Securities Industry Commentator by Bill Singer Esq

February 27, 2023

 
 
DOJ RELEASES
 
 
 
 
SEC RELEASES
 
 
 
 
 
CFTC RELEASES
 
 
FINRA RELEASES 
 
FINRA Arbitration Panel Slams Morgan Stanley With Multi-Million Dollar Compensatory/Punitive Damages in Charles Schwab Lawsuit
In the Matter of the Arbitration Between Charles Schwab & Co., Inc, Claimant, v. Morgan Stanley, Christopher Robert Armstrong, Randall Brian Kiefner, Respondents (FINRA Arbitration Award)
= = =
2/27/2023
 
https://www.brokeandbroker.com/6904/sec-clark-edva-4cir/
The Federal Rules of Civil Procedure allow a District Court judge to dismiss a case after finding that a party had failed to carry its burden of proof to the extent that no reasonable jury could possibly find in that party's favor. In a recent insider trading case, the trial judge found that the SEC came to court with lots of allegations but not so much proof; and, accordingly, he dismissed the case. On appeal, a Circuit Court thought that a jury could have muddled through the SEC's allegations. 
 
JOIN the Financial Professionals Coalition, Ltd
https://www.finprocoalition.com/
The Financial Professionals Coalition, Ltd. is the one-stop, go-to clearinghouse for financial professionals - registered reps, associated persons, traders, bankers, back-office staff. If you work in our industry, join us and hook into our network of like-minded professionals.
 

Niagara Falls Woman Going To Prison For Stealing Hundreds Of Thousands Of Dollars From Investment Firm Clients (DOJ Release)
https://www.justice.gov/usao-wdny/pr/niagara-falls-woman-going-prison-stealing-hundreds-thousands-dollars-investment-firm
In the United States District Court for the Western District of New York,  Jennifer Campbell, 48, pled guilty to wire fraud; and she was sentenced to 36 months in prison and ordered to pay $371,332.11 in restitution. As alleged in part in the DOJ Release: 

[C]ampbell was employed as the Office Manager and Chief Compliance Officer at an investment advisory firm based in Buffalo, with access to client accounts. Between November 2018, and May 2021, Campbell used this access to steal over $500,000 from several clients and from the firm itself, primarily by writing checks from client accounts, forging the signatures of either the client or a principal at the firm, and then depositing the checks into her own personal account. 

Campbell took various steps to conceal her theft. In one instance, she sent a victim a falsified account statement that purported to show an account balance of approximately $148,000, when in fact the account at the time had a balance of only $93. In another instance, Campbell took funds from a client and transferred them to the bank account of one of her earlier victims. Finally, Campbell gained access to the email accounts of the firm’s principals and diverted emails that they received from anti-money laundering and financial crimes personnel at the firm’s broker-dealer, who had begun to raise questions about some of the transactions that Campbell had engaged in. In an effort to put off these inquiries, Campbell sent several emails using the email account of a firm principal. In these emails, Campbell made various false statements and submitted fake documentation in an effort to make the transactions appear legitimate. 

Wells Fargo Agrees to Training on New Companywide Policy to Improve Telephone Access by Customers Who are Deaf or Hard of Hearing (DOJ Release)
https://www.justice.gov/usao-co/pr/wells-fargo-agrees-training-new-companywide-policy-improve-telephone-access-customers-who
In the United States Attorney's Office for the District of Colorado has resolved a  Americans with Disabilities Act (ADA) Complaint made by a hard-of-hearing Wells Fargo customer. As alleged in part in the DOJ Release:

The complainant, who has difficulty hearing and speaking on the telephone, attempted to use her caregiver to relay information on her behalf on telephone calls with Wells Fargo customer service representatives.  The complainant was a consumer banking and credit card customer with Wells Fargo, and some of her telephone inquiries related to fraudulent charges that had been made using her credit card.  The complainant alleged that Wells Fargo refused to permit the caregiver to assist the complainant, which prevented her from receiving services over the telephone.  This refusal forced the complainant to visit Wells Fargo bank branches in-person during the COVID-19 pandemic in the summer and fall of 2020. 

