KuCoin is a virtual currency trading platform that allows investors to buy and sell cryptocurrency through its website and app. On its platform, KuCoin investors can buy and sell popular virtual currencies, including ETH, LUNA, and TerraUSD (UST), which are securities and commodities. This action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies available, is a security. The petition argues that ETH, just like LUNA and UST, is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.
KuCoin also sells unregistered securities in the form of KuCoin Earn, its lending and staking product. New York law requires securities and commodities brokers to register with the state, which KuCoin failed to do. The OAG was able to create an account with KuCoin using a computer with a New York based IP address and buy and sell digital tokens, for which KuCoin charged a fee. The OAG was also able to deposit digital tokens into the KuCoin Earn product, for which KuCoin also charged a fee.
In addition, KuCoin claimed to be an exchange, but is not registered with the Securities and Exchange Commission as a national securities exchange or appropriately designated by the Commodity Futures Trading Commission as is required under New York Law. KuCoin also failed to comply with a subpoena issued by OAG to provide more information about its digital asset trading activities in the state. KuCoin has already been found to be operating without proper licensure in multiple jurisdictions including the Seychelles, Canada, and the Netherlands.
From in or about December 2017 through in or about August 2022, MURRAY was employed as the Director of Finance for a non-profit financial services trade association located in Manhattan. The organization, which has more than 600 institutional members, works to promote industry thought leadership, participate in industry advocacy work, educate members and stakeholders, and establish industry standards and best practices.
As the Director of Finance, MURRAY had access to the organization’s bank accounts. From at least October 2019 through at least in or about March 2021, MURRAY misappropriated approximately $490,000 from one of the organization’s bank accounts through more than 100 unauthorized wire transactions from the organization’s bank account to her personal bank account. To conceal the embezzlement from her employer, MURRAY fabricated recipients and invoice numbers purporting to be associated with the wire transactions in her employer’s general ledger, even though MURRAY was the true recipient of those wire transfers.
After siphoning hundreds of thousands of dollars from her employer’s bank account to her own, MURRAY withdrew from her bank account over $400,000 in cash on more than 300 occasions and used the remainder of the stolen funds for peer-to-peer online money transfers, loan payments, and consumer and luxury items, including Yves Saint Laurent and Michael Kors designer apparel; beauty, wellness, and skincare products and services; home furnishings and décor; hundreds of Amazon orders; smoke shop purchases; and a treadmill for cats.
Bill Singer's Comment: Although not identified by name in the Complaint, the trade association seems to be the Loan Syndications and Trading Association:
Since 1995, the Loan Syndications and Trading Association (LSTA) has been the industry’s premier platform for all participants in the rapidly evolving syndicated lending market.
Thanks to its members, who include a who’s who of thought leaders from major firms industry-wide—including buy-side, sell-side, and supporting services (legal, accounting, consulting, technology, analytics, clearing, and settlement)—the LSTA has remained singularly focused on its core mission: to promote a fair, orderly, efficient, and growing corporate loan market while advancing and balancing the interests of all market participants.
Nearly six years have passed since the Commission issued, via authority delegated to the Division of Trading and Markets, its first order disapproving an application by an exchange to list and trade an exchange-traded product (“ETP”) designed to track the price of spot bitcoin. Notwithstanding significant evolution of the bitcoin market, the Commission has continued to disapprove every such filing that has come before it. In our view, the Commission is using a different set of goalposts from those it used—and still uses—for other types of commodity-based ETPs to keep these spot bitcoin ETPs off the exchanges we regulate. Today, the Commission has issued the latest in this disappointing string of disapproval orders. This order’s analysis essentially repeats the analysis that the Commission has given in each of these recent orders. However, it is worth reflecting on the Commission’s approach to these products, how that approach differs from the approach the Commission has taken—and indeed continues to take—toward other commodity-based ETPs, and what this bodes for the future of innovation, and by extension, for investor protection and capital formation, in our markets.
Consistent with its prior bitcoin ETP disapproval orders, the Commission bases its disapproval of the VanEck Bitcoin Trust filing on the inability of the exchange to establish “that it has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to spot bitcoin.” The Commission asserts that this analysis is consistent with its approach to considering earlier rule filings related to non-bitcoin commodity-based ETPs, in which “there has been in every case at least one significant, regulated market for trading futures on the underlying commodity[,] and the ETP listing exchange” has had a surveillance sharing arrangement with that market. Because it finds that the exchange has not established that “it is reasonably likely that a would-be manipulator of the proposed ETP would have to trade on the CME bitcoin futures market to successfully manipulate the proposed ETP,” the Commission concludes that the exchange has not established that that futures market is a “market of significant size” in relation to the bitcoin spot market.
It is true that when approving other types of commodity-based ETPs, the exchange listing such products has had a surveillance-sharing agreement with a market on which futures of the commodity underlying the ETP trade. And those orders typically describe the relevant futures market as “significant.” But it is also clear that the Commission is using a uniquely burdensome definition of “significant” in its analyses of spot bitcoin ETP filings. For example, the Commission has quoted language from its approval orders for other commodity-based ETPs that, it argued, shows that the exchanges seeking these approvals universally had in place a surveillance-sharing agreement with a “significant” futures market. However, the language quoted by the Commission demonstrates that “significant” could not have been referring to the relationship between the futures market and the spot market—indeed, in many of the orders, the Commission draws no connection between the futures market and the spot market. Instead, the Commission’s use of “significant” in the prior approval orders for other commodity-based ETPs appears to refer to the significance, presumably measured by liquidity and volume, of a particular venue for trading futures as compared to the overall market for futures in the relevant commodity.
The spot bitcoin ETP disapproval orders represent a sharp departure from this approach. Rather than look at the size and quality of the relevant futures market to determine whether it is significant, the Commission, beginning in 2018, has insisted that a bitcoin futures market is “significant” for the purposes of determining whether listing and trading a related product only if it meets two conditions:
(a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.
The attentive reader will find no hint that this standard applied in any of the many prior approval orders that the Commission has cited as showing that the “significance” of a regulated market is important in its approval of commodity-based ETPs. Indeed, to establish the authority for applying this standard, the Commission cites only to other previous bitcoin disapproval orders, which indicates that the standard applies only in the context of disapproving spot bitcoin ETP applications. Moreover, although the Commission appears to have included some more direct language regarding surveillance-sharing agreements with significant, regulated markets in its more recent approval orders for other types of commodity-based ETPs, it has not required exchanges proposing to list and trade these products to show that the ostensibly significant market relevant to each filing meets the two-part test it applies to spot bitcoin ETPs.
The Commission has never adequately explained why it has not applied and still does not apply this two-part test when determining whether a futures market related to any other commodity-based ETP is significant. It is true, as the Disapproval Order notes, that the futures markets relating to these other commodities (gold, silver, platinum, palladium, and copper) began trading many years—in some cases several decades—before the related spot commodity ETP was approved. But the age of a futures market would seem to be a poor proxy for whether price formation occurs on the futures market (rather than on the spot market) or for whether the futures market is large enough to ensure that trading in the related ETP would not be the predominant influence on prices in that market, making it difficult to see how it is at all relevant to either prong of the test that the Commission insists spot bitcoin ETP filings satisfy. Moreover, the Commission makes no attempt to show how it is relevant, apparently taking that relevance for granted.
In our view, the Commission should not be applying this two-part test to any commodity-based ETPs, as it is inconsistent with the standard of review imposed by the Exchange Act and is not clearly fit for the purpose for which the Commission is using it. But, given that the Commission continues to use this test in connection with spot bitcoin ETPs, we are puzzled as to why the Commission gives no indication that it has even considered applying the test when it approved more recent commodity-based ETPs. At the very least, the Commission should explain why it has determined that it is not necessary to apply this test to these other products it has approved even after it has determined that a bitcoin futures market cannot be treated as “significant” until an exchange establishes that that market satisfies this two-part test. The Commission has explained neither why it departed from prior practice with respect to analyzing commodity-based ETP rule filings only when faced with spot bitcoin ETP filings, nor why that prior practice remains appropriate when assessing non-bitcoin commodity-based ETPs.
In addition, the Commission has never provided any evidence that any of the non-bitcoin commodity-based ETPs could themselves satisfy the two-part test, or that a lead-lag analysis would show for any other commodity market that price formation typically occurs on the futures market. Without such evidence, it is impossible to know either whether it is reasonable to make this demand of any market or whether, in retrospect, the test would have allowed the Commission to approve commodity-based ETPs that have apparently traded without significant investor harm over the past nearly two decades. Absent evidence that the Commission has established the utility of the test and its connection to the Commission’s stated regulatory objectives, its decision to use this specific test also appears arbitrary and capricious.
We believe that the Commission’s decision to subject spot bitcoin-based ETPs to a bespoke standard that may be impossible for any product to meet has harmed investors by making it harder for the bitcoin market to mature through institutionalization and easier, and potentially safer, retail investor access. But our concern is not just with bitcoin. If we use the test in other markets, we will prevent other products from coming to market. Had we applied the test to other commodity-based ETPs, they might not be trading today. Arbitrarily depriving investors of access to products does not protect them. Consistent application of the standards Congress gave us does.
Importantly, the Commission is required by law to provide an explanation for any change to its policy regarding the approval of commodity-based ETPs. According to the Supreme Court, it would be “arbitrary and capricious” for an agency to enact a new policy that rests upon factual findings that contradict those which underlay its prior policy without providing a reasoned explanation. Additionally, the “requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position.” Here, the Commission has crafted a new standard for determining whether a futures market is “significant.” Not only has the Commission failed to provide an explanation for the change, but it has failed even to acknowledge that there has been a change.
Because we believe that spot bitcoin ETPs should be subject to the same standards the Commission has used for every other type of commodity-based ETP and because we believe the poorly designed test being used here is not fit for purpose and will inhibit innovation—and thereby harm investors—in our markets, we dissent.
 See Order Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, to List and Trade Shares Issued by the Winklevoss Bitcoin Trust, Rel. No. 34-80206, 82 Fed. Reg. 14076 (Mar. 16, 2017) (issued via delegated authority).
