The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

March 22, 2021

CFTC Orders Coinbase Inc. to Pay $6.5 Million for False, Misleading, or Inaccurate Reporting and Wash Trading (CFTC Release)

Foreign Nationals Sentenced for Roles in Transnational Cybercrime Enterprise / The Infraud Organization victimized millions of people in all 50 states and caused more than $568 million in financial losses (DOJ Release)

11 Cir Sees No Breach of Contract by Ohio National in Variable Annuity Commissions Lawsuit (BrokeAndBroker.com Blog)

An Honest Conversation about ESG Regulation (Speech by SEC Commissioner Elad L. Roisman)

Former Employee of Federal Reserve Board Pleads Guilty to Theft of Government Property / Removed Proprietary Documents Prior to Quitting His Job (DOJ Release)

FINRA Fines and Suspends Rep for Unsuitable  and Discretionary Trading
In the Matter of Edmund Zack, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Average-Pricing Executions and Unauthorized Trades
In the Matter of Trevor Rahn, Respondent (FINRA AWC)

FINRA Fines and Bars Former CCO For Failing to Reasonably Monitor Trading Activities
In the Matter of Corey A. White, Respondent (FINRA AWC)

The CFTC issued an Order filing and settling charges against digital asset exchange operator Coinbase Inc. https://www.cftc.gov/media/5796/enfcoinbaseorder031921/download for reckless false, misleading, or inaccurate reporting as well as wash trading by a former employee on Coinbase's GDAX platform; and the company is ordered to pay a civil monetary penalty of $6.5 million and to cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations, as charged. Also see, Concurring Statement of CFTC Commissioner Dawn D. Stump. 
https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement031921 As alleged in part in the CFTC Release:

[B]etween January 2015 and September 2018, Coinbase recklessly delivered false, misleading, or inaccurate reports concerning transactions in digital assets, including Bitcoin, on the GDAX electronic trading platform it operated. During this period, Coinbase operated two automated trading programs, Hedger and Replicator, which generated orders that at times matched with one another. The GDAX Trading Rules specifically disclosed that Coinbase was trading on GDAX, but failed to disclose that Coinbase was operating more than one trading program and trading through multiple accounts.

In addition, the order finds that while Hedger and Replicator had independent purposes, in practice the programs matched orders with one another in certain trading pairs, resulting in trades between accounts owned by Coinbase. Coinbase included the information for these transactions on its website and provided that information to reporting services, either directly or through access to its website. Reporting firms such as Crypto Facilities Ltd., which publishes the CME Bitcoin Real Time Index, and CoinMarketCap OpCo, LLC, which posts such transactional information on its website, received access to Coinbase's transactional information via Coinbase's Application Programming Interface, while the NYSE Bitcoin Index, received it directly in transmissions from Coinbase. According to the order, transactional information of this type is used by market participants for price discovery related to trading or owning digital assets, and potentially resulted in a perceived volume and level of liquidity of digital assets, including Bitcoin, that was false, misleading, or inaccurate. 

The order also finds that over a six-week period-August through September 2016-a former Coinbase employee used a manipulative or deceptive device by intentionally placing buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as wash trades. This created the misleading appearance of liquidity and trading interest in Litecoin. Coinbase is therefore found to be vicariously liable as a principal for this employee's conduct.

https://www.justice.gov/opa/pr/foreign-nationals-sentenced-roles-transnational-cybercrime-enterprise
Sergey Medvedev, a/k/a "Stells," "segmed," and "serjbear;" and Marko Leopard, a/k/a "Leopardmk," each pled guilty to one count of racketeering conspiracy in the United States District Court for the District of Nevada, and they were sentenced, respectively, to 10 years and 5 years in prison. As alleged in part in the DOJ Release:

