Securities Industry Commentator by Bill Singer Esq

High Standards In Low Places on Wall Street (BrokeAndBroker.com Blog)

Phishing Email Purporting to Be From FINRA / FINRA Alerts Firms to Phishing Email Using "finra-online.com" Domain Name (FINRA Regulatory Notice)

9Cir Reverses SLUSA Dismissal of Investors' Class Action Against Edward Jones

Edward Anderson, Coleen Worthington, and Janet Goral, Plaintiffs/Appellants, v. Edward D. Jones & Co., The Jones Financial Companies, Inc., James D. Weddle, and Vincent J. Ferrari, Defendants/Appellees (Opinion 9Cir)

Minnesota Man Pleads Guilty To Central Florida Investment Fraud (DOJ Release)

Cryptocurrency Fraudster Pleads Guilty to Securities Fraud and Money Laundering Charges in Multi-Million Dollar Investment Scheme (DOJ Release)

SEC Issues Over $5 Million to Joint Whistleblowers Located Abroad (SEC Release)

SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (SEC Release)

Enhancing Focus on the SEC's Enhanced Climate Change Efforts (Statement by SEC Commissioners Hester M. Peirce and Elad L. Roisman)

As Time Goes By At FINRA And TradeStation (BrokeAndBroker.com Blog)

Vanguard Compliance Manager Submits Altered and Fabricated Documents to FINRA (BrokeAndBroker.com Blog)

FINRA Censures and Fines Securities America Over Outsourced Onboarding (BrokeAndBroker.com Blog)

The Saga of FINRA Versus Kimberly Springsteen-Abbott (BrokeAndBroker.com Blog)

From: FINRA Membership 

Date: March 4, 2021 at 10:32:14 AM CST 

To: XXXXX Subject: 

ATTN: FINRA COMPLIANCE AUDIT 

Good day, 

Please find the following attached report from FINRA on regulatory non-compliance for which your immediate response is required. 

As part of a disclosure review process, we require this background report be completed. Review the enclosed document in respect to our compliance policy. I

f you've got more questions regarding this letter don't hesistate [sic] to contact us. 

Regards 

Team FINRA

Financial Industry Regulatory Authority 

Phone Number : +1 786 292 XXXX

The panel reversed the district court's dismissal of a class action brought by investors with a financial services firm, alleging breach of fiduciary duties under Missouri and California law when the investors moved their assets from commission-based to fee-based accounts. 

The district court concluded that it lacked subject matter jurisdiction over the state law claims because the Securities Litigation Uniform Standards Act (SLUSA) prevented plaintiffs from bringing their claims as a class action consisting of fifty or more persons. The district court also dismissed plaintiffs' securities fraud claim under § 10(b) of the Securities Exchange Act of 1934. Plaintiffs appealed dismissal of their state law claims only. 

Reversing, the panel held that SLUSA did not bar plaintiffs' state law fiduciary duty claims because the alleged misrepresentation or omission that formed the basis for the claims was not "in connection with the purchase or sale of a covered security." Following Chadbourne & Parks LLP v. Troice, 571 U.S. 377 (2014), the panel held that the phrase "in connection with" requires a showing that the misrepresentation or omission was material to a decision to buy or sell a security. The panel concluded that defendants' alleged failure to conduct a suitability analysis before inviting plaintiffs to switch to fee-based accounts was not material because plaintiffs did not allege that they would have purchased or sold different covered securities had defendants conducted such an analysis.

A. Plaintiffs' Investment Relationship with Edward Jones 

Plaintiffs were investors with Edward Jones, a financial services firm headquartered in St. Louis, Missouri.¹ According to Plaintiffs, they are "buy-and-hold clients," which means that they "conduct[] little to no trading each year." Plaintiffs previously invested with Edward Jones through commission-based accounts. Under this investment model, "Edward Jones provided its clients free financial advice, only charging them on a per trade basis." Plaintiffs assert that this "model particularly benefitted middle-income investors in small communities who engaged in little to no trading," like themselves. 

In 2008, Edward Jones introduced a fee-based model of investing. In a fee-based account, Edward Jones "charged a flat annual asset management fee." "The standard fee was 1.35% to 1.50% of a client's assets under management," though it could be as high as 2%, in addition to administrative fees. Clients investing in a fee-based account would pay an annual fee "regardless of the transactions" that Edward Jones conducted on behalf of those clients. 

Plaintiffs moved their assets from commission-based to fee-based accounts. During the transition, Edward Jones purportedly gave written disclosures to Plaintiffs, including a brochure entitled "Making Good Choices." Clients also signed a form in which they "acknowledge[d] that [the client] has received and read the Brochure, which describes the [fee-based program] in greater detail." Clients also acknowledged that they "made [their] own decision[s] to invest in the" fee-based account. Additionally, clients filled out a form with their investment objectives.

