Securities Industry Commentator by Bill Singer Esq

No-Show FINRA Member Firm Loses Customer Arbitration But Where is FINRA When It Comes To Collecting on the Award? (BrokeAndBroker.com Blog)

Risky Whiskey - Securities Commissioner Stops International Investment Scheme (TSSB Release)

President's Working Group Report on Stablecoins (Statement by SEC Chair Gary Gensler)

Prepared Remarks Before the SIFMA Annual Meeting (Statement by SEC Chair Gary Gensler)

Orville Broker-Dealer Charged with Securities Fraud (DOJ Release)

SEC Charges Two Additional Defendants in Pump-And-Dump Scheme (SEC Release)

New York Man Admits Defrauding Investors of More Than $3.5 Million through Securities Offering Scheme  (DOJ Release)

SEC Charges Attorney with Assisting Prime Bank Scheme (SEC Release)

California Attorney Pleads Guilty To Multimillion-Dollar Investment Fraud Scheme (DOJ Release)

No Margin For Error With Options Expiration (BrokeAndBroker.com Blog)

Today, the President's Working Group on Financial Markets (PWG), along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, published a thoughtful report on stable value coins, or so-called stablecoins.

Stablecoins are crypto tokens pegged or linked to the value of fiat currencies. The existing stablecoin market is worth nearly $130 billion,[1] having grown 20-fold in the last 20 months.

These stablecoins are embedded in crypto trading and lending platforms. Though they represent only about 5 percent of all crypto assets,[2] in October, more than 75 percent of trading on all crypto trading platforms occurred between a stablecoin and some other token.[3]

As the report notes, "stablecoins, or certain parts of stablecoin arrangements, may be securities, commodities and/or derivatives."

Thus, the use of stablecoins presents a number of public policy challenges with respect to protecting investors.

Further, stablecoins may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and other safeguards against illicit activity.

As the report also acknowledges, some stablecoin issuers may seek for these tokens to be used for payments in the future. This, along with the intertwined nature of stablecoins with crypto trading and lending platforms, raises emerging financial stability concerns.

The PWG report highlights a number of recommendations to address these public-policy challenges. While Congress and the public evaluate this report, we at the SEC and our sibling agency, the Commodity Futures Trading Commission, will deploy the full protections of the federal securities laws and the Commodity Exchange Act to these products and arrangements, where applicable.

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[1] Numbers as of Oct. 31. See The Block, "Total Stablecoin Supply," available at https://www.theblockcrypto.com/data/decentralized-finance/stablecoins.

[2] Total crypto market capitalization of $2.65 trillion as of Nov. 1, per https://coinmarketcap.com/.

[3] See The Block, "Share of Trade Volume by Pair Denomination," available at https://www.theblockcrypto.com/data/crypto-markets/spot.

Thank you. It's good to be here at the annual meeting of the Securities Industry and Financial Markets Association - what we all know as SIFMA. John [Rogers], I look forward to your questions.

As is customary, I will note that I am not speaking on behalf of the Commission or SEC staff.

The SEC has a three-part mission: protecting investors, facilitating capital formation, and maintaining that which is in the middle: fair, orderly, and efficient markets.

We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe's capital markets.[1] This exceeds even our impact on the world's gross domestic product, where we hold a 24 percent share.[2]

Further, U.S. market participants rely on capital markets more than market participants in any other country.

For example, debt capital markets account for 80 percent of financing for non-financial corporations in the U.S. In the rest of the world, by contrast, nearly 80 percent of lending to such firms comes from banks.[3]

We can't take our leadership in capital markets for granted, though. New financial technologies continue to change the face of finance for investors and issuers. More retail investors than ever are accessing our markets. Other countries are developing deep, competitive capital markets as well.

Today, before I take John's questions, I thought I might share some thoughts on market structure. Because of rapidly changing technology and business models, I think we at the SEC need to look for opportunities to freshen up our rules to continue to maintain markets that are the envy in the world.

I'd like to discuss market structure in the context of the underlying principles of efficiency, competition, and transparency; market integrity; and resiliency. Albeit somewhat reordered, these three principles map to that middle arm of our mission to maintain efficient, fair, and orderly markets.

