Securities Industry Commentator by Bill Singer Esq

FINRA Fines Robinhood Financial, LLC $1.25 Million for Best Execution Violations (FINRA Release)

Courts Rebuke FINRA and Public Customer Over Arbitration of Settled Dispute (BrokeAndBroker.com Blog)

CFTC Awards More Than $1 Million to Whistleblower (CFTC Release)

IN RE: TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION (Opinion, 2Cir)

Federal Court Questions Basis of Appeal. FIRST CAPITAL REAL ESTATE INVESTMENTS, LLC, Petitioner-Appellant, v. SDDCO BROKERAGE ADVISORS, LLC, Respondent-Appellee, and FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Respondent (Order, 2Cir)

SEC Charges Recidivist Investment Adviser With Defrauding Retirees (SEC Release)

FINRA NAC Affirms OHO Wilson-Davis Findings But Reduces Sanctions. In the Matter of Department of Enforcement, Complainant, vs.Wilson-Davis & Co., Inc., James C. Snow, and Byron B. Barkley, Respondents (FINRA NAC Decision)

Lithuanian Man Sentenced To 5 Years In Prison For Theft Of Over $120 Million In Fraudulent Business Email Compromise Scheme (DOJ Release)

C.E.O. And Founder Of Cash Flow Partners Charged With Multimillion-Dollar Bank Fraud And Securities Fraud Scheme (DOJ Release)

SEC Files Charges in Ponzi Scheme Targeting Hispanic Community (SEC Release)

FINRA Fines and Suspends Rep for False Customer Contact Entries Designed to Boost Compensation. In the Matter of Jonathan Gerald Schnell, Respondent (FINRA AWC 2018057786401)

FINRA found that for more than a year, Robinhood-which offers its customers the ability to trade in equity securities without being charged commissions-routed its customers' non-directed equity orders to four broker-dealers, all of which paid Robinhood for that order flow. This arrangement is known in the brokerage industry as payment for order flow.

FINRA Rule 5310-Best Execution-requires firms to use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. FINRA member firms that route customer orders away for execution can satisfy their best execution obligations by conducting either an order-by-order review of execution quality or a "regular and rigorous review." FINRA Rule 5310 enumerates a number of criteria for firms to evaluate in these reviews. During its reviews, Robinhood did not reasonably consider the Rule 5310 execution quality factors (such as price improvement) that the firm could obtain from alternative markets. Instead, Robinhood's Best Execution Committee materials focused only on the execution quality of its pre-existing routing destinations, all of which paid Robinhood for that order flow. 

In addition, the firm did not perform systematic best execution reviews of several order types, such as nonmarketable limit orders, stop orders, and orders received outside of regular trading hours. Accordingly, hundreds of thousands of orders each month fell outside the firm's "regular and rigorous" review process. 

In addition, Robinhood's supervisory system was not reasonably designed to achieve compliance with its best execution obligations. The firm's supervisory system disregarded several order types and factors to be considered in conducting its best execution reviews. Further, the firm's written supervisory procedures concerning best execution and its "regular and rigorous" reviews merely recited the regulatory requirements. They provided no description of the firm's supervisory system or guidance as to how it should supervise to achieve compliance with those requirements.

This award is significant because it recognizes that whistleblowers are eligible to receive an award for 1) being the original source of information the CFTC receives from another regulator, or 2) a tip that leads to evidence of a violation the CFTC ultimately charges, even if the reported conduct itself does not form the basis for those charges.

NOTE HOLDERS, Deutsche Bank Trust Company Americas, Law Debenture Trust Company of New York, Wilmington Trust Company, INDIVIDUAL RETIREES, William A. Niese, on behalf of a putative class of Tribune Company retirees, Plaintiffs-Appellants-Cross-Appellees, 

MARK S. KIRSCHNER, as Litigation Trustee for the Tribune Litigation Trust, Plaintiff, 

TENDERING PHONES HOLDERS, Citadel Equity Fund Ltd., Camden Asset Management LLP and certain of their affiliates, Plaintiffs-Intervenors, 

v.

LARGE PRIVATE BENEFICIAL OWNERS, FINANCIAL INSTITUTION HOLDERS, FINANCIAL INSTITUTION CONDUITS, Merrill Lynch, Pierce, Fenner & Smith, Inc., on behalf of a putative class of former Tribune Company shareholders, PENSION FUNDS, including public, private, and Taft Hartley Funds, INDIVIDUAL BENEFICIAL OWNERS, Mario J. Gabelli, on behalf of a putative class of former Tribune Company shareholders, MUTUAL FUNDS, AT LARGE, ESTATE OF KAREN BABCOCK, PHILLIP S. BABCOCK, DOUGLAS BABCOCK, DEFENDANTS LISTED ON EXHIBIT B, Defendants-Appellees-Cross-Appellants, 

CURRENT AND FORMER DIRECTORS AND OFFICERS, Betsy D. Holden, Christopher Reyes, Dudley S. Taft, Enrique Hernandez, Jr., Miles D. White, Robert S. Morrison, William A. Osborn, Harry Amsden, Stephen D. Carver, Dennis J. FitzSimons, Robert Gremillion, Donald C. Grenesko, David Dean Hiller, Timothy J. Landon, Thomas D. Leach, Luis E. Le, Mark Hianik, Irving Quimby, Crane Kenney, Chandler Bigelow, Daniel Kazan, Timothy Knight, Thomas Finke, SAM ZELL AND AFFILIATED ENTITIES, EGI-TRB, LLC, Equity Group Investments, LLC, Sam Investment Trust, Samuel Zell, Tower CH, LLC, Tower DC, LLC, Tower DL, LLC, Tower EH, LLC, Tower Gr, LARGE SHAREHOLDERS, Chandler Trusts and their representatives, FINANCIAL ADVISORS, Valuation Research Corporation, Duff & Phelps, LLC, Morgan Stanley & Co. Inc. and Morgan Stanley Capital Services, Inc., GreatBanc Trust Company, Citigroup Global Markets, Inc., CA PUBLIC EMPLOYEE RETIREMENT SYSTEM, CALPERS, UNIVERSITY OF CA REGENTS, T. ROWE PRICE ASSOCIATES, INC., MORGAN KEEGAN & COMPANY, INC., NTCA, DIOCESE OF TRENTON-PENSION FUND, FIRST ENERGY SERVICE COMPANY, MARYLAND STATE RETIREMENT AND PENSION SYSTEM, T BANK LCV QP, T BANK-LCV-PT, JAPAN POST INSURANCE, CO., LTD., SERVANTS OF RELIEF FOR INCURABLE CANCER (AKA DOMINICAN SISTERS OF HAWTHORNE), NEW LIFE INTERNATIONAL, NEW LIFE INTERNATIONAL TRUST, SALVATION ARMY, SOUTHERN TERRITORIAL HEADQUARTERS, CITY OF PHILADELPHIA EMPLOYEES, OHIO CARPENTERS' MIDCAP (AKA OHIO CARPENTERS' PENSION FUND), TILDEN H. EDWARDS, JR., MALLOY AND EVANS, INC., BEDFORD OAK PARTNERS, LP, DUFF AND PHELPS LLC, DURHAM J. MONSMA, CERTAIN TAG-ALONG DEFENDANTS, MICHAEL S. MEADOWS, WIRTZ CORPORATION, Defendants

Representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company appeal from Judge Sullivan's grant of a motion to dismiss their state law, constructive fraudulent conveyance claims brought against Tribune's former shareholders. Appellants seek to recover an amount sufficient to satisfy Tribune's debts to them by avoiding (recovering) payments by Tribune to shareholders that purchased all of its stock. The payments occurred in a transaction commonly called a leveraged buyout ("LBO"),¹ soon after which Tribune went into Chapter 11 bankruptcy. Appellants appeal the district court's dismissal for lack of statutory standing, and appellees cross-appeal from the district court's rejection of their argument that appellants' claims are preempted.² 

We address two issues: (i) whether appellants are barred by the Bankruptcy Code's automatic stay provision from bringing state law, constructive fraudulent conveyance claims while avoidance proceedings against the same transfers brought by a party exercising the powers of a bankruptcy trustee on an intentional fraud theory are ongoing; and (ii) if not, whether the creditors' state law, constructive fraudulent conveyance claims are preempted by Bankruptcy Code Section 546(e). 

On issue (i), we hold that appellants are not barred by the Code's automatic stay because they have been freed from its restrictions by orders of the bankruptcy court and by the debtors' confirmed reorganization plan. On issue (ii), the subject of appellees' cross-appeal, we hold that appellants' claims are preempted by Section 546(e). That Section shields certain transactions from a bankruptcy trustee's avoidance powers, including, inter alia, transfers by or to a financial institution in connection with a securities contract, except through an intentional fraudulent conveyance claim.³ 

We therefore affirm.

= = = = =

Footnote 1: In a typical LBO, a target company is acquired with a significant portion of the purchase price being paid through a loan secured by the target company's assets. 

Footnote 2:  Because the issue has no effect on our disposition of this matter, we do not pause to consider whether a cross-appeal was necessary for appellees to raise the preemption issues in this court, but, for convenience purposes, we sometimes refer to those issues by the term crossappeal.

Footnote 3: As discussed infra, after we previously issued an opinion in this appeal, In re Tribune Co. Fraudulent Conveyance Litig. ("Tribune I"), 818 F.3d 98 (2d Cir. 2016), the Supreme Court clarified the test for determining whether a transaction falls within Section 546(e), see Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), causing us to recall the mandate and issue this amended opinion.

First Capital argues on appeal that the District Court's opinion and order failed to address First Capital's argument that a member of the arbitration panel had not been properly selected pursuant to the arbitration agreement, requiring vacatur of the award. The District Court stated specifically that it had "considered all of the arguments raised by the parties" and that as to any arguments "not specifically addressed, the arguments are either moot or without merit." App'x 72. Furthermore, as noted by First Capital, the District Court's opinion adopted SDDCO's contention that First Capital waived its objection to the arbitrator in question by failing to seek disqualification before the arbitration began. See Appellant's Br. at 4; App'x 9-10. Because the District Court addressed the issue of waiver in SDDCO's favor, the question of whether the panel was improperly formed was thereby mooted. Accordingly, based on the record before us, we cannot conclude that the District Court improperly failed to address or consider First Capital's argument, whether unintentionally or otherwise. Our cursory note in Schonfeld v. Hilliard, as cited by both parties, does not require a different result. See 218 F.3d 164, 184 (2d Cir. 2000). 

Indeed, we question whether this issue is properly raised on appeal-if First Capital genuinely believed that the District Court overlooked one of its arguments, it did not attempt to bring the matter to the District Court's attention through a motion for reconsideration. See Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995) (noting that a party may prevail on a motion for reconsideration if it is able to "point to controlling decisions or data that the court overlooked  . . . that might reasonably be expected to alter the conclusion reached by the court"). 

The SEC's complaint alleges that Springer and SFA received millions of dollars in undisclosed compensation and other benefits for recommending certain investment products while claiming that they did not have any conflicts of interest. According to the complaint, many clients learned of Springer through his radio show, "Smart Money with Keith Springer," and Springer misled prospective clients into believing he was selected to host the show because of his industry expertise. In reality, SFA paid to broadcast the show. The SEC's complaint further alleges that Springer went to great lengths to hide prior charges by the SEC and his disciplinary history with the New York Stock Exchange, hiring internet search suppression consultants and instructing employees not to provide the information to prospective clients.

Respondent Wilson-Davis & Co. is fined $1,170,000 and ordered to disgorge $51,624 for improper short sales. For its failure to supervise and implement adequate AML procedures, Wilson-Davis is fined an additional $300,000, while Respondents James Snow and Byron Barkley are fined $140,000 and $115,000, respectively, and both are suspended for one year and ordered to requalify before re-entering the industry

For its unlawful short sales in violation of Rule 203 of Reg SHO, Wilson-Davis is fined $350,000 and ordered to disgorge $51,624, plus prejudgment interest.49For its failures to supervise and implement adequate AML procedures in violation of NASD Rule 3010 and FINRA Rules 3310 and 2010, Wilson-Davis is fined an additional $750,000 and directed to retain an independent consultant as detailed above. 

For his failures to supervise and implement adequate AML procedures in violation of NASD Rule 3010 and FINRA Rules 3310 and 2010, Snow is fined $77,000, suspended in all capacities for three months and in his principal and supervisory capacities for one year, to be served concurrently, and ordered to requalify as a principal by examination before acting in that capacity again. 

For his failure to supervise the short sales in violation of NASD Rule 3010 and FINRA Rule 2010, Barkley is fined $52,000, suspended in all capacities for three months and in his principal and supervisory capacities for one year, to be served concurrently, and ordered to requalify as a principal by examination before acting in that capacity again. We affirm the joint and several imposition of $13,443.39 in hearing costs. . .

We agree with the Hearing Panel that there are several aggravating factors reflected in Wilson-Davis's misconduct that render the violations egregious. Wilson-Davis acted recklessly. The firm's misconduct involved 122 trades over a period of close to a year. The short sales also resulted in monetary gain for the firm and affected other market participants.

However, we disagree that the misconduct at issue here was so egregious as to warrant the fine imposed by the Hearing Panel. The Hearing Panel provides no basis, nor does the record support, a fine so far in excess of the Guidelines. See ACAP Fin., Inc. v. SEC, 783 F.3d 763,769 (10th Cir. 2015) (noting several balancing factors that are considered when "fashioning a remedial sanction," including the seriousness of the offense); Dep't of Mkt. Regulation v. Kresge, Complaint No. CMS030182, 2008 FINRA Discip. LEXIS 46, at *35 n.32 (FINRA NAC Oct. 9, 2008) ("Whether a sanction is punitive or remedial . . . depends on the facts and circumstances of the case."); see generally Guidelines, at 7 (listing factors that should be considered in determining appropriate sanctions with respect to all violations). Both the Hearing Panel and Enforcement state that Wilson-Davis made tens of millions of dollars in profits from Kerrigone's short selling, but this contention is not supported by record. In fact, Wilson-Davis made just in excess of $50,000 on three of the four stocks-profits we are ordering be disgorged -and suffered losses in excess of $4.2 million on Kerrigone's LOTE trading. 

Finally, while we decline to calculate the fine on a "per trade" basis as the Hearing Panel did, we do agree that a significant fine is warranted in excess of the recommended ranges. Thus, we believe, on balance, that a fine of $350,000 for the firm's violation of Reg SHO is appropriately remedial. 

[T]IAA employed a program designed to encourage its registered representatives to develop new customers or expand the services provided to the Firm's existing customers. Pursuant to the program, Schnell received credit toward incentive compensation for certain customer interactions, such as meetings, and for delivering certain documents to customers. In order to receive credit, Schnell was required to enter the program actions he took, and the dates they occurred, in the record-keeping systems TIAA used to collect customer information and record meetings and correspondence with Firm customers ("UD/S"). 

Schnell made 37 false entries in UD/S. 35 of the entries falsely stated that Schell delivered certain financial planning documents to customers when he did not, and two entries falsely stated that Schnell conducted meetings with customers, when he had not. Schnell made the false entries knowing that they generated credits which factored into the calculation of his incentive compensation. 

By virtue of the foregoing, Schnell violated FINRA Rule 2010. 

• Securities Industry Commentator
• Bill Singer