The ADA requires that places of public accommodation allow individuals with disabilities to use appropriate auxiliary aids and services, including by allowing others to communicate on their behalf, in order to ensure effective communication so that they can receive equal service from businesses and other public accommodations.

To resolve the complaint, Wells Fargo agreed to pay the complainant $10,000. In addition, Wells Fargo made changes to its companywide ADA policy to clarify that companions of individuals with disabilities may provide communication assistance.  Wells Fargo also agreed to train call center employees and other customer service representatives on the policy.   Wells Fargo also agreed to reach out to other customers who had made complaints about the same issue and notify them of the policy change.  These companywide changes and efforts may affect numerous individuals nationwide, as Wells Fargo serves approximately one in three households in the United States, with approximately 4,700 banking locations across the country. 

Former Bank Employee Convicted After Trial for Fraudulently Opening Bank Accounts (DOJ Release)
https://www.justice.gov/usao-md/pr/former-bank-employee-convicted-after-trial-fraudulently-opening-bank-account
In the United States District Court for the District of Maryland, after an eight-day jury trial, Diape Seck was convicted of conspiracy to commit bank fraud; bank fraud; making false entries in bank records; and receipt of a bribe or reward by a bank employee. As alleged in part in the DOJ Release:

[F]rom at least January 2019 to January 2020, Seck, a customer service representative with Bank A, conspired with Mateus Vaduva, Marius Vaduva, Vlad Baceanu, Nicolae Gindac, Florin Vaduva, Marian Unguru, Daniel Velcu, Vali Unguru and others to commit bank fraud.  Specifically, the evidence showed that Seck fraudulently opened bank accounts in fake identities in exchange for cash bribes.  Co-conspirators engaged in fraud that included fraud involving rental cars and the deposit of checks stolen from the incoming and outgoing mail of churches and other religious institutions, into the fraudulently opened bank accounts.  The co-conspirators then withdrew the funds and spent the fraudulently obtained proceeds.

As detailed in the trial evidence, Diape Seck facilitated the opening of hundreds of bank accounts at Bank A for his co-conspirators, who used purported foreign identity documents, often but not universally Romanian, to fraudulently open bank accounts with him at Bank A, as well as bank accounts at other victim financial institutions.  Seck opened accounts for co-conspirators without their presence in the bank, without verifying identity information, and opened accounts for co-conspirators who opened multiple accounts at a time under different identities.  To conceal his improper activities, Seck opened accounts for the co-conspirators at the same time he conducted legitimate bank activities.  The co-conspirators paid Seck cash in exchange for him opening the fraudulent bank accounts.

According to court documents and witness testimony, Seck violated numerous bank policies in opening approximately 412 checking accounts in a one-year period from approximately January 2, 2019 through January 3, 2020, relying predominantly on purported Romanian passports and driver's license information.  Checks payable to and written from churches and other religious institutions from around the country were deposited into many of the 412 checking accounts which were not opened in the names of the churches.

The co-conspirators fraudulently negotiated the stolen checks by depositing them into the victim bank accounts, including the fraudulent accounts opened by Seck at Bank A, often by way of automated teller machine (ATM) transactions.   After depositing the stolen checks into the bank accounts, the conspirators made cash withdrawals from ATMs and purchases using debit cards associated with the bank accounts.

Co-conspirators Vlad Baceanu, age 38; Daniel Velcu, age 43; Marian Unguru, age 36; and Vali Unguru, age 20, all of Baltimore, Maryland, previously pled guilty to conspiracy to commit bank fraud and wire fraud.  Nicolae Gindac, age 52, of Dania Beach, Florida was sentenced to 54 months in federal prison and ordered to pay restitution of $1,096,660.11; Mateus Vaduva, age 29, of Baltimore was sentenced to five years in federal prison and ordered to pay restitution of $1,320,885.84; Florin Vaduva, age 31, of Dania Beach, Florida was sentenced to 51 months in federal prison and ordered to pay restitution of $1,096,660.11; and Marius Vaduva, age 28, of Baltimore was sentenced to 42 months in federal prison and ordered to pay restitution of $1,334,230.84, after they previously pled guilty to conspiracy to commit bank and wire fraud.