First, a few thoughts on the markets I'll discuss:

The $22 trillion Treasury market[4] is integral to our overall capital markets as well as to global markets. It is the base upon which so much of our capital markets are built. They are how we, as a government and as taxpayers, raise money: We are the issuer. During the start of the Covid crisis, as well as in 2014 and 2019, we observed challenges in this market.

The $25-plus trillion non-Treasury fixed income markets are so critical to issuers. They include corporate bonds, a $10 trillion market; municipal bonds, a $4 trillion market; and asset-backed securities (which back mortgages, automobiles, and credit cards), a $13 trillion market.[5] They are nearly 2.5 times larger than the commercial bank lending of about $10.5 trillion in our economy.[6]

Our nearly $50 trillion equity markets[7] make up nearly half of our capital markets and a far greater proportion of the retail public's investing.[8] The Commission has taken up work with respect to market data under former Chairman Jay Clayton. I think we can build upon those efforts. Over the past 16 years, since the Commission took up Regulation National Market Structure, technology has expanded by leaps and bounds.

Finally, the security-based swaps market, while not large compared to the fixed income and equity markets, was at the core of the 2008 financial crisis. This market remains relevant today, as the collapse in March of Archegos Capital Management reminded us.

Ultimately, promoting fair, orderly, and efficient markets can help reduce the cost of capital for issuers and increase the rate of returns for investors across each of these markets. This helps contribute to economic growth and is a competitive advantage for our nation.

Efficiency, Competition, and Transparency

Now, to the principles. First, let me turn to efficiency, competition, and transparency.

While efficiency is in our stated mission, transparency and competition are critical components underpinning that efficiency. Further, the word "competition" was embedded in our statutes 25 years ago.[9] In rulemaking, the Commission considers efficiency, competition, and capital formation, in addition to investor protection and the public interest.[10]

Fundamentally, finance is about the pricing and allocation of risk and money in our economy. Our capital markets sit in the middle - between those who want to lay off risk and those who want to bear it, between issuers seeking to raise capital and investors seeking to grow their nest eggs.

With literally trillions of dollars of money and risk flowing through our capital markets each day, it becomes ever more important to promote efficiency in the middle. It becomes ever more important that market participants there have sufficient competition and transparency to lower economic rents, or excess profits above market competition, that might otherwise accrue.

Efficiency is about transacting at a low cost; it's about prices that capture all the available information; it's about promoting transparency, before and after the trade, and competition.

This principle is something that humankind has understood since antiquity. If you bring vendors into a public square and they compete selling apples, it's clear what the prices are, and the townspeople benefit from those competitive prices.

I've asked staff to consider ways that we can increase transparency and competition, facilitating efficiency across the entire capital markets, particularly across the four market sectors I just highlighted.

As one example, in the equity markets, I've asked staff to consider: how do we facilitate greater competition and efficiency on an order-by-order basis - when people send each order into the marketplace? I've asked staff to consider whether shrinking tick sizes, reevaluating what is included in the National Best Bid and Offer, enhancing disclosure, or leveling competition between trading venues and wholesalers could increase transparency and competition.

In the $25-plus trillion non-Treasury fixed income markets, I've asked staff to consider what reforms might be appropriate with respect to post-trade transparency and the trading platforms for corporate bonds, mortgage markets, asset-backed securities, and municipal bonds. Further, many professionals have access to some amount of pre-trade price information in the corporate bond market. I wonder if broadening the dissemination of that type of information might make this market more accessible, competitive, and liquid.

In the security-based swaps market, we have projects that will strengthen transparency to the official sector and to the public. Next Monday, security-based swaps dealers will have to start posting trades to swap data depositories, providing transparency to regulators. Then, data about these individual security-based swap transactions will be available to the public in February.

I've asked staff for recommendations on how the Commission can finalize mandates to stand up a security-based swaps execution facility regime consistent with the regime established by the Commodity Futures Trading Commission (CFTC) nearly a decade ago.

Moreover, I've asked staff to complete other unfinished Dodd-Frank mandates with respect to short selling and securities lending.[11]

Additionally, I've asked staff to think about potential rules around aggregate positions, authorized under Exchange Act Section 10B. As the collapse of Archegos showed, this may be an important reform to consider.

