Securities Industry Commentator by Bill Singer Esq

February 3, 2023

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Individual Who Portrayed Himself as Experienced Stock Trader Sentenced to 30 Months' Imprisonment for Defrauding Investor / Defendant Also Ordered to Pay $224,500 in Restitution to the Victim (DOJ Release)

In the United States District Court for the Eastern District of New York, Gonzalo Ortiz pled guilty to one count of investment advisor fraud; and he was sentenced to 30 months in prison plus two years of supervised release, and ordered to pay $224,500 in restitution. As alleged in part in the DOJ Release:

Between approximately April 2015 and May 2017, Ortiz falsely represented himself to an investor (the “Victim”) as a successful investment adviser who had made profits for other individuals by trading stocks on their behalf.  Ortiz convinced the Victim to allow him to invest the Victim’s money, promising significant returns.  Based on those misrepresentations, the Victim made successive investments with Ortiz over a period of years.  During this time, Ortiz falsely told the Victim that the investments were profitable and sent the Victim a false account statement to support these claims. In reality, Ortiz made poor trading decisions that resulted in the loss of a portion of the Victim’s money, and also stole some of the Victim’s money for himself, siphoning off portions of the investments to pay for personal expenses, including clothing, food and car payments.  Ortiz controlled nearly $600,000 of the Victim’s money, stole approximately $224,500 for himself, and lost a significant amount of the Victim’s money to unprofitable trades.

Activision Blizzard to Pay $35 Million for Failing to Maintain Disclosure Controls Related to Complaints of Workplace Misconduct and Violating Whistleblower Protection Rule (SEC Release)
Without admitting or denying the findings in an SEC Order that Activision Blizzard violated Exchange Act Rules 13a-15(a) and 21F-17(a); the company agreed to a cease-and-desist order and to pay a $35 million penalty.
As alleged in part in the SEC Release:

[B]etween 2018 and 2021, Activision Blizzard was aware that its ability to attract, retain, and motivate employees was a particularly important risk in its business, but it lacked controls and procedures among its separate business units to collect and analyze employee complaints of workplace misconduct. As a result, the company’s management lacked sufficient information to understand the volume and substance of employee complaints about workplace misconduct and did not assess whether any material issues existed that would have required public disclosure. Separately, the SEC’s order finds that, between 2016 and 2021, Activision Blizzard executed separation agreements in the ordinary course of its business that violated a Commission whistleblower protection rule by requiring former employees to provide notice to the company if they received a request for information from the Commission’s staff.


SEC Obtains Final Judgment in Microcap Fraud Litigation (SEC Release)

In a Complaint filed in the United States District Court for the Southern District of California (or possibly New York -- unclear from the SEC Release), the SEC charged Annetta Budhu with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of  Rule 10b-5 thereunder. Apparently the United States District Court for the Southern District of New York entered a Final Judgment on consent by which Budhu agreed to be permanently enjoined from violations of the charged provisions and agreed to a penny stock bar; and she agreed to pay disgorgement of $5,000, prejudgment interest thereon, and a civil penalty of $5,000. As alleged in part in the SEC Release:

[B]udhu was involved in a fraudulent scheme to inflate the price and volume of the stock of Arias Intel Corp. ("ASNT") in which she profited $5,000. The SEC alleged that as part of the scheme, Budhu sold shares and lied to a transfer agent about the sale.

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The FINRA Regulatory Mule Kicks Defrauded Customers In the Head ( Blog)
In today's Blog we got a FINRA regulatory decision, a state court judgment, a bankruptcy, and a federal court action. As the legal matters now stand, some defrauded customers are left scratching their heads. All of which prompts us to consider the outdated, unworkable construct of FINRA. The experiment of allowing Wall Street to regulate itself has been abused for so many decades as to undercut virtually any argument favoring the continuation of FINRA. If you need proof, just consider one federal court's awkward attempt to explain what FINRA is or isn't. It's sort of a horse. It's sort of a donkey. It's sort of a mule but it isn't except it is . . . sort of.
Ex-Allianz Manager’s Legal Fight Tests DOJ White-Collar Strategy (Bloomberg Law by Ben Penn)
A lovely bit of spot-on journalism from Bloomberg Law reporter Ben Penn. Penn's article presents the challenging scenario in which a former Allianz Global Investors Chief Investment Officer Gregoire Tournant has fled a Motion to Dismiss federal criminal fraud charges. As Penn notes in part, Tournant's Motion:
blames the alleged breach of attorney-client privilege on DOJ’s “onerous” policy that requires companies “to build the Government’s case against employees” if they wish to receive lenience, such as avoiding a guilty plea. His lawyers argued Jan. 29 that DOJ pressured Allianz to “scapegoat” Tournant and “coerced” his former lawyers from Sullivan & Cromwell and Ropes & Gray “to turn on one client in order to save another.”

Alleged Perpetrator Of $100 Million Crypto Market Manipulation Scheme To Make Initial Appearance In The Southern District Of New York (DOJ Release)
In the United States District Court for the Southern District of New York, an Indictment was filed charging Avraham Eisenberg with one count of commodities fraud, one count of commodities manipulation, and one count of wire fraud. As alleged in part in the DOJ Release: 

Background on Mango Markets

Mango Markets is a decentralized cryptocurrency exchange that allows investors to, among other things, purchase and borrow cryptocurrencies and cryptocurrency-related financial products.  Mango Markets is run by the Mango Decentralized Autonomous Organization (the “Mango DAO”).  The Mango DAO has its own crypto token called MNGO, which investors could buy and sell. Holders of the MNGO token are allowed to vote on changes to Mango Markets and issues related to the governance of the Mango DAO.

Investors on Mango Markets can, among other things, buy and sell perpetual futures contracts (“Perpetuals”).  When an investor buys or sells a Perpetual for a particular cryptocurrency, the investor is not buying or selling that cryptocurrency but is, instead, buying or selling exposure to future movements in the value of that cryptocurrency relative to another cryptocurrency.  An investor who buys a Perpetual based on the relative value of the stablecoin USDC and MNGO (a “MNGO Perpetual,” for short) at a price of 0.02 USDC/MNGO is “long” on MNGO, and the value of that position will rise if the value of MNGO rises above 0.02 USDC/MNGO.  Conversely, the investor who sold that Perpetual is “short” on MNGO, and the value of that position will rise if the value of MNGO falls relative to USDC.  Either party to a Perpetual can settle the Perpetual at any time and realize their gain or loss. 

To determine the settlement price of Perpetuals, Mango Markets uses an “oracle,” which is a computer program that calculates the relative value of two cryptocurrencies by looking at the exchange rate of those cryptocurrencies on various cryptocurrency exchanges (the “Oracle”).  When the Oracle price changes for a particular cryptocurrency pairing, the settlement price of Perpetuals based on that cryptocurrency pairing also changes on Mango Markets.  Each party to a Perpetual on Mango Markets also regularly makes or receives payments known as “funding” payments.  Funding payments are calculated based on the midprice of bids and asks for that Perpetual compared to the Oracle price for that Perpetual.  Funding payments are designed to ensure the purchase price for Perpetuals stays close to settlement prices. 

Investors can also engage in “spot” trades on Mango Markets.  In a spot trade, an investor exchanges one cryptocurrency for another, at whatever the prevailing exchange rate between those two cryptocurrencies is at the time of the transaction.

Mango Markets also allows investors to use their deposits and positions as collateral for borrowing and withdrawing cryptocurrency from the Mango Markets exchange.  To borrow through Mango Markets, an investor accesses the Mango Markets website and clicks a button labeled “borrow” that allows the investor to borrow cryptocurrency.  The investor can then withdraw the borrowed cryptocurrency by clicking another button labeled “withdraw.”  The borrowed cryptocurrency comes from cryptocurrency that other investors have deposited in Mango Markets accounts.  The amount that an investor on Mango Markets can withdraw is determined by a formula that looks at, among other things, the value of the cryptocurrency deposited in the investor’s account, the value of the investor’s positions on Mango Markets, and the amount of cryptocurrency that the investor has already borrowed through Mango Markets.  Mango Markets uses a formula to track the relationship between these assets and liabilities, which Mango Markets labels the “health” of the account.  If the “health” of a Mango Markets account falls below a certain threshold, the investor’s positions on Mango Markets can be liquidated

EISENBERG’s Market Manipulation Scheme

EISENBERG engaged in a scheme to steal approximately $110 million by artificially manipulating the price of MNGO Perpetuals on Mango Markets.  To achieve this objective, EISENBERG took a number of steps.  First, EISENBERG used an account that he controlled on Mango Markets to sell a large amount of MNGO Perpetuals and used a separate account on Mango Markets to purchase those same MNGO Perpetuals.  One account that EISENBERG controlled held a “long” position, the value of which would rise if the value of MNGO relative to USDC rose above the threshold of 0.0382 USDC/MNGO (the “Long MNGO Perpetual Position”).  The second account that EISENBERG controlled held a “short” position, the value of which would rise if the value of MNGO relative to USDC fell below 0.0382 USDC/MNGO (the “Short MNGO Perpetual Position”).  EISENBERG was the owner of both positions and had sold to himself, from himself, the MNGO Perpetuals.

Second, EISENBERG made a series of large purchases of MNGO using the stablecoins USDC and USDT on multiple cryptocurrency exchanges with the objective of artificially increasing the price of MNGO relative to USDC and, in turn, the price of MNGO Perpetuals on Mango Markets.  EISENBERG’s manipulative trading caused the price of MNGO Perpetuals on Mango Markets to rise approximately 1300% in a period of approximately 20 minutes.