SEC Charges Texas Stockbroker for Stealing Funds from Elderly Customers (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25651.htm
In the United States District Court for the Eastern District of Texas, the SEC filed a Complaint charging  Bradley Morgan Holts with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. https://www.sec.gov/litigation/complaints/2023/comp25651.pdf
As alleged in part in the SEC Release:

[H]olts, while a registered representative associated with a broker-dealer based in Denver, Colorado, misappropriated $186,382 from three elderly customers of the broker-dealer. According to the SEC's complaint, Holts falsely told these investors that he would invest their money in mutual funds. The SEC's complaint further alleges that Holts instead stole the investors' money and used it to pay personal expenses, including for clothing, tanning salons, adult and dating websites, and a divorce lawyer.

SEC Orders Affiliated Investment Advisers to Repay Clients for Failing to Disclose Conflicts and Duty of Care Violations (SEC Release)
https://www.sec.gov/enforce/ia-6251-s

Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/ia-6251.pdf that finds that they had violated the antifraud and compliance provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, Huntleigh Advisors, Inc. and its affiliate Datatex Investment Services, Inc. consented to a cease-and-desist order and a Censure. Huntleigh agreed to pay disgorgement of $608,251 with prejudgment interest of $105,251 and a civil penalty of $130,000; and Datatex agreed to pay a civil penalty of $50,000. As alleged in part in the SEC Release:

[H]untleigh and Datatex failed to fully and fairly disclose to their advisory clients conflicts of interest associated with: (i) Huntleigh's receipt of transaction fees that advisory clients paid to the affiliated broker-dealer; (ii) revenue sharing payments an affiliated broker-dealer received and shared with Huntleigh from clients' investments in cash sweep vehicles; (iii) mutual fund share class selection practices that paid fees to an affiliated broker-dealer pursuant to Rule 12b-1 under the Investment Company Act of 1940 instead of available lower-cost share classes of the same funds that did not charge those fees; and (iv) revenue an affiliated broker-dealer received and shared with Huntleigh based on the rate of margin interest charged to advisory clients. The order also finds that, although eligible to do so, Huntleigh and Datatex did not self-report their affiliate's receipt of 12b-1 fees to the Commission pursuant to the Division of Enforcement's Share Class Selection Disclosure Initiative.

As set forth in the order, Huntleigh and Datatex also breached their duty of care, including their duty to seek best execution, in connection with evaluation of the transaction fees charged to their advisory clients, and the selection of cash sweep account options and mutual fund share classes for clients. According to the order, Huntleigh and Datatex also failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.

Statement Regarding Huntleigh Advisors, Inc. and Datatex Investment Services, Inc. by SEC Commissioner Hester M. Peirce and SEC Commissioner Mark T. Uyeda
https://www.sec.gov/news/statement/peirce-uyeda-statement-huntleigh-datatex-022723

We dissent from the finding in this Order that Huntleigh Advisors, Inc. and Datatex Investment Services, Inc. (together, the “Advisers”) breached their duty to seek best execution “by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds were available to the clients that presented a more favorable value under the particular circumstances in place at the time of the transactions.”[1] In a substantive area where significant efforts have been undertaken to define fiduciary duty through the notice and comment process, it is unfortunate that the Commission chooses to create novel regulatory interpretations through enforcement.

