Securities Industry Commentator by Bill Singer Esq

February 6, 2023

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FINRA Arbitrator Denies Indemnification Citing Firm's Failure to Supervise ( Blog)
It would have been an easy bit of adjudication by a FINRA arbitrator to find that a now-barred rep was the bad guy, that he victimized his clients and his employer, and, in the end, hell no, it's just not fair for his employer brokerage firm to be burdened with having to foot the bill for a fine caused by the former rep's misconduct. The arbitrator did not opt for that easy decision; and, as a result, the industry is on notice that there are consequences to a failure to supervise -- as in it could jeopardize indemnification claims.

Calling All Unreasonable Wall Street Professionals
a personal message from Bill Singer Esq

I entered Wall Street in 1982 in the Law Department of Smith Barney, Harris Upham & Co.
There is no more Smith Barney.
Nor, if memory still serves me, is there a Bear Stearns, Dean Witter Reynolds, Drexel Burnham Lambert, Kidder Peabody, Lehman Brothers, PaineWebber, Saloman Brothers, Shearson -- they are all gone, sliced and diced into oblivion. In 2023, the winnowing continues, and it is only a matter of time until the FINRA broker-dealer community is reduced to little more than Goldman Sachs, Vanguard, Charles Schwab, Fidelity, Bank of America/Merrill Lynch, J.P. Morgan, Morgan Stanley, and Wells Fargo. 
Bigger is not always better, so perhaps with fewer brokerage firms, Wall Street will become more nimble and less bloated. That could be. I don't think so but it's possible. What I see, unfortunately, is the ongoing erosion of independence and professionalism to the detriment of the industry and public investors. Once, stockbrokers did their own research and knew the stocks that they sold. Nowadays, it's up-selling. It's cross-selling. It's cold calling. It's pushing house product and in-house services. Sorry, I'm not going to play the apologist. I will not whitewash the dumbing-down of Wall Street.  If anything, it's a history of bad going to worse.

Over the last quarter of a century of Wall Street regulation, the result has been one step forward and two steps back.  Always, the SEC is behind the curve and regulating yesterday's fraud. These days, the federal regulator has invested far too much human and financial capital in overly ambitious rulemaking and rule-amending at the expense of robust, aggressive enforcement. FINRA, a self-regulatory-organization, fares no better. No matter the regulator, the effort seems more about the glossy marketing of the appearance of regulation rather than delivering its substance. We get podcasts. We get videos. We get Zoom calls. We get cable TV interviews. We get seminars at over-priced resorts. We get tweets. We get self-serving press releases. We get inundated with moronic reports that were commissioned to examine the obvious. What we don't get is a singular, passionate, laser-focused regulatory agenda designed to proactively ferret out fraud and retroactively prosecute and punish the scamsters and fraudsters.

The public has already voted by opting for self-directed trading rather than reposing trust and confidence in a tarnished brokerage industry. Unfortunately, in making their own investment decisions, many unsophisticated investors fell prey to what they didn't understand: Meme stocks, Crypto, NFTs, SPACs, Day Trading, and the like. No one to trust. Nowhere to go. Frankly, it's a pathetic landscape filled with the walking wounded.
Maybe this year, finally, someone launches a trade group for the industry's hundreds of thousands of professionals. Yeah, I know, wishful thinking. But there are rumblings. I hear them. I feel them. The industry's grunts are getting fed up. They aspire to more than the glorified role of a teleservice operator working out of a soul-crushing call center masquerading as a branch office. The Covid pandemic showed them that they could work from home, work remote. The purported support services provided by the erstwhile wirehouses have been revealed as illusory -  and not worth the hit to gross commissions or fees. In 2023, if pressed, many Wall Street professionals would admit that they now realize that they can deliver better customer service if they weren't shackled to a large industry employer by anti-consumer laws and rules enforced by co-opted industry regulators.

What the public investor and the industry both need is an honest, unconflicted financial professional firmly entrenched in the role of a fiduciary. The consequence of that empowerment would be to put meaning into the phrase: You work for me. The "you" being an independent financial fiduciary; and the "me" being the public-investor-client in contradistinction to the industry-employer.

Is it an unreasonable goal? Perhaps, but as George Bernard Shaw opined:

The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.