Finally, as the price of MNGO Perpetuals on Mango Markets rose due to the manipulative purchasing by EISENBERG, the apparent value of the MNGO Perpetuals that EISENBERG had purchased for himself also rose.  Because Mango Markets allows investors to borrow and withdraw cryptocurrency based on the value of their assets on the platform, the artificial increase in the value of the MNGO Perpetuals EISENBERG had purchased from himself allowed him to borrow, and then withdraw, approximately $110 million worth of various cryptocurrencies from Mango Markets, which came from deposits of other investors in the Mango Markets exchange.  EISENBERG withdrew nearly all then-available funds from Mango Markets.  When Eisenberg borrowed and withdrew this cryptocurrency, he had no intention of repaying the borrowed funds but rather intended to steal those funds.

After EISENBERG stopped purchasing MNGO with USDC in connection with his fraudulent scheme, the price of MNGO Perpetuals on Mango Markets – which was no longer being artificially propped up by EISENBERG – collapsed. 

Three Individuals Charged with Operating Multimillion-Dollar Elder Fraud Scheme (DOJ Release)

In the United States District Court for the District of Nevada, an Indictment was filed charging Kimberly Stamps, John Kyle Muller, and Barbara Trickle with conspiracy to commit mail and wire fraud, along with multiple counts of mail fraud and wire fraud. As alleged in part in the DOJ Release:

[T]he indictment alleges that, from 2012 to 2018, the defendants mailed millions of prize notices that led victims to believe they were specially chosen to receive a large cash prize and would receive the prize if they paid a small fee. Victims who paid the requested fee, however, did not receive the promised cash prize. Although the notices appeared to be personalized correspondence, they were merely mass-produced form letters that were bulk-mailed to recipients whose names and addresses appeared on mailing lists purchased and rented by the defendants.

. . .

[S]tamps and Muller selected and edited the prize-notice mailings, set the mailing schedules, and collected and processed victim payments. Trickle – aware of the deceptive nature of the mailings and that victims were in fact deceived – produced the physical mailings, introduced them to the U.S. Mail, and assisted with managing the data that Stamps and Muller used to target consumers for repeated victimization. 

According to the indictment, Stamps, Muller, and Trickle continued to operate their fraudulent mass-mailing scheme in violation of a United States Postal Service cease-and-desist agreement and consent order reached in 2012. The agreement and order had permanently barred Stamps and anyone working with her from mailing fraudulent prize notices.


SEC Obtains Judgment Against Texas-Based Technology Company and Its CEO for Fraud & Misappropriation of Investor Funds (SEC Release)

In the United States District Court for the Northern District of Texas, the SEC filed a Complaint against Aether Innovative Technology, Inc. and its Chief Executive Officer John C. Wilson II. As alleged in part in the SEC Release:

[F]rom August 2019 to September 2020, Aether and Wilson raised approximately $1.9 million from investors using materially false and misleading statements in offering materials and other written communications, regarding, among other things, the existence and amount of prior investments, the use of investor assets, the deployment of the hardware to be used in Aether's primary business, and the existence of a significant customer relationship. The complaint further alleged that Wilson also misappropriated investor assets for himself and his family.

The judgment, entered on the basis of default, enjoins Aether and Wilson from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Aether was ordered to pay a civil penalty of $207,183 and disgorgement of $254,000 with prejudgment interest of $15,418.48. Wilson was ordered to pay a civil penalty of $207,183 and disgorgement of $122,850 with prejudgment interest of $7,457.33. The judgment also prohibits Wilson from serving as an officer or director of a public company and prohibits Wilson and Aether from participating in the issuance, purchase, offer, or sale of any security.


SEC Charges Nevada-Based Investment Adviser for Conducting Fraudulent "Cherry-Picking" Scheme (SEC Release)
In a Complaint filed in the United States District Court for the District of Nevada, the SEC charged Steven J. Susoeff  and Steve  Susoeff LLC d/b/a Meritage Financial Group with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder, Sections 17(a)(1) and (3) of the Securities Act, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. As allleged in part in the SEC Release:

[F]rom January 2021 through July 2021, Susoeff placed securities trades using Meritage's omnibus trading account, which is intended to facilitate purchases of securities for multiple client accounts. As alleged, Hobbs placed the securities trades early in the trading day but did not allocate the trades to specific clients or Susoeff's personal accounts until later in the day. The complaint alleges that Susoeff disproportionately allocated profitable trades to himself and two favored clients and unprofitable trades to his other clients' accounts.


SEC Obtains Final Judgments Against Alleged Perpetrators of Fraudulent Pyramid Scheme (SEC Release)
Litigation Release No. 25628 / February 1, 2023
In the United States District Court for the Eastern District of Kentucky, the SEC filed a Complaint alleging that John Brian McLane, Jr. and Paul Anthony Nash owned and operated a multilevel marketing company known as Mindset 24 Global, LLC that:

offered personal development materials and a compensation plan that incentivized investors to recruit others into the salesforce through payment of commissions in bitcoin. The complaint also alleged that despite the promotion of Mindset 24 as a legitimate enterprise, it was nothing more than a fraudulent pyramid scheme.

Without admitting or denying the allegations in the SEC Complaing, McLane, Jr. and Nash
consented to the entry of Final Judgments permanently enjoining them from 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 securities offering registration requirements of Section 5 of the Securities Act. Further, McLane was ordered to pay disgorgement of $135,200, plus prejudgment interest of $17,770, and Nash was ordered to pay disgorgement of $173,600, plus prejudgment interest of $22,817. Both defendants also were ordered to pay civil penalties of $60,000. 


SEC Publishes Annual Staff Report on Nationally Recognized Statistical Rating Organizations
READ the Report: 

FINRA Fines and Suspends Rep for Private Securities Transactions
In the Matter of Archie Abel Blood, Respondent (FINRA AWC 2020065683301)
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, Archie Abel Blood submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Archie Abel Blood was first registered in 1988; and by 2011, he was registered with Cambridge Investment Research, Inc.. In accordance with the terms of the AWC, FINRA imposed upon Blood a $5,000 fine, a four-month-suspension from associating with any FINRA member in all capacities. As alleged in part in the  AWC:

Between June 2020 and January 2021, Blood participated in private securities transactions involving two married couples who were his customers at Cambridge (Customers A and Customers B). In June 2020, Blood introduced Customers A and Customers B to an individual associated with a potential investment in Company X, which the firm had not approved for sale. The Unit Purchase Agreements for the offering identified the investment interests as unregistered securities. Blood participated in both customers' investments. After making the initial introductions, Blood sent Customers A the Unit Purchase Agreement, told his contact that the customers would invest $200,000
and ensured that the necessary funds were wired to complete the investment. In connection with Customers B, Blood provided their information to his contact and provided to his contact a non-disclosure agreement executed by Customers B, which was necessary to complete the investment. Customers A and Beach invested $200,000 in
Company X.

Blood's participation in these transactions was outside the regular course and scope of his employment with his firm. Blood failed to provide prior written notice to his firm to participate in the company's sale of securities issued by Company X to Customers A and B. To the contrary, Blood falsely attested to his firm that he did not assist, advise, or facilitate any private securities transactions.

Therefore, Blood violated FINRA Rules FINRA Rules 3280 and 2010. 

FINRA Arbitrators Slam Raymond James with Over $15 million in Damages in Wells Fargo Raiding Case
In the Matter of the Arbitration Between Wells Fargo Advisors, LLC, Claimant, v. Raymond James Financial Services, Inc., Kent Jackson Rhoades, Steven Bettenhausen, David Matty, Janet Schmeski, Michael Stockton, and Logan Stone, Respondents (FINRA Arbitration Award 20-02796)
In a FINRA Arbitration Statement of Claim filed in August 2020, FINRA member firm Claimant Wells Fargo Advisors, LLC asserted:

unfair competition, breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conspiracy, tortious interference with actual and prospective business advantage and/or relationship, tortious interference with contractual relations, violations of FINRA Rules of Conduct, and unjust enrichment. The causes of action relate to Claimant’s allegation that it was damaged by Respondents’ coordinated raid of Claimant’s branch office in Mountain Home, Arkansas, which targeted all of the employees of the Mountain Home Branch and resulted in its closure.

Respondents generally denied the allegations,  asserted affirmative defenses, and filed a Counterclaim that in part asserted that:

subsequent to their departures from Claimant, Claimant assigned
Individual Respondents’ clients to replacement financial advisors and that the replacement financial advisors, through untruths and/or deception, improperly caused clients to sever their relationship with Individual Respondents.

In August 2022, Claimant Wells Fargo withdrew its claims against Respondents and, accordingly, the FINRA Arbitration Panel made no determinations as to those parties. At the FINRA Arbitration Hearing, Claimant Wells Fargo sought $12.3 million in damages.

The FINRA Arbitration Panel found Respondent Raymond James and Respondent Rhoades jointly and severally liable and ordered them to pay to Claimant Wells Fargo $15.3 million in compensatory damages plus interest, and a $500 in filing fees. Further, Rhoades was ordered to pay to Claimant $3.5 million in attorneys' fee and $847,000 in costs. Finally, Raymond James was ordered to pay $1,000 in punitive damages.

FINRA Arbitration Panel Hits Credit Suisse With a Net Award of Over $1.3 million in Breach of Contract Case
In the Matter of the Arbitration Between James D. Garrity, Claimant, v. Credit Suisse Securities (USA) LLC, Respondent (FINRA Arbitration Award 20-03957)
In a FINRA Arbitration Statement of Claim filed in December 2020, associated person Claimant Garrity asserted breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; unjust enrichment; and false and misleading Form U5. Claimant sought at least $1,003,682 in deferred compensation and $121,154 in severance plus fees, costs, interest; and an amendment of his Form U5. Respondent Credit Suisse generally denied the claims, asserted affirmative defenses, and filed a Counterclaim seeking $34,150 for unearned advance of quarterly commissions and at least $296,193.45 in damages plus costs and disbursements. The FINRA Arbitration Panel found Respondent Credit Suisse liable and ordered it to pay to Claimant Garrity $363,244.20. The Panel found Claimant Garrity liable and ordered him to pay to Respondent Credit Suisse $34,150 in compensatory damages. The Panel ordered an offset of its awards with a net award due to Claimant of $1,347,719.09.


