Securities Industry Commentator by Bill Singer Esq

November 15, 2022




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SEC Chair Gensler Speaks About Shakespeare and Hammurabi While FTX Dissolves ( Blog)
What follows is yet another bit of indulgence by those at the SEC who have serious things to do but, instead, find time to give speeches, attend seminars, make podcasts, film videos, and do all sorts of stuff that doesn't quite advance Wall Street reform, doesn't quite protect vulnerable investors, and doesn't quite pursue the scamsters and fraudsters. For several years there has been a clamor to implement some form of crypto regulation. Even if only first-stage in design and with the full intent to adapt on the run. Something, anything might have protected those now devastated by the FTX debacle. Instead, we got nothing. We got regulatory turf wars. We got petulance and inaction. 

The Securities and Exchange Commission today announced that it filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or "stand alone," enforcement actions, a 6.5 percent increase over fiscal year 2021; 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and 169 "follow-on" administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. The SEC's stand-alone enforcement actions in fiscal year 2022 ran the gamut of conduct, from "first-of-their-kind" actions to cases charging traditional securities law violations.

Money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.439 billion, the most on record in SEC history and up from $3.852 billion in fiscal year 2021. Of the total money ordered, civil penalties, at $4.194 billion, were also the highest on record. Disgorgement, at $2.245 billion, decreased by 6 percent from fiscal year 2021. Fiscal year 2022 was the SEC's second highest year ever in whistleblower awards, in terms of both the number of individuals awarded and the total dollar amounts awarded.
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, Boustead Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Boustead Securities, LLC has been a FINRA member firm since 2007 and has about 50 registered representatives at two branches. In accordance with the terms of the AWC, FINRA imposed upon Boustead Securities a Censure and $35,000 fine. The AWC asserts in part that [Ed: footnotes omitted]:

From March 2018 through March 2020, Boustead's WSPs required the use of new account forms to collect and record customer and investment profile information, but Boustead did not enforce this procedure with respect to certain customers in certain private placement offerings. In practice, Boustead did not require the use of new account forms for customers participating in private placements. Instead, the firm collected customer information through other methods such as an issuer-specific subscription agreement, the registration process conducted through an affiliated crowd funding portal, or an accredited investor questionnaire. The firm's WSPs did not address the collection of customer information through a crowd funding portal and did not provide any guidance as to the content of subscription agreements or accredited investor questionnaires or require them to solicit any specific customer information. In each sampled private placement transaction for this period, Boustead failed to collect at least one component of the customer and investment profile information required by Exchange Act Rule 17a-3 or FINRA Rules 4512 and 2111. 

By failing to supervise the collection and recording of required information about its customers participating in private placement offerings, including not enforcing its WSPs, Boustead violated FINRA Rule 3110. By failing to collect and record required customer information, Boustead violated Exchange Act Rule 17a-3 and FINRA Rule 4512. By violating those rules, Boustead also violated FINRA Rule 2010. 

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From March 2018 through March 2020, Boustead's WSPs acknowledged the firm's obligation to comply with FINRA Rule 5110, but the firm did not establish any procedures to do so. For example, there was no reasonable process to ensure the firm made timely filings required by the rule. The firm did not assign an individual to be responsible for compliance with Rule 5110. In addition, although the firm authorized its outside counsel to make the filings required by Rule 5110, the firm did not have a process to ensure that its counsel or others made such filings in accordance with the rule. As a result, Boustead failed to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5110. During this period, Boustead also failed to file with FINRA documents required by Rule 5110 on 19 occasions and failed to timely file with FINRA other documents required by Rule 5110 on 51 occasions, in violation of FINRA Rule 5110(b). 

By failing to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5110, Boustead violated FINRA Rule 3110. By failing to file or timely file documents with FINRA required by FINRA Rule 5110, Boustead violated FINRA Rule 2010.

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

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

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

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

Re: Corrective Action Statement to Letter of Acceptance, Waiver and Consent
Boustead Securities, LLC, Matter No. 2019060735601 

Dear Ms. Betcher: 

I am responding on behalf of Boustead Securities, LLC ("Boustead") to the above-referenced Letter of Acceptance, Waiver and Consent (the "AWC"). The AWC related to two (2) issues: Boustead's collection of customer information as required by Exchange Act, Rule 17a-3, and FINRA Rules 2111 and 4512; and the filing of certain information associated with public offerings of securities as required by the corporate financing rule, FINRA Rule 5110(b). The findings in the AWC have been addressed and mitigated as explained in this Corrective Action Statement. 

This Corrective Action Statement is submitted by Boustead and does not contain factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff. 

In response to the collection of customer information, Boustead has required the use of customer relationship forms to collect and record customer and investment profile information as set forth in Boustead's WSPs. The form and content of the forms are modeled on the FINRA Account Application Template short format which contains all components of the relevant rules. Boustead has also required that at least one (1) supervisor is responsible for reviewing the account forms to ensure they are complete and provide all the information required by the Exchange Act and FINRA rules. 

