Securities Industry Commentator by Bill Singer Esq

November 28, 2022



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11/28/2022

(BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6770/finra-goldman-sexism/
By way of preamble, this blog is about Goldman, Sachs & Co. and the Financial Industry Regulatory Authority's ("FINRA") Board of Governors. This is about a multinational investment bank and financial services company. This is about Wall Street's largest self-regulatory-organization. This is about a sexual discrimination Class Action filed in 2010 against Goldman Sachs. This is about a growing chorus of troubling, disturbing, unsettling allegations by female professionals against Goldman. This is about the appointment of the Goldman Sachs General Counsel to the FINRA Board of Governors. This is about the cowardly silence of FINRA's Board.

https://news.bloomberglaw.com/securities-law/wall-street-whistleblowers-tip-off-sec-but-hear-nothing-back
From bad to worse -- to the point where, sadly, it's a waste of time. That's the sad state of the SEC Whistleblower Program. As Bloomberg's John Holland sets out, whistleblowers who contact the SEC "remain in the dark about whether they're in line for awards, and why or why not. The program operates in almost complete secrecy. Tipsters have waited as long as a decade to collect money."

https://www.justice.gov/usao-sdny/pr/former-ceo-iconix-brand-group-convicted-trial-accounting-fraud
After a four-week jury trial in the United States District Court for the Southern District of New York, former Iconix Brand Group, Inc.'s Chief Executive Orricer Neil Cole was convicted of one count of securities fraud, six counts of making false filings with the SEC, and one count of improperly influencing the conduct of audits. As alleged in part in the DOJ Release:

Iconix, whose shares traded on the NASDAQ, was in the business of acquiring various brands, including clothing and fashion brands, and then licensing those brands to retailers, wholesalers, and suppliers who, in turn, produced and sold clothing and other products bearing the brand names. 

Iconix utilized joint ventures ("JVs") to profit from its brands in foreign markets.  With respect to these JVs, Iconix transferred ownership of a trademark or brand to the JV while maintaining a 50 percent ownership interest in the JV itself.  The other party involved in the JV purchased a 50 percent interest in the JV from Iconix.  As part of the JV agreements, each JV partner was generally entitled to 50 percent of the JV's licensing revenue.  When it entered into a JV, Iconix recognized as revenue the buy-in purchase price paid by the JV partner, less Iconix's cost basis in the trademarks.

Among the most critical financial metrics disclosed in Iconix's public filings with the SEC were Iconix's quarterly and annual revenue and non-GAAP diluted earnings per share ("EPS").  Iconix executives, including COLE, publicly identified revenue and EPS as the principal metrics demonstrating Iconix's growth.  They also touted Iconix's consistent record of revenue and earnings growth and of meeting or exceeding Wall Street analyst consensus with respect to these metrics. 

The Accounting Fraud Scheme

COLE engaged in a scheme to falsely inflate Iconix's reported revenue and EPS by orchestrating a series of "round trip" transactions in which COLE and a senior Iconix executive induced a JV partner, a Hong Kong-based international apparel licensing company ("Company-1"), to pay artificially inflated buy-in purchase prices for JV interests, with the understanding that Iconix would then reimburse Company-1 for the overpayments.  COLE executed the scheme for the purpose of enabling Iconix to report fraudulently inflated revenue and EPS figures based on the inflated buy-in purchase prices it obtained from Company-1. 

COLE arranged for Iconix to enter into at least two JVs with Company-1 that included inflated buy-in purchase prices from Company-1: (1) an amendment to a preexisting Southeast Asia joint venture, which closed on or about June 30, 2014 ("SEA-2"), and (2) a second amendment to the Southeast Asia joint venture, which closed on or about September 17, 2014 ("SEA-3") (collectively, the "SEA JVs").  SEA-2 and SEA-3 involved a fraudulent "round trip" transaction, lacking in economic substance, in which Company-1 paid an artificially inflated buy-in purchase price for its interest in the JV, in exchange for COLE's agreement that Iconix would give back the inflated portion of the purchase price to Company-1.  COLE and a senior Iconix executive hid from Iconix's lawyers and outside auditors that COLE had reached an understanding with Company-1 to artificially increase the consideration Company-1 paid Iconix in exchange for COLE's agreement to round-trip the overpayment back to Company-1.

