Securities Industry Commentator by Bill Singer Esq

Did SEC Permanently Bar Twice The Same Frivolous Whistleblower Claimant? (BrokeAndBroker.com Blog)

Protecting Investors from Misconduct / FINRA Adopts Rules to Address Firms With a Significant History of Misconduct  / Effective Date: January 1, 2022 (FINRA Regulatory Notice)

Lexington Man Sentenced to 120 Months for Investment Fraud (DOJ Release)

U.S. Attorney Announces Unsealing Of Indictment Charging Six Individuals And One Corporate Entity With Tax Fraud Conspiracy, And Related Guilty Plea / Indictment Alleges that Defendants Conspired to Help U.S. Clients Evade Taxes on More Than $60 Million Hidden Offshore (DOJ Release)

Founder Of New York Litigation Finance Firm Pleads Guilty To Multimillion-Dollar Securities Fraud Scheme (DOJ Release)

SEC Charges New York Attorney with Defrauding Investors in Litigation Finance Business (SEC Release)

SEC Charges Former IIIinois Investment Adviser with Fraud for Misappropriating Client Funds (SEC Release)

SEC Charges California Cannabis Company, CEO and President with Fraud (SEC Release)

SEC Obtains Emergency Relief Against New York Real Estate Developer Charged with EB-5 Securities Fraud (SEC Release)

Dan Berkovitz Named SEC General Counsel; John Coates to Leave SEC (SEC Release)

CFTC Orders Nevada Man and His Company to Pay $374,000 for Fraudulent Solicitation and Misappropriation in Forex Scheme (CFTC Release)

CFTC Orders Interactive Brokers LLC to Pay a $1.75 Million Penalty for Supervision Failures / Failures for Electronic Trading System's Inability to Handle Negative Crude Oil Futures Prices on April 20, 2020 (CFTC Release)

CFTC Imposes A $1.25 Million Penalty against Kraken for Offering Illegal Off-Exchange Digital Asset Trading and Failing to Register as Required (CFTC Release)

A Thought Piece on Risk from SEC Commissioner Caroline A. Crenshaw (BrokeAndBroker.com Blog)

FINRA has adopted new rules to address firms with a significant history of misconduct. New Rule 4111 (Restricted Firm Obligations) requires member firms that are identified as "Restricted Firms" to deposit cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations. New Rule 9561 (Procedures for Regulating Activities Under Rule 4111) and amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) establish a new expedited proceeding to implement Rule 4111.

As explained in detail below, Rule 4111 establishes a multi-step, annual process through which FINRA will determine whether a member firm raises investor protection concerns substantial enough to require that it be designated (or re-designated) as a "Restricted Firm" and subject to additional obligations, including a "Restricted Deposit Requirement." The multi-step process includes numerous features designed to narrowly focus the new obligations on the firms most of concern. Each year's process will begin with a calculation of which firms meet numeric thresholds based on firm-level and individual-level disclosure events to identify member firms with a significantly higher level of risk-related disclosures as compared to similarly sized peers. The process also gives each member firm that is preliminarily identified by these numeric criteria several ways to affect outcomes during subsequent steps in the process. These include a one-time opportunity to avoid the imposition of obligations by voluntarily reducing its workforce; an opportunity to explain to the Department of Member Supervision (Department) why the firm should not be designated as a Restricted Firm or be subject to a Restricted Deposit Requirement or to propose alternatives that would still accomplish FINRA's goal of protecting investors; and the opportunity to request a hearing before a FINRA Hearing Officer in an expedited proceeding to challenge a Department determination.

From in or about 2009 to in or about 2014, Ivo Bechtiger, Bernhard Lampert, Peter Rüegg, Roderic Sage, Rolf Schnellmann, Daniel Wälchli, and Allied Finance Trust AG of Zurich, Switzerland ("ALLIED FINANCE"), the defendants, defrauded the IRS by concealing income and assets of certain U.S. taxpayer-clients with undeclared bank accounts located at Privatbank IHAG Zurich AG ("IHAG"), a Swiss private bank in Zurich, Switzerland,[2] and elsewhere.  In order to assist the U.S. taxpayer-clients, the defendants and others devised and implemented a scheme dubbed the "Singapore Solution" to fraudulently conceal the bank accounts of the U.S. taxpayer-clients, their assets, and their income from U.S. authorities.  In furtherance of the fraudulent scheme, the defendants and others conspired to transfer more than $60 million from undeclared IHAG bank accounts of three U.S. taxpayer-clients through a series of nominee bank accounts in Hong Kong and other locations before returning the funds to newly opened accounts at IHAG in the name of a Singapore-based asset-management firm.  The U.S. taxpayer-clients paid large fees to IHAG and others to help them conceal their funds and assets and evade taxes. 