Market Integrity

Next, I'll turn to market integrity. Again, this maps onto the "fairness" we seek in our markets, as fairness underpins integrity.

Market integrity is about access and fairness of the markets. It's about working toward trading and price discovery processes that are free of fraud, manipulation, and other misconduct. It is embedded in so many of the rules over the decades. Every day, we at the SEC are trying to promote it, not only through our rules, but through our examinations and enforcement regimes; half of our staff works in those divisions.

Finance is about trust. Enhancing market integrity lowers the cost of capital by reducing the risk premium associated with unfairness, fraud, manipulation, and lack of trust. It also does so by promoting equal access, which facilitates greater competition among capital providers.

In the Treasury market, I've asked staff to reconsider the approach we released in 2020 that would bring certain Treasury trading platforms into the SEC's regulatory regime and to make recommendations. As part of that work, I've asked staff to consider whether we could bring other key platforms in and whether we could introduce even more transparency and competition.

With regard to our equity markets, we recently heard from the public in response to a request for comment about potential conflicts of interest and digital engagement practices, particularly in the context of payment for order flow and in exchange rebates. There could be two potential rulemakings - one with respect to investment advisers, and another with regard to broker-dealers.

What's more, after the 2008 crisis and everything that happened with credit default swaps, Congress mandated that we address anti-manipulation in security-based swaps. I've asked staff to draft a proposal for the Commission's consideration related to those mandates under Section 9j of the Securities Exchange Act of 1934.

Resiliency

Finally, I'd like to turn to resiliency. I think the SEC has a responsibility to help protect for financial stability, which maps onto many parts of our statutes, but particularly onto the "orderly" part of our mission.

Our work, starting with our oversight of clearing agencies and broker-dealers in the 1930s, has been about lowering the risk that problems in the financial sector might spill out to the rest of the economy.

Enhancing resiliency and protecting for financial stability are at the heart of the work we're doing in the Treasury market. We're working closely with our colleagues at the Department of the Treasury, across the Federal Reserve System, and at the CFTC on projects in this market.

As I mentioned earlier, I've asked staff to reconsider some initiatives on Treasury trading platforms. I've also asked them to consider how to level the playing field by ensuring that firms that significantly trade in this market are registered as dealers with the SEC, and how to bring about more central clearing in the Treasury cash and repo markets.

As it relates to the broader fixed income markets, I've asked staff to consider ways to increase resiliency in response to the challenges money market funds faced last year. Given significant growth in open-end funds and some lessons learned in spring 2020, I've also asked them to contemplate any appropriate measures to enhance the resiliency of that sector during times of stress.

With respect to the equity markets, we saw with January's market events that retail investors were restricted from trading when some brokerage firms couldn't meet their margin calls to clearinghouses. I've asked staff to make a proposal for the Commission's consideration on shortening the settlement cycle. Given today's technologies, I think certain functions could even take place on the same day, such as confirmations, allocations, and affirmations.

While I spoke about these principles in isolation, the reality, of course, is that these principles are interrelated. Together, they encompass the middle of our mission regarding the markets. Further, if we get that middle right, that benefits investors and capital formation.

Before we get to John's questions, I have a request of the audience: As we make proposals, the Commission benefits from your comments and perspectives.

While our missions may vary, I imagine that we can all agree that we should maintain markets that are the best in the world.

I'll leave it there. Thank you.

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[1] See Securities Industry and Financial Markets Association, "2021 SIFMA Capital Markets Fact Book," available at https://www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.

[2] See World Bank data: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

[3] Ibid.

[4] Statistics from Securities Industry and Financial Markets Association: https://www.sifma.org/resources/archive/research/statistics/

[5] Ibid.

[6] See Federal Reserve, "Assets and Liabilities of Commercial Banks in the United States," Table 2, Line 9, available at https://www.federalreserve.gov/releases/h8/current/default.htm.

[7] As of Sept. 30, 2021: https://siblisresearch.com/data/us-stock-market-value/

[8] See 2019 Survey of Consumer Finances: https://sda.berkeley.edu/sdaweb/analysis/?dataset=scfcomb2019

[9] See The National Securities Markets Improvement Act: https://www.congress.gov/104/plaws/publ290/PLAW-104publ290.pdf.