The Advisers are both registered with the Commission as investment advisers. Under the Investment Advisers Act of 1940 (“Advisers Act”), an investment adviser owes a fiduciary duty to its clients.[2] This fiduciary duty comprises a duty of care and a duty of loyalty.[3] The Commission has articulated three components of the duty of care: (1) the duty to provide advice that is in the best interest of the client, (2) the duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (3) the duty to provide advice and monitoring over the course of the relationship.[4] Under an investment adviser’s duty of loyalty, an adviser must not subordinate its clients’ interests to its own.[5] According to the Commission, to satisfy its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship, including eliminating or disclosing all conflicts of interest.[6] The Commission may bring enforcement actions against an adviser that has breached its fiduciary duty under the anti-fraud provisions of Section 206 of the Advisers Act.[7]

The Commission Order makes a compelling case for a violation of Section 206(2) by finding that the Advisers breached their fiduciary duties by failing to “disclose either the existence of a conflict of interest or all material facts regarding the conflict of interest that arose when they invested advisory clients in a share class that would generate 12b-1 fee revenue for [the Advisers’ affiliated broker-dealer] while a share class of the same fund was available that would not provide [that broker-dealer] with that additional compensation.”[8] But the Commission Order goes further by finding that the Advisers breached the component of the duty of care that requires an adviser to seek best execution by selecting a more expensive share class.[9] The Commission Order makes clear that this duty of care violation is separate and distinct from the “failure to disclose” violation.

There is no legal authority cited in the Commission Order for the finding that mutual fund share class selection implicates an investment adviser’s duty to seek best execution. The Commission has stated that this duty means that an adviser must “[seek] to obtain the execution of securities transactions on behalf of a client with the goal of maximizing value for the client under the particular circumstances occurring at the time of the transaction.”[10] Explaining what it means to “maximize value” in this context, the Commission quotes from a Commission release that interprets the scope of Section 28(e) of the Securities Exchange Act of 1934.[11] Section 28(e) provides a safe harbor for persons who exercise investment discretion over beneficiaries’ or clients’ accounts to pay for research and brokerage services with commission dollars generated by account transactions.[12] Taken together, it is our view that the Commission’s interpretations stand for the proposition that an investment adviser’s duty to seek best execution concerns the manner in which the investment adviser places securities transactions through broker-dealers, with a particular focus on the price at which the order is executed and the commission rate paid to the broker-dealer.

The conduct that implicates the duty to seek best execution is inapplicable to purchases of mutual fund shares for two reasons. First, mutual funds are required to sell and redeem their shares at a price based on the net asset value next calculated after the receipt of the purchase or redemption order.[13] Accordingly, execution quality is not relevant to the selection of mutual fund share classes. Second, Rule 12b-1 fees are paid out of the assets of a mutual fund on an ongoing basis. These fees are unlike commissions that are paid to broker-dealers, which are transaction-based, meaning that they are charged by broker-dealers for facilitating the purchase or sale of a particular security at a particular point in time. Whereas brokerage commission rates may vary among broker-dealers, all shareholders of a mutual fund share class are assessed the same Rule 12b-1 fee rate, regardless of who facilitated the purchase of fund shares. In other words, when an adviser selects a mutual fund share class for clients, there is no mechanism by which an intermediary can improve execution price, and any Rule 12b-1 fee is an asset-based fee that applies to all shareholders of the class equally. Scrutinizing this conduct through the lens of the duty to seek best execution is forcing a square peg into a round hole.

Some might argue that a recent district court case affirms the view that mutual fund share class selection implicates an adviser’s duty to seek best execution. In Securities and Exchange Commission v. Ambassador Advisors, LLC, et al,[14] the Commission brought an action in federal district court alleging that a registered investment adviser and its principals breached their fiduciary duties in violation of Section 206(2) of the Advisers Act by investing client assets in mutual fund share classes that charged Rule 12b-1 fees, portions of which were paid back to the adviser. The Commission also alleged that the adviser violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt adequate compliance policies and procedures regarding conflict disclosure.[15] In a memorandum opinion,[16] the court granted the Commission’s motion for summary judgment as to the Section 206(4) and Rule 206(4)-7 allegations and denied the Commission’s motion for summary judgment as to the Section 206(2) allegations.