Through the scheme, COLE caused Iconix to report fraudulently inflated revenue and EPS figures to the investing public.  COLE did so, in part, to ensure that the reported figures met analyst consensus and to fraudulently convey the impression to the investing public that Iconix was growing quarter after quarter, as COLE had touted to the investing public. 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96381; Whistleblower Award Proc. File No. 2023-17)
https://www.sec.gov/rules/other/2022/34-96381.pdf
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending a $20 million Whistleblower Award to Claimant 1; and recommending the denial of an Award to Claimant 2 and Claimant 5. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

Claimant 2's information did not cause Enforcement staff to open the Covered Action investigation or to inquire into different conduct as part of the Covered Action investigation and did not significantly contribute to the success of the Covered Action. Enforcement staff responsible for the Covered Action investigation did not review Claimant 2's first tip. Enforcement staff received Claimant 2's second tip on the same day the Covered Action was filed, and the tip related to Redacted which was not part of the Commission's charges. Furthermore, Enforcement staff provided a supplemental declaration, which we credit, confirming that the law firm to which Claimant 2 provided his/her second tip did not represent the Company in the underlying investigation, and as such, there is no evidence supporting Claimant 2's supposition that the second tip motivated the Company to settle the charges.
. . .

Enforcement staff opened the Covered Action investigation based on a source unrelated to Claimant 5. Enforcement staff responsible for the Covered Action investigation clarified in a supplemental declaration, which we credit, that on  Redacted, OMI sent an email to an Enforcement accountant ("Accountant"), summarizing information that had been provided by Claimant 5 in his/her Redacted complaint and proposing that a disposition of no further action appeared warranted given the lack of substantiating evidence supporting Claimant 5's allegations. That same day, the Accountant agreed with the proposed disposition. On Redacted , almost nine months after the Redacted email communication discussed above, Enforcement staff opened the Covered Action investigation based on information provided by an individual other than Claimant 5. While the Accountant became the lead accountant on the Covered Action investigation, the information in Claimant 5's  Redacted  complaint was not used in the Covered Action investigation and did not contribute to the Covered Action.

FINRA Fines and Suspends Rep for Falsifying Rep Code
In the Matter of Barry Lee Garapedian, Respondent (FINRA AWC 2021070477901)
https://www.finra.org/sites/default/files/fda_documents/2021070477901
%20Barry%20Lee%20Garapedian%20CRD%201039257%20AWC%20lp.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, Barry Lee Garapedian submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that 
Barry Lee Garapedian
 was first registered in 1982, and from June 2009 to February 2021, he was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Garapedian a $5,000 fine and three-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:


From July 2014 through November 2016, Garapedian directed a junior registered representative on his team to place trades in accounts that were covered by the agreement using different joint representative codes than the one Garapedian should have used pursuant to his agreement with the estate of the retired representative. Specifically, although Morgan Stanley's system correctly prepopulated the trades with a joint representative code Garapedian shared with the estate of the retired representative, Garapedian directed the junior registered representative to enter 417 transactions under different joint representative codes through which Garapedian received a higher percentage of commissions than what he was entitled to receive pursuant to the agreement.2 Garapedian mistakenly assumed that he had permission to change the representative codes in this manner to equalize commissions earned by him and the other registered representatives across accounts serviced by the branch office, including those covered by the joint production agreement. However, Garapedian had not verified that the estate of the retired representative agreed that Garapedian could change the representative code for the transactions at issue. 



Footnote 
2 During this same time period, Garapedian directed the junior registered representative to enter an additional 322 trades under different joint representative codes through which Garapedian received a lower percentage of commissions than what he was entitled to receive pursuant to the agreement. 