On or about August 16, 2021, defendant PETER RÜEGG, 61, of Switzerland was arrested in Spain.  As alleged in the Indictment, RÜEGG was a member of IHAG's management and a relationship manager for one of the U.S. taxpayer-clients who participated in the Singapore Solution scheme.  RÜEGG is alleged to have helped the U.S. taxpayer-client conceal approximately $50 million in undeclared assets at IHAG through the Singapore Solution. 

. . .

[A]ccording to statements made during CHINN's plea proceeding, and related court filings:

From at least in or about 2001 through at least in or about January 2019, CHINN concealed approximately $5 million in undisclosed and untaxed income for tax years 2001 through 2018.  During this period, CHINN held offshore accounts at IHAG in nominee names.  Beginning in 2010, CHINN and others transferred funds from these offshore accounts at IHAG through nominee accounts outside of Switzerland, including in Hong Kong, before returning them to newly opened accounts at IHAG held in the name of a Singapore-based trust company purportedly on behalf of two foundations created by a co-conspirator.  They did so to continue to conceal CHINN's income and assets from U.S. authorities.  CHINN subsequently transferred the funds out of Switzerland to undeclared accounts in Singapore.  CHINN did not file any tax returns or disclose his offshore bank accounts during the years at issue.  

From at least in or about 2017 through in or about 2019, BIRNBUAM [sic] obtained more than $3 million in investments for Cash4Cases based on fraudulent misrepresentations.  These investments were in the form of promissory notes, titled "Investor Security Agreements" ("ISAs"), which purported to provide the relevant investors with a security interest in the recoveries associated with certain specified lawsuits that were ostensibly purchased by Cash4Cases.  In fact, in some instances, the lawsuits that were either never funded by Cash4Cases or BIRNBAUM had previously pledged their recoveries to other parties.

To help carry out his fraud, BIRNBAUM directed an employee to falsify his company's books and records to make it appear that the recoveries from lawsuits that had already been paid out were still available to be pledged as collateral to new investors.

BIRNBAUM also misappropriated a substantial portion of investors' funds for his personal use and to make promised payments to earlier investors.  As one example, BIRNBAUM obtained a $1 million investment for Cash4Cases in September 2019.  Prior to this investment, BIRNBAUM told the investor that Cash4Cases would use the money exclusively for advances to litigants.  However, contrary to this representation, on the same date that Cash4Cases received the $1 million investment, BIRNBAUM used the money to send a $530,000 wire toward the purchase of a house in New Jersey.

[F]rom 2017 to 2019, Birnbaum defrauded investors in the course of selling them debt securities in Cash4Cases, Inc., his now-bankrupt litigation funding business. Cash4Cases allegedly made loans to individuals expecting a litigation settlement or recovery, and took a security interest in their expected litigation recoveries. As alleged, Birnbaum sold individual investors Cash4Cases securities styled as promissory notes. According to the complaint, Birnbaum falsely represented that the notes were secured by security interests in the litigation recoveries. The complaint alleges that Birnbaum defrauded investors by double pledging the same security interests to multiple investors and pledging other security interests that Cash4Cases did not actually own. The complaint further alleges that Birnbaum misappropriated investor funds from at least two of the individual investors by using those funds to support his personal expenses, and by making Ponzi-like payments to earlier funders and investors.

[S]alamah stole more than $950,000 from at least three elderly advisory clients. As alleged, Salamah chose these three clients because he did not think they would pay close attention to their brokerage account statements. The complaint alleges that Salamah falsely represented to his clients that he was moving their funds to diversify their securities holdings, but instead used fraudulently altered authorization forms to transfer their funds to a bank account that he controlled. According to the complaint, Salamah used the misappropriated money for his own personal expenses, including vacations, luxury cars, and private school tuition.

[F]rom October 2011 through November 2019, C3 International, Inc. (C3), based in Garden Grove, California, and its CEO, Steele Clarke Smith III, deceived investors through numerous material misrepresentations and omissions regarding the company's business and its cannabis pill called Idrasil. Specifically, the complaint alleges that on C3's and Idrasil's websites, in investor offering materials, on social media, and in investor communications, C3 through Mr. Smith misrepresented, among other things, that Idrasil was patented or patent-pending or trademarked, that most insurance companies reimbursed for Idrasil, and that investor funds would be used for business purposes. C3 and Mr. Smith also allegedly made statements about Mr. Smith's background, education and legal history, but omitted the material fact of his prior criminal conviction for conspiracy to manufacture marijuana plants. The complaint further alleges that Mr. Smith's wife and C3's President, Theresa Smith, aided and abetted Mr. Smith's and C3's securities fraud violations. The Smiths allegedly misappropriated over $1 million of investor funds to pay for their personal living expenses.