One of the Commission’s Section 206(2) allegations in Ambassador Advisors was that the adviser failed to seek best execution.[17] In its memorandum opinion, the court found that the duty to seek best execution falls within an adviser’s duty of loyalty, not its duty of care.[18] In that regard, the court failed to grant summary judgment on the best execution allegation because it was not clear “whether Defendants obtained their clients’ consent to engage in this investment practice.”[19] Importantly, the Court found that “[i]f Defendants did give their clients enough information to obtain their consent, then Defendants would not have violated their duties of best interest or best execution by following through with the arrangement.”[20] This is at odds with the Commission’s own interpretation regarding an investment adviser’s standard of conduct, which places the duty to seek best execution within the duty of care.

Because the court framed the issue through the duty of loyalty, the court also ruled that adequate disclosure regarding the mutual fund share class selection arrangement at issue would have satisfied the adviser’s duty to seek best execution, even if the adviser ended up selecting a more expensive share class than what otherwise was available. Accordingly, the Ambassador Advisors court and the Commission Order are referring to two different things when they invoke the duty to seek best execution. The Ambassador Advisors court’s conception of the duty to seek best execution is akin to the “failure to disclose” violation cited in the Commission Order, which is premised on the lack of adequate disclosure regarding a conflict of interest.

The Commission Order in the present action finds that – in addition to a violation stemming from lack of adequate disclosure – the Advisers’ share class selection practices constituted a breach of the duty of care, which even adequate disclosure presumably would not have cured. Since the Ambassador Advisors opinion does not stand as authority for the proposition that certain mutual fund share class selection practices constitute a breach of the duty to seek best execution under the duty of care, the opinion undermines the Commission’s application of the duty to seek best execution in this case.

Although mutual fund share class selection does not implicate an adviser’s duty to seek best execution, one might make a reasonable argument that this practice implicates a different component of an investment adviser’s duty of care: the duty to provide advice that is in the best interest of the client. In fact, when the Commission issued its proposed interpretation regarding the standard of conduct for investment advisers in 2018, the Commission specifically discussed mutual fund share class selection in the context of this duty, not the duty to seek best execution.[21] However, the Commission’s final interpretation, issued in 2019, deleted the reference to mutual fund share class selection entirely.[22] While the Commission’s final interpretation is silent as to which duty might be implicated by this particular conduct, the selection of mutual fund share classes fits more naturally within the duty to provide advice that is in the best interests of clients than within the duty to seek best execution. In this regard, the Commission Order should have referenced only the “best interests” prong of the duty of care rather than taking the extra step of misapplying the duty to seek best execution.

This action is only the latest in a long line of actions alleging that mutual fund share class selection implicates the duty to seek best execution.[23] In these cases, although the Commission could establish a violation of Section 206(2) of the Advisers Act by making findings solely with respect to the advisers’ disclosure failures, the Commission went a step further and alleged best execution violations. This is problematic. If the Commission’s interpretations regarding an adviser’s standard of conduct are to have any meaning, the different categories of duties and the corresponding conduct that those duties implicate must be respected. Forcing a certain set of conduct into a category of duties that does not fit undermines the Commission’s authority to interpret the statutory provisions that it seeks to enforce.

Incorrectly applying an adviser’s fiduciary duty to a specific type of conduct is more than a matter of semantics. The ripple effect has tangible detrimental consequences for all regulated entities. The Commission only should allege violations that are supported by adequate legal authority. For that reason, we cannot support the best execution violations cited in the Commission Order.

[1] In the matter of Huntleigh Advisors, Inc. and Datatex Investment Services, Inc., Release No. IA-6251 (Feb. 27, 2023) (“Commission Order”), at paragraph 30, available at https://www.sec.gov/litigation/admin/2023/ia-6251.pdf.

[2] See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). See also Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019); 84 Fed. Reg. 33669 (July 12, 2019) (“Commission Interpretation”), available at https://www.govinfo.gov/content/pkg/FR-2019-07-12/pdf/2019-12208.pdf.

[3] Commission Interpretation, supra note 2, at 2.

[4] Id. at 12.

[5] Id. at 21.

