Securities Industry Commentator by Bill Singer Esq

SEC Charges S&P Dow Jones Indices for Failures Relating to Volatility-Related Index (SEC Release)

Statement on S&P Dow Jones Indices LLC by SEC Commissioner Hester M. Peirce

SEC Awards More Than $31 Million to Whistleblowers in Two Enforcement Actions (SEC Release)

SEC Charges Additional Unregistered Broker Who Sold $10.8 Million in 1 Global Securities to Investors (SEC Release)

Worcester Man Charged with Fraudulently Depositing U.S. Treasury Check Values at More Than One Million Dollars (DOJ Release)

FINRA Sanctions Firm and Principal Over Supervision

In the Matter of Bradley Woods & Co. Ltd and Daniel Ripp, Respondents (FINRA AWC)

FINRA Publishes Helpful Notice About Online Account Takeover (ATO) (BrokeAndBroker.com Blog)

The SEC's order finds that the S&P 500 VIX Short Term Futures Index ER (Index) published by S&P DJI was intended to calculate values based on real-time prices of certain CBOE Volatility Index (VIX) futures contracts.  According to the order, S&P DJI licenses the Index to, among others, issuers that use it to offer securities, including the issuer of the inverse exchange-traded note called XIV, and the license agreement requires S&P DJI's approval of the description of the index in offering documents.  On Monday, Feb. 5, 2018, the VIX experienced a spike of 115%, but the Index remained static during certain intervals between 4:00 p.m. and 5:08 p.m. that day.  According to the SEC's order, this was due to an undisclosed "Auto Hold" feature, which is triggered if an index value breaches certain thresholds, at which point the immediately prior index value continues to be reported.  The SEC found that XIV's issuer derived information about the Index from S&P DJI's public disclosures about the Index, but the Auto Hold feature had never been publicly disclosed.  The SEC's order finds that S&P DJI personnel did not release the Auto Hold for the Index during the referenced intervals, as they had the ability to do, resulting in the publication and dissemination of stale and static Index values, rather than values based on the real-time prices of certain VIX futures contracts.

The SEC's order finds that, because the Index was the primary input for the calculation of the XIV ETN's indicative value, the ETN's indicative values published to the market during the same intervals were similarly static and, as a result, the indicative values being reported in real-time were higher than they would have been if the Auto Hold had not been triggered.  While the Auto Hold was in place freezing the values being published to the market, XIV's indicative value breached a key metric, which provided XIV's issuer the right to accelerate all outstanding notes.  According to the SEC's order, XIV therefore had an economic value that was substantially lower than what had been publicly reported and was at risk of being accelerated by its issuer.

Today the Commission announced a settled enforcement action against S&P Dow Jones Indices LLC ("S&P DJI"). The Commission charged S&P DJI with violating Section 17(a)(3) of the Securities Act, which prohibits, in the offer and sale of securities, engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit on the purchaser. In charging S&P DJI, the Commission addresses conduct that is outside the reach of Section 17(a)(3). Moreover, this precedent, if not appropriately confined to its particular facts, will open the door to subsequent expansions of the securities laws to reach all manner of actors and conduct with even more tenuous connections to the offer and sale of securities. Accordingly, I do not support bringing this action.

At issue here is a volatility-related index that S&P DJI created and licensed to users. Among the licensees was Credit Suisse AG ("CSAG"), which used the index, among other things, to construct the XIV, an exchange-traded note ("ETN") series designed to offer sophisticated investors an inverse of the performance of the index. Unbeknownst to CSAG and XIV investors, S&P DJI's index was subject to an "Auto Hold" feature. The Auto Hold, which is a common index feature, halts extraordinary movements in the index to prevent the publication of potentially erroneous values and holds the published intraday index value constant until the Auto Hold is released, either manually upon determination that the value was not erroneous or automatically upon the values returning to a pre-determined range. That feature became relevant on February 5, 2018, a day of extreme market volatility; the Auto Hold kicked in, which caused the published intraday index value to remain static during certain intervals from 4:00 PM to 5:08 PM. Because the note's calculation agent used the reported intraday index values to calculate the intraday indicative value of the XIV ETN, the XIV's published intraday indicative value likewise remained static even as the XIV's market price fluctuated. During a very critical moment on a very critical day for CSAG and XIV investors, the public information about the intraday value of the index on which that ETN was based was stagnant. CSAG learned why after market close when, in response to CSAG's queries, S&P DJI explained the Auto Hold. The next day CSAG exercised its right to accelerate the XIV notes, thus locking in investors' losses. CSAG had the right to accelerate based on the intraday indicative value. Had S&P DJI's Auto Hold not kicked in, XIV investors would have had another indication-in addition to the XIV's market price-that acceleration was a possible outcome of February 5's market turmoil.