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FOOTNOTE 1: The background that we lay out in this opinion is largely drawn from Plaintiffs' Second Amended Complaint. Because the district court disposed of this case at the motion to dismiss stage of the litigation, we must accept Plaintiffs' well-pleaded allegations as true. Northstar Fin. Advisors, Inc. v. Schwab Invs., 904 F.3d 821, 828 (9th Cir. 2018). 

We hold that SLUSA does not bar bringing the state law fiduciary duty claims as a class action in Plaintiffs' Second Amended Complaint. Plaintiffs claim that Edward Jones breached its fiduciary duties under Missouri and California law by failing to conduct a suitability analysis. Plaintiffs allege that this lack of suitability analysis caused them to move their assets from commission-based accounts to fee-based accounts, which was not in their best financial interest as low-volume traders. Because the alleged failure to conduct a suitability analysis was not material to the decision to buy or sell any covered securities, Plaintiffs' state law claims are not based on alleged conduct that is "in connection with" the purchase or sale of any covered securities. SLUSA requires that all five elements outlined by this court be met if a class action is to be barred. See Northstar, 904 F.3d at 828. Because Plaintiffs' state law claims do not meet the fourth requirement,11 we reverse the decision of the district court and remand for further proceedings consistent with this opinion.

[A]nderson led a conspiracy that defrauded more than 200 victims out of over $10.3 million through investments offered in connection with a company called Tri-Med Corporation. Anderson was the founder and principal owner of Tri-Med.   

The investment fraud scheme involved the alleged purchase of medical receivables by Tri-Med, and services that were provided to accident victims who were represented by personal injury attorneys. Payment of those medical receivables was supposed to have been made from the proceeds of litigation or an insurance claim made against a general liability or automobile insurance policy. Each of the medical receivables was also supposed to be secured by a "Letter of Protection," a letter that is provided by a patient's personal injury attorney to a medical services professional as an incentive to provide services to a patient. The letter is a contract involving a patient, the patient's attorney, and the medical services provider by which the patient and attorney agree to pay all or part of the total billed by the medical services provider from the proceeds of any pre-suit settlement, lawsuit settlement, or judgment that the patient may obtain.

To fund Tri-Med's alleged purchases of medical receivables, Anderson and his conspirators solicited individuals to participate in an "investment program" in which investors' money would be used by Tri-Med to buy medical receivables "backed" by letters of protection. As part of their solicitations, Anderson and his conspirators represented to investors that that their investments were safe and that investor funds would be held in a trust account that was controlled by an attorney. To assure investors that their investments were secure, Tri-Med claimed that it would transfer its interest in the letter of protection to the investor in a document called an "Assignment of Interest Certificate." Those representations were false. 

Of the more than $17 million raised from over 200 investors, only approximately $2.7 million was ever transferred from Tri-Med to the attorney's trust account. The vast majority of the funds raised from investors never made it to that account. Over $6.5 million was paid to the sales people and the operators of Tri-Med or was used by them to benefit themselves or pay business expenses, while approximately $2.3 million was paid as distributions to investors to make them believe that their investments were profitable. In fact, Tri-Med did not purchase enough medical receivables to secure the incoming investments, so it fabricated "Assignment of Interest Certificates." The result was that more than 200 victims lost over $10.3 million in this scheme.

Anderson is the fourth person to be charged as part of this conspiracy.  Previously, the following individuals were charged and sentenced to federal prison terms for their roles in this conspiracy: Anthony Nicholas, Jr. (63, Hudson) received 11 years and 3 months and Eric Ager (78, Orlando) and Irwin Ager (84, Orlando) each were sentenced to 24 months' imprisonment.

Roger Nils-Jonas Karlsson, 47, and his company, Eastern Metal Securities (EMS), was charged in a criminal complaint filed March 4, 2019, with crimes involving a scheme to defraud victims of more than $16 million. Karlsson, also known by several aliases including Steve Heyden, Euclid Deodoris, Joshua Millard, Lars Georgsson, Paramon Larasoft, and Kenth Westerberg, was arrested on June 17, 2019, in Thailand and was extradited to the United States to face the charges. A federal grand jury indicted Karlsson and EMS on July 25, 2019. Karlsson pleaded guilty to all the charges pending against him. EMS has ceased to exist.

The indictment and a factual basis filed by the government describe a long-running scheme by which Karlsson and EMS used a website to commit wire fraud against thousands of victims.  Specifically, the indictment explains that from Nov. 27, 2012, through June 19, 2019, Karlsson and EMS used www.easternmetalsecurities.com to make fraudulent representations and convince victims to send funds using a virtual currency exchange. During the same period, Karlsson and EMS used deceptive "devices and contrivances" to sell securities and then tried to conceal the proceeds of the wire fraud and securities fraud. 