[10] "Whenever pursuant to this title the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation." See Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940, and Investment Company Act of 1940.

[11] See Sections 929X and 984 of the Act: https://www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf

was a financial broker-dealer and President of First American Securities, Inc., located in Orrville.  In March of 2015, it is alleged that the defendant, Person-1 and others conspired together to recruit the defendant's clients to "invest" in United RL Capital Services, LLC ("URL"), a company that purportedly financed medical laboratory developments. 

It is alleged that the defendant and Person-1 solicited investors over the phone, through letters and in person.  According to the indictment, the two misrepresented material information to the investors, including that investors' money would finance medical laboratory developments, investors would receive their money back with interest after three years and that URL was as safe or safer than other existing investments.

It is alleged that some investors, at the defendant's and Person-1's encouragement, removed money from their IRAs to invest in URL and that the defendant and Person-1 misrepresented that doing so would not result in tax penalties.   

The indictment describes how the defendant, instead of apportioning the investors' money as promised, allegedly used these funds for his benefit, including large racecar-related purchases and to pay taxes.  The indictment also alleges that when investors inquired about their investments, the defendant and Person-1 misrepresented that their investments were secure and provided some investors with sporadic, minimal payments, disguised as installments of earned interest, in order to lull investors into believing that their money was safe and being used as promised. 

According to the indictment, the defendant knew that he was being investigated in 2015 and 2016 for selling URL securities by the Financial Industry Regulatory Authority ("FINRA"), a congressionally authorized entity that licenses and regulates broker-dealers.  Despite this, it is alleged that neither the defendant nor Person-1 told prospective investors about the investigation, that First American Securities, Inc. could face closure and that the defendant could be suspended from associating with any FINRA-registered firm. 

[J]aberian and Rajkaran worked with Miller in a scheme to hijack or control at least seven defunct public issuers between September 2017 and April 2019. The amended complaint alleges that Jaberian and Rajkaran participated in the drafting and issuance of a press release containing misrepresentations of material fact about an issuer and that Jaberian posed as that issuer's CEO. Rajkaran also allegedly promoted false information about certain issuers in the scheme on various social media platforms in order to generate trading activity, and Jaberian agreed to share trading profits with Miller. By purchasing issuer shares at Miller's direction and then selling after false information was disseminated, Jaberian and Rajkaran allegedly reaped approximately $240,000 and $65,000 in profits, respectively. The amended complaint alleges that Jaberian's and Rajkaran's conduct also aided and abetted Miller's previously charged primary violations.

Beginning in 2012, Milne founded Instaprin Pharmaceuticals Inc. (Instaprin), a purported pharmaceutical corporation that operated in New York, for the stated purpose of developing a fast-acting form of powdered aspirin that could instantly stop heart attacks and strokes. Instaprin was a successor entity to another New York corporation, SPI Acquisition Corp. (SPI), which Milne founded in 2010 for the stated purpose of acquiring assets for the development of the same fast-acting form of powdered aspirin. Milne was the founder, president, and chief executive officer of Instaprin and SPI, and exercised complete and exclusive control over them, including the offer, marketing, and sale of securities issued by those entities.

From as early as 2013 and through 2018, Milne executed a scheme to defraud dozens of investors in Instaprin and SPI securities through multiple and ongoing material misrepresentations concerning, among other things, how the victims' investment money would be used and how their past investments had performed, so that Milne could misappropriate substantial sums of the investors' money for his own personal gain and enrichment. Through at least four separate unregistered securities offerings that he caused Instaprin or SPI to issue between 2013 and 2016, Milne received more than $4 million in investment proceeds from victim investors across the country, and deposited the investment funds in one or more bank accounts that he controlled.