To all you unreasonable Wall Street professionals out there, contact me. Let's make common cause. Let's see if we can make some progress reforming Wall Street!  

Phishing-as-a-service’ kits are driving an uptick in theft: What you can learn from one business owner’s story (CNBC by Dawn Giel)
An absolutely wonderful article from CNBC's Giel -- consider it a public service announcement! Revealed to us is the infuriating tale of small business owner Cody Mullenaux, who fell prey to a $120,000 wire transfer fraud. As Giel relates in part:

Whether the scammers realized they were doing it or not, they successfully exploited two loopholes in current consumer protection legislation that resulted in Chase not being required to replace Mullenaux’s stolen funds. Legally, banks do not have to reimburse stolen funds when a customer is tricked into sending money to a cybercriminal.

However, under the Electronic Fund Transfer Act, which covers most types of electronic transactions like peer-to-peer payments and online payments or transfers, banks are required to repay customers when funds are stolen without the customer authorizing it. Unfortunately, wire transfers, which involve transferring money from one bank to another, are not covered under the act, which also excludes fraud involving paper checks and prepaid cards.

Criminals use Telegram to recruit ‘walkers’ as America’s big banks see an 84% increase in check fraud (CNBC By Eamon Javers and Paige Tortorelli)
Not that you needed more things to keep you awake at night but CNBC posted this frightening article about how easy it is for fraudsters to wipe out your banking account. 

SEC Charges Pennsylvania Investment Adviser with Multi-Million Dollar Fraud (SEC Release)
Without admitting or denying the allegations in a Complaint filed by the SEC in the United States District Court for the Eastern District of Pennsylvania alleging violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, as well as Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 promulgated thereunder, Joshua W. Coleman  agreed to the entry of a judgment, subject to court approval, imposing a permanent injunction and an officer-and-director bar, while reserving the issue of disgorgement and a civil penalty for further determination by the court. Coleman also has agreed to the imposition of associational and penny stock bars as part of a settled follow-on administrative proceeding. As alleged in part in the SEC Release:

[C]oleman entered into six successive loan transactions between December 2018 and June 2022 and diverted the proceeds for his personal use, including financing personal investments and paying outstanding business expenses. Coleman's scheme allegedly involved a wide range of misconduct, including forging signatures on loan documents, lying to advisory clients, and fabricating and altering emails, bank statements, and other documents. The complaint alleges that Coleman obtained the initial loans in part by pledging as collateral over $160 million in advisory client assets, a portion of which were seized by Coleman's lender after Coleman defaulted. The complaint further alleges that, to repay these clients, Coleman procured additional loans by pledging his own securities as collateral while misleading his new lenders concerning the purpose of the loans and the value of certain pledged collateral. According to the complaint, Coleman defaulted on those loan transactions and owes over $50 million in proceeds.

It's Not Sewer Service But SEC Enforcement's Effort to Serve Ex-Inmate Deemed Falling Short
In the Matter of Charles K. Topping (Order Denying Motion to Deem Service Complete and Directing the Filing of a Status Report, SEC, 1934 Release No. 96806; Admin. Proc. File No. 3-20817 / February 6, 2023)

On April 8, 2022, the SEC issued an Order Instituting Administrative Proceedings ("OIP") against Charles K. Topping; and, thereafter, the Division of Enforcement was ordered to file status reports concerning service of the OIP -- ultimately ending with the Division seeking an Order on January 12, 2023, that service was complete. Pointedly, the SEC Order asserts that:

The Division’s most recent status report, filed on December 15, 2022, states that Topping recently was released from prison and that the Federal Bureau of Prisons advised that Topping could be contacted by mail at a P.O. Box address at a Residential Reentry Management Office in Miami, FL. The status report further states that the Division mailed the OIP to that address by Priority Express Mail and included the U.S. Postal Service’s tracking information, which stated that the package was “Picked Up at Postal Facility” on August 24, 2022, and that “waiver of signature was exercised at the time of delivery.” 