FINRA Fines and Suspends Rep for Forging Customer Signatures
In the Matter of Todd Michael Seymour, Respondent (FINRA AWC 2020068811301)
https://www.finra.org/sites/default/files/fda_documents/2020068811301
%20Todd%20Michael%20Seymour%20CRD%203249733%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, Todd Michael Seymour submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Todd Michael Seymour was registered with Morgan Stanley Smith Barney LLC from June 2014 to February 2017; and thereafter from February 2017 to December 2020 with Raymond James Financial Services, Inc. In accordance with the terms of the AWC, FINRA imposed upon Seymour a $5,000 fine and two-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

Before becoming associated with any FINRA member firm, Seymour provided tax preparation and trust administration services through his wife's tax and estate business. Beginning around 2010, Seymour also served as co-trustee of Trust A. Both Trust A and the beneficiaries of Trust A later became customers of Seymour at Morgan Stanley and Raymond James. 

Upon associating with Morgan Stanley and Raymond James, Seymour sought to continue working for his wife's tax and estate business. In considering Seymour's requests for approval of his outside business activity, each firm placed restrictions on the scope of his participation in the activity. In June 2014, Seymour disclosed to Morgan Stanley that he served as co-trustee of Trust A, and that he worked for his wife's tax and estate business. Morgan Stanley approved Seymour's work for his wife's business as an outside business activity, but prohibited him from continuing to serve as co-trustee for Trust A. When Seymour later became associated with Raymond James in February 2017, he again requested approval to work for his wife's business, but did not disclose to the firm that he provided trust administration services, including performing the duties of a co-trustee for Trust A, through his wife's business. Instead, Seymour's written request for approval described his responsibilities for his wife's business merely as "[t]ax [p]reparation." Raymond James subsequently approved Seymour's work for his wife's business as an outside business activity, but prohibited him from serving as a trustee or maintaining billpaying authority over any third-party bank account. 

Seymour exceeded the scope of his approved outside business activity while he was associated with each firm. From June 2014 to November 2020, Seymour, at the direction of the remaining co-successor trustee, continued to perform the duties of a co-trustee for Trust A, even though both Morgan Stanley and Raymond James had prohibited him from serving as a trustee. And from February 2017 to at least November 2020, Seymour failed to comply with Raymond James's prohibition against having bill-paying authority over any third-party account. Using his check-writing authority for Trust A's bank account, Seymour issued checks, including checks to compensate himself for the services he provided Trust A. In so doing, Seymour engaged in outside business activities without providing full and accurate prior written notice to his firms of those activities. 

Additionally, from 2017 to 2020, Seymour submitted five compliance questionnaires to Raymond James, in which he falsely attested that he had not participated in outside business activities that he had not disclosed to the firm. 

Therefore, Seymour violated FINRA Rules 3270 and 2010.

%20FFEC%20Wealth%20Partners%20LLC%20CRD%2016507
%20and%20Jeffrey%20Graves%20CRD%201398578%20AWC%20lp.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, FFEC Wealth Parnters LLC and Jeffrey Scott Graves submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that FFEC has been a FINRA member since 1985 with 165 registered individuals at 25 branches; and that Graves was first registered in 1986, and since 2006, he has been registered with FFEC. In accordance with the terms of the AWC, FINRA imposed upon FFEC a Censure, $35,000 fine, and $112,672.87 restitution; and upon Graves a $5,000 fine, 15-buseinss-day suspension from associating with any FINRA member in Principal-only capacities, and an undertaking to complete 20 hours of continuing education concerning supervisory responsibilities. The "Overview" portion of the AWC asserts that:

During the period Jtne 2017 through September 2019, FFEC failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 as they pertain to margin use. In addition, FFEC and Graves failed to reasonably supervise the use of margin in two customer accounts and failed toreasonably supervise mutual fund switches in two customer accounts. These failures caused the customers to pay more than $112,000 in commissions, fees, and margin interest. By this conduct, FFEC and Graves violated FINRA Rules 3110 and 2010.