[6] Id. at 21-23.

[7] Id. at 7.

[8] Commission Order, supra note 1, at paragraph 29. The Commission Order does not specify that this conduct violates the duty of loyalty, but consistent with the Commission Interpretation, we would view the failure to disclose a conflict of interest as implicating the duty of loyalty.

[9] Id. at paragraph 30.

[10] Commission Interpretation, supra note 2, at 19.

[11] See Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters, Release No. 34-23170 0 (Apr. 23, 1986); 51 Fed. Reg. 16004, 16011 (Apr. 30, 1986). (“A money manager should consider the full range and quality of a broker's services in placing brokerage including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness to the money merger.”)

[12] See 15 U.S.C. 78bb(e).

[13] See 15 U.S.C. 80a-22; 17 CFR § 270.22c-1.

[14] Securities and Exchange Commission v. Ambassador Advisors, LLC, et al., Civil No. 5:20-cv-02274 (E.D. Pa. filed May 13, 2020).

[15] Id.

[16] Id., Memorandum Opinion (Dec. 20, 2021), available at https://www.sec.gov/files/ambassador-smj-opinion.pdf.

[17] Id., Complaint (filed May 13, 2020), at paragraph 2, available at https://www.sec.gov/litigation/complaints/2020/comp24817.pdf.

[18] Id., Memorandum Opinion, supra note 16. (“To fulfil their duty of loyalty, investment advisers must disclose their conflicts of interest, act in their clients’ best interest, and seek best execution for their clients’ transactions.”)

[19] Id. at 20.

[20] Id.

[21] Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Release No. IA-4889 (Apr. 18, 2018); 83 Fed. Reg. 21203 (May 9, 2018), at 12, available at https://www.govinfo.gov/content/pkg/FR-2018-05-09/pdf/2018-08679.pdf.

[22] Commission Interpretation, supra note 2.

[23] See, e.g., In the Matter of O.N. Investment Management Company, Release No. IA-5944 (Jan. 11, 2022), available at https://www.sec.gov/litigation/admin/2022/ia-5944.pdf; In the Matter of Northwest Advisors, Inc., Release No. IA-5830 (Aug. 24, 2021), available at https://www.sec.gov/litigation/admin/2021/ia-5830.pdf; In the Matter of Coordinated Capital Securities, Inc., Release No. IA-5581 (Sep. 17, 2020), available at https://www.sec.gov/litigation/admin/2020/34-89900.pdf.

SEC Denies Whistleblower Awards to Claimant 
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-96983; Whistleblower Award Proc. File No. 2023-39)
https://www.sec.gov/rules/other/2023/34-96983.pdf
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]:

[C]laimant asserts that while the Commission’s complaint was filed several months prior to Claimant’s initial contact with the Commission, Claimant provided information about a broader
scheme involving additional entities and individuals, as well as attempts to thwart the Investigation. Claimant maintains that, after a meeting at REDACTED, Enforcement staff told Claimant that the Investigation had been stalled and without the  information and knowledge provided by Claimant, staff “never would have known who the key players were, where to look, or how the business operated.” As stated under penalty of perjury in a supplemental declaration, Enforcement staff assigned to the Investigation has no recollection of having said this, and it is not consistent with the facts, given that the Commission had already filed its detailed complaint. As the record demonstrates, the documents provided by Claimant were largely redundant of materials already within the Commission’s possession, and staff did not view the new documents Claimant provided as materially helpful. 

. . .

Finally, Claimant asserts that staff disclosed Claimant’s identity as a whistleblower to Defendants and their counsel and that such disclosure “is evidence that the information [Claimant] provided led to the cooperation, deal negotiation, and ultimately the SEC’s enforceable action.” According to Claimant, “the SEC’s exposure of my identity as a whistleblower, the information I provided, and the evidence I provided would have caused opposing counsel to consider and take into account those facts when deciding and weighing the option of going to trial or negotiating a deal with the SEC.” Claimant’s assertion is not supported by the record. In a supplemental declaration, Enforcement staff has confirmed that, although Claimant was identified as a potential witness in the Commission’s Rule 26(a) disclosures  REDACTED, staff responsible for the Covered Action never disclosed to Defendants or their counsel that Claimant was an SEC Whistleblower. 