 See Order Disapproving a Proposed Rule Change to List and Trade Shares of the VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Rel. No. 34-97102 (Mar. 10, 2023) (“Disapproval Order”) (listing nearly 20 disapproval orders for spot bitcoin ETPs).
 Based on a review of exchange filings on the Commission’s website, there appear to be no active spot bitcoin ETP filings currently before the Commission, perhaps reflecting the market’s reasonable conclusion that this Commission will not approve a spot bitcoin ETP, at least not until the SEC has regulatory authority over spot bitcoin markets. See Self-Regulatory Organization Rulemaking, https://www.sec.gov/rules/sro.shtml (containing links to rule filings and related materials submitted by each national securities exchange).
 Disapproval Order, supra note 2, at 11.
 Id. at 8 (emphasis in original).
 Id. at 41. The Commission makes other findings that lead it also to find that the Exchange has not provided sufficient evidence that would give the Commission an alternative basis for finding that permitting the listing and trading of the product is consistent with the Exchange Act. We do not address these findings here.
 See id. at 8.
 See, e.g., id.; U.S. Sec. and Exch. Comm’n, Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss Bitcoin Trust Rel. No. 34-83723, 83 Fed. Reg. 37579, 37592 n. 202 (“Winklevoss Disapproval Order”) (listing prior approval orders and including parenthetical quotations of relevant language identifying various futures markets as “significant”).
 See Winklevoss Disapproval Order, supra note 9, 83 Fed. Reg. at 37592, n. 202.
 See id. (quoting, for example, one order as noting that “‘[t]he most significant palladium futures exchanges are the NYMEX and the Tokyo Commodity Exchange’”; another as noting that “the COMEX is one of the ‘major world gold markets’”; and another as noting that “‘the most significant gold, silver, platinum and palladium futures exchanges are the COMEX and the TOCOM’”). See also Commissioner Hester M. Peirce, Dissenting Statement of Hester M. Peirce in Response to Release No. 34-88284; File No. SR-NYSEArca-2019-39 (“2020 Peirce Dissent”) (Feb. 26, 2020) (“Tellingly, in none of these pre-bitcoin orders does the Commission appear to have performed any analysis of whether those volumes were significant when compared to the underlying commodity markets. In some prior orders, the Commission does not even mention the size of any related market, much less conduct any analysis of the relevant markets. In at least one case, the Commission approved a rule change to list shares of a product referencing a futures market that, at the time of approval, had no trading whatsoever.”).
 Winklevoss Disapproval Order, supra note 9, 83 Fed. Reg. at 37594.
 Disapproval Order, supra note 2, at 5, n. 13.
 See 2020 Peirce Dissent, supra note 11, at n. 13.
 See, e.g., Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of the Franklin Responsibly Sourced Gold ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)), Rel. No. 34-94746, 87 Fed. Reg. 24357 (Apr. 25, 2022) (approving a responsibly-sourced gold ETP); Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of the Sprott ESG Gold ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Rel. No. 34-94518, 87 Fed. Reg. 18837 (Mar. 31, 2022) (approving an ESG gold ETP). See also Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Listing and Trading of Shares of iShares Gold Trust Micro under NYSE Arca Rule 8.201-E, Rel. No. 34-84881, 86 Fed. Reg. 22996 (Apr. 30, 2021) (notice of immediate effectiveness of rule change to allow listing and trading of physical gold ETP).
 See Disapproval Order, supra note 2, at 8, n. 23.
 See Commissioner Hester M. Peirce, Dissent of Commissioner Hester M. Peirce to Release No. 34-83723; File No. SR-BatsBZX-2016-309 (July 26, 2018).
 See FCC v. Fox Television Stations, Inc. 556 U.S. 502, 515-516 (2009).
 Id. at 515.
 Id. (emphasis in original). See also National Cable & Telecomm. Ass’n v. Brand X Internet Services, 545 U.S. 967 (2005) (stating that an unexplained inconsistency is a reason for holding an interpretation to be an arbitrary and capricious change from agency practice).
 Fox Television, 556 U.S. at 515 (“agency may not . . . depart from a prior policy sub silentio”).
https://www.brokeandbroker.com/6905/financial-professionals-coalition/ The Financial Professionals Coalition was founded out of a sense that as Wall Street evolves, the ripple effect puts enormous personal and professional stresses on the industry's small-firms and their employees. The Financial Professionals Coalition is a resource for the 1.2 million-plus folks who work at banks, broker-dealers, hedge funds, mutual funds, RIAs, and the rest of the industry's emanations. The Coalition is designed to serve as a clearinghouse of resources in order to help industry professionals navigate their careers, and to provide such services on a diverse and inclusive basis. Our goal is to help you get answers; but, also, to help you come up with the questions that you need to ask. JOIN US!
launder billions of dollars embezzled from 1Malaysia Development Berhad (1MDB),
violate the Foreign Corrupt Practices Act (FCPA) by paying more than $1.6 billion in bribes to a dozen government officials in Malaysia and Abu Dhabi, and
violate the FCPA by circumventing the internal accounting controls of Goldman Sachs.
As alleged in part in the DOJ Release:
1MDB is a Malaysian state-owned and controlled fund created to pursue investment and development projects for the economic benefit of Malaysia and its people.
Ng was employed as a Managing Director by various subsidiaries of Goldman Sachs and acted as an agent and employee of Goldman Sachs from approximately 2005 to May 2014.
Between approximately 2009 and 2014, Ng conspired with others to launder billions of dollars misappropriated and fraudulently diverted from 1MDB, including funds 1MDB raised in 2012 and 2013 through three bond transactions it executed with Goldman Sachs, known as “Project Magnolia,” “Project Maximus,” and “Project Catalyze.” As part of the scheme, Ng and others, including Tim Leissner, the former Southeast Asia Chairman and participating managing director of Goldman Sachs, and co-defendant Low Taek Jho, a wealthy Malaysian socialite also known as “Jho Low,” conspired to pay more than a billion dollars in bribes to a dozen government officials in Malaysia and Abu Dhabi to obtain and retain lucrative business for Goldman Sachs, including the 2012 and 2013 bond deals. They also conspired to launder the proceeds of their criminal conduct through the U.S. financial system by funding major Hollywood films such as “The Wolf of Wall Street,” and purchasing, among other things, artwork from New York-based Christie’s auction house including a $51 million Jean-Michael Basquiat painting, a $23 million diamond necklace, millions of dollars in Hermes handbags from a dealer based on Long Island, and luxury real estate in Manhattan.
Ng, Leissner, Low and their co-conspirators used Low’s close relationships with high-ranking government officials in Malaysia and Abu Dhabi to obtain and retain business for Goldman Sachs through the promise and payment of hundreds of millions of dollars in bribes. In the course of executing the scheme, Ng conspired with others at Goldman Sachs to circumvent the investment bank’s internal accounting controls. Through its work for 1MDB during that time, Goldman Sachs received approximately $600 million in fees and revenues, while Ng received more than $35 million for his role in the bribery and money laundering scheme. In total, Ng and the other co-conspirators misappropriated more than $2.7 billion from 1MDB.
As proven at trial, Ng spent years cultivating a relationship with Low in order to get him to bring business to Goldman Sachs. In the process of doing so, Ng attempted to onboard Low as a private wealth management client for Goldman Sachs and, when confronted with questions from Goldman Sachs compliance personnel about Low’s government connections and source of wealth, lied about the extent of his relationship with Low; Ng communicated with Low about business opportunities using personal email accounts to avoid detection by Goldman Sachs compliance personnel; and Ng and Leissner attempted to work with Low on a series of side deals that were not disclosed to Goldman Sachs, and in one such potential deal, Ng, Leissner and Low discussed paying a bribe to get a deal completed. With respect to the charged conduct, the trial evidence shows that Ng was instrumental in creating the structure of the bond deals, which enabled the theft of billions of dollars, and in lying to Goldman Sachs about Low’s involvement in the deals and the payment of bribes and kickbacks in order to get the deals approved. To receive his $35 million in kickbacks, Ng set up a shell company in the name of his mother-in-law, and he and his wife used a bank account in the name of that company, in addition to a number of other bank accounts in the names of family members, to conceal and further launder his ill-gotten gains. And when news about the 1MDB scheme started to become public, Ng deleted the contents of four email accounts that had been used in furtherance of the crimes, and lied to law enforcement authorities in Malaysia and Singapore investigating the scheme.
Low remains a fugitive. In August 2018, Leissner pleaded guilty to a two-count criminal information charging him with conspiring to launder money and conspiring to violate the FCPA by both paying bribes to various Malaysian and Abu Dhabi officials and circumventing the internal accounting controls of Goldman Sachs. Leissner has been ordered to forfeit $43 million and shares of stock valued at more than $200 million. Leissner is awaiting sentencing.
In October 2020, Goldman Sachs and Goldman Sachs (Malaysia) Sdn. Bhd. (GS Malaysia), its Malaysian subsidiary, admitted to conspiring to violate the anti-bribery provisions of the FCPA in connection with the scheme. Goldman Sachs entered into a deferred prosecution agreement with the United States Attorney’s Office for the Eastern District of New York and the Department of Justice’s Criminal Division, Fraud Section and Money Laundering and Asset Forfeiture Section (MLARS), and GS Malaysia pleaded guilty in the U.S. District Court for the Eastern District of New York to a one-count criminal information. Goldman Sachs also paid more than $2.9 billion as part of a coordinated resolution with criminal and civil authorities in the United States, the United Kingdom, Singapore, and elsewhere.
Former Wall Street Precious Metal Traders Sentenced for Wire Fraud (DOJ Release) https://www.justice.gov/opa/pr/former-wall-street-precious-metal-traders-sentenced-wire-fraud In the United States District Court for the Northern District of Illinois, former Deutsche Bank and Bank of America senior trader Edward Bases, 61, and former Bank of America and Morgan Stanley senior trader John Pacilio, 59, were convicted at trial of conspiracy to commit wire fraud affecting a financial institution and multiple counts of wire fraud affecting a financial institution; and, additionally, Pacilio was convicted of commodities fraud. Bases and Pacilio were sentenced to one year and one day in prison. As alleged in part in the DOJ Release, Bases and Pacilio:
fraudulently pushed market prices up or down by placing large “spoof” orders in the precious metals futures markets that they did not intend to fill. Bases and Pacilio did so to manipulate prices for their own gain and the banks’ gain, and to defraud other traders on the Commodity Exchange Inc. and the New York Mercantile Exchange Inc., both of which are exchanges run by the CME Group Inc.