[F]rom 2010 through late 2017, Xia, through Fleet, fraudulently raised more than $229 million through five EB-5 offerings from more than 450 investors. The funds were allegedly raised for Xia's two real estate development projects - the Eastern Mirage project and the Eastern Emerald project. According to the complaint, the offering materials made material misrepresentations regarding the sources of financing for the projects, the experience of the projects' development and construction team, the scope of the Eastern Emerald project, and the existence of lease agreements among several entities that Xia owns and controls. Additionally, Xia allegedly misappropriated approximately $17 million in Eastern Mirage investor funds, and at least $11.8 million in Eastern Emerald investor funds.

Berkovitz has served as a Commissioner of the CFTC since September 2018 after being unanimously confirmed by the U.S. Senate. Prior to his appointment, Berkovitz was a partner and co-chair of the futures and derivatives practice at the law firm of WilmerHale. He also was an Adjunct Professor at Georgetown University Law School and vice-chair of the American Bar Association Committee on Derivatives and Futures Law. He previously served as the CFTC's General Counsel from 2009 to 2013. Earlier in his career, Berkovitz was a senior staff lawyer for the U.S. Senate Permanent Subcommittee on Investigations and Deputy Assistant Secretary in the Department of Energy's Office of Environmental Management. He obtained an A.B. in Physics from Princeton University and a J.D. from the University of California, Hastings College of the Law.

Joint Statement of Concurrence of Commissioners Dawn D. Stump and Rostin Behnam Regarding JPMorgan Chase & Co., et al. (CFTC Commissioners' Statement)

https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpbehnamjointstatement092920

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Supporting Statement of Commissioner Dan M. Berkovitz Regarding Historic Penalty against JPMorgan and Opposing "Bad Actor" Waiver (CFTC Statement by Commissioner Dan M. Berkovtiz)

https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement092920

CFTC Commissioners Stump, Behnam, and Berkovitz supported the overall action against JPMorgan; however, they raised concerns about the process by which Respondents were not subjected to disqualification from certain SEC exemptions under Regulations A and D. In offering their comments, Commissioners Stump and Behnam noted in part in a joint statement that [Ed: footnotes omitted]:

Unfortunately, though, the Order also presents a troubling - and wholly collateral - issue.  Pursuant to rules adopted by the SEC, the findings of our Order will result in the disqualification of Respondents from certain exemptions relating to the registration of securities offerings under Regulations A and D of the SEC's regulations (a "Reg A/D disqualification"). However, the SEC's regulations also provide that such disqualification "shall not apply" if the CFTC "advises in writing" that disqualification "should not arise as a consequence of such order." The Order issued today includes this advice.

Although they may have been well-intentioned, these SEC rules (which were not mandated by statute) have put the CFTC in a difficult position in cases such as this one.  As often happens, the Respondents will not agree to settle the CFTC's enforcement action absent a waiver of the resulting Reg A/D disqualification.  SEC rules provide that the SEC may waive the disqualification upon a showing of good cause, but waiting for such an SEC waiver intolerably subjects the CFTC's enforcement program to the vagaries of when the SEC makes time to consider the Respondents' request.  In order to efficiently perform our responsibility to enforce the CEA and the Commission's regulations, therefore, we decide whether to advise, as set forth in the SEC's rules, that the Reg A/D disqualification provisions of the securities laws should not apply - a decision that is more appropriately one for securities regulators to make.

This is not a new issue; we have wrestled with this conundrum several times since we joined the Commission in September 2017 and September 2018.  Indeed, this is not the first time that CFTC Commissioners publicly have raised concerns regarding this issue. We are aware that CFTC and SEC representatives have been seeking a resolution that would permit the CFTC to effectively enforce the CEA and CFTC regulations while allowing the SEC to more appropriately determine whether a Reg A/D disqualification resulting from a CFTC enforcement action should be waived.  We appreciate these efforts and the progress that we understand has been made to date.  But the fact that this case has arisen and yet this issue still has not been resolved prompts us to write together to emphasize the urgency of finding a remedy from the SEC to avoid further hindering the CFTC's enforcement program and consuming valuable time of our Commission.