Bill Singer's Comment: Yet again, according to the SEC, another Whistleblower Claimant is full of crap and totally misunderstood everything allegedly told to him by Staff, who, "stated under penalty of perjury in a supplemental declaration" that they had "no recollection of having said this, and it is not consistent with the facts . . ."  A somewhat odd phrasing, no? 

  SEC Staff swears to not having any "recollection" about what Claimant alleges and Staff swears that Claimant's allegation "is not consistent" with what they . . . what they, what? . . . what they don't recollect? Not recollecting and finding something inconsistent doesn't quite amount to a declaration that "I never, ever said that." Maybe I've become too suspicious after some four decades of lawyering. On the other hand, maybe my instincts are spot on. 

  As I have said before and I will say it again: "Sorry but I no longer believe the SEC when it comes to the purported rationale for many -- too many -- of the regulator's declinations of an Award." See: "Securities Industry Commentator" at https://www.rrbdlaw.com/6899/securities-industry-commentator/#wb37:

CFTC Whistleblower Alert: Blow the Whistle on Romance Investment Frauds in the Commodities and Derivatives Markets (CFTC Alert)
https://www.whistleblower.gov/system/files/2023/02/1677510939/02.27.2023%20-%20Romance%20Fraud%20WBO%20Alert.pdf
In part the CFTC Release asserts that:

This alert is soliciting information from anyone who can provide the CFTC with helpful information, such as:

• Names and addresses of perpetrators of this fraud who are in the United States, including organizers, money mules, technology providers, potentially complicit bank employees, and others who facilitate or help facilitate the fraud; and
• Information as to where and how the money collected from victims is stored in the United States, such as U.S.-based digital asset exchanges and U.S. bank account information

Bill Singer's Comment: Yeah, sure, all well and fine; however, both the CFTC and the SEC have been denying a lot of claims for whistleblower awards.

The federal regulators ask a lot from public tipsters; however, after they get the tips, those same regulators engage in quite a bit of subterfuge (if not bad faith) when it comes to recommending and paying awards. Hopefully, the CFTC is sincere with its solicitation and will try to up its game.

FINRA Arbitration Panel Slams Morgan Stanley With Multi-Million Dollar Compensatory/Punitive Damages in Charles Schwab Lawsuit
In the Matter of the Arbitration Between Charles Schwab & Co., Inc, Claimant, v. Morgan Stanley, Christopher Robert Armstrong, Randall Brian Kiefner, Respondents (FINRA Arbitration Award 19-00948)
https://www.finra.org/sites/default/files/aao_documents/19-00948.pdf
In a FINRA Arbitration Statement of Claim filed in April 2019 by FINRA member firm Charles Schwab & Co., Claimant asserted "breach of contract; misappropriation of trade secrets (Defend Trade Secrets Act, 18 U.S.C. § 1836 et seq. and the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1); breach of duty of loyalty; tortious interference with contracts and with prospective business relations; unfair competition in violation of N.J.S.A 56:4-1; aiding and abetting and participation in breach of duty of loyalty and other unlawful conduct; and civil conspiracy."

Respondent Morgan Stanley and associated person Respondents Armstrong and Kiefner (the "AP Respondents") generally denied the allegations, and asserted affirmative responses.

Morgan Stanley filed a Cross-Claim against the AP Respondents asserting "abuse of process, and attorneys' fees."

AP Respondents filed a Counter-Claim against Claimant Schwab seeking the expungement of their Form U5s; and, also, the AP Respondents filed a Cross-Claim against Morgan Stanley asserting "tortious interference with an actual business relationship and contract; tortious interference with a prospective business relationship and contract; breach of contract; breach of covenant of good faith and fair dealing; promissory estoppel; contribution and indemnity; civil conspiracy; defamation; and expungement of Form U5."