Bases and Pacilio also taught other traders how to engage in the practice of spoofing. As a result of Bases and Pacilio’s scheme, other market participants were induced to trade at prices, quantities, and times that they otherwise would not have traded.
Qualys, Inc., SumoLogic, Inc., and F5, Inc. – Qualys, SumoLogic, and F5 are providers of cloud security assessments, audit and compliance services, and firewall and monitoring products and services. One director served simultaneously on the boards of all three companies. After the division expressed concerns about the alleged interlock, the director recently resigned from Qualys’s board and declined to stand for reelection to F5’s board.
N-able, Inc., Dynatrace, Inc., and SolarWinds Corp. – N-able, Dynatrace, and SolarWinds are software companies. Representatives of the investment firm Thoma Bravo sat on all three companies’ boards. As the department previously announced in October 2022, three Thoma Bravo representatives resigned from the SolarWinds’s board in response to the division’s concerns about the alleged interlock between Dynatrace and SolarWinds. Shortly thereafter, in November 2022, two separate Thoma Bravo designees resigned from the N-able board.
Brookfield Asset Management Inc. and American Equity Investment Life Holding Company (AEL) – AEL and a Brookfield Asset Management subsidiary’s wholly-owned company American National are both insurance companies. Brookfield and/or its subsidiary appointed the officers or directors on the American National board. Additionally, the Brookfield subsidiary has the contractual right to appoint a director to the AEL board, and in December 2022, the Brookfield subsidiary announced that it would exercise that right. After the division raised concerns regarding the potential interlock, the Brookfield subsidiary announced it had changed course and it was withdrawing its proposed nomination to the AEL board.
Sun Country Airlines Holdings, Inc. and Atlas Air Worldwide Holdings, Inc. – Sun Country and Atlas Air both provide crew, maintenance, and insurance for domestic air freight routes. In August 2022, an investment group led by Apollo Global Management, Inc. proposed acquiring all of Atlas Air’s outstanding shares. At the time, two Apollo-affiliated individuals sat on the Sun Country board of directors. After the division raised concerns regarding a potential interlock arising from Apollo’s proposed acquisition of Atlas Air, the two Apollo-affiliated directors resigned from the Sun Country board.
[O]n July 16, 2020, Blackbaud announced that the ransomware attacker did not access donor bank account information or social security numbers. Within days of these statements, however, the company’s technology and customer relations personnel learned that the attacker had in fact accessed and exfiltrated this sensitive information. These employees did not communicate this information to senior management responsible for its public disclosure because the company failed to maintain disclosure controls and procedures. Due to this failure, in August 2020, the company filed a quarterly report with the SEC that omitted this material information about the scope of the attack and misleadingly characterized the risk of an attacker obtaining such sensitive donor information as hypothetical.
SEC Obtains Final Judgments Against Canadian Public Company and Its CEO in Fraudulent Microcap Scheme (SEC Release) https://www.sec.gov/litigation/litreleases/2023/lr25661.htm Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the District of Massachusetts, Bradley Moynes and Digatrade Financial Corp consented to the entry of final judgments enjoining them from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and the imposition of penny stock bars against Moynes and Digatrade and an officer and director bar against Moynes. Additionally, Moynes was enjoined from directly or indirectly, including but not limited to, through any entity owned or controlled by him, participating in the issuance, purchase, offer, or sale of any security. Moynes was ordered to pay disgorgement of $1,042,407, prejudgment interest of $253,868, and a civil penalty of $207,183. Digatrade was ordered to pay disgorgement of $510,000 and prejudgment interest of $133,309 and a civil penalty of $100,000. $62,007 of Digatrade's disgorgement is joint and several with Moynes. The SEC Complaint named as a Relief Defendant: Vancap Ventures, Inc., which was ordered to pay disgorgement of $980,400 and prejudgment interest of $235,577 on a joint and several basis with Moynes. As alleged in part in the SEC Release:
On June 27, 2022, the SEC charged that Moynes was the President, CEO and Director of two small and thinly traded companies, Formcap Corporation and Digatrade, whose stock was publicly traded in the U.S. securities markets. According to the complaint, Moynes used foreign nominee companies to hold stock in these microcap companies, thus concealing his ownership. The SEC alleged that Moynes and his associates generated demand for the stock they controlled by paying promoters to tout the stock and then secretly sold stock into that demand, generating substantial illicit profits from unsuspecting investors. The complaint alleged that, as a result of Moynes' deceptive conduct, investors buying the stock he sold were deprived of important information-that the stock they purchased was being dumped by the President and majority shareholder of the company.
[A]bdelkader's wife worked for Audentes. The SEC alleges that Abdelkader determined, based on facts he learned from his wife, that there was a high likelihood of Audentes being acquired. Using this material nonpublic information he misappropriated from his wife, Abdelkader allegedly purchased short-term, out-of-the money Audentes call options on October 17 and October 18, 2019. The SEC further alleges that when Audentes' stock price rose by approximately 106% following the acquisition announcement, Abdelkader obtained ill-gotten gains of approximately $81,580.
FINRA Censures and Fines SageTrader For Reg SHO Issues In the Matter of SageTrader, LLC, Respondent (FINRA AWC 2018057956001) https://www.finra.org/sites/default/files/fda_documents/2018057956001%20SageTrader%2C%20LLC%20CRD%20137862%20AWC%20gg.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, SageTrader, LLC, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that SageTrader, LLC has been a FINRA member firm since 2006 with six registered persons at one branch. In accordance with the terms of the AWC, FINRA imposed upon SageTrader, LLC Censure and $175,000 fine. As alleged in part in the AWC [Ed: footnotes omitted]:
In July 2017, SageTrader began effecting customer short sale orders on a net basis. Net trading generally refers to contemporaneous principal transactions where the initial and offsetting transactions are at different prices. For example, a firm trades on a “net” basis when it accumulates a position at one price and executes the offsetting trade with its customer or broker-dealer client at another price. SageTrader mismarked its principal short sales as long in connection with its handling of net trades because it incorrectly believed that the receipt of its customer sell order created an unconditional contract for the firm to purchase the securities from the customer and the firm was, therefore, deemed to own the securities. SageTrader, however, had not entered into an unconditional contract with its customer because SageTrader would only purchase the subject securities from that customer if it was able to sell those securities to another broker-dealer. On December 1, 2017, the firm began marking its principal sales as short.
From July 2017 through November 2017, SageTrader improperly marked approximately 9.7 million principal short sale orders as long. Those orders resulted in approximately 390,000 executions.
Therefore, SageTrader violated Rule 200(g) of Regulation SHO and FINRA Rule 2010.
. . .
As a result of mismarking its principal sell orders as long from July 2017 through November 2017, SageTrader effected approximately 390,000 short sales without obtaining a locate. When the firm started marking its principal sales as short in December 2017, it also began uploading easy to borrow lists (ETBLs) to its smart order router (SOR) to comply with Regulation SHO’s locate requirement.SageTrader, however, failed to program the SOR to prevent the routing of short sale orders for securities that were not on the ETBLs. From December 2017 through February 2018 the firm failed to obtain locates for approximately 100,000 principal short sales. In late February 2018, SageTrader discovered this programming error and imposed a block on its SOR for nonETBL securities.
By failing to obtain required locates for approximately 490,000 short sales, SageTrader violated Rule 203(b)(1) of Regulation SHO and FINRA Rule 2010.
. . .
From July 2017 through August 2022, the firm failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with Regulation SHO’s order marking and locate requirements.
From July 2017 to December 2018, SageTrader did not conduct any supervisory reviews and had no WSPs addressing order marking or locates for principal short sales.
In December 2018, the firm amended its WSPs to require periodic “spot checks” of principal orders and executions to ensure that the firm’s SOR was properly marking principal sales as short and that securities sold short were on the ETBL. The amended WSPs, however, failed to provide reasonable guidance as to when and how to conduct the referenced spot checks and were not reasonably designed to achieve compliance with Regulation SHO’s order marking and locate requirements.
Therefore, SageTrader violated FINRA Rules 3110 and 2010.
FINRA Censures and Imposes $3 Million Fine on Webull Financial for Options Trading Supervision In the Matter of Webull Financial LLC, Respondent (FINRA AWC 2021070581401) https://www.finra.org/sites/default/files/2023-03/Webull-AWC-No-2021070581401.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Webull Financial LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Webull Financial LLC has been a FINRA member firm since 2018 with about 75 registered representatives at three branches. In accordance with the terms of the AWC, FINRA imposed upon Webull Financial LLC a Censure, $3,000,000 fine and a certification of remediation of the cited supervisory issues. As alleged in part in the AWC [Ed: footnotes omitted]:
From December 2019 (when the firm first offered options trading) through July 2021, the firm did not exercise reasonable due diligence before approving customers to trade options. During this period, the firm employed an automated, electronic system to approve or disapprove customer accounts for options trading. Flaws in that system—and the firm’s supervision of the system—resulted in customers being approved for options trading authority who did not satisfy the firm’s eligibility criteria or whose accounts contained red flags that options trading was potentially inappropriate for them. As a result, the firm violated FINRA Rules 3110, 2360, and 2010.
. . .
For example, during the relevant period, the firm required that customers seeking approval to trade options spreads (a privilege granted only to customers approved for “level 3” options trading authority) have at least three years of options trading experience. Because customers must be at least 18 years old to open brokerage accounts, any customer under the age of 21 who applied for level 3 privileges could not have attained the three years of options trading experience. Nonetheless, from mid-2020, when the firm first began approving customers for level 3 options trading authority, through July 2021, the firm’s automated system approved customers for level 3 options trading authority based on the customers’ representations that they had three years of options trading experience—even if the customers were younger than 21 years old.