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SEC Charges CEO of Microcap Public Company for Defrauding Investors (SEC Release)
In a Complaint filed in the United States District Court for the District of Connecticut, the SEC charged Seong Yeol Lee and Ameritrust Corporation with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10(b)-5 thereunder. Also, the Complaint names as Relief Defendants Beespoke Capital, Inc., Beespoke Capital LLC, Alice Mee-Hyang Choi, April Sue-Chang Lee, and Elaine Choung-Hee Lee. As alleged in part in the SEC Release:

[T]hrough a network of recruiters acting at his direction, Lee solicited more than $20 million from investors primarily in the Republic of Korea, who sent money to corporate and personal bank accounts that Lee controls in the United States to buy shares of Ameritrust, a publicly traded company in the United States. Lee, either directly or through his recruiters, allegedly told investors that their money would buy shares in a U.S.-based company that would be listed on a national stock exchange, guaranteeing profits for anyone holding the shares. In reality, the complaint alleges that Ameritrust has no real operations and has not taken any steps to apply for any exchange listing. According to the SEC's complaint, Lee misappropriated at least $4 million of investor funds by transferring money from corporate bank accounts to his personal bank accounts and to three of his adult children. Lee and Ameritrust also allegedly defrauded the public by making materially false statements or failing to disclose material information in Ameritrust's filings with the Commission.


It's Not Sewer Service But Social Media Service Still Doesn't Cut It When It Comes To An SEC Order Instituting Proceedings
In the Matter of Lisa Gordon (Order Regarding Service, SEC, 1934 Release No. 96785; Admin. Proc. File No. 3-21039 / February 1, 2023)
On September 7, 2022, the SEC issued an Order Instituting Administrative Proceedings ("OIP") against Lisa Gordon; and, thereafter, the Division of Enforcement filed a Declaration by the process server stating:

[T]the process service “searched social media; proprietary, non-public electronic databases; and other public records”; through which it discovered that Gordon “is an agent of Wentworth Hightower Community Fund” with a principal address in Tarzana, California. The declaration states that the process service served the OIP by sending it via U.S. mail to Gordon at that address.

Okay, sure, that's nice -- except, howsabout we take a look at SEC Rule of Practice 141: Orders and Decisions: Service of Orders Instituting Proceedings and Other Orders and Decisions, which states in part that [Ed: highlight added]:

(a) Service of an Order Instituting Proceedings.

(1) By Whom Made. The Secretary, or another duly authorized officer of the Commission, shall serve a copy of an order instituting proceedings on each person named in the order as a party. The Secretary may direct an interested division to assist in making service.

(2) How Made.

(i) To Individuals. Notice of a proceeding shall be made to an individual by delivering a copy of the order instituting proceedings to the individual or to an agent authorized by appointment or by law to receive such notice. Delivery means -- handing a copy of the order to the individual; or leaving a copy at the individual's office with a clerk or other person in charge thereof; or leaving a copy at the individual's dwelling house or usual place of abode with some person of suitable age and discretion then residing therein; or sending a copy of the order addressed to the individual by U.S. Postal Service certified, registered or Express Mail and obtaining a confirmation of receipt; or giving confirmed telegraphic notice. . . .

Ummm . . . so, lemme see if I got this, the SEC's Division of Enforcement hired a process server, who mailed the OIP to Gordon at some address of a Fund that he found on social media?

Looking at the checklist above, that's not quite handing the Order to Gordon or leaving it at her office or at her house/abode -- at least that's not how I see it. More to the fact, consider this from the SEC Order Regarding Service:

Under Commission Rule of Practice 141(a)(2)(i), service of an OIP may be made by sending it “addressed to the individual by US. Postal Service certified, registered or express mail and obtaining a confirmation of receipt.”2 The Status Report and the declaration do not state or attach evidence showing how the mailing was addressed or what type of U.S. mail was used; and they do not attach a confirmation of receipt. The Status Report and the declaration also do not explain how the Division determined that Gordon is currently an agent of Wentworth Hightower Community Fund or attach an exhibit evidencing this status; nor do they establish that the OIP was mailed to Gordon’s current address. Under the circumstances, there is an absence of information necessary to confirm that service has been properly made.

The declaration also states that the process service attempted to serve the OIP on Gordon personally over “varying days and times” at her home address in Woodland Hills, California, but that it was unsuccessful, so it instead “posted [the OIP] to the front door” of Gordon’s home. But the Rules of Practice do not authorize service of an OIP by posting it to a respondent’s front door.3  Moreover, the Division does not explain why it did not attempt to send the OIP via U.S. mail to Gordon’s home address in Woodland Hills, California, and obtain a confirmation of receipt, which as noted above is a valid method of service under Rule 141(a)(2)(i).

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Footnote 2: 17 C.F.R. § 201.141(a)(2)(i). In the Status Report, the Division cites Rule of Practice 150(d), which concerns service of papers by parties generally, but not service of an OIP.

Footnote 3: See, e.g., Am. Realty Funds Corp., Exchange Act Release No. 91250, 2021 WL 824409, at *1 (Mar. 3, 2021) (order regarding service stating that “posting of the OIP” at the main entrance of respondent’s address “does not appear” to satisfy the service requirements in Rule 141(a)(2)).

Bill Singer's Comment: Compliments to the SEC's Office of the General Counsel for flagging this non-compliant service. 

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The SEC Toys With A Dead FINRA Expungement Mouse for 50 Months ( Blog)
When considering an appeal questioning FINRA's denial of an expungement request, the SEC seems to have approached its deliberation as a cat toying with a dead mouse. There seems no rush in the effort and not much accomplished beyond playing with a dead-on-arrival case. Shamefully, the SEC took 50 months to deny the appeal. 
A 'postage' fee of $7.95 and the SEC's warning to the industry (Financial Planning by Tobias Salinger / January 31, 2023)

U.S. Promoter of Foreign Cryptocurrency Companies Sentenced to 60 Months in Prison for His Role in Multi-Million Dollar Securities Fraud Scheme (DOJ Release)
John DeMarr pled guilty to one count of conspiracy to commit securities fraud; and he was sentenced to 60 months in prison and ordered to pay $3,513,305.41 in forfeiture. As alleged in part in the DOJ Release”:

[D]eMarr, a promoter of several digital asset-related companies, conspired with others to defraud investor victims by inducing them to invest in their companies, “Start Options” and “B2G,” based on materially false and misleading representations. Start Options purported to be an online investment platform that provided cryptocurrency mining, trading, and digital asset trading services. B2G was purportedly an “ecosystem” that would allow users to trade B2G tokens, provide digital wallet staking, and trade digital and fiat currencies “on a secure, comprehensive platform.” Both Start Options and B2G, however, were fraudulent. 

DeMarr and others falsely claimed that investor funds would be invested in digital asset mining and trading platforms that would earn them massive profits. In reality, the funds were never invested and instead diverted to accounts controlled by DeMarr and others and used for various personal expenditures, including the purchase of a Porsche, jewelry, and the remodeling of DeMarr’s home in California. 

Start Options also purported to feature celebrity endorsements to promote its securities offerings. For example, a professional athlete purportedly endorsed Start Options and his name and likeness were used without his consent. Based on this and other fraudulent promotional materials, investors sent millions of dollars’ worth of Bitcoin, Ethereum, and fiat currency to financial accounts, including cryptowallets, controlled by DeMarr and others in the United States and abroad. In late January 2018, rather than permitting Start Options investors to withdraw money from their accounts after the requisite time period, DeMarr and others required investors to roll over their accounts into an unregistered “initial coin offering,” or ICO, of B2G. Investors never actually received any digital tokens, and funds from the offering were not used to develop the B2G platform.

Additionally, DeMarr and others also paid various promoters, including an actor famous for martial arts films made in the 1980s and 1990s, to serve as a promoter and celebrity spokesperson, falsely claiming that B2G could generate an “8,000%” return for investors within one year, and that he was a participant in the ICO. DeMarr and others also created false press releases and whitepapers about B2G, fabricated B2G account statements, and refused to allow investors to withdraw their money.  

Former Chief Financial Officer Pleads Guilty for Failing to Pay Over $3.6M in Employee Tax Withholdings and for Pocketing $130,000 from his Employer’s Bank Account (DOJ Release)
In the United States District Court for the Northern District of Oklahoma, Paul B. Bowker, 60, pled guilty to one count of failure to account for and pay over withholding and FICA (Social Security) taxes and one count of bank fraud. Three years ago when Bowker was first charged, he fled the United States but was extradited from the United Kingdom. As alleged in part in the DOJ Release:

At the time of the crime, Bowker was the chief financial officer and vice president of finance at a company that maintained offices in the Northern District of Oklahoma. In his role at the company, Bowker was responsible for withholding income taxes and FICA taxes from employees’ paychecks and for paying the monies over to the IRS. According to court document, from April 2014 through January 2016, Bowker withheld the funds but willfully failed to file quarterly employment tax returns for the company and failed to pay over the majority of the employment taxes owed to the IRS, totaling nearly $3.6 million. During the investigation, agents discovered that the defendant had not embezzled the tax monies that he willfully neglected to pay, and the IRS was able to recover the funds.