The FINRA Arbitration Panel set out under "AWARD" the following:

1. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $3,026,485.44 in compensatory damages.

2. Respondent Morgan Stanley is liable for and shall pay to Claimant the sum of $3,026,485.44 in punitive damages pursuant to Federal and Florida law, and New Jersey Trade Secrets Statutes (DTSA, Section 1836; FL-UTSA, Section 688.004; NJ-UTSA, Section 56:15-4) and New Jersey’s Unfair Competition Statute (N.J.S.A. Section 56:4-2).

3. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $104,833.89 in costs.

4. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $1,136,459.08 in attorneys’ fees pursuant to Defend Trade Secrets Act of 2016, DTSA, Section 1836; FL-UTSA, Section 688.005; NJ-UTSA, Section 56:15-6, and as provided for in Armstrong and Kiefner’s Agreements with Claimant. (Florida and New Jersey Uniform Trade Secret Act).

5. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong the sum of $2,850,900.00 in compensatory damages.

6. Morgan Stanley is liable for and shall pay to Randall Brian Kiefner the sum of $1,173,900.00 in compensatory damages.

7. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong and Randall Brian Kiefner the sum of $672,399.00 in attorneys’ fees. Attorneys’ fees are awarded as Morgan Stanley promised to engage legal counsel and to “cover everything” if Claimant sued. Attorneys’ fees are awarded also pursuant to Revised Uniform Arbitration Act (RUAA) Section 21(b); AAA Commercial Rule 49.; R-49 (d)(ii).

8. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong and Randall Brian Kiefner the sum of $35,371.76 in costs.

9. Morgan Stanley’s Cross-Claim against Christopher Robert Armstrong and Randall Brian Kiefener is denied.

10.The Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of Christopher Robert Armstrong’s (CRD Number 1446768) Form U5 filed by Morgan Stanley (CRD Number 149777) on May 1, 2019 and maintained by the Central Registration Depository (“CRD”). The Reason for Termination shall be changed to “Voluntary”, and the Termination Explanation should be deleted in its entirety and shall appear blank. This directive shall apply to all references to the Reason for Termination and Termination Explanation. The Panel further recommends the expungement of Occurrence Number 2029531 from the registration records maintained by the CRD for Christopher Robert Armstrong. Any “Yes” answers should be changed to “No,” as applicable. The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Christopher Robert Armstrong must forward a copy of this Award to FINRA’s Credentialing, Registration, Education and Disclosure Department for review.

11.The Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of Randall Brian Kiefner’s (CRD Number 2078087) Form U5 filed by Morgan Stanley (CRD Number 149777) on May 1, 2019 and maintained by the CRD. The Reason for Termination shall be changed to “Voluntary”, and the Termination Explanation should be deleted in its entirety and shall appear blank. This directive shall apply to all references to the Reason for Termination and Termination Explanation. The Panel further recommends the expungement of Occurrence Numbers 2029590 and 2029592 from the registration records maintained by the CRD for Randall Brian Kiefner. Any “Yes” answers should be changed to “No,” as applicable. The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Randall Brian Kiefner must forward a copy of this Award to FINRA’s Credentialing, Registration, Education and Disclosure Department for review.

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

Bill Singer's Comment: For some context on the above arbitration, read:

"Fired Morgan Stanley Brokers Blame Law Firm for Botched Move" (AdvisorsHub by Jake Martin / April 1, 2021) https://www.advisorhub.com/fired-morgan-stanley-brokers-blame-law-firm-for-botched-move/

"Fired Morgan Stanley Reps Blame Law Firm's Bad Advice / The Morgan Stanley–recommended law firm that represented the transitioning advisors told them their nonsolicit agreements with Schwab were unenforceable, according to their lawsuit against the lawyers." (WealthManagement.com by Patrick Donachie / Mar 26, 2021)
https://www.wealthmanagement.com/regulation-compliance/fired-morgan-stanley-reps-blame-law-firms-bad-advice