In response to the corporate financing rule, Boustead revised its WSPs to provide procedures for ensuring that filings for all public offerings with which Boustead is affiliated are filed within the timeframe required by the FINRA rules. Boustead has also assigned a designated principal to be responsible for ensuring that all public offering filings are filed in compliance with FINRA Rule 5110, whether by Boustead directly, or by a duly authorized representative associated with the public offering. In order to address the violations alleged by FINRA during the investigation, Boustead also directly communicated with FINRA representatives about the public filing reports regarding accessibility and requirements for compliance with FINRA Rule 5110, including changes made by FINRA to Rule 5110 thereafter. 

The AWC does not allege that customers were harmed. Boustead reviewed all customer-related information related to the violations noted in the AWC and did not identify any customer harm. Therefore, Boustead has not contacted any prior customers to request that they provide their investment profile information on a new profile form, nor has Boustead contacted prior issuers or representatives, but it will continue to monitor customer accounts to determine if any further corrective action is necessary in the event any customer harm is found. 

I greatly appreciate your attention to this matter. Please feel free to contact me at any time if you have any questions regarding the corrective actions taken. . . .

Enhancing Your Compliance Practice with the FINRA Institute at Georgetown CRCP Program (FINRA Unscripted)
Jim Angel, the FINRA Institute at Georgetown Certified Regulatory and Compliance Professional Program ("CRCP") Academic Director and Associate Professor with the Georgetown McDonough School of Business; and Susanne Goldsmith, a Senior Director with FINRA's Member Relations and Education team discuss the CRCP Program.

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When a government prosecutes criminal misconduct, the Defendant is protected by constitutional and due process rights. When a non-governmental actor like FINRA pursues industry misconduct, however, a Respondent is often deprived of constitutional and due process rights. That distinction explains why courts generally allow for the imposition of penalties in criminal cases but only the imposition of sanctions in civil and regulatory cases. All of which explains why alarms go off when FINRA imposes what it calls a sanction but what others might view as a penalty, as demonstrated in a recent FINRA regulatory settlement.

Watertown Man Arrested in Connection with African Sports Investment Fraud Scheme (DOJ Release)
SEC Charges Massachusetts Resident with Conducting $2 Million Fraudulent Investment Offering (SEC Release)

In the United States District Court for the District of Massachusetts, Adrian J. Kawuba was charged with one count of wire fraud. As alleged in part in the DOJ Release:

[K]awuba told his investors that he would invest their money in short-term financing of sports ventures in Africa and elsewhere overseas and that he would personally guarantee their investments. It is alleged however, that Kawuba did not invest any of the funds he received from victim investors. Instead, Kawuba allegedly used the money to pay for luxury goods and to pay purported returns to his investors - in some instances paying back an investor's earlier investment with money that investors had just sent Kawuba for a new investment.

with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and, the District Court entered an Order granting a temporary restraining order, asset freeze, and other emergency relief. Parallel criminal charges alleging wire fraud were filed against Kawuba. As alleged in part in the SEC Release:

Kawuba allegedly raised approximately $2 million from investors in a Ponzi scheme. According to the SEC's complaint, unsealed today, Kawuba promised investors they would receive returns of 25% to 50% in as little as twelve days to seven months and told investors he would use their money to finance lucrative short-term projects related to youth sports, entertainment events, and private soccer clubs. In fact, as alleged in the complaint, Kawuba used money from later investments to pay out on earlier investments, and he misappropriated investor money to pay for personal travel to the Greek islands and other destinations, to purchase a luxury automobile, and to buy tens of thousands of dollars' worth of designer goods at fashion and jewelry stores.
The SEC filed an Order charging nationally recognized statistical rating organization ("NRSRO") S&P Global Ratings, with issuing and maintaining credit ratings in violation of rules promulgated under the Securities Exchange Act. Without admitting or denying the findings in the SEC Order, S&P agreed to settle this matter by paying a $2.5 million penalty and agreeing to the entry of a cease-and-desist order, a censure, and compliance with certain undertakings. registered with the Commission, with violating conflict of interest rules designed to prevent sales and marketing considerations from influencing credit ratings. As alleged in part in the SEC Release:

The SEC's order finds that an issuer engaged S&P to rate a jumbo residential mortgage backed security transaction in July 2017. Over a five-day period in August 2017, S&P commercial employees -- employees responsible for managing the relationship with the issuer -- on several occasions attempted to pressure the S&P analytical employees -- employees responsible for evaluating and assigning the rating -- to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error. Despite sending the communications through the compliance department as required by S&P's policies and procedures at that time, some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations. The order finds that, as a result of the content, urgent nature, high volume, and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations.
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After discovering the circumstances surrounding the rating of the transaction, S&P self-reported the conduct at issue to the SEC, cooperated with the SEC's investigation, and took remedial steps to enhance its conflicts of interest policies and procedures.
Washington, D.C. - On Friday, November 11, 2022, counsel for LedgerX LLC, d/b/a FTX US Derivatives (FTX), submitted to the Commodity Futures Trading Commission's Division of Clearing and Risk a formal withdrawal of FTX's request, originally submitted on December 6, 2021, to amend FTX's Amended Order of Registration as a derivatives clearing organization to allow FTX to offer products that are not fully collateralized. The application was not approved.