Bowker also committed bank fraud as the company’s chief financial officer. In his position, Bowker was entrusted with a company’s Visa credit card and was responsible for paying the monthly credit card bill by authorizing the electronic transfer of funds from the company’s checking account at Mabrey Bank, in Bixby, to the company’s Visa account. From January 2014 through December 2015, Bowker fraudulently used the Visa credit card to make $130,000 worth of purchases for his own benefit. Bowker purchased items at drug stores, department stores, online retailers, furniture stores, gas stations, and liquor stores. He paid for the Visa charges with funds from the company’s checking account at Mabrey Bank.

Bowker did this by calling the credit card processor and authorizing a one-time electronic transfer from Mabrey Bank to pay the credit card bill.  By authorizing the payment via telephone, Bowker was able to avoid the company’s two-signature requirement on company checks.

FINRA Fines and Suspends Rep for Impersonating Former LPL Customer
In the Matter of Robert J. Boschke, Respondent (FINRA AWC 2020065683301)
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, Robert J. Boschke submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Robert J. Boschke was first registered in 1996 and by 2012, he was registered with LPL Financial LLC. In accordance with the terms of the AWC, FINRA imposed upon Boschke a $5,000 fine, a 30-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the  AWC:

On February 13, 2020, Boschke called an annuity company to facilitate the transfer of a former LPL Financial customer’s annuity to the former customer’s ex-wife as part of a divorce settlement. During the call, Boschke impersonated the former customer and stated that he was divorced, that his “ex” was getting the account and that he was instructed by his attorney to call and get the value of the account as of the divorce date.The annuity company provided the information to Boschke.

On June 10, 2020, Boschke called the annuity company again and impersonated the same former customer. Boschke stated that a problem existed with the Notification of Divorce and Division Instructions form due to outdated signatures. Boschke asked the company to email him (the former customer) the form to be re-signed. Boschke was unable to answer the security question that the annuity company posed to him and the instruction form was not sent.

By impersonating a former customer, Boschke violated FINRA Rule 2010.  

FINRA Fines and Suspends Rep For Reg BI Misconduct
In the Matter of Todd Anthony Cirella, Respondent (FINRA AWC 2020065683301)
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 Anthony Cirella submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Todd Anthony Cirella entered the industry in 1993 and since 2004 was registered with Laidlaw & Company (UK) Ltd.. In accordance with the terms of the AWC, FINRA imposed upon Cirella a $5,000 fine, a three-month suspension from associating with any FINRA member in all capacities, and $27,566 plus interest in restitution. The AWC contains this admonition:

Respondent understands that this settlement includes a finding that he willfully violated Rule 15/-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes him subject to a statutory disqualification with respect to association with a member. 

As alleged in part in the  AWC:

In July 2010, Respondent's retail customer opened an account with Laidlaw when he was aged 60. Between June 2020 and January 2021 , the customer relied on Respondent's advice and routinely followed his recommendations and, as a result, Respondent exercised de facto control over the customer's account.

Between June 2020 and January 2021 , Respondent recommended 46 transactions in the customer's account. During this period, the trading in the customer's account generated $27,566 in commissions and resulted in approximately $12,000 in trading losses, an annualized cost-to-equity ratio of 37.65%, and an annualized turnover rate of20.39. The high cost-to-equity ratio meant the customer's account would have to grow by more than 37 percent annually just to break even, making it very difficult for the customer to realize a profit. This level of trading was excessive, unsuitable, and not in the customer's best interest.

Therefore, Respondent willfully violated Exchange Act Rule 15/-1 and violated FINRA Rule 2111 and FINRA Rule 2010. 

FINRA Fines and Suspends Rep for Impersonating Former LPL Customer
In the Matter of Edward Scott Short, Respondent (FINRA AWC 2020065683302)
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, Edward Scott Short submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Edward Scott Short entered the industry in 1994, and by 2012, he was regsitered with Laidlaw & Copany (UK) Ltd.. In accordance with the terms of the AWC, FINRA imposed upon Short a $5,000 fine, a seven-month suspension from associating with any FINRA member in all capacities, and $116,859 plus interest in restitution. The AWC contains this admonition:

Respondent understands that this settlement includes a finding that he willfully violated Rule 15/-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes him subject to a statutory disqualification with respect to association with a member. 

As alleged in part in the  AWC:

In September 2015, Respondent’s retail customer opened an account with Laidlaw when he was aged 77. During the relevant period, the customer had a high net worth and a speculative investment objective. Between July 2018 and December 2020, the customer relied on Respondent’s advice and routinely followed his recommendations and, as a result, Respondent exercised de facto control over the customer’s account.

Between July 2018 and December 2020, Respondent recommended 204 transactions in the customer’s account. During this period, the trading in the customer’s account generated $116,859 in commissions and resulted in approximately $185,000 in trading losses, an annualized cost-to-equity ratio of 76.53%, and an annualized turnover rate of 47.49. The high cost-to-equity ratio meant the customer’s account would have to grow by more than 76 percent annually just to break even. This level of trading was excessive,
unsuitable, and not in the customer’s best interest.

Therefore, Respondent willfully violated Exchange Act Rule 15l-1 (for the period June 30, 2020 through December 31, 2020) and violated FINRA Rule 2111 (for the period July 1, 2018 through June 29, 2020) and FINRA Rule 2010. 

= = =

Federal Appellate Court Affirms Dismissal of Wells Fargo and FINRA ( Blog)
A public customer filed a FINRA Arbitration Statement of Claim against Wells Fargo Advisors and asked for no less than $100,000 in damages. The arbitrators found in the customer's favor and awarded about $99,000 in damages and fees. For whatever reasons, the customer appealed the FINRA Award to federal District Court, which looked somewhat askance at a quintessential shotgun pleading and a myriad of motions. On appeal, a Circuit Court affirms the District's dismissal.
In the Superior Court of the District of Columbia, Ted Blair Williams, Jr., 30, pled guilty to felony fraud, and he was sentenced to five years of probation plus12 months of supervised release, and ordered to pay over $46,000 in restitution. As alleged in part in the DOJ Release: 
[W]illiams made approximately 20 fraudulent transfers from the company to his personal bank account between April and November 2019, totaling more than $65,000. Williams, who was employed by the company as an accountant and responsible for reviewing its accounting information, hid the fraudulent transactions in the company’s ledger by falsely coding the transactions in the records and concealing any accounting discrepancies from the company. The company had been able to recover approximately $19,000 after discovering the fraud but suffered a net financial loss of more than $46,000 because of the scheme.
SEC employees are required to preclear securities transactions and comply with minimum holding periods; and,, in part they are prohibited from transacting in securities of companies the agency is investigating, engaging in short selling, transacting in derivatives, participating in initial public offerings for seven calendar days, or purchasing or carrying securities on margin. The SEC is proposing amendments to:

  • Expand the existing prohibited holdings restrictions to ban employees from investing in financial industry sector funds;
  • Authorize the SEC to collect data on employees’ covered securities transactions and holdings directly from financial institutions through an automated electronic system; and
  • Exempt diversified mutual funds from the Supplemental Ethics Rule’s requirements, given that they generally pose a low risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems. Mutual funds that concentrate investments in a particular sector, industry, business, state, or country other than the United States would remain subject to the rules.
SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-96767; Whistleblower Award Proc. File No. 2023-34)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:
[T]he Preliminary Determination considered all relevant factors under the Rules, and it was based on an appropriate record, which included: (1) the Declaration; (2) all of Claimant’s submissions; and (3) documents filed in the Covered Action. Claimant has pointed to no additional documents he/she believes should be part of the record or which the Preliminary Determination failed to consider, and the Commission is aware of no such additional documents.

Claimant’s assertions about the failures of the Declaration to specifically explain why Claimant’s non- REDACTED information did not advance or impact the Investigation are unavailing. The Declaration comprehensively set forth the fact that Claimant’s non- *** REDACTED information was already known or was not used by Staff.
SEC Awards $1 Million Whistleblower Award to Claimant 1 But Denies Award to Claimant 2
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-96765; Whistleblower Award Proc. File No. 2023-33)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award totaling about $1 million to Claimant 1 and denying an Award to Claimant 2. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:
Claimant 2 has failed to meet the demanding standard for showing that there were extraordinary circumstances beyond Claimant 2’s control that caused the failure to file his/her award claim by the deadline. Claimant 2’s stated belief that a claimant can only be eligible for an award if his or her tip or testimony to the Commission specifically mentioned the subject of the covered action does not excuse Claimant 2’s failure to file by the deadline. “[A] lack of awareness about the [whistleblower award] program does not . . . rise to the level of an extraordinary circumstance as a general matter [since] potential  claimants bear the ultimate responsibility to learn about the program and to take the appropriate steps to perfect their award applications.” Claimant 2’s limited understanding of the whistleblower rules is not an “extraordinary circumstance[]” that should trigger the Commission’s discretion to excuse the fact that Claimant 2 submitted his/her award application more than a year after the deadline. Further, while Claimant 2 was unrepresented at the time of the deadline for submitting his/her Form WBAPP, he/she still waited nearly a year after obtaining representation to file his/her award application. Accordingly, we do not believe it is appropriate here to exercise our discretionary authority under Rule 21F-8(a) to excuse Claimant 2’s untimely filing. 

Big “Issues” in the Small Business Safe Harbor: Remarks at the 50th Annual Securities Regulation Institute by SEC Commissioner Caroline A. Crenshaw

Thank you Thomas [Kim] for that lovely introduction and I’m very pleased to be here at the Securities Regulation Institute giving the Alan B. Levenson Keynote Address. Director Levenson was the consummate public servant who left an enduring mark on the Division of Corporation Finance, and the Commission more generally. I’m happy to say that his legacy of combating corporate corruption and promoting integrity in our markets lives on today.