The firm’s automated system also did not review customers’ previous applications to search for and incorporate into its analysis any materially different information, or applications that had previously been denied by the firm. As a result, the firm’s automated system approved customers for options trading authority even when those approval decisions were based on information that was inconsistent with information that customers had previously submitted.
. . .
From May 2018 through December 2021, the firm’s system for identifying and responding to written customer complaints was not reasonably designed to identify and respond to the volume of customer complaints it received. The firm relied on a lexicon as one of its tools to identify potential customer complaints within written communications received from customers. The lexicon was not sufficiently broad in scope to identify certain customer complaints. For example, in December 2020, the firm received more than 88,000 written customer communications, but only 15 were escalated for review as potential customer complaints using the lexicon.The firm’s WSPs were not reasonably designed to identify customer complaints and stated throughout the relevant period that a “customer complaint” includes “any written grievance by a customer or prospective customer” but “does not include routine information questions, operations concerns, or service issues that can be readily resolved in a reasonable manner.” The WSPs failed to clarify that where a customer’s question, operational concern, or service issue involved a grievance, it should be considered a customer complaint.
During the relevant period, the firm experienced significant and rapid customer growth but did not commit the staff and other resources necessary to keep pace with the increasing number of customer communications it received. For example, between January 1, 2020, and September 30, 2020, the firm received approximately 430,000 written customer communications, including complaints that required, but did not always receive, a response. As another example, in 2020, the firm received approximately 115,000 customer calls, which included customer complaints. Customers complained in writing to the firm that they had tried calling the firm, but their issue was not addressed during the call or they could not reach a customer service representative.
Because the firm did not reasonably supervise its customer complaints system, it violated FINRA Rules 3110(a), 3110(b)(5), and 2010.
. . .
From May 2018 to December 2021, the firm reported no complaints under FINRA Rule 4530(a)(1)(B) despite the fact that it received numerous written complaints alleging misappropriation or theft.
The firm also underreported complaints under FINRA Rule 4530(d). From May 2018 to December 2021, the firm’s WSPs did not provide reasonable guidance to its staff on how to identify and report to FINRA customer complaints under Rule 4530(d) because, among other things, the WSPs stated that “[a] complaint does not include routine . . . operations concerns or service issues that can be readily resolved in a reasonable manner” without clarifying that any such communication that also included a grievance concerning the firm or a person associated with the firm should also be considered a complaint. This caused the firm to fail to report an undetermined number of customer complaints under FINRA Rule 4530(d). From May 2018 through December 2019, the firm reported a total of eight customer complaints. In 2020, the firm reported a total of only 69 written customer complaints despite receiving over 500,000 written customer communications that year.
Therefore, the firm violated FINRA Rules 4530 and 2010.
. . .
Although the firm started offering options trading in December 2019, it did not maintain a separate options complaint log until January 2021, at which time it created a monthly folder of options-specific complaints. However, those monthly folders were incomplete as to certain complaints. For example, the firm reported a March 2021 options-related complaint to FINRA under Rule 4530(d), but did not include the complaint in its monthly options complaint folder.
Therefore, during the period from December 2019 through March 2021, the firm violated FINRA Rules 2360(b)(17) and 2010.
Bill Singer's Comment: As perfect a FINRA AWC has I have ever read! Great content and context that serve to make the regulator's case and also offers very helpful guidance to the industry. Also read:
Transfer of AMC Shares From Webull Financial to Fidelity Becomes Unfunny Comedy of Errors (BrokeAndBroker.com Blog / January 13, 2023) https://www.brokeandbroker.com/6832/webull-fidelity-amc/ In today's featured FINRA Arbitration we got a mess involving a transfer of a customer account from Webull Financial to Fidelity. We got a misspelled customer's name. We got covered calls that wound up as naked options sales. We got a busted position and a margin call. Maybe the customer sustained losses. Maybe not. And then we have a pro se customer asked to prove that a purported contract didn't exist. What we don't have are answers. That's just not acceptable when it comes to a public, published FINRA Arbitration Award.
FINRA Fines and Suspends BD/RIA Rep for Variable Annuities Recommendations In the Matter of Gary Mark Goldberg, Respondent (FINRA AWC 201906477620) https://www.finra.org/sites/default/files/fda_documents/2019064776201 %20Gary%20Mark%20Goldberg%20CRD%20223919%20AWC%20va.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Gary Mark Goldberg submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Gary Mark Goldberg was first registered in 1980; and from 2015 to October 2019, he was registered with Bruderman Brothers, LLC. In accordance with the terms of the AWC, FINRA imposed upon Gary Mark Goldberg a $25,000 fine, $594,590 in restitution plus interest; and an 18-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC [Ed: footnotes omitted]:
During the relevant period, Goldberg was dually registered as an investment advisor with Bruderman Brothers’ affiliated investment advisory firm, and many of his customers had both brokerage and advisory accounts. Customers with advisory accounts paid an annual fee of 1.875% for assets managed in those accounts.
Between July 2018 and June 2019, Goldberg recommended that 54 customers who had or were in the process of establishing advisory accounts purchase B-shares of a particular VA in their brokerage accounts. During that time, advisory shares of the VA were available for Goldberg’s customers to purchase. The advisory shares provided living and death benefits, sub-account investment options, and other features that were virtually identical to the B-shares, but at a lower cost to customers. Specifically, customers’ annual fee for the advisory shares was 0.95 percent lower than the annual fee for the B-shares. In addition, customers who purchased advisory shares were not subject to a surrender fee, but customers who purchased B-shares were subject to a surrender fee for seven years. Goldberg and the firm earned a seven percent commission in connection with sales of B-shares of the VA, but Goldberg and the firm did not earn any commissions for sales of advisory shares of the VA.
Moreover, Goldberg recommended that each of the 54 customers referenced above transfer the B-shares of the VA from their brokerage account to their advisory account— usually within one business day of the initial purchase of the B-shares. As a result, the customers were required (and continue to be required) to pay annual advisory fees of 1.875%, as well as annual fees for the VAs that are 0.95 percent higher than if the customers had purchased advisory shares. In addition, the customers are subject to a surrender fee for seven years as a result of purchasing the B-shares.
Goldberg’s customers who held the B-shares have collectively paid approximately $594,590 in unnecessary fees as a result of the higher annual fees imposed by the B-shares.
As a result of the foregoing, Goldberg violated FINRA Rules 2111, 2330, and 2010.
Bill Singer's Comment: The alleged facts are a shameful indictment of the industry's in-house compliance oversight. Making matters worse, by the date of the AWC, the cited trades are between four to five years old -- where the hell were the industry's federal, state, and self-regulators during that half decade of abuse?
It's one of those cases that everyone is talking about -- and, frankly, it's hard not to laugh despite the fact that there's nothing funny going on with the fraud. As savvy industry reporter Tobias Salinger could only do, consider his titillating opening paragraph, and you tell me that you're not going to have to read the full article:
Over three months in 2021, one of a pair of identical twins who are both financial advisors asked a client to approve $156,000 in wire transfers out of their line of credit, the SEC said.
[B]etween April 2015 and July 2019, the defendant conspired with others to sell and trade sports trading cards, including 1986 Fleer Michael Jordan rookie cards, with victims he found via the Internet and through online selling platforms. The defendant misrepresented that the sports trading cards he was offering were graded by a professional authentication company, when in reality the trading cards were not authentic. The defendant defrauded his victims of over $800,000 in cash and authentic sports trading cards that were traded for the counterfeits.
Operators And Attorney Of Global Multi-Million-Dollar Cryptocurrency Ponzi Scheme "AirBit Club" Plead Guilty (DOJ Release) https://www.justice.gov/usao-sdny/pr/operators-and-attorney-global-multi-million-dollar-cryptocurrency-ponzi-scheme-airbit In the United States District Court for the Southern District of New York, Pablo Renato Rodriguez, Gutemberg Dos Santos, Scott Hughes, Cecilia Millan, Karina Chairez and Jackie Aguilar pled guilty to charges including wire fraud conspiracy, money laundering conspiracy, and bank fraud conspiracy. Defendants were ordered to forfeit their fraudulent proceeds of Airbit Club, which include seized or restrained assets consisting of U.S. currency, Bitcoin, and real estate currently valued at approximately $100 million. As alleged in part in the DOJ Release:
RODRIGUEZ, DOS SANTOS, HUGHES, MILLAN, CHAIREZ, and AGUILAR participated in a coordinated scheme in which victim-investors (the “Victims”) were induced to invest in AirBit Club based on the false promise of guaranteed profits in exchange for cash investments in club “memberships” (the “AirBit Club Scheme” or the “Scheme”). Beginning in late 2015, AirBit Club, through its founders, RODRIGUEZ and DOS SANTOS, as well as its promoters (the “Promoters”), including MILLAN, CHAIREZ, and AGUILAR, marketed AirBit Club as a multilevel marketing club in the cryptocurrency industry. Promoters falsely promised Victims that AirBit Club earned returns on cryptocurrency mining and trading and that Victims would earn passive, guaranteed daily returns on any membership purchased.
RODRIGUEZ, DOS SANTOS, HUGHES, MILLAN, CHAIREZ, and AGUILAR traveled throughout the United States and around the world to places in Latin America, Asia, and Eastern Europe, where they hosted lavish expos and small community presentations aimed at convincing Victims to purchase AirBit Club memberships. In furtherance of the AirBit Club Scheme, the Victims were fraudulently induced to buy memberships in cash, including in the Southern District of New York. Following a Victim’s investment, a Promoter provided the Victim with access to an online AirBit Club portal to view the purported returns on memberships (the “Online Portal”). While Victims saw “profits” accumulate on their Online Portal, those representations were false; no Bitcoin mining or trading on behalf of Victims in fact took place. Instead, RODRIGUEZ, DOS SANTOS, MILLAN, and AGUILAR enriched themselves and spent Victim money on cars, jewelry, and luxury homes, and financed more extravagant expos to recruit more Victims.
HUGHES, an attorney licensed to practice law in California, had previously represented RODRIGUEZ and DOS SANTOS in a Securities and Exchange Commission investigation related to another investment scheme known as Vizinova. He then aided RODRIGUEZ and DOS SANTOS in perpetrating the AirBit Club Scheme by, among other things, helping to remove negative information about AirBit Club and Vizinova from the internet.
