Securities Industry Commentator by Bill Singer Esq

Troubling FINRA Regulatory Case: Quis custodiet ipsos custodes? (BrokeAndBroker.com Blog)

New Jersey-based trader admits to involvement in options trading scheme (DOJ Release)

SEC Charges Webcast Host for Role in Market Manipulation Scheme (SEC Release)

Former SCANA CEO Sentenced to Two Years for Defrauding Ratepayers in Connection with Failed Nuclear Construction Project (DOJ Release)

CFTC Orders ICE Clear Europe Limited to Pay a $450,000 Civil Monetary Penalty for Violating Customer Protection Regulations (CFTC Release)

FINRA NAC Affirms OHO Panel's Findings But Increases Bars From Three to Four

FINRA Department of Enforcement, Complainant, v. Jorge A. Reyes, Respondent (FINRA National Adjudicatory Council Decision)

The Ronald H. Filler Institute for Financial Services Law / New York Law School presents: "A Conversation About Current Issues Facing the Global Financial Industry"

PLI Broker/Dealer Regulation and Enforcement 2021 (Speech by Gurbir Grewal, Director, SEC Division of Enforcement)

Testimony Before the United States House of Representatives Committee on Financial Services by SEC Chair Gary Gensler / Oct. 5, 2021 (BrokeAndBroker.com Blog)

FINRA NAC Affirms OHO But Eliminates Heightened Supervision (BrokeAndBroker.com Blog)

Between approximately October 2017 and January 2020, Melnick, Ross, and at least three other individuals, conspired to execute a scheme in which they traded securities-primarily short-term call options-in large, publicly traded companies (often Fortune 500 companies) based on materially false rumors about those companies that they generated and disseminated. These materially false rumors were intended to drive up the price of the securities (both the underlying stock and options).

. . .

Ross, who was formerly a registered broker with FINRA, and the co-conspirators generated the rumors. The conspirators would often refine a proposed rumor by exchanging drafts among themselves using the Trillian instant messaging application. Melnick was a day trader and T3 Live Senior Trading Strategist. Melnick often provided a "technical evaluation" on whether a particular false rumor would be successful. After a rumor was formulated and finalized, one of the co-conspirators, identified as Individual-1 in the criminal information, was responsible for disseminating the rumor via Trillian to multiple accounts, which would in turn result in the false rumor being disseminated over one or more market subscription services, including Trade The News, TradeXchange, and Benzinga, as well as various Twitter accounts.

Before Individual-1 disseminated the rumor, Melnick, Ross, and the other co-conspirators would acquire a position in the publicly traded company that was the subject of the materially false rumor. The co-conspirators typically purchased short-term call options before (sometimes just minutes or seconds before) Individual-1 disseminated the rumor. The conspirators often (but not always) purchased short-term call options because the price of such options is more sensitive than the price of the underlying stock. It was therefore possible for Melnick and the others to earn a greater percentage return by trading short-term call options rather than the underlying stock. Melnick and the conspirators profited from their scheme by selling the options (or other securities) after they increased in price. They would typically sell off their positions shortly after the rumor was disseminated (and after the price of the option or underlying stock had increased). Melnick also had an agreement with Individual-1 to share a portion of his profits from the scheme with Individual-1.

Melnick executed at least 102 trades based on the generation and dissemination of false rumors, including in March and April 2018, when Ross traded short-term call options in Disney and Ben Franklin Resources, respectively. Overall, Melnick earned approximately $374,000 in profits from the scheme.

[F]rom February 17, 2015 through August 12, 2019, ICEU, a DCO, opened six customer segregated accounts, each clearly titled to identify them as futures customer funds, without obtaining executed acknowledgment letters from the depository prior to or contemporaneously with the opening of those accounts, or at any time thereafter, and thus failed to meet the requirements of CFTC regulations. ICEU also failed to have adequate standards and procedures designed to protect and ensure the safety and assets belonging to clearing members and their customers, as required by CFTC regulations. 

Two of the accounts ICEU opened in April 2018 and May 2019 held customer funds in connection with tri-party reverse repurchase transactions pursuant to an investment services agreement. In aggregate, the two funded accounts collectively held more than $500 million at one time.

Jorge A. Reyes appeals an Extended Hearing Panel decision. The Hearing Panel found that Reyes, a former registered representative of former FINRA member CP Capital Securities, Inc. ("CP Securities"), engaged in conduct that, in several ways, violated the federal securities laws and FINRA Rules. The Hearing Panel's findings include that Reyes fraudulently and negligently misrepresented and omitted material facts when he recommended and sold to customers of CP Securities promissory notes issued through private placements by three limitedliability companies affiliated with the broker-dealer-CP US Income, LLC ("CP Income"), CP Venture Capital, LLC ("CP Venture I"), and CP Venture Capital II, LLC ("CP Venture II"). The Hearing Panel's findings include further that Reyes improperly used and converted funds, made recommendations in violation of reasonable-basis and customer-specific suitability requirements, and used marketing materials that violated the standards that apply to the public communications of FINRA members and their associated persons. For his misconduct, the Hearing Panel imposed a succession of bars-three in total-prohibiting Reyes from associating with any FINRA member in any capacity, and it ordered that Reyes pay more than $4 million in restitution. 

After a thorough review of the record, we affirm the Hearing Panel's findings, in part, and modify the sanctions it imposed.

. . .

We find that Reyes fraudulently misrepresented and omitted material facts, in violation of Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010. We also find that Reyes made unsuitable recommendations to a particular customer, in violation of FINRA Rules 2111 and 2010. We further find that Reyes converted funds, in violation of FINRA Rule 2010. Finally, we find that Reyes created and used marketing materials that violated the standards that apply to the public communications of FINRA members and their associated persons, in violation of FINRA Rules 2210 and 2010. Accordingly, we bar Reyes from associating with any FINRA member in any capacity for each of the four causes of misconduct for which we find Reyes liable under the federal securities and FINRA rules. These four separate bars are effective immediately upon issuance of this decision. We also affirm the Hearing Panel's order that Reyes pay restitution in the sum of $4,009,000 and hearing costs of $14,226.97, and we impose appeal costs of $1,600.31. 

Recordkeeping violations may not grab the headlines, but the underlying obligations are essential to market integrity and enforcement. Take for example an enforcement action the Commission brought last year against a California broker-dealer for failing to preserve business-related text messages.The SEC's order found that some of the firm's registered representatives used their personal devices when communicating with each other, with firm customers, and with other third parties concerning, among other things, the size of orders, the timing of trades, and the pricing of certain securities. These messages were potentially responsive to a records request SEC staff made to the firm in an unrelated investigation and the firm's failure to retain and produce them directly impacted that investigation. 

Unfortunately, this is not an isolated example. We continue to see in multiple investigations instances where one party or firm that used off-channel communications has preserved and produced them, while the other has not. Not only do these failures delay and obstruct investigations, they raise broader accountability, integrity and spoliation issues. 

A proactive compliance approach requires market participants to not wait for an enforcement action to put in place appropriate policies and procedures to preserve these communications and anticipate these emerging challenges. Listen, many of these are not even new technological advances. After all, my 75 year-old mother has been texting my 13-year-old daughter for years, and I am certain many in this room have sent or received professional communications on personal devices or unofficial communications channels. You need to be actively thinking about and addressing the many compliance issues raised by the increased use of personal devices, new communications channels, and other technological developments like ephemeral apps.

• Securities Industry Commentator
• Bill Singer