Before I begin, let me make my standard disclaimer – the views I express today are my own and do not necessarily represent the views of the SEC or my fellow Commissioners.

The growth of private markets through exempt offerings, the ascension of the once-mythical “unicorns,” and what these things portend for the future of our public markets have been hotly debated topics for some time now.[1] Over the past decades, private securities offerings have grown at a significantly faster rate than public offerings.[2] Companies that contemplate going public are now waiting much longer to do so.[3] Others are choosing not to go public at all.[4] Companies no longer need to go public to raise enormous amounts of capital.

Where we are today is a long way from where we began, when the federal securities laws first established true public markets with certain limited registration exceptions. From the inception of the federal securities laws, companies could choose to offer to the broad investing public by taking on substantial disclosure obligations in exchange for exclusive access to the relatively unlimited pool of public capital; private companies, on the other hand, had to raise capital from insiders or certain large financial institutions, and were subject to restrictions on transfer and resale.[5] Private markets were meant to be the exception to the proverbial rule. But, through decades of legal, regulatory, and market developments, private companies now have access to increasing amounts of private capital, inflating their sizes and significance to investors and our economy, and all without the concomitant safeguards built into the public markets.[6]

So, how did we get here? Today I’ll talk about Rule 506 of Regulation D (“Reg D”). This rule is the primary exemption relied upon by large private issuers to raise essentially unlimited capital from an unlimited number of accredited investors.[7] I will focus on the original intent of Reg D and discuss some of the consequences of allowing limitless capital to flow into the private markets. And, finally, I will suggest some modest reforms.

I. The Origins of Reg D
We could begin this discussion in 1982, when Reg D was codified. But the story really begins with the statute that created the public registration process—the Securities Act of 1933. As everyone in this room knows, the foundational U.S. securities laws were passed in response to the 1929 stock market crash that preceded the Great Depression. Before 1929, all securities markets in the United States were private and thus, dark. The passage of the Securities Act and the Exchange Act, and the authority that Congress gave to the Commission, reflected an intentional and marked departure from that dark default. U.S. securities laws were designed to protect investors in large part by creating public markets, which are subject to registration requirements, and therefore an information sharing process intended to reduce the stark information asymmetry between the issuer of securities and its current and potential investors. This framework, which undergirds the deepest and most liquid capital market in history, intentionally constrained private companies’ ability to raise capital if they did not provide registration statements or information of the type a registration statement would provide.[8]

Over the decades, the Commission developed several safe harbors from registration requirements that flow from the Securities Act, including Reg D.[9] Issuances exempted from the requirements of the public markets, however, were imagined to be relatively narrow in scope. As one House Committee Report stated, exempt offerings should be “a specific or an isolated sale of…securities to a particular person”[10] and were intended for limited transactions “where the public benefits are too remote.”[11]

Moreover, prior to the passage of Reg D, the Supreme Court had noted that determining whether registration is required or exempt turns on whether investors have access to “the kind of information which registration would disclose.”[12]As one Fifth Circuit court noted “if the [investors] did not possess the information requisite for a registration statement, they could not bring their sophisticated knowledge of business affairs to bear in deciding whether or not to invest.”[13] In that case, the offering would not be exempt.

And, from its inception, Reg D was intended to facilitate access to capital by small businesses. It was prompted by the Small Business Incentives Act, and is “the product of [the Commission’s] evaluation of the impact of its rules and regulations on the ability of small businesses to raise capital.”[14] The Commission has continued the expansion of Reg D as recently as 2020 under the auspices of facilitating capital formation for small and medium sized businesses.[15]

So, the Commission coalesced around a narrow exception to the registration requirement for certain (i) private securities offerings, (ii) to a limited type of investor who had access to baseline disclosures, in order to (iii) allow our small business community to grow and thrive. I think we can all agree this is a laudable goal. Small businesses form the backbone of communities, are drivers of jobs, are critical for the development of new ideas and new technology, and are an avenue to wealth creation—all fundamental aspects of the Commission’s capital formation mission.[16]

II. Regulation D Today
Since 1982, however, Rule 506 of Reg D and other exemptions under Securities Act[17] have changed the landscape of the private markets entirely. Like the children’s book, the “Very Hungry Caterpillar,” [18] unfettered access to capital through Rule 506 has had a bloating effect on private issuers.[19] Whereas, in prior decades, small private issuers who grew and grew had to turn to the public markets to sate their capital needs, now Reg D, among other legal and regulatory mechanisms, has allowed for the development of pools of private capital sufficient to satisfy the needs of even the largest private issuers.

The clearest evidence of this may be the mere existence of the once-mythical (but now ubiquitous) “unicorns”, or private issuers purportedly valued at over a billion dollars. When the term was first coined in 2013, there were 43 unicorns.[20] There are now roughly 1,205.[21] That is an increase of about 121 unicorns in less than one year since I last spoke on this topic. Those unicorns have rough purported overall valuations of about $4 trillion.[22]

And, relevant here, these unicorns have consistently relied on Rule 506 of Reg D to raise billions of dollars in U.S. capital.[23] Make no mistake, Reg D has helped pave the way for the advent of the unicorn. Not only can the companies rely on Reg D to raise capital as small businesses, but they can keep raising capital, and keep growing, indefinitely while staying in private markets. The exception is no longer narrow.

But, there are consequences to allowing issuers to grow so large without any of the requirements of registration.

Investor Protection. First, investors are simply not protected in the same ways in the private markets as they are in the public markets. The Rule 506 safe harbor provides insulation from state blue sky laws and, as I’ve mentioned, from the registration provisions of the federal securities laws. The current logic for that exemption, more or less, is that if investors are accredited, there is no need for any baseline regulatory disclosure obligations. Many would say, in fact, that large private issuers are backed by the most sophisticated investors in the world and don’t need the SEC to impose disclosure or corporate governance protections. I am concerned, though, that sophistication is not quite the safeguard it’s presumed to be.

The relevant question perhaps should be, as the Fifth Circuit noted, whether investors have the information needed to bring “their sophisticated knowledge of business affairs to bear in deciding whether or not to invest.”[24] As private companies have gained increasingly large market power and as the pool of accredited investors has expanded – including venture capital, private equity funds, mutual funds, pension funds, and individuals that meet the requisite wealth thresholds – the de facto presumption that accredited investors need no disclosure isn’t panning out.

In fact, history tells a different story when it comes to inadequate underlying information given to or collected by investors. We saw this, for example, in the 2008 financial crisis, and have many recent examples of the continued phenomenon with companies such as FTX, Theranos, and WeWork. Consider FTX in particular – despite the reported presence of many elite and sophisticated investors capable of negotiating for information and protections, FTX was nonetheless described by its court-appointed, post-bankruptcy CEO as marred by “a complete failure of corporate controls” and a “complete absence of trustworthy financial information.”[25] Bankruptcy filings indicate that FTX didn’t even maintain an accurate list of its bank accounts or account signatories.[26]

Further, when there are wide-spread failures among large private issuers, the spillover effects can go well beyond the investor base of that one company.[27] Other companies and investors almost inevitably get swept up in their wake. In other words, there are market integrity implications to allowing private issuers to grow so big without adequate disclosure or oversight.

Inflated Valuations. Second, allowing nearly unfettered access to private capital in the dark also raises concerns relating to valuation. Private markets today seem to have certain immutable characteristics that, historically, have lent themselves to concerns surrounding valuation – investors may not receive complete or reliable information; securities are generally illiquid, there is limited price discovery and trading can be expensive; and, investors are not guaranteed the best available price when buying or selling the securities.[28]

There is also a set of endemic incentives among institutional private markets to show growth in valuations, all to collect fees. Fund managers rely on the growth of their portfolio companies to propel their fees, to reflect prosperous fund performance, to show healthy assets under management, and to distinguish themselves among a crowded field. Portfolio companies are incentivized to report continuously positive values to show not only the successes of their business, but also to justify the valuations given to earlier round investors, and to avoid their investors from having to suffer write-downs.[29] Ironically, the most reliable valuation practices in the private markets come when the underlying positions are priced with reference to the public markets.[30] But, when there is volatility in those public markets (which bear the benefits of more accurate pricing mechanisms), there is a tendency to drive money into the private markets, either to escape the volatility, or more cynically, simply to avoid the “visible volatility” of the public markets.[31] Investors should not mistake less price transparency, or less “visible volatility,” for safer waters. Indeed, the more light that we can shine on the valuation of fund assets – through the work of auditors and the imposition of internal controls around financial reporting– the better we serve all investors and build integrity into this market.

Healthy Corporate Governance. Third, the large and sometimes questionable valuations inure benefits to private issuers in other ways. Academic work has shown the ancillary or collateral effects of private companies that used their amassed market power to distort traditional corporate governance protections – from dual-class share structures, inconsistent disclosure across investors, and conditions that create lax or deficient systems of internal controls.[32]

The Impact on Small Businesses. Finally, another perhaps unintended and perverse consequence of the unlimited nature of Reg D is that it may actually be hurting small businesses it was designed to help. The fact that unicorns and large private issuers are able to continue to raise capital through Reg D, even after they have far outgrown the small business moniker, means that the capital going to large private issuers is locked up.[33] As I’ve said, private markets are notoriously illiquid, with little price transparency, and with capital often tied up for years on end. And, while information in this space is limited, information that we have collected seems to indicate that large funds and issuers are raising the most amounts of capital under Reg D, and that certain small businesses may be looking to other sources of funding, rather relying than on Rule 506 Reg D.[34]

To me, this says that Reg D is not serving its intended purpose.[35]

III. Form D Today
To put this all into context, I’ve pulled the regulatory filings for two separate offerings. I won’t name which companies made these filings.