In many instances, as early as 2016, Victims who attempted to withdraw money from the AirBit Club Online Portal and complained to a Promoter were met with excuses, delays, and hidden fees amounting to more than 50% of the Victim’s requested withdrawal, if they were able to make any withdrawal at all. In one instance, AGUILAR told one Victim of the AirBit Club Scheme who was complaining about her inability to withdraw AirBit Club returns that she should “bring new blood” into the AirBit Club Scheme in order to receive her returns.
In April 2020, another victim received a notice on the AirBit Club Online Portal that his account was closed – and principal investment lost – due to “execution of financial sustainability Reserve, policy #34 of the Airbit Club Terms and Conditions, due to the economic and financial crisis caused by (Covid-19).”
RODRIGUEZ, DOS SANTOS, HUGHES, CHAIREZ, and MILLAN sought to conceal the AirBit Club Scheme, as well as their respective control of the proceeds of that Scheme, by requesting that Victims purchase memberships in cash, using third-party cryptocurrency brokers, and by laundering the Scheme’s proceeds through several domestic and foreign bank accounts, including an attorney trust account managed by HUGHES (the “Hughes Trust Account”). The Hughes Trust Account was ostensibly intended to maintain custody of HUGHES’s law practice’s client funds. Instead, the Hughes Trust Account was used by RODRIGUEZ, DOS SANTOS, HUGHES, CHAIREZ, and MILLAN to conceal the nature and origin of the AirBit Club Scheme’s illicit proceeds. Through that account, HUGHES directed Victim funds to the personal expenses of RODRIGUEZ, DOS SANTOS, CHAIREZ, MILLAN, and himself, and funded promotional events and sponsorships designed to further promote the AirBit Club Scheme.
Green United, LLC, its founder Wright W.Thurston, and promoter Kristoffer A. Krohn with violating Sections 5(a) and 5(c) of the Securities Act ;
Green United with violating Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act;
Thurston with violating Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) and Rules 10b-5(a) and (c) of the Exchange Act; and
Krohn with violating Sections 17(a)(2) and (3) of the Securities Act and Section 15(a)(1) of the Exchange Act.
The Complaint names as Relief Defendants: True North United Investments, LLC and Block Brothers, LLC. As alleged in part in the SEC Release:
[F]rom April 2018 until at least December 2022, Thurston and Green United, LLC, d/b/a "Green" or "Set Power Free," raised at least $18 million in the unregistered offer and sale of investments they called "Green Boxes" or "Green Nodes," leading investors to believe that those products mined a digital token they called GREEN on a purported "Green Blockchain." As alleged in the complaint, investors were led to believe that and that the value of GREEN could increase if Green United succeeded in creating a "public global decentralized power grid." In reality, as alleged in the complaint, the Green Boxes purchased by investors did not mine GREEN, but rather mined Bitcoin, which was not transferred to investors. Likewise, Green Nodes did not mine GREEN but, as alleged in the complaint, were a basic software that in no way generated GREEN. As alleged in the complaint, Thurston created the total supply of GREEN tokens in October 2018 through a smart contract on the Ethereum blockchain, and Green United distributed those GREEN tokens to investors wallets at Thurston's direction in order, as alleged, to create the appearance that GREEN was being mined. Additionally, the complaint alleges that from April through October 2018, SEC recidivist Krohn, whom Thurston recruited and paid commissions to promote and sell Green Boxes and whom the SEC alleges acted as an unregistered securities broker, made numerous misrepresentations to investors about the present value of the GREEN token and returns on investment that investors could anticipate.
The CFTC charged the defendants with taking the opposite side of thousands of brokerage customer block trade orders without the customers’ prior consent. Weinmann took the opposite side of Coquest customer orders on behalf of accounts at Buttonwood and Weva that he controlled and in which he had a financial interest. He did this on more than 2,000 occasions between May 2015 and September 2019 without the customers’ knowledge or consent. Through this scheme, Weinmann was able to obtain block trade prices for his accounts that may not have been available if he was openly participating as a trader in the block trade market. Weinmann obtained profits for the Buttonwood and Weva accounts, at Coquest customers’ expense, by trading against the customers at prices that were less favorable to the customers than the prices he knew or should have known to be available in the market. Weinmann also deceived or attempted to deceive Coquest customers into believing he was reporting bids and offers made by third-party trading counterparties, when in fact Weinmann was making the bids or offers on behalf of the Buttonwood or Weva accounts. The order also states this activity constituted fraudulent misappropriation of the customers’ material nonpublic information. The order further states Weinmann and Vassallo each failed to diligently supervise the handling of commodity interest accounts and activities relating to Coquest’s and Buttonwood’s business.
Series 7 Exam: can I take it without a sponsor ? (YouTube Video from Capital Advantage Tutoring / Kenneth Finnen) Finally! Someone posted a video about the thorny issue of what you can do when you don't have a Series 7 sponsor -- and, more important, Ken Finnen's warns about all the pitfalls of rushing into this issue and not knowing about the minefield that you just entered. Really great content from a Co-Founder of the Financial Professionals Coalition.
The $3.4 Million Tip: (FINRA Blog / FINRA Departments of Member Supervision and Enforcement) https://www.finra.org/media-center/blog/santa-rosa-bonds I will be the first to criticize FINRA and Wall Street's misguided approach to so-called self-regulation. As I am often viewed as among the leading critics of FINRA and self regulation, I believe that imposes upon me an obligation to avoid hypocrisy and give credit when credit is due (even if it's to the Devil). In offering tough but fair coverage of industry regulation, let me take this moment to compliment FINRA for getting something right, and doing so in a fashion that furthers the best goals of what self regulation should be able to accomplish. In that spirit, let me stand aside and offer FINRA's own words from this recent online posting:
A call to FINRA’s Senior Helpline resulted in $3.4 million returned to approximately 300 customers.
In 1996, the Santa Rosa Bay Bridge Authority in Milton, Fla. issued bonds to raise capital for the construction of a bridge. Fast forward about 25 years to February 2021: A customer contacted FINRA’s Senior Helpline, concerned that he had been overcharged for his purchase of the Santa Rosa bridge bonds. He also told FINRA that he asked his brokerage firm about the overcharge, and that the firm had not provided an adequate response.
The bonds he and other customers purchased were “capital appreciation bonds”—meaning that all payments were intended to be made at maturity. But the bridge bonds fell into technical default in 2011. When the issuer started making accelerated principal payments to bondholders in 2013, the bonds started to trade at a lower price to take into account the reduced outstanding principal. This reduction is known as a “factor.”
Unlike the markets for other types of bonds, the municipal bond market does not have a robust infrastructure for informing market participants when municipal bonds trade with factors. Instead, investors and market participants rely on the trustee (as agent for the issuer) and data vendors for this information. For the Santa Rosa bonds, brokerage firms relied on inaccurate factors provided by data vendors, leading to many customers being overcharged for their bond purchases.
When investigating the customer complaint, FINRA’s Fixed Income Specialist Team observed that the Santa Rosa bonds were trading with a factor and discovered that the customer’s brokerage firm applied an incorrect factor. The Specialist Team contacted the firm, which agreed to pay the customer approximately $24,000—the amount of the overcharge plus interest.
FINRA did not stop there. The Specialist Team, aided by their Enforcement colleagues, analyzed records dating from 2013 through 2021 and found that the application of the inaccurate factor was a widespread problem. FINRA reached out to 30 brokerage firms involved with Santa Rosa bond transactions and presented the findings, which resulted in the firms reimbursing their customers for the overcharges.
With the firms’ cooperation, FINRA succeeded in getting more than $3.4 million returned to approximately 300 customers. The cross-team efforts demonstrate the important difference FINRA’s response to a single customer complaint can make and highlights FINRA’s commitment to its investor protection mission.
FINRA Censures and Imposes $500,000 Fine on Transamerica Capital for Failure to Register Over 400 Individuals In the Matter of Transamerica Capital, Inc, Respondent (FINRA AWC 2020068071402) https://www.finra.org/sites/default/files/fda_documents/2020068071402 %20Transamerica%20Capital%20Inc.%2C%20CRD%208217%20AWC%20va.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Transamerica Capital, Inc submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Transamerica Capital, Inc has been a FINRA member firm since 1980 with about 400 registered representatives at 27 branches. In accordance with the terms of the AWC, FINRA imposed upon Transamerica Capital, Inc a Censure and $500,000 fine. As alleged in part in the AWC [Ed: footnotes omitted]:
During the period December 2019 to February 2021, a cumulative total of more than 400 call center personnel were not registered, or timely registered, despite their engaging in conduct requiring registration. During this time, TCI used a contracted, third-party vendor to administer the Transamerica call centers to handle calls and requests from Transamerica variable product policy holders who had transaction requests related to securities. These securities transaction requests included customer orders for investment of additional premiums, reallocations of contract value among subaccounts, and withdrawals of contract value.
These call center personnel handling transaction requests related to securities were associated persons of TCI, and thus required to be registered in the category of registration appropriate to his or her functions. Although TCI determined to register certain of the call center personnel prior to the relevant period herein, and had advised FINRA of that fact, the firm failed to register, or timely register, these individuals before they engaged in the conduct requiring registration described above. By February 2021, the firm had made changes to the Transamerica call centers with regard to the handling of policy holder requests relating to Transamerica variable products, had approximately 175 individuals registered with TCI who handled policy holder requests relating to Transamerica variable products, and had established policies, procedures, and systems prohibiting call center personnel who were not registered from addressing transaction requests involving Transamerica variable products.
Therefore, TCI violated FINRA Rules 1210 and 2010.