The CFTC and SEC have an admirable record of cooperative enforcement efforts that - as reflected in the resolution of our respective charges against the Respondents in this case - have served the public interest well.  But the public interest is not being well served by the current circumstances regarding Reg A/D disqualifications created by the SEC's rules.  Resolving this issue must be a top priority.

In a separate statement, Commissioner Berkovitz noted in part that [Ed: footnotes omitted]:

For eight years, a group of traders at JPMorgan systematically "spoofed" precious metals and Treasury futures markets by entering hundreds of thousands of orders with the intent to cancel them before execution.  The Commission's Order finds that JPMorgan manipulated these markets and failed to diligently supervise its traders.  The scope of misconduct and market harm described in the Order is unparalleled among prior spoofing cases brought by the Commission.  This enforcement action illustrates how vital it is for firms to maintain adequate surveillance systems and promptly investigate red flags.

These egregious violations warrant the historic level of monetary sanctions imposed by the CFTC.  However, it is the responsibility of the SEC, not the CFTC, to determine who is subject to registration requirements for the offer and sale of securities, and whether such misconduct warrants any disqualifications in the securities markets.

Various SEC regulations, including Regulations A and D, exempt companies from the requirement to register securities offerings with the SEC. "Bad actors" found to have committed certain violations of the securities laws are automatically disqualified from claiming such exemptions absent a determination by the SEC to provide a waiver.  SEC regulations also provide for automatic disqualification for certain violations of the Commodity Exchange Act ("CEA").  However, under those SEC regulations, the automatic disqualification does not apply if the CFTC "advises" the SEC that disqualification under Regulations A and D should not arise as a consequence of the CFTC's order.

This SEC-created process has complicated the CFTC's ability to settle its own enforcement cases without resource-intensive litigation.  Respondents in CFTC cases subject to automatic disqualification under the SEC's regulations often do not agree to settle their CFTC cases unless and until either the SEC grants a waiver of the disqualification, or the CFTC "advises" the SEC that the disqualification shall not apply.  In a number of instances, such as this one today, rather than indefinitely delay enforcement of the CEA in anticipation of a potential waiver by the SEC, CFTC enforcement staff will notify SEC staff of the request to waive the bad actor provisions.  Where SEC staff does not object or raise concerns, the Commission will then "advise" the SEC that the disqualification shall not apply.  Essentially, the SEC advises the CFTC on whether the CFTC should advise the SEC that the SEC's regulation shall not apply.  This circular consultation obscures public transparency and accountability and wastes scarce CFTC resources.

More fundamentally, the CFTC's advice on the application of the SEC's regulations has no legal effect.  Congress has not authorized the CFTC-the federal derivatives regulator-to determine whether companies should be required to register securities offerings with the SEC.  Nor did it authorize the SEC to delegate this responsibility to the CFTC.

Accordingly, any advice the CFTC offers about compliance with securities registration requirements is, as the term indicates, purely advisory and has no effect on JPMorgan's qualifications under the securities laws.  For this reason, although I disagree with the proffering of this advice, its inclusion does not affect my overall support of this enforcement action.

As I have said before, the CFTC and the SEC should develop a process in which the SEC exclusively will consider and decide whether a company subject to a CFTC enforcement order should be exempt from registration under the securities laws, within a timeframe that does not unreasonably delay the CFTC's issuance of the order.  I urge my colleagues at the SEC to continue to work with us to speedily resolve this issue.

[F]rom approximately October 2019 through May 2021, Porter and KatchPips FX fraudulently solicited and accepted funds from 18 customers to participate in forex commodity pool. Customers were told that the forex commodity pool would earn 3 percent to 10 percent each month and that the pool would be traded through a registered retail forex dealer. Instead of placing customer funds into a forex commodity pool, Porter and KatchPips FX misappropriated the vast majority of customer funds for personal expenses such as food, rent and vacations. -Despite operating a forex commodity pool, neither Porter nor KatchPips FX was ever registered with the CFTC in any capacity. Customers suffered losses totaling over $187,000.