[Medvedev] was a co-founder of Infraud along with Syvatoslav Bondarenko of Ukraine. From November 2010 until Infraud was taken down by law enforcement in February 2018, Medvedev was an active participant in the Infraud online forum, operating an "escrow" service to facilitate illegal transactions among Infraud members. For several years, Medvedev served as Infraud's administrator, handling day-to-day management, deciding membership, and meting out discipline to those who violated the enterprise's rules.
. . .
[Leopard] joined Infraud in June 2011, offering his services as an "abuse immunity" web hoster to Infraud members who wished to create websites to sell contraband. Unlike a legitimate host, Leopard would knowingly cater to websites offering illegal goods and services, ignoring any abuse reports from internet users. He hosted a number of sites for Infraud members in this fashion, providing the infrastructure that allowed his co-conspirators to profit off of their criminal activities.
. . .
Infraud was a criminal enterprise that existed to enrich its members and associates through a myriad of criminal acts of identity theft and financial fraud. Infraud facilitated the sale of contraband by its members, including counterfeit documents, stolen bank account and credit account information, and stolen personal identifying information. Members and associates of Infraud operated throughout the world and the United States, to include Las Vegas. The enterprise, which boasted over 10,000 members at its peak and operated for more than seven years under the slogan "In Fraud We Trust," is among the largest ever prosecuted by the Department of Justice.

Infraud was responsible for the sale and/or purchase of over 4 million compromised credit and debit card numbers. The actual loss associated with Infraud was in excess of $568 million USD.

http://www.brokeandbroker.com/5751/11cir-ohio-national/
Ohio National entered into contracts with various broker dealers whereby the former compensated the latter for sales of variable annuities. The commission paid by Ohio National to a brokerage firm is undertaken pursuant to the terms of a Selling Agreement. The problem with that arrangement is that the brokerage firms sell through human beings, who are registered representatives. What happens when Ohio National terminates a Selling Agreement and stops paying commissions to the brokerage firm? Who is supposed to pay the reps their commissions? Who should they sue?

An Honest Conversation about ESG Regulation (Speech by SEC Commissioner Elad L. Roisman)
https://www.sec.gov/news/speech/roisman-amac-2021-03-19
Under incoming Chair Gensler, the SEC will likely implement a more "progressive" agenda in regard to ESG than as was the case (and pace) under Chair Clayton. Whatever the prevailing winds, the two Republican appointees, Commissioners Peirce and Roisman have suggested that they will not be jumping on the bandwagon, at least not immediately, at least not until someone tells them what's on the band's playlist. In a recent speech, in part, Commissioner Roisman's reservations are laid out for all to see:

[ESG] is a topic that can feel polarizing.  I have heard from some, who feel inclined to question the propriety of SEC regulation in this area, that they fear the reputational risk of being painted as "anti-climate," "anti-social justice," or other shades of immoral if they express their critiques publicly.  On the flip side, proponents of this agency's intervention sometimes offer rationales for action that are entirely outside the realm of securities law.  A letter recently arrived at my office advocating for mandatory ESG disclosures and ended by saying: "There is no Planet B." 

It is entirely reasonable for a person to feel that climate change deserves immediate attention from lawmakers and still question whether the SEC mandating new disclosures from U.S. public companies is an appropriate step for the agency.  In this forum, I feel confident that we all recognize the fundamental questions here are about the SEC's authority as a regulator and whether this agency's intervention is appropriate to address the problems people have identified in our markets.  This is an entirely healthy and necessary conversation, and it will be critical for us to have the full spectrum of market participants engaged.  If the only people who feel safe to comment are those who want the agency to join the fight against climate change and those whose business models would benefit from new regulation, we will miss hearing from those voices who can alert us to the hidden costs and unintended consequences of our actions.

https://www.justice.gov/usao-md/pr/former-employee-federal-reserve-board-pleads-guilty-theft-government-property
Venkatesh Rao pled guilty to the theft of government property in the United States District Court for the District of Maryland. As alleged in part in the DOJ Release:

[I]n 2019, the Federal Reserve Board notified Rao that it considered his work performance to be unsatisfactory and Rao made a decision to voluntarily separate from the Board.  Over the course of five weekend days in November 2019, Rao entered the FRB building in Washington, D.C. approximately 16 times and printed more than 50 restricted government documents from his workstation and avoided FRB restrictions on the emailing and electronic copying of restricted materials.  Rao removed the restricted documents, which contained proprietary information used by the FRB to conduct bank stress tests, from the FRB building and stored the materials at his home.