= = = 3/7/2023
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Baton Rouge Man Sentenced to 57 Months in Federal Prison for Fraudulent Investment Scheme (DOJ Release) https://www.justice.gov/usao-mdla/pr/baton-rouge-man-sentenced-57-months-federal-prison-fraudulent-investment-scheme In the United States District Court for the Middle District of Louisiana, Monty Matthews, 52, pled guilty to wire fraud, interstate communication of an extortionate threat, and attempted escape; and he was sentenced to 57 months in prison plus three years of supervised release, and ordered to pay $1,066,853 restitution. The Court considered the "impact of Matthews’ criminal conduct on victims aged 60 and older; that resulted in the loss of over $1,000,000 of the victims’ retirement savings, which all went to Matthews; and the fact that the victims were left with virtually no retirement savings. Judge deGravelles also commented on injuries to FBI agents resulting from Matthews’ attempt to escape custody." As alleged in part in the DOJ Release
[I]n August 2017, Matthews advised two victims that he could make investments on their behalf and with very high rates of return. Matthews acted as the victims’ investment team lead, and demanded that they needed to maintain an investment account with him exceeding $550,000. Based on Matthews’ false assurances and representations regarding what were, in fact, non-existent investment opportunities, along with his threat to injure the victims if they did not continue to make payments, the victims made over 4,000 cash drops to Matthews. In addition, on March 23, 2022, Matthews was in in the custody of two special agents with the Federal Bureau of Investigation due to a lawful arrest relating to federal felony charges. Matthews attempted to escape from custody, but agents were able to prevent him from fleeing.
Cape Coral Caretakers Plead Guilty To Stealing More Than Half A Million Dollars From Elderly Victim (DOJ Release) https://www.justice.gov/usao-mdfl/pr/cape-coral-caretakers-plead-guilty-stealing-more-half-million-dollars-elderly-victim In the United States District Court for the Middle District of Florida, Diane Durbon and Brittany Lukasik pled guilty to conspiracy to commit wire fraud; and, additionally, Lukasik pled guilty to filing a false tax return. As part of their guilty pleas, Durbon and Lukasik have agreed to forfeit a 2016 Nissan Rogue, 2020 Kia Sorento, real property in Cape Coral, and approximately $542,760.23, which are traceable to proceeds of the offenses. As alleged in part in the DOJ Release:
[D]urbon and her daughter, Lukasik, a registered nurse, were first hired in approximately 2016 to be caretakers for T.H., the 92-year-old victim. In October 2017, Durbon began unlawfully accessing T.H.’s investment accounts. To unlawfully gain access to the investment accounts, Durbon would place T.H. on the phone to answer various account security questions. Video surveillance cameras that Durbon had installed inside T.H.’s home captured Durbon putting a script that contained answers to account security questions in front of T.H. before and during each phone call.
After being given authorization to speak to the investment account representative on T.H.’s behalf, Durbon would move funds from T.H.’s investment accounts into a Prime Money Market Account (PMMA) that also functioned as a checking account. After transferring the funds, checks were unlawfully issued to Lukasik, ranging in amounts from $1,000 to $9,600, which were deposited into bank accounts that Lukasik controlled and maintained. Between November 2017 and July 2019, approximately $231,659 in checks were issued to Lukasik from T.H.’s PMMA account.
Beginning in approximately November 2018, Durbon also unlawfully gained access to T.H.’s annuity policy, similarly to how she had unlawfully gained access to T.H.’s investment accounts. In January 2019, Durbon faxed a fraudulent Annuity Withdrawal form which misrepresented that T.H. wanted to cash out her annuity policy. This caused the annuity company to issue a check to T.H. in the amount of $244,521.09. The check was deposited into one of T.H.’s checking accounts. After the check was deposited, approximately 92 checks, totaling $372,092.98, were issued to Lukasik from T.H.’s checking account between February 2019 and March 2020. The checks were deposited into bank accounts that Lukasik controlled and maintained. Moreover, Lukasik failed to report receipt of any of T.H.’s funds in her 2019 tax return.
In total, between January 2019 and March 2020, approximately $542,760.23 in fraudulently obtained funds were deposited into Lukasik’s accounts. After the funds were deposited, Lukasik and Durbon used the funds to pay off debt and make a variety of purchases. Those purchases included paying $26,354.05 for a 2018 Nissan Rogue, $17,735.17 to pay off a car loan, more than $29,000 to pay student loan debt, and more than $100,000 in credit card payments. Lukasik and Durbon also used the funds to purchase a duplex in Cape Coral, and more than $100,000 of the fraudulently obtained proceeds were used to buy electronics, furniture, and to remodel the duplex.
Man Sentenced to 30 Months in Federal Prison for Defrauding Investors of 2 Companies, Evading Taxes (DOJ Release) https://www.justice.gov/usao-ct/pr/man-sentenced-30-months-federal-prison-defrauding-investors-2-companies-evading-taxes In the United States District Court for the District of Connecticut, Brian Hughes, 58, pled guilty to one count of wire fraud, one count of making an illegal monetary transaction, and one count of tax evasion; and he was sentenced to 30 months in prison plus three years of supervised release, and ordered to pay $2,991,880 in restitution. As alleged in part in the DOJ Release:
[I]n March 2015, Hughes founded Handcrafted Brands, LLC (“HCB”), for the purpose of raising money to purchase Salute American Vodka, (“Salute”) an alcoholic beverage company. Hughes subsequently solicited and received funds from dozens of investors ostensibly for the purchase and subsequent development of Salute. Hughes used the first investment he received, in the amount $150,000, to pay his taxes and his American Express credit card expenses. Although HCB purchased Salute in June 2016 for $450,000, Hughes continued to solicit investments from investors and used hundreds of thousands dollars in invested funds for expenses unrelated to Salute. He also used funds to pay off an earlier investor under the guise of a return on a prior investment made by the earlier investor, which is commonly known as a “lulling” payment.
Hughes also solicited investments purportedly on behalf of another company, which is identified in court documents as “Company-1.” In fact, Hughes had no official relationship with Company-1 and could not raise capital on its behalf. Hughes spent the money he received for this investment on personal expenses, to pay earlier investors, and on business related to Salute.
Finally, Hughes evaded the assessment of his tax obligations for the 2015 through 2018 tax years by substantially underreporting his income to the IRS, resulting in a tax loss of $470,880.
Central Florida Man Pleads Guilty To Committing Almost $20 Million In Fraud (DOJ Release) https://www.justice.gov/usao-mdfl/pr/central-florida-man-pleads-guilty-committing-almost-20-million-fraud In the United States District Court for the Middle District of Florida, Nikesh Ajay Patel pled guilty to one count of conspiracy to commit wire fraud, three counts of wire fraud, one count of conspiracy to commit money laundering, and eight counts of money laundering. As alleged in part in the DOJ Release:
[P]atel, a Central Florida resident, was charged in 2014 by the U.S. Attorney’s Office in the Northern District of Illinois for a $179 million fraud scheme. He was arrested and released on bond. For the next several years, Patel claimed that he was cooperating with authorities and using his business skills to get funds to repay some of what he owed. In fact, Patel had devised a new scheme that netted him almost $20 million.
Patel’s new fraud scheme involved three parts. First, Patel fabricated fraudulent loan documents that falsely represented that a bank in Miami had authorized loans to be made to convert hotels in rural areas into assisted living facilities. Although the bank in Miami exists, it had never made any of the loans. The person who was listed as signing the loans (“Ron Elias”) was a fictitious identity used by Patel to perpetrate his conspiracy and scheme. Second, Patel applied to the United States Department of Agriculture (USDA) to guarantee the fake loans pursuant to its Business and Industry Guaranteed Loan Program. Third, after the USDA agreed to guarantee the fake loans, Patel sold the guaranteed portion of the fake loans to the Federal Agricultural Mortgage Corporation, also known as Farmer Mac. Patel executed the scheme on three occasions, receiving almost $20 million in proceeds. Patel used a portion of the funds from that scheme to pay some of his restitution, but he was saving much of it to flee the United States.
Patel’s sentencing in the Northern District of Illinois was set for January 9, 2018. Three days before that, he was arrested at the airport in Kissimmee. Patel had chartered a flight to Ecuador, where he intended to request political asylum and live off the proceeds that he had obtained from his new scheme. Instead, Patel’s bond was revoked and the U.S. Marshals Service transported him to the Northern District of Illinois. On March 6, 2018, Patel was sentenced to 25 years in federal prison for his case in the Northern District of Illinois.
[I]n January 2022, the family of four arrived in Los Angeles, California, on Belgian passports and moved to Hawaii in or about September 2022. The indictment further alleges that, between October 2022 and February 2023, they solicited multiple persons in Hawaii to invest money, based on false promises that the money would be placed in high return investment contracts supposedly guaranteed by a mainland wealth management firm and its partner. HAITEM DHAENE represented he was a partner in the mainland firm, when, according to the indictment, he was not a partner, and the wealth management firm did not know about his claimed association or the purported investment contracts.
Among other things, the indictment alleges the defendants falsely claimed to have formed a private equity investment group; that they provided an investment contract promising a return of 315% per annum; and that the contract bore the name and forged signature of a mainland wealth advisor. As a result of these promises, various individuals gave the four defendants approximately $309,000, including $294,000 withdrawn from an individual’s 401k retirement account.
The Joint Claimants promptly provided significant information to another agency, which shared it with the Commission staff, alerting Commission staff to the fraudulent conduct, and prompting the opening of the investigation. Thereafter, the Joint Claimants submitted a TCR and provided continuing helpful assistance to the Commission staff, including meeting with them and providing additional important information and documents concerning their allegations.
Thank you, Beth [Zorc], for that introduction and thank you to the Institute of International Bankers for this opportunity to provide closing remarks to your 2023 Annual Washington Conference. For the last two days, you have been addressed by top U.S. financial regulators, including the chairman of the Federal Deposit Insurance Corporation, the acting Comptroller of the Currency, and the chairman of the Commodity Futures Trading Commission, on issues ranging from banking regulation, the economy, and financial crimes to cybersecurity, digital assets, and taxes. It is a privilege to close out your conference with thoughts on the capital markets. My remarks reflect solely my individual views as a Commissioner and do not necessarily reflect the views of the full U.S. Securities and Exchange Commission (SEC) or my fellow Commissioners.
The SEC’s current regulatory agenda is ambitious, with such an extensive list of proposals not seen since the 2008 financial crisis and the enactment of the Dodd-Frank Act. Many of these changes will impact portions of your operations that conduct business in the United States or provide services to U.S. citizens. The agenda’s sheer scale raises good questions on what securities regulators should focus on, and why.