[I]nteractive Brokers' supervisory failures were discovered on April 20, 2020, when the benchmark West Texas Intermediate light, sweet crude oil (CL) futures contract on CME Group Inc.'s New York Mercantile Exchange (NYMEX) traded into negative prices, settling at negative $37.63 per barrel for the May 2020 contracts set to expire the following day. This price was the basis for determining the settlement price for certain cash-settled contracts, including the E-mini crude oil (QM) futures contract on the NYMEX and the West Texas Intermediate light, sweet crude oil (WTI) futures contract on the Intercontinental Exchange Europe. Because the QM and WTI contracts settle based on the trading of the CL contract in the settlement window, both contracts settled at negative $37.63 per barrel. Interactive Brokers customers held long positions in the May QM and WTI contracts on April 20, 2020 and experienced trading losses on those positions as a result of the firm's systems issues.

The order finds that Interactive Brokers was on notice of the possibility of negative oil futures prices prior to April 20, 2020, but did not adequately prepare and configure its electronic trading system to recognize negative prices. Specifically, Interactive Brokers failed to deploy necessary system changes before negative prices occurred resulting in two significant systems issues on April 20, 2020: (1) negative prices were not displayed to customers and customers were unable to place orders with negative-priced limit orders to buy or sell; and (2) internal minimum margin requirements were not correctly enforced prior to trade execution for trades in the WTI contract. These issues impacted hundreds of customer accounts that held long QM or WTI futures positions into settlement, and those customers experienced trading losses on April 20, 2020, initially determined by Interactive Brokers to exceed $82.57 million. 

The order recognizes Interactive Brokers' substantial cooperation and systems remediation in the form of a reduced civil monetary penalty. 

I agree with the Commission's finding that Interactive Brokers LLC (IB) violated CFTC Rule 166.3 by failing to diligently supervise its electronic trading system's preparedness for, and ability to handle, negative crude oil futures prices as occurred on April 20, 2020.

The Order being issued by the Commission states, "IB's substantial cooperation and appropriate remediation is . . . reflected in the form of a reduced civil monetary penalty." This credit results from the application of an Advisory issued by the Division of Enforcement (DOE or the Division) in 2017.  I would like to note the absence of credit to IB for self-reporting based on the Advisory, and the considerations implicated in that regard.

. . .

However, as a matter of general application, I am troubled by the position that a self-reporting credit also should be denied because IB failed to satisfy the Advisory's separate requirement that the disclosure be made "within a reasonably prompt time after the company becomes aware of the conduct."  In my view, this position reflects an unwarranted stinginess in granting credit for self-reporting, and a misguided focus with respect to achieving the Commission's objectives under our governing statute, the Commodity Exchange Act. 

. . .

I wholeheartedly support the Advisory's stated objectives of transparency in granting credit for self-reporting and utilizing such credits to increase voluntary compliance with the law.  But I believe we undermine these very objectives when self-reporting credit hinges on a company calling DOE rather than the appropriate oversight division.  And I do not believe that denying self-reporting credit to a company for failing to report a gap in its system that is not presently a problem but that might become a problem if certain events happen in the future-and that is already being remediated by the company-does anything to further our objective of increasing voluntary compliance with the law.

[F]rom approximately June 2020 to July 2021, Kraken offered margined retail commodity transactions in digital assets to U.S. customers who were not eligible contract participants. According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margin for the duration of a customer's open margined position. 

Where a customer purchased an asset using margin, Kraken supplied the digital asset or national currency to pay the seller for the asset. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days. Customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated. Kraken could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur.

These transactions were unlawful because they were required to take place on a designated contract market and did not. Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken illegally operated as an unregistered FCM.

The Commission finds that Kraken violated CEA Section 4(a) because it engaged in retail commodity transactions that are prohibited by the CEA unless traded on or subject to the rules of a DCM - a registration designation that has neither been requested by nor granted to Kraken.  But it also finds that Kraken operated as an unregistered FCM with respect to those transactions, which begs the question:  If Kraken had sought to register with the Commission as an FCM, how would it have been expected to operate?  Absent these transactions occurring on a DCM, they would continue to be illegal even if Kraken had an FCM registration.  Furthermore, how Kraken would be regulated as an FCM is not entirely clear, because many of the Commission's rules governing its regulation of traditional FCMs do not fit Kraken's role as an exchange.  It also would be unprecedented for an entity to register as both a DCM and an FCM.

In short, the application of the Commission's FCM rules to an exchange on which retail commodity transactions are traded is uncharted territory at this time.  I agree that Kraken's activities meet the definition of an FCM set out in the CEA, and that Kraken thus operated as an FCM without registering as such (though I would note this is a rather broad interpretation of the definition beyond the traditional application).  I believe that if the Commission is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the Commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the Commission will apply them in enabling the entity to conduct business with U.S. customers.

• Securities Industry Commentator
• Bill Singer