First the Form D. This is the form ostensibly filed with a Reg D offering. In this case, it’s the filing of a unicorn, which purportedly has a valuation of greater than tens of billions.

  • The Form is 6 pages long (printed), and consists mostly of check the box answers. The company is seeking to raise over $300 million in funding. It lists whether the company’s year of incorporation was more or less than 5 years ago. It lists the principal place of business; it lists certain executives and directors; and it notes the types of securities offered. It declines to disclose its revenue or net asset value range; it shows no information about sales compensation nor the total number of investors. It’s signed by a deputy general counsel, and not a chief officer. That’s it. That’s all it says. Oh, and, if the issuer fails to file this form, there is really little to no consequence.[36]

The second registration statement is a public offering of securities on Form S-1. Today this company has a market cap of greater than tens of billions, although at the time of its initial offering that number was in the hundreds of millions.

  • It is 173 pages before appendices, and (as you all know), contains detailed, descriptive information about the business, the offering, the use of proceeds, risk factors, audited financial data, information on capitalization, dilution, board of directors and director independence, executive compensation, and related party transactions. It also includes the report of an independent registered public accountant, and it is signed by executive officers and directors.

Now, I’m going to posit something that I think we all implicitly know. When you see these two forms you have, more or less, one of two reactions. You either think:

  • I am shocked and astounded that a company with a market value greater than the size of many small nations and the ability to impact the economy writ large by its corporate decisions can raise hundreds of millions of dollars of capital by filing a check-the-box form that discloses little more than its address.

Or, you think to yourself:

  • Look at the size of that registration statement for the public company. All I see are legal fees and compliance costs and information that most investors aren’t even going to read.

Regardless of where one falls on this spectrum, it is clear that the disparity in disclosure is great. But, acknowledging that the private markets have a place, and building on the fundamental successes that we have achieved in our public markets through this mandatory disclosure, oversight and investor protection, I propose incremental reforms to Reg D. There should be more transparency to ensure a basic level of disclosure that allows investors, even the most sophisticated, to make informed investment decisions. And other regulatory obligations should be tailored for size.

IV. Potential Reforms
So what could reforms look like?[37]

a. Reforms to Form D could give essential information to all private investors, to the public markets and to the regulators, which leads to healthier markets overall

First, we could revise Form D.[38] Form D could be required to be filed prior to the time any solicitation under Reg D is made.[39] Failure to file a Form D could have actual consequences, such as the inability to rely on Reg D in future offerings.[40] And the Form itself could have useful, substantive information about a private company. For example, its size (by assets, investors and employees), its operations, its management, its financial condition and revenues, and the volume and nature of the securities offerings.[41] Additionally, the Form could be signed and certified by an executive officer, who would bear accountability for the statements made therein. Form D does not have to contain the level of detail required under an S-1, but it could provide basic, material information about the issuer.[42]

Reforms to Form D can bring material information to investors, curing (at least to a degree) the informational asymmetry that is allowed currently.[43] Requiring information about the use of offering exemptions can also bring important systemic information to our Divisions of Corporation Finance and Investment Management, to Congress, as well as to academics for data analyses and a more thorough understanding of our private markets more generally.[44] Finally, greater transparency around the use of exempt offerings can potentially shed light on fraudulent offerings or offering practices, and hopefully, in some instances, prior to investor loss.

b. Heightened Obligations Could Be Imposed Upon Large Private Issuers and Large Capital Raises, Consistent With Previous Reforms

And second, we could import a two-tiered framework, similar to that under Regulation A (often referred to as “mini-IPO offerings”), which would impose certain heightened obligations on the larger private issuers and issuances. Recall that under Reg A, there are two separate levels of offerings, based on the amount of capital raised.[45] Both tiers are subject to basic requirements as to issuer eligibility and disclosure. For example, Tier 1 and Tier 2 issuers must file an offering circular, subject to review and qualification by the staff, and must file two years of financial statements.[46] But Tier 2 offerings – for larger raises – are subject to heightened requirements. Tier 2 offerings, for example, must disclose to prospective investors financial statements, audited in accordance with GAAS by an independent accountant. Additionally, they must file annual, semiannual, current and special financial reports with the Commission. The scaled disclosure framework is also used for public reporting companies – with more limited disclosures for newer and smaller public companies and also accelerated filing deadlines for larger public companies.[47] Smaller Reporting Companies (“SRCs”), for example, have reduced narrative disclosure obligations and can provide audited financial statements for two years rather than three.[48]

The adoption of a tiered framework for Rule 506 recognizes that not all offerings are created equally. I envision that, like Reg A, different sizes of offerings would trigger different disclosure obligations. But unlike Reg A, additional obligations would be triggered by the size of the company, in terms of market cap, value or the size of the investor base. In other words, large private issuers – and not the small businesses at the heart of Reg D – would have additional obligations.[49] I believe that, at a minimum, large private issuers could bear heightened disclosure obligations, over and above what would be required of Form D, at offering and on an ongoing basis. For example, they could be required to engage independent auditors and would have to provide prospective and committed investors with financial statements audited in accordance with GAAS, along with auditor opinion letters, confirming the adequacy of the company’s internal controls over financial reporting.[50]

To my mind, this is a tailored solution that helps us fulfill our mandates. First it imposes heightened obligations on larger private companies. In so doing we would both acknowledge Reg D’s purpose in allowing reprieve to smaller businesses, and also help eliminate the benefit and effective subsidy being given to large private issuers on the backs of these same small businesses. Second, it provides broader disclosure to investors, which acknowledges again that, even among a set of accredited and sophisticated investors, private market investors are entitled to a certain basic set of information.


As I alluded to earlier, the reforms we propose to Reg D are incremental, but essential. These are among the critical reforms that we can make to ensure that our private markets operate as originally intended. Let’s ensure the exemption operates as designed.

Thank you.

[1] According to the most recent SEC data, for the 12 month period from July 1, 2021 through June 30, 2022, exempt offerings accounted for approximately $4.45 trillion in capital raising (a likely underreported number); whereas during that same time period, publicly raised funds accounted for roughly $1.23 trillion in fundraising. Fiscal Year 2022 Office of the Small Business Advisor Annual Report, at 19. That’s roughly 3.5 times more capital raised in the private markets than in the public markets. IPOs, once the seminal form of going public, accounted for $126 billion of that capital raised. See also SEC 2020 Report to Congress on Regulation A / Regulation D Performance (Aug. 2020) at 41, Table 12.

The public and private market framework is the creation of securities laws and regulations laying out when disclosure and registration are required. See, e.g., Written Testimony of Elizabeth De Fontenay, Before the United States House of Representatives, Committee on Financial Services, “Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment,” (Sept. 11, 2019). During the prior administration, there was a deregulatory push to allow for additional capital to be raised in the private markets. See, e.g., Adopting Release, Accredited Investor Definition, Rel. Nos. 33-10824; 34-89669 (Aug 26, 2020); Adopting Release, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Rel. Nos. 33-10884; 34-90300; IC-34082 (Nov. 2, 2020). But despite the obvious correlation between the public and private markets, such rules were passed without attendant research as to their impact on the public markets, or consideration of correspondent rulemaking to facilitate capital formation in the public markets.

[2] See, e.g., McKinsey & Co., Private Markets Come of Age: McKinsey Global Private Markets Review 6 (2019). See generally McKinsey & Co, Private Markets Rally to New Heights: McKinsey Global Private Markets Review (2022); Joan Farre-Mensa & Michael Ewens, The Evolution of the Private Equity Market and the Decline in IPOs, Harv. L. Sch. F. Corp. Governance (Sept. 28, 2017); Morgan Stanley,Public to Private Equity in the United States: A Long-Term Look(Aug. 4, 2020) (“[C]ompanies have raised more money in private markets than in public markets in each year since 2009”) (citing Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2017, Division of Economic and Risk Analysis, U.S. Securities & Exchange Commission (August 1, 2018)).

[3] See, e.g., George S. Georgiev, The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms, 18 N.Y.J.L. & Bus. 221, 227-29, 241 (2021); Samantha Sharf, Is The IPO Outmoded? Why Venture Backed Companies Are Waiting Longer to Go Public, Forbes (Dec. 24, 2014); Timothy B. Lee, Companies Are Waiting Longer and Longer to Go Public. Here's Why, Vox (Sept. 11, 2014)

[4] See, e.g., Georgiev, The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms, 18 N.Y.J.L. & Bus. at 227-29; McKinsey & Co., Grow fast or die slow : Why unicorns are staying private (May 11, 2016).

[5] See Elizabeth De Fontenay, The Deregulation of Private Capital and the Decline of the Public Company, 68 Hastings Law Journal 445, 448 (2017) (“From their inception, the federal securities laws proposed a simple bargain to U.S. companies: disclosure in exchange for investors.”). Further, it is important to note that there is a robust exempt offering framework outside of Rule 506 of Regulation D, including Rule 504 of Regulation D, Regulation A, Regulation Crowdfunding, Rule 147 (17 C.F.R. § 230.147), Rule 144 (17 C.F.R. § 144), Rule 144A debt issuances (17 C.F.R. § 230.144A).

[6] Cf., De Fontenay, The Deregulation of Private Capital and the Decline of the Public Company, at 466-472 (arguing that the deregulation of private capital over the past few decades have played a role in the decline of equity capital raising in the public market).

[7] General solicitation is not permitted in connection with Rule 506(b) offerings. The offerings are limited to “accredited investors” and 35 non-accredited, but sophisticated, investors. 17 C.F.R. § 230.506(b); see also 17 C.F.R. § 230.502.