I would like to share with you today my regulatory approach to the securities markets, which itself is drawn, of course, from the work of many others. There is a lot at stake here. Efficient capital formation can bring massive benefits to a nation. The promise of more efficiently allocated cross-border flows of capital resources into investment projects can result in superior risk/return tradeoffs and better portfolio diversification. It can also result in higher economic growth and increased prosperity.
In regulating the capital markets, one goal ought to be creating a set of rules and norms that offer investors a reasonable degree of well-founded confidence, not false confidence, that both the material risks and potential returns associated with their investments are disclosed. This goal is at the core of both investor protection and capital formation.
The notion that investor protection and capital formation are symbiotically related dates back to a famous economic paper published in 1970 by George Akerlof, entitled The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Professor Akerlof won the 2001 Nobel Prize for this seminal work, which highlights the manner in which asymmetries of information can undermine the powers of the market. In his article, he asks a simple question: why do new cars lose so much value the instant you drive them off of the lot? The explanation, he offered, was the asymmetry of information between the potential buyer and seller. If the new car turns out to have a lot of mechanical defects, we colloquially refer to it as a “lemon” in the United States. If someone has purchased a new car, and soon thereafter makes an attempt to sell it, a potential buyer is likely concerned that the car is a “lemon,” and, in light of this expectation, the buyer is likely to reduce how much he or she is willing to pay. Typically, a new car loses a substantial amount of its original market value. From an economic perspective, this is puzzling: it is the same car as it was a few moments before, with the same likelihood of delivering value across time, and yet we have this precipitous drop. As Professor Akerlof noted, this is due to the asymmetry of information—that is, the seller likely knows the quality of the item offered and the buyer does not.
In some instances, the Lemons Problem can result in the destruction of a market. If potential sellers with quality cars decide to refrain from the market—because they do not want to sell their car for less than its perceived worth—then the probability of purchasing a lemon among the remaining cars increases. This, in turn, leads to a higher discount demanded by buyers, which may result in a further removal of quality cars from the market, until this negative feedback loop effectively causes market failure.
The same Lemons Problem can apply to the securities markets. There may be honest firms with new entrepreneurial ideas trying to raise capital, but there are also bad actors who want to take the investors’ money and run. The firms raising capital know whether they are fraudsters, but potential investors do not. If the potential investors cannot discriminate between which firms are honest and which ones are frauds, then they will demand a higher return to compensate them for the risk they may be giving their money to a fraudster. From the entrepreneurs’ perspective, this increases the cost of capital.
As a rational person will not invest in a project unless the cost of capital is lower than the expected rate of return, an increase in cost of capital reduces investment in the economy, which lowers economic growth. If there are too many fraudsters in the securities markets, then the market may no longer be a viable means of raising capital. As the cost of capital increases through the presence of fraudsters, some honest entrepreneurs will withdraw from the market altogether, which will increase the likelihood of encountering a bad actor. As Professor Bernard Black explains: “Discounted share prices mean that an honest issuer can’t receive fair value for its shares, and has an incentive to use other forms of financing. But discounted prices won’t discourage dishonest issuers.”
The key to addressing the Lemons Problem is to remove a sufficient quantum of fraudsters from the market. This will lower the cost of capital, resulting in more investment, greater economic growth, and more prosperity.
Specifically, there are four essential investor fears that securities regulators must address if they are to overcome the Lemons Problem: first is the investor fear of being uninformed about the investment being offered; second is potential abuse by market intermediaries, as investors enter, participate in and exit from securities markets; third is the fear of inefficient market prices, including due to market manipulation and insider trading; and fourth is the fear of intermediary failures that may leave investors unable to access their wealth.
First, how does a jurisdiction ensure that investors can place some degree of confidence in the information from corporate issuers raising capital? There are five basic regulatory tools: (1) mandatory financial reporting, so investors know what to expect; (2) standardized accounting, so financial results can be compared; (3) auditing, so investors can have some assurance; (4) oversight of auditing, to ensure auditors are doing their jobs; and (5) effective enforcement, so the investors know that the bad actors are being filtered out and removed.
Second, regarding abuse by securities markets intermediaries, the list of harms is long, ranging from misleading statements to churning to front running to unauthorized trading and theft. Regulatory tools include: (1) registration requirements; (2) recordkeeping rules; (3) supervisory rules, so an entity can be held accountable for abuses by its agents; (4) disclosure rules; (5) rules prescribing specific types of conduct, such as sales practice, best execution, principal trading, and other obligations; and, finally, (6) regulatory examinations and enforcement.
The third fear is market abuses, including insider trading and market manipulation. Trading by insiders, or their “tipees,” on material non-public information is a “zero-sum game”; for every dollar an insider gains, or avoids losing, that is a dollar that an investor loses. If insiders are allowed to profit by trading on material non-public information, investors will avoid that market and drive up the cost of capital.
The same is true of market manipulation, which is conduct designed to deceive investors by controlling or artificially affecting the price of securities. There are many ways to engage in market manipulation, ranging from the promulgation of misleading statements to purposefully moving prices through the volume of trading, including via matched or so-called wash sales. The classic manipulation is the pump-and-dump. The regulatory toolset to prevent these activities is well known: antifraud rules, market surveillance, and effective enforcement.
The fourth fear is failures by intermediaries. Investors want access to their wealth. If a failure by a broker-dealer or exchange, for example, results in a multi-year bankruptcy process or other legal entanglements, they are not going to want to hold their wealth through that intermediary. If there are serious cyber-threats that might debilitate the market—again, investors will turn away. The regulatory tools in this space include transparency and disclosure, inspections and enforcement, business continuity planning, appropriate cyber safeguards, capital rules, margin requirements, rules governing custody of client assets, clearing-house rules, and circuit breakers.
The final essential ingredient of a healthy capital market is that the regulatory framework itself must be cost effective. If the regulatory burdens designed to address the Four Fears are excessively burdensome, and not justified by the benefits associated with those regulations, then the capital market will fail to live up to its potential in terms of economic growth and prosperity.
How do we assure cost effectiveness? Cost benefit analysis—both on a prospective and retrospective basis—is crucial. While such an analysis is hard to do—and there are many benefits, costs, and unintended consequences that are difficult to gauge accurately—laying out and presenting the costs and benefits, as best we can, results in a more efficient regulatory framework. Another important tool is the public comment process on rulemaking, so regulators can learn from interested persons. Of course, the public comment process only works as intended when industry participants and stakeholders have sufficient time to analyze a proposal. At the same time, regulators must be cognizant of effects on competition as a regulatory framework can unnecessarily increase market power, which may increase transactional costs and damage a market’s potential.
Globally, one needs to ask whether it is possible to effectively address the Lemons Problem across borders. Investors might be interested in diversifying their portfolio of investments beyond their home country, and gaining not only new investment opportunities, but also ones that are less correlated. However, they will not do so unless there is some degree of confidence that their investments will not be siphoned away by fraudsters. Thus, if we are to work across borders, we need agreements and often assistance from foreign regulatory authorities and they need that same assistance from us.
In the international context, there is the added complexity of different rule sets in different jurisdictions. Beyond the market failures induced by the Lemons Problem, this can introduce other elements that interfere with efficient capital formation. There are a number of areas that may benefit from attention and effort among securities regulators.
First, there should be cross-border clarity on regulatory scope as entities that might operate internationally need to know which rules apply to them and which do not. It is vitally important that regulators ensure that the legal perimeter and regulatory scoping are as clear and assessable as possible. Legal ambiguity can be the death of healthy cross-border activity.
Second, conflicts of law across jurisdictions need to be addressed. If the regulation in one jurisdiction says you must do X, and the regulation in a second jurisdiction says you may not do X, then you cannot lawfully operate across those jurisdictions. Some conflicts of law may even be relatively peripheral from a securities regulatory perspective, arising out of trade, competition, or privacy laws that are enforced by non-financial regulators.
Third, duplicative regulation increases the costs of cross-border securities activity without corresponding benefits if they address regulatory issues in an unnecessarily redundant manner. In order to permit a healthy flow of cross-border activities in financial markets, countries do not need to have exactly the same rule book. If one jurisdiction has a different regulatory approach to an issue, then, so long as the regulatory outcome is qualitatively comparable and transparent, a jurisdiction might choose to recognize the compliance of a foreign-based entity with another jurisdiction’s regulations as satisfactory, and thus ease restrictions on cross-border flows of activity associated therewith. This kind of regulatory collaboration goes by a number of different names—ranging from mutual recognition to substituted compliance.
Fourth is identifying gaps in a foreign regulatory framework that the home jurisdiction believes are of key importance. While a jurisdiction might choose to recognize some aspects of a foreign regulatory framework, it does not have to embrace the whole of that framework to facilitate cross-border activity. In other words, an all-or-nothing approach may not make sense in facilitating cross-border activity. Rather, there will be more success in lowering the cost of beneficial cross-border activity, while maintaining appropriate investor protection, if we embrace a more open-ended, evidence-based approach that examines the actual regulatory differences and similarities, as well as the pertinent compliance mechanisms.
One more thought: healthy competition among jurisdictions when crafting regulations is not necessarily a bad thing. Some argue that globalized capital markets run a risk of a regulatory “race to the bottom.” In other words, capital and market activity will flow to the jurisdictions with the lowest regulatory requirements, and, thus, flow to where there may be a higher degree of fraud to the detriment of investors. This line of argument forgets the Lemons Problem. If regulation is inadequate in a jurisdiction, the Lemons Problem suggests that the cost of capital will be higher than it would otherwise be. And who wants to raise capital in a jurisdiction where they have to pay a higher cost of capital? Indeed, the Lemons Problem suggests that healthy jurisdictional competition may result in a “race to optimality”—that is, there is likely to be more capital market activity in jurisdictions where there is cost-effective and high-quality regulation, including examination and enforcement.
The economic benefits to be gained from increased regulatory cooperation across borders that facilitates a more globalized capital market cannot be overstated. This goal becomes even more important among similarly-minded societies during times when the ideas of free enterprise, democracy, and personal liberty are under threat. However, this requires some degree of trust and resource-intensive collaboration among regulators across borders. The international entities represented in this organization are vital to informing such a process, and I look forward to continuing to learn from you.