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 contacted Topping at a POB after his release from prison and the package was picked up at the POB per a "waiver of signature." Looking at the checklist in the SEC Service Rule above, that's not quite obtaining a confirmation/receipt, right? More to the fact, consider this from the SEC Order Regarding Service [Ed: footnotes omitted]:

Commission Rule of Practice 141(a)(2)(i) provides that service of an OIP on an individual respondent can be accomplished by “sending a copy of the [OIP] addressed to the individual by U.S. Postal Service . . . express mail and obtaining a confirmation of receipt.” We cannot determine whether such service was accomplished here. According to the Bureau of Prisons’ website, the Miami Residential Reentry Management Office (“RRMO”) is a field office that administers and monitors “local Residential Reentry Centers, which are responsible for providing federal offenders with community-based services that will assist with their reentry needs.” The Bureau of Prisons’ website further explains that the Bureau of Prisons does not house inmates at the RRMO itself, but rather at a physically separate Residential Reentry Center, typically run by a third party under contract with the Bureau of Prisons. Topping’s receipt of the OIP thus appears to turn on the RRMO’s forwarding the OIP to the appropriate third-party facility, and then staff of that facility delivering it to Topping. 

Unable to determine if the above service complied with its Rule, the SEC denied Enforcement's Motion for an Order Deeming Service Complete and ordered a further status report on subsequent service efforts.

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

FINRA Fines and Suspends Rep For Improper Meal and Transportation Expenses
In the Matter of Jong Ik Lee, Respondent (FINRA AWC 2022074194701)
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, Jong Ik Lee; submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jong Ik Lee entered the industry in 2019, and by October 2021, he was registered with Jefferies LLC. In accordance with the terms of the AWC, FINRA imposed upon Lee a $5,000 fine and a nine-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

During the period when Lee was associated with Jefferies, the firm’s travel and business expense policy permitted employees to be reimbursed for meals consumed when working late or on a weekend or public holiday. Employees were also entitled to reimbursement for the cost of transportation to a major commutation point or to an employee’s primary residence when working late on weekdays, or for the cost of one round trip to the office from the employee’s primary residence when working on a weekend or public holiday. Employees were required to submit expense reports with dated, time-stamped, itemized
receipts (including the pick-up/drop-off time, address, date, and total fare for any transportation expense), and to allocate the expense to an active project code.

From October 26, 2021, through December 30, 2021, while associated with Jefferies, Lee submitted 31 meal and 38 transportation expenses for reimbursements totaling $1,878.32. Lee characterized the expenses as business expenses when, in fact, they were personal in nature and did not comply with the firm’s travel and business expense policy. For example, Lee requested and received reimbursements for meal and transportation expenses using project codes Lee knew he was not entitled to use, either because the codes had expired or because they were from projects on which Lee was not staffed. Lee also altered some receipts to make the meal and transportation expenses appear as if they were eligible for reimbursement under the firm’s travel and business expense policy, such as by altering the time of the ride, pick-up location, drop-off location, or the map route on car service receipts. Lee then submitted those receipts to Jefferies, and the firm reimbursed him. In April 2022, Lee voluntarily repaid Jefferies the $1,878.32 for which he was improperly reimbursed.

Therefore, Lee violated FINRA Rule 2010. 
FINRA Censures and Fines BNA Wealth  For Conducting Unregistered Muni Biz Without Muni Principal
In the Matter of BNA Wealth, Inc., Respondent (FINRA AWC 2020065178201)
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, BNA Wealth, Inc., submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that BNA Wealth, Inc. has been a FINRA member firm since 1995 with three registered representatives at on branch. In accordance with the terms of the AWC, FINRA imposed upon BNA Wealth, Inc. Censure, a $45,000 fine, and an undertaking to certify compliance with the cited issues. As alleged in part in the "Overview" portion of the AWC [Ed: footnotes omitted]:
Between January 2018 and April 2022, BNA Wealth violated Municipal Securities Rulemaking Board (MSRB) Rules G-2, G-3, and A-12 by conducting a municipal securities business without being registered to do so and by failing to employ at least one qualified municipal principal to supervise that business. In addition, the firm violated MSRB Rule G-27 by failing to establish and maintain a supervisory system and written procedures reasonably designed to supervise municipal securities transactions.

Between January 2018 and June 2020, BNA Wealth also violated NASD Rule 1017 and FINRA Rule 1017 by failing to file an application with FINRA prior to implementing a material change in its business operations. In addition, the firm violated FINRA Rule
3110 because its supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with the firm’s obligation to conduct and document due diligence on private placements.