That this course of events plausibly denied investors information they may have wanted does not make S&P DJI a primary violator of Section 17(a)(3). S&P DJI, by licensing its index to CSAG for use in a security, did not engage in an offer or sale of a security. We do not allege that S&P DJI interacted with investors. CSAG, not S&P DJI, had disclosure obligations. CSAG, not S&P DJI, made the decision to accelerate the notes. Was the nondisclosure a violation of S&P DJI's contract with CSAG? Perhaps. Should S&P DJI, if it reviewed CSAG's descriptions of the index, have ensured that the Auto Hold was mentioned? Yes. Should S&P DJI, at a minimum, have told CSAG about the Auto Hold feature in advance so that CSAG could decide whether and when to tell investors about it? Yes. Was S&P DJI's failure to do so a violation of Section 17(a)(3)? No.

The charges against S&P DJI suggest that any person who knows another party will use her product or service to build a security could be charged under Section 17(a)(3) for omissions or misstatements about that product or service. Securities laws are not meant to address every wrong. CSAG was obligated to its investors. S&P DJI's obligations ran to CSAG.

This enforcement action may hint at a deeper, unspoken concern that index providers, whose products have become so integral to our securities markets, are not governed by a regulatory framework explicitly tailored to their activities. I am open to exploring the need for and propriety of such a framework. An enforcement action, however, is not a substitute for doing the hard work to determine whether a regulatory framework for index providers is appropriate and, if so, what it should look like.

The Securities and Exchange Commission today announced charges against an additional individual in connection with its ongoing investigation related to 1 Global Capital, LLC, a South Florida merchant cash advance company. The SEC previously charged 1 Global, its owner, and others with operating a fraudulent scheme to misappropriate millions of dollars from at least 3,600 investors. The SEC also previously charged nine of 1 Global's top sales agents, for various registration violations.

The SEC's complaint alleges that the defendant, Roy Y. Gagaza, one of 1 Global's top sales agents, unlawfully sold more than $10.8 million of 1 Global's unregistered securities to numerous investors. According to the complaint, Gagaza marketed 1 Global securities to investors as providing "peace of mind for some money in a volatile market" and claimed that the investments would achieve high single-digit or low double-digit annual returns. Gagaza earned approximately $403,000 in commissions on his sales, even though he was not registered as broker-dealer or associated with a registered broker-dealer.

[O]n Oct. 30, 2020, Nascimento visited a branch of Santander Bank, opened a business bank account and then deposited a United States Treasury check in the amount of $1,064,613 in someone else's name into the account. Nascimento allegedly provided Santander with a form claiming the payee gave Nascimento permission to cash a check in his name. That form also contained the payee's purported signature. Investigators then spoke with the payee who confirmed that the Treasury Check was his 2019 personal tax return refund. It is alleged that Nascimento did not know the payee and that the signature on the check was not the payee's actual signature.

Bradley Woods: Censure, $40,000 fine, and $10,000 fine joint and several with Ripp

Daniel Ripp: $10,000 fine joint and several with Woods, and two-month suspension from associating with any FINRA member in all capacities with the exception of any activities requiring registration as a Financial and Operations Principal.

Between October 2015 and January 2018, Bradley Woods and Ripp failed to establish and maintain a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with FINRA's rules concerning outside business activities (OBAs), in violation of FINRA Rules 3110 and 2010. Bradley Woods and Ripp also failed to (1) reasonably and timely review, and evidence the review of, OBAs that the firm's representatives engaged in and disclosed, in violation of FINRA Rules 3270 and 2010, and (2) timely amend five representatives' Uniform Applications for Securities Industry Registration or Transfer (Forms U4) to disclose eight OBAs, in violation of Article V, Section 2(c) of FINRA's By-Laws and FINRA Rule 2010. 

Between January 2017 and January 2018, Bradley Woods and Ripp failed to establish and maintain a supervisory system, including WSPs, reasonably designed to achieve compliance with its due diligence and filing obligations for private placements, in violation of FINRA Rules 3110 and 2010. Bradley Woods and Ripp also failed to submit required offering documents to FINRA within 15 calendar days of the date of first sale for three private placements, in violation of FINRA Rules 5123 and 2010.  

• Securities Industry Commentator
• Bill Singer