FINRA Fines and Suspends Rep for Unsuitable  and Discretionary Trading
https://www.finra.org/sites/default/files/fda_documents/2020068439201
%20Edmund%20Zack%20CRD%202215116%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, Edmund Zack submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Edmund Zack was first associated with FINRA member firms in 1992 and from June 2012 through October 2017, he  was first registered with Aegis Capital Corp. The AWC alleges that Zack "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Zack violated NASD Rule 2510(b), FINRA Rules 4511,  2111 and 2010. Accordingly, the self regulator imposed upon Zack a $10,000 fine, an eight-month suspension from associating with any FINRA member in all capacities, and a $5,161 disgorgement of commissions. As alleged in the "Overview" of the AWC: 

Between November 2014 and September 2015, Zack violated FINRA Rules 2111 and 2010 when he made unsuitable stock recommendations to, and engaged in excessive and quantitatively unsuitable trading in the Aegis account held by, one of his customers. 

In October 2017, Zack violated NASD Rule 2510(b) and FINRA Rule 2010 when he exercised discretionary trading authority to effect sales of securities in 27 customers' accounts without having obtained prior written authorization from the customers or approval from Aegis to treat the accounts as discretionary. 

Because Zack marked these sale orders as unsolicited, he caused Aegis to maintain inaccurate books and records in violation of Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-3 thereunder. By causing the firm to maintain inaccurate books and records, Zack violated FINRA Rules 4511 and 2010.

https://www.finra.org/sites/default/files/fda_documents/2018059251701
%20Trevor%20B.%20Rahn%20CRD%202196155%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, Trevor Rahn submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Trevor Rahn entered the industry in 1991 and by July 2010, he was registered with J.P. Morgan Securities LLC. The AWC alleges that White "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that White violated NASD Rule 2510(b), FINRA Rules 4511, 2111 and 2010. Accordingly, the self regulator imposed upon White a $10,000 fine, and 18-month suspension from associating with any FINRA member in all capacities. As alleged in the "Overview" of the AWC: 

During his association with JPMS, Rahn engaged in a pattern of breaking up customer orders for execution in violation of FINRA Rules. Specifically, from January 2014 to September 2018, Rahn recommended an "average pricing" investment strategy to his customers in which he executed orders by breaking them into multiple small trades, each generating a separate commission. Rahn lacked a reasonable basis to believe this strategy was suitable for his customers in violation of FINRA Rules 2111(a) and 2010. In connection with his strategy, Rahn exercised time and price discretion on over 7,500 trades without the required authorization in violation of NASD Rule 2510(b) and FINRA Rule 2010. 

Separately, between June 2016 and September 2017, Rahn executed 577 unauthorized trades in a customer's account in violation of FINRA Rule 2010. He also mismarked 4,714 solicited trades in three customer accounts as "unsolicited" in violation of FINRA Rules 4511 and 2010.

FINRA Fines and Bars Former CCO For Failing to Reasonably Monitor Trading Activities
https://www.finra.org/sites/default/files/fda_documents/2017054755209
%20Corey%20A.%20White%20CRD%204537015%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, Corey A. White submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Corey A. White was first registered in 2002 with Financial West Group and between January 2013 and July 2017, he was that firm's Chief Compliance Officer and Registered Options Principal. The AWC alleges that White  "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that White violated NASD Rules 3010(a) and (b), and FINRA Rules 3110(a) and (b), 2360(b)(2) and 2010. Accordingly, the self regulator imposed upon White a $20,000 fine, and a Bar from from associating with any FINRA member in all principal capacities.  As alleged in the "Overview" of the AWC: 

Between January 2013 and July 2017, White was responsible for establishing, maintaining, and enforcing the firm's supervisory systems and Written Supervisory Procedures (WSPs). Additionally, White was responsible for monitoring the activities of all associated persons through the review of daily trade blotters and exception reports. White failed to reasonably discharge these responsibilities. White also failed to reasonably respond to red flags indicating representatives were excessively trading and recommending qualitatively unsuitable transactions, including transactions involving Non-Traditional Exchange Traded Products (ETPs), low-priced securities and options . . .

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