[8] See S.E.C. v. Ralston Purina, 346 U.S. 119 (1953) (holding that “the focus of the inquiry should be on the need of the offerees for the protections afforded by registration. The [investors] here were not shown to have access to the kind of information which registration would disclose.”).

[9] In 1974, the SEC adopted Rule 146, an exception from registration under Securities Act Section 4(2) for unlimited amounts of capital, which in practice was underutilized, particularly by small businesses, due to the limited relief it provided. In 1975, the SEC adopted Rule 240 in response to limitations of Rule 146. Rule 240 provided a much broader, less onerous exemption for small companies selling up to $100,000 in securities. At the time, the SEC explained the exemption as one “where, because of the small size and limited character of the offering, the public benefits of registration are too remote.” Securities Act Release No. 5560, 6 SEC Docket 132, 1975 WL 160968, at *1 (Jan. 24, 1975). In 1978, the SEC adopted Rule 242, a more moderate exemption for offerings of up to $500,000 in securities. In 1982, the SEC adopted Regulation D. Rules 504, 505, and 506 replaced 240, 242, and 146, respectively.

[10] See LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATIONS § 3-C-7 (3d ed. 2004) (citing House Committee Report).

[11] Comm. on Interstate & Foreign Com., House Report on Securities Act of 1933, H.R. Rep. No. 73–85, at 5 (1933).

[12] See Ralston Purina, 346 U.S. 119.

[13] See Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 690 (5th Cir. 1971).

[14] Adopting Release, Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales, Rel. No. 33–6389 (Mar. 8, 1982), 47 Fed. Reg. 11251.

[15] In support of the 2020 Harmonization rules, Chair Clayton noted that amendments were being implemented to provide “a more rational framework that [would] facilitate capital formation for small and medium sized businesses and benefit investors for years to come.” Press Release, SEC Harmonizes and Improves ‘Patchwork’ Exempt Offering Framework, SEC Press Release No. 2020-273 (Nov. 2, 2020) (quoting Chairman Jay Clayton).

[16] The SEC’s tri-parte mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

[17] See supra at n. 5.

[18] Eric Carle, The Very Hungry Caterpillar, World Publishing Company (1969).

[19] Georgiev, The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms, 18 N.Y.J.L. & Bus. 221 (2021) at Figure A-8; Daria Davydova, Rüdiger Fahlenbrach, Leandro Sanz, & René M. Stulz, The Unicorn Puzzle, Oct. 2022 (finding that unicorn status enables startups to access new sources of capital).

[20] Georgiev, The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms 18 N.Y.J.L. & Bus. at 227.

[21] CB Insights – the Complete List of Unicorn Companies. At the time of this speech, CB Insights was reporting 1,204 Unicorns.

[22] Id.

[23] See, e.g., Form D Filings by (just to name a few): Space Exploration Technologies Corp dated 8/5/2022, 6/13/2022, 12/29/2021, 11/15/2021, 2/23/2021, 8/18/2020, 3/13/2020, 7/9/2019, 4/17/2019, 1/3/2019, 4/18/2018, 8/8/2017, 1/26/2015, 11/9/2010, 3/31/2009, 8/4/2008, 8/19/2002 (reflecting individual offerings of up to $2 billion in a single offering); Stripe, Inc. dated 3/26/2021, 5/4/2020, 10/4/2019, 9/3/2019, 2/8/2019, 10/5/2018, 3/13/2018, 7/31/2017, 3/30/2017, 12/23/2016, 12/6/2016 (reflecting individual offerings of up to $630 million in a single offering); FTX Trading, Inc. dated 11/2/21, 8/5/21 (reflecting individual offerings of up to $1bn); Theranos, Inc. dated 5/30/2017, 7/8/2010, 11/17/2006, 2/21/2006, 1/3/2005 (reflecting individual offerings of up to $582 million in a single offering (for those Form Ds electronically available); Canva, Inc. dated 9/27/2016, 10/9/2015, 6/20/2014, 3/6/2014, 3/21/2013, 8/16/2012 (reflecting individual offerings of up to $27 million in a single offering); Databricks, Inc. dated 9/15/2021, 2/2/2021, 11/5/2019, 2/7/2019, 8/22/2017, 7/3/2014, 9/25/2013 (reflecting individual offerings of up to $1.6 billion in a single offering).

[24] See Hill York Corp., 448 F.2d at 690.

[25] Declaration of John J. Ray III In Support of Chapter 11 Petitions and First Day Pleadings, In Re FTX Trading, LTD., et al., No. 22-11068, (Bank. Ct. D. Del. 2022), Dkt. No. 24, ¶ 5 (In full: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”); Jason Zweig, Why the Investing Pros Were Such Suckers for FTX, Wall Street Journal (Nov. 22, 2018); Elliot Brown, New CEO Says FTX Suffered 'Complete Failure of Corporate Controls', Wall Street Journal (Nov. 18, 2022).

[26] Declaration of John J. Ray III In Support of Chapter 11 Petitions and First Day Pleadings, In Re FTX Trading, LTD., et al., No. 22-11068, (Bank. Ct. D. Del. 2022), Dkt. No. 24, ¶ 50.

Any statements made here are based solely on media reports and public information, and are without judgment as to the presence or absence of liability or culpability in connection with any ongoing investigations or actions, or those that may occur in the future.

[27] These types of misconduct or unaddressed red flags in the private markets could flourish, even with the presence of sophisticated investors, when the pools of private money and “dry powder” are so frothy that issuers could have the upper hand and the ability to convince (even sophisticated) investors that they will miss out on a unique opportunity unless they invest quickly, and potentially without critical information.

[28] See, e.g., Mark I. Steinberg, Rethinking Securities Laws, Oxford University Press (2021) ((In order “[t]o have effective access, the individual or entity must have sufficient leverage to induce the issuer to make available the type of information that would be provided in a registration statement. Ordinarily, only the issuers’ insiders (and perhaps their family members) and investors whose financial contribution is central to the consummation of the offering will have such leverage.”) citing Doran v. Petroleum Management Corp., 545 F.2d 893, 906 (5th Cir. 1977)).

[29] Matt Levine, Money Stuff, Private Markets Don’t Like to Go Down (Jan. 4. 2023).

[30] See, e.g., Elizabeth De Fontenay, The Deregulation of Private Capital and the Decline of the Public Company, 68 Hastings Law Journal 445, 490-494 (2017).

[31] Matt Levine, Money Stuff, Private Markets Don’t Like to Go Down (Jan. 4, 2023). (“One cynical way to understand private investing generally is that private investment firms —venture capital, private equity, private real estate, etc. —charge their customers high fees for the service of avoiding the visible volatility of public markets. If you invest in stocks, sometimes they go up, and other times they go down. If you invest in private assets, they don’t trade; sometimes they go up (because companies raise new rounds of capital at higher prices), but the companies and the investment managers take pains to keep them from going down.”)

[32] See, e.g., Robert J. Jackson, Testimony before the U.S. House of Representatives Committee on Financial Services, Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets of the Committee on Financial Services (Mar. 30, 2020) (“But exchanges’ weak incentives to help investors hold corporate insiders accountable [and impose limits on governance issues such as dual-class shares] are now coupled with the explosive growth of our private capital markets. As my friend and colleague Commissioner Allison Lee has ably explained, the growth of private markets is not an accident, but instead a consequence of deliberate policy choices. Those choices have created new sources of private capital, increasing founders’ power, and while sophisticated early-stage investors are able to bargain for contractual provisions that protect their rights, ordinary investors in initial public offerings do not have the same opportunities. Thus, any changes to the balance between public and private markets should consider the effects of expanding private markets on investors’ power to hold insiders accountable in public markets.”); Mark Steinberg, Rethinking Securities Law at 54 (noting that only the issuers that are required to consummate the transaction have the bargaining power to demand disclosure with registration-type information, others do not have that bargaining power and receive less information).

[33] See Daria Davydova, Rüdiger Fahlenbrach, Leandro Sanz, & René M. Stulz, The Unicorn Puzzle (Oct. 2022) (finding, among other things, unicorns have access to additional pools of capital).

[34] Data collected by DERA and presented to Congress shows that the overwhelming amount of funds collected through Reg D go to private funds. Sec. & Exch. Comm’n, 2020 Report to Congress on Regulation A / Regulation D Performance (Aug. 2020) (“The largest category of issuers in the Reg D capital market, based on the amount sold, are pooled investment funds (predominantly private funds), which include hedge funds, venture capital (VC) funds, PE funds, and other pooled investment vehicles.”) And, “among Reg D issuers that report size, large issuers (greater than $100 million in revenue) account for a greater share of the proceeds.” Id. at 24. Thus, for example, the mean offer size between 2009 – 2019 for Reg D issuers (for reported issuances) was approximately $71 million. While the frequency of offerings by small issuers is much greater than those of large issuers, the amounts are much less, and they seem to be concentrated in urban centers. Thus, for example, most Reg D issuers are in New York and California. Id. at 22. Small rural issuers rely much more on small banks as a source of funding, and small rural issuers reliance on Reg D accounts for a less than 1% of raises. See, e.g., Fiscal Year 2022 Office of the Small Business Advisor Annual Report, at 66-67.

[35] Some have argued that it is the unruly and costly regulatory framework that is bleeding the public markets. But that seems to be belied by the data. See Elizabeth De Fontenay, The Deregulation of Private Capital and the Decline of the Public Company, 68 Hastings Law Journal 445, 463-465 (2017) (finding that the data is inconclusive as to whether legal and compliance costs have led to the growth in the private markets, and positing instead that the deregulatory framework is the greatest contributor).

[36] Failure to file a Form D does not invalidate the exempt offering, and we understand that law firms have advised that filing a Form D is considered somewhat voluntary. It is common practice for Form Ds to go unfiled or to be filed with partial or incomplete information. U.S. Sec. & Exch. Comm’n, Office of Inspector General,: Regulation D Exemption Process at 27 (March 31, 2009) (“In fact, [officials from the Division of Corporate Finance] have informed us that many companies that rely on the Regulation D exemption reportedly do not file a Form D, and that issuers’ lawyers frequently advise their clients that Form D is essentially voluntary.”)

[37] Of course, I will keep an open mind to public feedback, and if we do move forward with any rulemaking on this topic, to commenters’ input.

[38] Form D is currently required to be filed in connection with exempt registrations made under Rule 504 or 506 of Regulation D, or under Section 4(a)(5) of the Securities Act.

[39] Currently, a Form D must be filed 15 days after the first sale of securities in the offering. This framework, however, does not allow all investors to benefit from the information that would be contained in the form, nor does it allow the Commission to consider the information prior to a potentially fraudulent, or otherwise improper, sale.

[40] Amendments to Regulation D, Form D and Rule 156 under the Securities Act (proposed 2013) (“We understand that some issuers are not making a Form D filing for Rule 506 offerings because the filing of Form D is not a condition of Rule 506.”)

[41]See, e.g., id at section II.s

[42] In addition to the above, we could also consider requiring information relating to the use of proceeds, the nature of the investor base (including information about accredited and unaccredited investors and steps taken to assure accreditation), expected returns through distributions, findings of securities fraud, enforcement actions or non-compliance with the securities laws, material risks and conflicts of interest, and the availability of secondary trading. The Form could also require an amendment or closing statement of amounts actually raised under the offering.

[43] Reg FD limits selective disclosure in the public markets, but not in the private markets. See generally Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (proposed Feb. 9, 2022) (describing information asymmetries between private fund issuers and investors, for example, “we continue to observe that private fund investments are often opaque; advisers frequently do not provide investors with sufficiently detailed information about private fund investments. Without sufficiently clear, comparable information, even sophisticated investors would be unable to protect their interests or make sound investment decisions.”)

[44] Requiring mandatory additional disclosures of large and potentially systemically important private issuers can help mitigate financial stability concerns.

[45] Tier 1 is an exemption that applies to offerings that do not exceed $20 million over a 12 month period; and Tier 2 covers offerings that do not exceed $75 million, similarly over a 12 month period. 15 C.F.R. 230.251.

[46] See Final Rule, Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Rel. Nos. 33-9741; 34-74578; 39-2501 (Mar. 25, 2015).

[47] See Smaller Reporting Company Definition, Release No. 33-10513 at 7 (June 18, 2018). Further, Emerging Growth Companies also benefit from reduced narrative and S-X disclosures, and do not have to provide auditor attestation of internal control over financial reporting under SOX 404(b). See also 15 U.S.C. §77b(a)(19) (defining Emerging Growth Companies). See generally U.S. Secs. & Exch. Comm’n, Emerging Growth Companies. Finally, the largest public issuers have the shortest window to file periodic reporting.

[48] See 17 C.F.R. § 229.10(f)(1) (requirements for smaller reporting companies); 17 C.F.R. 210.8-01 through 210.8-08 (financial statement requirements for smaller reporting companies).

[49] The size of the issuer that would trigger the heightened obligation could be determined through analysis in connection with rulemaking.

[50] Also acknowledging the need for more disclosure among our nation’s largest private companies, recent legislation was proposed in the Senate, would add new thresholds for registration to the Exchange Act based on the size of a company. See S. 4857 (117th Congress), The Private Markets Transparency and Accountability Act (2022) (proposing amendments to Exchange Act Section 12(g), including registration requirements for private companies whose values exceed $700 million, or where revenues exceed $5 billion and that employ not less than 5,000 employees). Additionally, the Commission could consider re-framing of the definition of “holder of record.” See Comm’n Allison Herren Lee, Going Dark: The Growth of Private Markets and the Impact on Investors and the Economy, (Oct. 12, 2021).

FINRA Fines and Suspends Sales Supervisor for Falsifying Rep Code
In the Matter of Steven G. Brettler, Respondent (FINRA AWC 2020068689201)
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, Steven G. Brettler submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Steven G. Brettler was first registered in 2001 and from 2009 to 2020, he was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Steven G. Brettler a $5,000 fine and a three-month suspensions from associating with any FINRA member in all capacities. As alleged in part in the AWC:
In January 2013, Brettler entered into an agreement through which he agreed to service certain customer accounts, including executing trades for those accounts, under a joint representative code (also known as joint production number) that he shared with the estate of a retired representative. The agreement set forth what percentages of the commissions Brettler and the estate of the retired representative earned on trades placed using the joint representative code.

From January 2014 through January 2018, Brettler placed 444 trades in accounts that were covered by the agreement using his own personal representative code. Specifically, although Morgan Stanley's system correctly prepopulated the trades with a joint representative code Brettler shared with the estate of the retired representative, Brettler entered the transactions under his personal representative code. Brettler failed to verify whether the 444 transactions at issue were subject to the joint production agreement. Additionally, Brettler did not ask the estate of the retired representative whether he could change the code on the 444 trades at issue.

As a result, Morgan Stanley's trade confirmations for the 444 trades inaccurately reflected Brettler's personal representative code instead of the joint representative code that Brettler shared with the estate of the retired representative. Brettler's actions resulted in his receiving higher commissions from the 444 trades than what he was entitled to receive pursuant to the agreement. In January 2021, Morgan Stanley paid restitution to the estate of the retired representative. Brettler reimbursed the firm a total of approximately $76,577, which is the approximate amount of additional commissions that Brettler received as a result of changing the representative code on the trades.

By falsifying the representative code on the 444 trades, Brettler violated FINRA Rule 2010. In addition, Brettler violated FINRA Rules 4511 and 2010 by causing Morgan Stanley to maintain inaccurate trade confirmations.

FINRA Censures and Fines Raymond James for 1.85 Million Inaccurate Customer Confirmations from 2014 to 2022
In the Matter of Raymond James & Associates, Inc., Respondent (FINRA AWC 2019061061201)

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, Raymond James & Associates, Inc.  submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Raymond James & Associates, Inc. has been a FINRA member firm since 1964 with about 8,000 registered representatives at about 770 branches. In accordance with the terms of the AWC, FINRA imposed upon Raymond James & Associates, Inc.  a Censure and a $300,000 fine. As alleged in part in the "Overview" of the  AWC:
From January 2014 through May 2022, Raymond James sent its customers at least 1,850,000 confirmations that inaccurately disclosed the firm’s execution capacity or whether the trade was executed at an average price, or inaccurately disclosed or omitted its status as a market maker in the security. As a result, Raymond James violated Exchange Act Rule 10b-10, promulgated under Section 10(b) of Securities Exchange Act of 1934, Exchange Act Section 17(a), Exchange Act Rule 17a-3, and FINRA Rules 2232, 4511, and 2010.
Wells Fargo Clearing Sues Commerce Brokerage. Commerce Brokerage Sues Wells Fargo Clearing. The Two Cases Are Consolidated Into One FINRA Arbitration Case. Apparently, It's All About Interference Or Not With Customers' Rights To Choose A Financial Advisor. The FINRA Award Offers No Explanations or Rationale.
In a Statement of Claim filed in February 2017, FINRA member firm Claimant Wells Fargo Clearing Services and associated person Claimant Herrmann asserted:
breach of contract, breach of the covenant of good faith and fair dealing, breach of the Form U4s, unfair competition, tortious interference, civil conspiracy, violation of FINRA Code of Arbitration Procedure for Industry Disputes (“Code”), violation of FINRA Rule 2140, and violation of FINRA Rule 2010. The causes of action related to 17-00299 Claimants’ allegation that Commerce violated FINRA rules by filing a verified petition in Kansas district court to avoid jurisdiction; requesting and obtaining a temporary ex parte judicial order in the district court, obtaining a temporary restraining order in the district court, and improperly interfering with the right of 17-00299 Claimants’ customers to choose their Financial Advisor.

Wells Fargo Clearing Services, LLC and Kyle Herrman, Claimants, v. Commerce Brokerage Services, Inc., Respondent (FINRA Arbitration Award 17-00299)
In a Statement of Claim filed in February 2017, FINRA member firm Commerce Brokerage services, Inc. asserted 
breach of contract, tortious interference with contract, conspiracy to tortiously interfere, and misappropriation of trade secrets in violation of the Kansas Uniform Trade Secrets Act (“KUTSA”), Kan. Stat. 60-03320, et seq. The causes of action related to Commerce’s claim that, immediately following his separation from Commerce, and in violation of the terms of Confidentiality and Award Agreements, Herrman, either himself and/or through Crittenden and/or with the assistance or support of other Wells Fargo employees/agents, began contacting customers and soliciting them to move their investment accounts to Wells Fargo and/or begin purchasing services and investment products from Wells Fargo rather than Commerce.

Commerce Brokerage Services, Inc., Claimant, v. Wells Fargo Advisors, LLC, Kyle Herrman, and Renee Crittenden, Respondents  (FINRA Arbitration Award 17-00514

In May 2017, the two arbitration cases were consolidated under Case #17-000299. The FINRA Arbitration Panel found Respondent Commerce liable and ordered it to pay to Claimant WFCS $812,332.81 in compensatory damages. Also, the Panel found Claimants Wells Fargo, Herrman, and Crittenden jointly and severally liable and ordered them to pay to Respondent Commerce $1,500 in compensatory damages. The Award offers no rationale or explanation.