During the proceedings, Karlsson admitted that he used the website to invite potential investors to purchase shares of the plan for less than $100 per share, promising an eventual payout of 1.15 kilograms of gold per share, an amount of gold which as of Jan. 2, 2019,  was worth more than $45,000. Karlsson advised investors that, in the unlikely event that the gold payout did not happen, he guaranteed to them 97% of the amount they invested. Karlsson admitted he had no way to pay off the investors. Instead, the funds provided by victims were transferred to Karlsson's personal bank accounts and he then used proceeds to purchase expensive homes and a resort in Thailand.

As the government has alleged, Karlsson also used a second website, www.hci25.com, to make multiple false communications to potential investors. Karlsson brought the investors in HCI25 together with the investors in the "Pre Funded Reversed Pension Plan" (PFRPP) and posted multiple communications to delay the moment investors would realize there would be no payout.  For example, on one occasion, Karlsson explained that a payout had not occurred because releasing so much money all at once could cause a negative effect on financial systems throughout the world.  Karlsson also falsely represented that EMS was working with the U.S. Securities and Exchange Commission to prepare the way for a payout.

Karlsson directed his victims to make investments using virtual currencies, such as Bitcoin.  Karlsson admitted he defrauded no less than 3,575 victims of more than $16 million. 

(1) Claimants 1 and 2 provided significant information that caused Commission staff to open an investigation and they provided assistance during the investigation; (2) Claimant 1's and Claimant 2's information directly supported certain allegations in the Commission's enforcement action; and (3) there are significant law enforcement interests in this matter, which involved misconduct abroad that would have been difficult to detect without the information reported by Claimants 1 and 2. The determination also reflects that certain of the Commission's charges related to misconduct by the Company that was more extensive than that reported by Claimants 1 and 2.  

The CRS, however, preliminarily determined that even if Claimants 11 and 12 provided information to the news media about the Company's competitors and that information influenced the Company to conduct an internal review of its own conduct, Claimants 11 and 12 still did not satisfy the "led to" standard. Because neither of the tips caused the opening of the Covered Action investigation under Rule 21F-4(c)(1), which Enforcement staff confirmed was based on the tip submitted by Claimants 1 and 2, their claims could only succeed if they satisfied the "led to" standard under either Rule 21F-4(c)(2) or (3). The CRS preliminarily determined that Claimants 11 and 12 did not satisfy either rule. First, Rule 21F-4(c)(2) requires that the claimant give the Commission original information about conduct that was already under examination or investigation and that the claimant's submission significantly contributed to the success of the action. To the extent Claimants 11 and 12 submitted any information after the investigation was opened,6 they did not provide the Commission information about conduct that was already under examination or investigation, as their tips related to conduct by entirely different companies, and not the Company. Additionally, the allegations made by Claimants 11 and 12 were not used in the Covered Action, which concerned conduct by the Company Redacted only. Thus, their submissions had no impact on the Covered Action. Further, the CRS preliminarily determined that the connection that Claimants 11 and 12 attempted to establish between information they provided to the news media about entirely different companies and the charges in the Covered Action, which do not relate to those companies, does not show that their information significantly contributed to the success of the Covered Action. Second, Rule 21F-4(c)(3) provides that claimants may receive credit for information the entity provides to the Commission resulting from an investigation initiated in whole or in part in response to information the claimant reported to the entity. Here, Claimants 11 and 12 provided information about the Company's competitors to the news media, not to the Company. Therefore, the CRS preliminarily determined that they did not satisfy the requirements of the rule. 

coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.

The initial focus will be to identify any material gaps or misstatements in issuers' disclosure of climate risks under existing rules.  The task force will also analyze disclosure and compliance issues relating to investment advisers' and funds' ESG strategies. Its work will complement the agency's other initiatives in this area, including the recent appointment of Satyam Khanna as a Senior Policy Advisor for Climate and ESG. As an integral component of the agency's efforts to address these risks to investors, the task force will work closely with other SEC Divisions and Offices, including the Divisions of Corporation Finance, Investment Management, and Examinations.

more prudent for us to await the results of the Corporation Finance staff's latest review of climate change-related disclosure and the Examinations staff's climate- or ESG-related findings in this new exam cycle before allocating resources to an ESG-specific Enforcement initiative?  Better yet, shouldn't we wait for our Corporation Finance staff to complete its assessment of our existing rules relating to ESG disclosures to find out if they are unclear or in need of updating before we announce an initiative aimed at bringing enforcement actions in this area?  But then maybe the Enforcement Division is merely continuing ongoing efforts with a little extra fanfare.  Either way, we must continue to review any alleged securities violations in light of the regulations and guidance in existence at the time of the conduct in question. 

• Securities Industry Commentator
• Bill Singer