 See SEC Agency Rule List, available at: https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST ¤tPub=true&agencyCode&showStage=active&agencyCd=3235
 For an excellent overview of the basic regulatory ingredients to building and maintaining a successful securities market, which I draw on, see, e.g., Ziven Scott Birdwell, The Key Elements for Developing A Securities Market To Drive Economic Growth: A Roadmap for Emerging Markets, Georgia Journal of International and Comparative Law (Spring 2011).
 Akerlof, George A., The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, Vol. 84, No. 3 (Aug. 1970).
 Bernard Black, The Core Institutions That Support Strong Securities Markets, 55 Bus. Law, 1567 (2000).
 John C. Coffee, Jr., Law and the Market: The Impact of Enforcement, 156 U. Pa. L. Rev. 229, 230 (2007) (“[H]igher enforcement intensity gives the U.S. economy a lower cost of capital and higher securities valuations”).
 See, e.g., Utpal Bhattacharya, Hazem Daouk, The World Price of Insider Trading, 57 J. Fin. 75 (2008) (after controlling for risk factors, a liquidity factor and shareholder rights, finds cost of equity is reduced by 5% through enforcement of insider trading laws).
 For a discussion of the evolution of this concept, see Howell E. Jackson, Substituted Compliance: The Emergence, Challenges, and Evolution of a New Regulatory Paradigm, Journal of Financial Regulation Vol. 1, Issue 2, pages 169-205 (2015). For an example of the application of the concept, see Rule 3a71-6 under the Securities Exchange Act of 1934 (“Exchange Act”) which permits the SEC to determine that registered non-U.S. major security-based swap participants may satisfy certain requirements promulgated under Exchange Act section 15F by complying with comparable non-U.S. requirements.
= = = 3/6/2023
Blackbook Capital Versus FINRA: A Decade of Battle (BrokeAndBroker.com Blog) https://www.brokeandbroker.com/6913/blackbook-finra-dnj-sec/ Way way back in 2014, a FINRA member firm entered into an Acceptance, Waiver and Consent regulatory settlement involving alleged misconduct in 2010 and 2011. By 2016, the firm seemed to have run into some difficulties and FINRA expelled it. Down but apparently not out, the expelled member firm sued FINRA in federal court in 2019. In 2020, the expelled firm petitioned the Securities and Exchange Commission with discrimination allegations against FINRA. In 2021, the court dismissed the lawsuit. In 2023, the SEC dismissed the application for review. So much for that last decade. What's next? Who knows -- let's just wait and see.
[I]n July 2011, Rio Tinto hired a French investment banker and close friend of a former senior Guinean government official as a consultant to help the company retain its mining rights in the Simandou mountain region in Guinea. The consultant began working on behalf of Rio Tinto without a written agreement defining the scope of his services or deliverables. Eventually the mining rights were retained, and the consultant was paid $10.5 million for his services, which Rio Tinto never verified. The SEC’s investigation uncovered that the consultant, acting as Rio Tinto’s agent, offered and attempted to make an improper payment of at least $822,000 to a Guinean government official in connection with the consultant’s efforts to help Rio Tinto retain its mining rights. Furthermore, none of the payments to the consultant was accurately reflected in Rio Tinto’s books and records, and the company failed to have sufficient internal accounting controls in place to detect or prevent the misconduct. The mine has not been developed by Rio Tinto.
[A]t all relevant times, the Company operated a number of gaming brands, including the PokerStars online poker website. The order finds that between May 26, 2015 and May 15, 2020, while the Company's shares were registered with the SEC, the Company paid approximately $8.9 million to consultants in Russia in support of the Company's operations and its efforts to have poker legalized in that country. The SEC's order further finds that, during this time period, the Company failed to both devise and maintain a sufficient system of internal accounting controls over its operations in Russia with respect to third-party consultants, and to consistently make and keep accurate books and records regarding its consultant payments in Russia. According to the order, contemporaneous emails indicate that those payments covered, among other things, (i) reimbursement for New Year's gifts to individuals including Russian government officials, which relevant Company policies prohibited, and (ii) reimbursement of a consultant's payments to Roskomnadzor, the Russian state agency responsible for administering internet censorship filters.
[F]rom at least October 2018 through September 2022, BKCoin raised approximately $100 million from at least 55 investors to invest in crypto assets, but BKCoin and Kang instead used some of the money to make Ponzi-like payments and for personal use.
According to the SEC’s complaint, filed under seal on February 23, 2023, and unsealed today, BKCoin and Kang assured investors that their money would be used primarily to trade crypto assets and represented that BKCoin would generate returns for investors through separately managed accounts and five private funds. As the complaint alleges, the defendants disregarded the structure of the funds, commingled investor assets, and used more than $3.6 million to make Ponzi-like payments to fund investors. The complaint also alleges that Kang misappropriated at least $371,000 of investor money to, among other things, pay for vacations, sporting events tickets, and a New York City apartment. According to the complaint, Kang attempted to conceal the unauthorized use of investor money by providing altered documents with inflated bank account balances to the third-party administrator for certain of the funds. The complaint further alleges that BKCoin materially misrepresented to some investors that BKCoin, or one of the funds, received an audit opinion from a “top four auditor,” when in fact neither BKCoin nor any of the funds received an audit opinion at any time.
FINRA Fines and Suspends Rep For Receiving Unemployment Benefits In the Matter of Joseph Louis Menotti, Respondent (FINRA AWC 2022075173701) https://www.finra.org/sites/default/files/fda_documents/2022075173701 %20Joseph%20Louis%20Menotti%20CRD%207089872%20AWC%20gg.pdf For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Joseph Louis Menotti submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joseph Louis Menotti was first registered in. In accordance with the terms of the AWC, FINRA imposed upon Joseph Louis Menotti a $10,000 fine and a nine-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:
In 2020, as a result of the COVID-19 pandemic, the federal government established Pandemic Unemployment Assistance (PUA) for individuals who were ineligible for regular unemployment benefits and were unable to work due to the pandemic. The PUA program generally prohibited PUA benefits to individuals who were teleworking with pay.
In May 2020, Menotti applied for PUA benefits through the Michigan Unemployment Insurance Agency (Michigan UIA), despite the fact that he was earning a salary while teleworking.
Between May and July 2020, Menotti submitted 18 certifications claiming PUA benefits for each week from March 8, 2020, through July 11, 2020. In each certification, Menotti recklessly misrepresented that he did not work full time during the week he requested benefits. In 17 certifications, Menotti also recklessly misrepresented that he did not "do any type of work" or "have any earnings" during the week he requested benefits. In fact, during this period, Menotti was employed full-time by Edward Jones as a registered representative and received a salary.
Based on Menotti's misrepresentations, the Michigan UIA approved Menotti's application for PUA benefits. Menotti received more than $11,000 in PUA benefits to which he was not entitled. Menotti has repaid $1,570 to the Michigan UIA.
In April 2022, Edward Jones commenced an investigation of Menotti's receipt of PUA benefits and terminated Menotti's employment in May 2022. The Michigan UIA also determined that Menotti had not been eligible to receive PUA benefits and that he was improperly paid more than $11,000 in benefits.
Based on the foregoing, Menotti violated FINRA Rule 2010.
FINRA Arbitration Panel Dismisses Something Involving Something Against Wells Fargo by Prominent Whistleblower Analyst In the Matter of the Arbitration Between David William Maris, Claimant, v. Wells Fargo Securities, LLC, Respondent (FINRA Arbitration Award 20-03466) https://www.finra.org/sites/default/files/aao_documents/20-03466.pdf In a FINRA Arbitration Statement of Claim filed in October 2020, associated person Claimant Maris asserted "breach of contract, breach of implied contract, quantum meruit-unjust enrichment, promissory estoppel, and violation of Whistleblower Protection under Dodd-Frank." Claimant sought at least $1.4 million in compensatory damages, at least $2 million back-pay, interest, costs, and fees.The FINRA Award asserts that at the "hearing, Claimant added a claim for damages for retention of Claimant’s Models." Respondent Wells Fargo generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel denied Claimant's request for monetary damages but ordered Respondent Wells Fargo to return to Claimant Maris "as promised" the referenced "Claimant's Models."
Bill Singer's Comment: Ummm . . . what the hell was that about?
Oddly, painfully, in prose that seems oh-so-carefully chosen, the FINRA Panel "denied" "Claimant's request for monetary damages . . . [and] Any and all claims for relief not specifically addressed herein . . ." It's nice that the arbitrators opted not to award any monetary damages but, y'know, like maybe, if y'all got nothin' else pressin', you might just take a sec here and tell us what happened to the substantive claims made by Maris? I mean, seriously, what claims of his did you dismiss and why? Further exacerbating any understanding of what was and was not dismissed, we have this in the Award:
On February 10, 2021, Respondent filed a Motion to Dismiss Count Five (violation of Whistleblower Protection under Dodd-Frank) of Claimant’s Statement of Claim pursuant to Rule 13504(a)(6)(A) of the Code of Arbitration Procedure (“Code”) (“Motion to Dismiss”). On March 29, 2021, Claimant filed a Response opposing the Motion to Dismiss. The parties waived the requirement to hold a hearing on the Motion to Dismiss. On April 23, 2021, the Panel’s Order granting the Motion to Dismiss was served on the parties.
So . . . in April 2021, the Panel dismissed the Whistleblower Protection count and, here we are, almost two years later, and what exactly was left of the case and how/why did the arbitrators adjudicate as they did? Hey, don't ask me. I have no damn idea because the Award is as terse and non-substantive as could be.
As of March 6, 2023, FINRA's online BrokerCheck discloses that Maris was first registered in 1996 but seems to have ceased being registered upon his January 2020 departure from Wells Fargo Securities. BrokerCheck indicates that since 2013, Maris was employed as an "Analyst:" and, notably, he has no disclosures on the online FINRA database.
Although there is no reference in the FINRA Award or BrokerCheck beyond what is noted above, see: