The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

July 28, 2020


Venture Investors Double Their Bets on Faux Meat Startups / Early stage investors back over 20 alternative protein startups with hopes of finding the next Beyond Meat.(Bloomberg by Emily Chasan)



http://www.brokeandbroker.com/5340/FINRA-Feitelberg-8210/
FINRA asked for a respondent's cooperation in an investigation about allegedly undisclosed tax liens. Then FINRA waited. And waited. Then it asked again but with a bit more oomph. But, still, all that occurred was non-compliance from the other end. And so the failed cooperation became a suspension and then a Bar. Lo and behold, the respondent informs FINRA that he had been hospitalized and never got its demands. At that point, FINRA shrugged and said it's too late. Which propelled the matter to the SEC. 

Advisor's "LOL" Text Messages to Client Spell Trouble (Wealthmanagement.com by Asia Martin)
https://www.wealthmanagement.com/news/advisor-s-lol-text-messages-client-spell-trouble
Wealthmanagement's Martin tells the tale of Brian Doench who was accused by a client of mismanaging his IRA by, among other things, short-term trading of pennystocks. As Martin reports in part:

What made matters potentially worse were a series of text messages allegedly from Doench to the client that included language such as "lol" and "hahaha" when referring to the IRA. McCaigue listed a handful of these text messages in a suit filed . . .

Florida Man who Used COVID-Relief Funds to Purchase Lamborghini Sports Car Charged in Miami Federal Court (DOJ Release)
https://www.justice.gov/opa/pr/florida-man-who-used-covid-relief-funds-purchase-lamborghini-sports-car-charged-miami-federal
In a criminal Complaint filed in the United States District Court for the Southern District of Florida
https://www.justice.gov/opa/press-release/file/1298186/download, 
David T. Hines, 29, was charged with one count of bank fraud, one count of making false statements to a financial institution and one count of engaging in transactions in unlawful proceeds. Allegedly, Hines fraudulently obtained $3.9 million in Paycheck Protection Program ("PPP") loans. As alleged in part in the DOJ Release:

[H]ines sought approximately $13.5 million in PPP loans through applications to an insured financial institution on behalf of different companies.  The complaint alleges that Hines caused to be submitted fraudulent loan applications that made numerous false and misleading statements about the companies' respective payroll expenses.  The financial institution approved and funded approximately $3.9 million in loans.

The complaint further alleges that within days of receiving the PPP funds, Hines purchased a 2020 Lamborghini Huracan sports car for approximately $318,000, which he registered jointly in his name and the name of one of his companies.  In the days and weeks following the disbursement of PPP funds, the complaint alleges that Hines did not make payroll payments that he claimed on his loan applications.  He did, however, make purchases at luxury retailers and resorts in Miami Beach.

Ed Yardeni says investors might be 'delusional; and the market is primed for a pullback (CNBC by Jesse Pound)
https://www.cnbc.com/2020/07/27/ed-yardeni-says-investors-might-be-delusional-and-the-market-is-primed-for-a-pullback.html
Yet again, another example of media outlets stretching to find something, anything to write about when the news is slow and about the only thing going on of note is COVID. Not that I blame CNBC but, c'mon, sometimes it's okay to sit quietly and contemplate your navel. As Securities Industry Commentator readers know, I'm a bit of an agnostic when it comes to predicting market direction. I thinks its nonsense. I think pundits too often talk their books. As to those "delusional" bullish investors, let's see -- where was the Dow Jones Industrial Average on, say, March 23, 2020? The Dow closed that day at 19,173.98. And, hmmm, where is it now? As I'm writing this story, the Dow is about 25,540. So, lemme see here, 25,540 minus 19,173.98? That comes out to 6,366.02, which works out to about a 33% increase during the last four months! That's one helluva a delusion Mr. Yardeni! It's also been one huge wall of worry that we've climbed the last four months, and, hey, who knows, ya may be right about how we're primed for a pullback. Frankly, I'm inclined to agree with you but for the fact that I would have been agreeing with you since March 23rd.

Venture Investors Double Their Bets on Faux Meat Startups / Early stage investors back over 20 alternative protein startups with hopes of finding the next Beyond Meat (Bloomberg by Emily Chasan)
https://www.bloomberg.com/news/articles/2020-07-27/venture-investors-double-their-bets-on-faux-meat-startups?srnd=premium
The kind of stuff that I love. In an interesting look into the developing faux meat industry, Bloombergs' Chasan reports in part that:

The venture investors backing this space range from companies like Cargill Inc. and General Mills Inc. to pension funds, traditional venture capital firms  and celebrities like Bill Gates and Oprah Winfrey. As a group, they are betting that faux meat and dairy can scale up production quickly to meet a new generation of climate-conscious eaters that want to reduce the impact of livestock on the planet, according to Marisa Drew, head of the impact advisory and finance group at Credit Suisse Group AG.  Plant-based and cell-based meat require a fraction of the water and energy used to manage livestock, but companies also have to invest heavily in marketing and technology to help replicate the look of a hamburger or the texture of seafood.

Commissioner enters order against Georgetown promoter of fraudulent medical investment (TSSB Order)
https://www.ssb.state.tx.us/news-publications/commissioner-enters-order-against-georgetown-promoter-fraudulent-medical
The Texas State Securities Board entered an Order https://www.ssb.texas.gov/sites/default/files/files/news/ENF_20_CDO_1815.p after the matter was litigated at the State Office of Administrative Hearings naming Randall "Randy" Johnson and his businesses Recovery management International and Advanced Wellness Services, LLC, d/b/a "WellnessTech HealthTM." The Order found that Johnson engaged in an illegal and fraudulent offering of investments tied to medical devices, and that he engaged in a scheme to obstruct the investigation,  As alleged in part in the TSSB Release:

Advanced Wellness was the "exclusive distributor" of medical devices referred to as WellnessTech Systems.  Advanced Wellness and Johnson touted WellnessTech Systems, claiming they are "the most advanced early screening system for use by Primary Care physicians."  The WellnessTech Systems purportedly permitted physicians to test patients of critical risk factors in a "10-minute, non-invasive test."  Johnson claimed physicians would test patients for these critical risk factors during annual appointments. 

Advanced Wellness and Johnson began offering investments in the WellnessTech Systems to Texas residents.  They were afforded the opportunity to invest $50,000 in the scheme.  After purchasing an investment, Johnson claimed the WellnessTech Systems would be placed with physicians, and the physicians would be trained to use the products to test their patients.  Investors were passive and not responsible for managing or servicing the WellnessTech Systems or billing for their use. 

The pitch promised lucrative returns.  Johnson promised investors a return of 20 percent of their investment per year over a term of two years, paid on a monthly basis.  He also promised Advanced Wellness would pay $5.00 to investors whenever a physician used the WellnessTech System to test a patient and predicted the aggregate payment of these returns could yield an additional profit of $15,000 to $18,000 per year over a term of five years. 

The Enforcement Division began investigating the scheme and determined that Advanced Wellness and Johnson were engaging in an illegal securities offering.  The Enforcement Division directed Johnson to cease and desist offering the investment.  Johnson thereafter promised to cease and desist offering the investments.  His promise was a sham.  On the same day Respondent Johnson met with the Enforcement Division, Advanced Wellness and Johnson again illegally offered investments in the WellnessTech System.  Commissioner Iles then entered an emergency cease and desist order to stop the scheme.

Johnson concealed significant information from potential investors, including information relating to the considerable risks associated with the WellnessTech Systems and the ability of Respondent Advanced Wellness to actually satisfy its promised payment of returns. 

https://www.cftc.gov/PressRoom/PressReleases/8213-20
The CFTC awarded about $9 million (one of the five largest awards from its Whistleblower Program) to a whistleblower whose specific, credible, and timely tip led the Commission to open an investigation and ultimately bring a successful enforcement action. Little substantive information about the underlying matter is provided via the CFTC Release or the Order. https://whistleblower.gov/sites/whistleblower/files/2020-07/No.%2020-WB-08.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, J K R & Company, Inc submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that The J K R & Company, Inc has been a FINRA member firm since 1979 with two registered representatives and two branches. The AWC alleges that J K R & Company, Inc " does not have any relevant disciplinary history with the United States Securities and Exchange Commission (SEC), any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Enterprise violated violated FINRA Rules 3310(a) and 2010; and the self regulator imposed upon the firm a Censure and a $5,000 fine. the firm agreed to undertake to have a Principal certify to FINRA within 90 days that it has established compliant AML systems and procedures. As alleged in "Overview" of the AWC:

During a sales practice examination of JKR, FINRA staff discovered that between November 2012 and December 2016 (the "relevant period"), JKR failed to detect red flags of suspicious activity in four related accounts. These red flags included: common ownership of multiple accounts without an apparent business purpose for multiple accounts; one account owner with significant disciplinary history related to securities fraud; potentially manipulative trading activity, unusual transfer activity between related accounts that was inconsistent with expected activity in such accounts and without an apparent business purpose; and unexplained third-party wire transfers that were inconsistent with expected account activity. By failing to detect these red flags, investigate them, and report the activities as required, the firm violated FINRA Rules 3310(a) and 2010.

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, The Enterprise Securities Company submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that The Enterprise Securities Company has been a FINRA member firm since 1990 with seven registered representatives and one branch. The AWC alleges that The Enterprise Securities Company "does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Enterprise violated the Securities Exchange Act Rule 15c2-4, willfully violated SEA Rule 10b-9, and, thereby, violated FINRA Rule 2010; and the self regulator imposed upon the firm a Censure and a $15,000 fine. As alleged in part in the AWC:

In early 2018, Enterprise became the placement agent for the TMGH offering, through which the issuer sought to raise $15 million for investment in two separate university housing complexes. At this time, Enterprise operated with a $5,000 minimum net capital requirement. The private placement memorandum ("PPM") for the TMGH offering was dated February 15, 2018, and required that a minimum of $4 million in investor funds be raised by March 10, 2018. The PPM further provided that, if the $4 million minimum amount was not raised as of that specified date, all funds would be returned to investors without interest or deduction.

Enterprise began raising funds shortly after the commencement of the offering. When Enterprise received those funds, the Firm immediately transferred them to an account controlled directly by TMGH rather than to a bank acting as the escrow agent. By the March 10, 2018 date specified in the PPM, Enterprise had only raised approximately $1 million, short of the $4 million minimum contingency required by the PPM. Enterprise did not return investor funds at that time, but rather continued to solicit investors for the TMGH offering. By June 7, 2018, Enterprise had raised an additional $4 million of investor funds for that offering.   

Note that the AWC contains this paragraph:

The Firm understands that this settlement includes a finding that it willfully violated SEA Rule 10b-9 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, 
this makes the Firm subject to a statutory disqualification with respect to membership. 

Respondent Enterprise attached to the AWC the following "Corrective Action Statement," which in part states [Ed: footnotes omitted]:

The Enterprise Securities Company ("TESC") submits this Statement of Corrective Action (this "Statement") with the foregoing Letter of Acceptance, Waiver and Consent ("AWC") to describe the steps it has taken during the review period and since the review to correct and substantially reduce the risk of issues identified in the AWC from occurring. This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff. The AWC relates to a direct placement of securities in a "best efforts contingency offering" between February and June of 2018. TESC failed to deposit investor funds into an escrow account and failed to return investor funds after the minimum contingency was not met. 

CORRECTIVE ACTION

The offering at issue stated that the securities, "...[were] being sold on a reasonable 'best efforts' basis...." The investor funds were deposited directly into the Issuer's account. The offering documents stated that if the Issuer did not raise a minimum amount by the closing date set forth therein, the investor funds would be returned. TESC has set up the following internal controls and procedures on all future direct placements: 

Offering Exempt from Registration (Contingency Offering Review). 

Prior to the submission of any private placement offering to FINRA pursuant to its obligations under Rule 5123, the company shall submit the offering documents to its counsel or outside compliance agency to assess whether the offering constitutes a contingency offering under SEA Rule 15c2-4 (a "Contingency Offering"). If the company concludes that the offering is a Contingency Offering, and that it will receive money or consideration from an investor in a contingency offering, then the company must promptly transmit those funds to a bank that has agreed in writing to act as the escrow agent for the offering. SEC staff has interpreted "promptly" to mean by noon of the next business day. The company's responsibility does not end when it promptly transmits funds to an escrow agent. A company must also promptly refund investors' funds if the contingency is not met. 

Offering Exempt from Registration (Termination Date). 

The company shall document the termination date of any private placement offering (the "Termination Date"). One week prior to the Termination Date, the company shall provide written notice to the Issuer requesting either (a) confirmation that the Termination Date is to be extended pursuant to resolution of its members, manager, partners, board or officers, as the same is required under the governance documents of the Issuer, and if so, the extended Termination Date, or (b) confirmation that the offering is to be terminated by the Termination Date without extension. In the event of the occurrence under subsection (b), the company shall terminate all sales of the offering at issue, and advise any prospective investors of the Termination Date, advising the prospective investors that the company shall not accept any investor funds or subscription documents after the Termination Date, and that any pending subscription documents shall be terminated effective as of the Termination Date. The failure of the company to receive confirmation from the Issuer shall constitute an event under subsection (b), above. 

TESC may amend these policies and procedures in the usual course of its operations. Please feel free to contact me if you have any questions regarding the corrective action taken herein.  . . .

Bill Singer's Comment:

As more fully explained in a 1998 NASD (FINRA's predecessor) "Regulatory Short Takes: NASD Clarifies Policy On Corrective Action And Mitigation Statements"
http://finra.complinet.com/en/display/viewall_plain.html?rbid=1189&element_id=1159005107
[Ed: Link seems to be inactive on FINRA.org but you can indirectly access the guidance on Pages 35 - 36 at https://www.finra.org/sites/default/files/RCA/p002412.pdf]:

Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.

A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.

Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.

Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.

NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .

I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statements, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.

Some think that a Corrective Action Statements gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission.

Some settling Respondents submit a Corrective Action Statement that details a proposed or in-place supervisory scheme at a current FINRA member firm -- which takes on the trappings of a proposed scheme of enhanced supervision of a statutorily disqualified individual attendant to the filing of a FINRA Membership Continuance Application (the "Form MC-400") http://brokeandbroker.com/PDF/MC400.pdf. I find that such a written proposal is an ill-advised practice because most AWC Respondents are merely suspended and fined and are not subjected to any further regulatory constraints after their time is served and the dollars paid. If FINRA wants to impose specific supervisory conditions upon a settling Respondent or require the submission of an undertaking by the registered rep or member firm, then so be it. On the other hand, why any member firm would draft an extensive list of compliance Do's and Don'ts to which a suspended rep would be subjected upon his or her return to production baffles me. Frankly, I'm old school: Don't volunteer anything and don't answer questions that weren't asked.

I appreciate that some employers/member firms think that memorializing an enhanced scheme of oversight for a settling registered person or member firm provides a hedge against future misconduct, but I don't agree with that premise. If a firm harbors such concerns about a particular associated person that the member feels compelled to memorialize in a FINRA settlement agreement an extensive, proposed supervisory protocol, then maybe that firm should terminate the individual. Similarly, if the firm intends to retain an outside, independent compliance consultant to redress in-house compliance failures, much of what needs to be reformed is likely stated at length in the AWC -- why restate the obvious or commit to steps that may prove unattainable? 

And one last thing to mull over before you submit a Corrective Action Statement, just imagine what some customer's lawyer will do with that published list of proposed corrective actions if an associated person or the firm engages in future disputed conduct. A savvy Claimant's lawyer will cite the language in the AWC and will then cite your undertakings in the Corrective Action Statement. Wait and see how quickly a skilled lawyer will demonstrate that the firm promised "this" and swore it would do "that" but that was all lies -- and the brokerage firm will continue to dishonor its regulatory promises and compliance obligations unless you send it a strong message in the form of compensatory damages with the added kick of punitive damages. Yeah, I know, when I put it like that, it doesn't sound so good. Trust me, it will be put like just like that.

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