Milne misrepresented to victim investors the manner in which he and Instaprin/SPI would maintain and use the funds raised through Instaprin securities offerings. For example, Milne represented in written offering materials transmitted to investors that their investment funds would be used to pay the "normal day-to-day operating expenses" of Instaprin, as well as "the costs involved in developing and commercializing its products," including "Batch/stability testing," "Manufacturing," "Market/advertising consultant," and "Salaries/rent/insurance [and] General working capital." Milne also falsely represented in the offering materials that he had assembled "a very strong world renowned board of directors and medical advisory board" that included industry leaders in fields of science and finance. Milne also misrepresented to investors that specific individuals had joined Instaprin as directors, advisors, and/or shareholders of Instaprin, when in fact, those individuals were not involved with Instaprin. Milne made numerous false and misleading statements in investment updates distributed to investors between April 2014 and September 2018, including: Instaprin's product had been approved by the U.S. Food and Drug Administration (FDA); Instaprin was nearing a product launch and public stock offering; and Instaprin had contracted with a New Jersey research company for an FDA-approved clinical trial. Milne also represented that Instaprin was in negotiations with large pharmaceutical corporations for joint busines ventures, which Milne represented were imminent. Milne made these and other similar representations knowing that they were false and misleading.

Milne misappropriated a substantial majority of the investors' funds to pay out distributions to other investors in a Ponzi-scheme fashion; pay for Milne's personal expenses, including a Caribbean vacation, boating expenses, divorce payments, clothing, and spa treatments; and to sustain and operate Island Raceway & Hobby Inc., a toy race car business that Milne separately owned.

In May 2019, the Securities and Exchange Commission filed a civil complaint against Milne and Instaprin in New Jersey federal court regarding the fraudulent scheme to which Milne pleaded guilty today. That matter was resolved through the entry of final judgments permanently enjoining Milne and Instaprin from violating the charged provisions of the federal securities laws, ordering full disgorgement, prejudgment interest, and civil penalties.

[K]leyman served as "paymaster" in at least nine transactions in which investors paid over $1.22 million in advanced fees to purchase, lease, and/or monetize purported bank instruments such as standby letters of credit or bank guarantees. As alleged in the SEC's complaint, Kleyman disbursed investor funds, usually within days of receipt, without conducting any inquiry into whether the investors had received their promised instruments or funding. The complaint further alleges that Kleyman had no basis to believe that the purported bank instruments existed, or that they had any value. According to the complaint, Kleyman learned of many red flags suggesting that these transactions were fraudulent, which, in fact, they were. The complaint alleges that Kleyman collected $12,499 in fees from investors for the nine transactions for which he served as escrow agent.

From at least 2012 through at least 2019, JONES solicited and obtained investments into various companies and investment funds he controlled, including purported real estate development and investment firms using variations of the names "BlueRidge," "Living City," and "Atiswin," and the purported venture capital firm Realize Holdings ("Realize").  

In fraudulently inducing victims to invest in his funds, JONES routinely made materially false oral and written statements, including in glossy brochures and legal documents that contained lies about real estate purportedly owned or otherwise controlled by BlueRidge, Living City, and Atiswin. For example, JONES falsely told investors and prospective investors that BlueRidge was developing a "resort village" on land it controlled in Washington State, and separately that BlueRidge had purchased an existing hotel in that same location, when in fact neither BlueRidge nor JONES owned or controlled any of that property. In other cases, JONES falsely claimed that his companies were under contract to purchase a ranch in Colorado, and that his companies had leased various pieces of property slated for development. Instead, JONES misappropriated investors' money, using much of it to make Ponzi-like payments to other investors to whom he owed money in connection with earlier transactions, and for personal and family expenses, including the private-school tuition of his children.

In executing his scheme, JONES also sent investors and others falsified and counterfeit documents. For example, on repeated occasions JONES provided doctored bank statements stating that he had millions of dollars in various corporate accounts, when in fact he had little or no money in such accounts. On other occasions, he provided counterfeit financial statements that falsely purported to be based on internal audits of companies that he controlled.

JONES defrauded investors-at least three of whom lived and/or transacted their banking in Manhattan-out of at least approximately $5.8 million. To prolong and conceal the fraud scheme, JONES regularly told lies designed to avoid meetings with or inquiries from victims. For example, in explaining his failure to respond promptly to questions or his reason for postponing meetings, JONES falsely told different investors, on different occasions, that one of his relatives was hospitalized and undergoing surgery. JONES also used the names of other individuals-without those individuals' authorization or knowledge-to communicate via email with investors and thus foster the illusion that JONES's businesses were viable operations with real employees.

• Securities Industry Commentator
• Bill Singer