the bank's supervisory failures, its books and records were inaccurate in several respects, and Natixis further failed to comply with certain obligations to provide accurate daily mark disclosures to certain counterparties, to properly calculate margin, and to report accurate swap valuation data to a swap data repository.

In addition, the order further finds that Natixis failed to diligently supervise the activities of its FAST Desk. Specifically, between February 2017 and November 2019, traders on the FAST Desk made certain manual adjustments to the bank's internal trade booking systems for the purpose of "smoothing" or hiding the FAST Desk's P&L and later releasing the P&L during difficult market conditions.  At its peak, the P&L smoothing understated the unrealized P&L of the FAST Desk by over $6 million. This misconduct rendered the bank's books and records inaccurate. 

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

The CFTC issued an Order filing and settling charges against former trader Blaise Brochard
https://www.cftc.gov/media/7611/enfbrochardorder090622/download and in accordance with the terms of the Order, Brochard will pay a $250,000 penalty, he will cease and desist from violating applicable provisions of the Commodity Exchange Act and CFTC regulations, and he will comply with certain conditions and undertakings, including a three-year ban on trading commodity interests for or on behalf of other persons or entities. As alleged in part in the CFTC Release:

The order finds that between January 2015 and at least April 2018, Brochard, a trader on the IRD Desk, submitted false or misleading entries in the swap dealer's internal recordkeeping and accounting system relating to the marking of the end-of-day USD LIBOR forward curve (Closing Curve), for the purpose of inflating the unrealized profit & loss (P&L) of the IRD Desk and disguising significant trading losses. Brochard engaged in a pattern of marking the Closing Curve in a manner that varied from observed mid-market prices and in a manner that aligned with the risk positions of the IRD Desk, while generally staying within the limits of internal controls designed to detect mismarking. At its peak in early 2018, Brochard's mismarking of the Closing Curve overstated the P&L of the IRD Desk by approximately $25 million.

In accepting Brochard's offer of settlement, the CFTC recognizes his substantial cooperation during the Division of Enforcement's investigation of this matter. The CFTC notes that Brochard's cooperation was recognized in the form of a reduced civil monetary penalty.

In the Matter of the Arbitration Between Donald Robinson, Timothy and Sharon Padden, Rhett Rainey, Kelly A. Rainey Trust, Toucan Holdings L.P., Robert Goodman, Robert Daniel Burgner, Individually and as Trustee of The Burgner Family Charitable Remainder Trust, Douglas Kasemeier, Wesley Callaway and Billy Loveless, Claimants, v. Oppenheimer & Co., Inc., Respondent, v James Woods Michael Mooney Britt Wright Iris Israel Julie Jones, Third-Party Respondents (FINRA Arbitration Award 21-02234)
https://www.finra.org/sites/default/files/aao_documents/21-02234.pdf
In a FINRA Arbitration Statement of Claim filed in August 2021, public customer Claimants asserted violations of FINRA Rules; negligence; breach of fiduciary duty; violation of the Georgia RICO statute; and breach of contract. The FINRA Arbitration Award characterizes the claims as involving "investments in Horizon Private Equity III." Claimants sought over $6 million in compensatory damages, punitive damages, treble RICO damages, interest, fees, and costs. Respondent Oppenheimer generally denied the allegations and asserted affirmative defenses; and the firm sought indemnification via its Third-Party Claim. The FINRA Arbitration Award notes this development:

On or about December 20, 2021, Respondent filed with FINRA Dispute Resolution Services, an Order Granting Receiver's Motion to Temporarily Extend the Stay Provided in the Order Appointing Receiver ("First Order"), dated December 13, 2021, issued by the United States District Court for the Northern District of Georgia, Atlanta Division ("U.S. District Court of GA"). Pursuant to the First Order, all matters concerning Third-Party Respondents were stayed until June 13, 2022. On or about June 23, 2022, and June 24, 2022, Claimants and Respondent respectively filed with FINRA Dispute Resolution Services, an Order Granting Receiver's Motion for Extension of Temporary Stay Provided in the Court's December 13, 2021, Order ("Second Order"), dated June 21, 2022, issued by the U.S. District Court of GA. Pursuant to the Second Order, all matters concerning Third-Party Respondents were further stayed until October 11, 2022. Therefore, the Panel made no determination with respect to the claims against the Third-Party Respondents. 

The FINRA Arbitration Panel rendered the following enumerated Award:

1. Respondent is liable for and shall pay to Claimant Robinson the sum of $700,000.00 in compensatory damages. 

2. Respondent is liable for and shall pay to Claimant T. Padden the sum of $202,750.00 in compensatory damages. 

3. Respondent is liable for and shall pay to Claimant S. Padden the sum of $500,000.00 in compensatory damages.

4. Respondent is liable for and shall pay to Claimants Rainey, Rainey Trust and Toucan Holdings the sum of $800,000.00 in compensatory damages. 

5. Respondent is liable for and shall pay to Claimant Goodman the sum of $1,000,000.00 in compensatory damages. 

6. Respondent is liable for and shall pay to Claimant Burgner the sum of $188,250.00 in compensatory damages. 

7. Respondent is liable for and shall pay to Claimant Burgner Trust the sum of $955,000.00 in compensatory damages. 

8. Respondent is liable for and shall pay to Claimant Kasemeier the sum of $450,000.00 in compensatory damages.

9. Respondent is liable for and shall pay to Claimant Callaway the sum of $603,166.00 in compensatory damages. 

10.Respondent is liable for and shall pay to Claimant Loveless the sum of $300,000.00 in compensatory damages. 

11.Respondent is liable for and shall pay to Claimants the sum of $11,398,332.00 in punitive damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

12.Respondent is liable for and shall pay to Claimant Robinson the sum of $2,100,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

13.Respondent is liable for and shall pay to Claimant T. Padden the sum of $608,250.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

14.Respondent is liable for and shall pay to Claimant S. Padden the sum of $1,500,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial.

15.Respondent is liable for and shall pay to Claimants Rainey, Rainey Trust and Toucan Holdings the sum of $2,400,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

16.Respondent is liable for and shall pay to Claimant Goodman the sum of $3,000,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

17.Respondent is liable for and shall pay to Claimant Burgner the sum of $564,750.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

18.Respondent is liable for and shall pay to Claimant Kasemeier the sum of $1,350,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

19.Respondent is liable for and shall pay to Claimant Callaway the sum of $1,809,498.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

20.Respondent is liable for and shall pay to Claimant Loveless the sum of $900,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorney's fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

21.Respondent is liable for and shall pay to Claimants the sum of $98,655.96 in costs. 

22.Respondent is liable for and shall pay to Claimants the sum of $5,315,624.30 in attorneys' fees pursuant to O.C.G.A. § 16-14-6(c) and O.C.G.A. § 13-6-11. 

23.Respondent shall pay Claimants the sum of $800.00, representing reimbursement of the non-refundable portion of the initial claim filing fee previously paid by Claimants to FINRA

24.Claimant Burgner Trust's request for RICO damages is denied. 

25.Any and all claims for relief not specifically addressed herein are denied. 


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