Securities Industry Commentator by Bill Singer Esq

Veteran Stockbroker Sues For Unjust Termination Involving Sales Goals and Outside Business Activities (BrokeAndBroker.com Blog)

In re: January 2021 Short Squeeze Trading Litigation / Antitrust Actions (Opinion SDFL)

Six defendants indicted for fraud that included targeting elderly citizens (DOJ Release)

McKinsey Affiliate to Pay $18 Million for Compliance Failures in Handling of Nonpublic Information (SEC Release)

SEC Charges Promoter with Conducting Cryptocurrency Investment Scams (SEC Release)

SEC Denies Award To Whistleblower Claimant and Permanently Bars Further Participation in the Whistleblower Program
Order Determining Whistleblower Award Claims

SEC Announces Enforcement Results for FY 2021 / Agency Brought Significant Actions in Traditional and Emerging Areas; Whistleblower Program Surpassed $1 Billion in Awards (SEC Release)

SEC Proposes Updates to Electronic Recordkeeping Requirements / Amendments Will Help Modernize How Broker-Dealers Preserve Electronic Records and Enhance the Requirements for Security-Based Swap Entities (SEC Release)

Worms and Dinosaurs: Statement on the Proposed Amendments to Modernize How Broker-Dealers Preserve Electronic Records (Statement by SEC Commissioner Hester M. Peirce)

SEC Proposes Rule to Provide Transparency in the Securities Lending Market Proposed Rule Would Increase Availability of Information Regarding Securities Lending Transactions (SEC Release)

The Ex-Wife, the Ex-Husband Stockbroker, the Two FINRA Arbitrations, the Stale Case, the Default Case, and the Appeal (BrokeAndBroker.com Blog)

Two of Three FINRA Arbitrators Ironically Disappear In Unexplained Expungement Award (BrokeAndBroker.com Blog)

DreamFunded Dream Faded At FINRA And SEC Declines to Stay Expulsions and Bars (BrokeAndBroker.com Blog)

This putative class action is brought on behalf of individual investors (the "Retail Investors") who suffered losses as a result of Defendants' response to a "short squeeze" - a situation in which stocks or other assets rise sharply in value, distressing short positions. (See id. ¶ 12). This short squeeze occurred in late January 2021, as the Retail Investors rapidly purchased the Relevant Securities,4 exposing those with short positions in the Relevant Securities to "massive potential losses[.]" (Id. ¶ 7 (alteration added); see id. ¶ 6). According to Plaintiffs, Defendants conspired to prevent these losses by "artificially constrict[ing] the price appreciation of the Relevant Securities," in violation of the Sherman Act, 15 U.S.C. § 1. (CCAC ¶ 16 (alteration added); see id. ¶¶ 494-507)

What factual allegations are left standing that support a plausible inference of a conspiracy? 

Well, there are none - other than an allegation of parallel conduct - with respect to Defendants, E*Trade, Interactive Brokers, Apex, ETC, and PEAK6. Each of these Defendants therefore must be dismissed because "an allegation of parallel conduct and a bare assertion of conspiracy will not suffice" to state a section 1 claim. Twombly, 550 U.S. at 556. 

That leaves Robinhood and Citadel Securities. High-level executives at these firms exchanged various vague and ambiguous emails immediately before and after Robinhood imposed trading restrictions on the Relevant Securities on January 28, 2021. These emails set up telephone discussions between the executives, the substance of which is unknown to Plaintiffs. Admittedly, these emails may be somewhat suspicious given the participants and their timing. But are a few vague and ambiguous emails between two firms in an otherwise lawful, ongoing business relationship enough to "nudge[] [Plaintiffs'] claims across the line from conceivable to plausible[?]" Id. at 570 (alterations added). The Court thinks not. 

Accordingly, the CCAC is dismissed.

[T]he defendants allegedly participated in a conspiracy to defraud victims in the United States, many of whom are elderly. The conspiracy began with either robocall recordings purporting to be from a government agency or with emails purporting to be from legitimate companies. The robocall recordings and email messages provided callback numbers. When individuals called those numbers, they were connected to alleged scammers - some of whom were located in India. During these telephone calls, the scammer pretended either to work for the United States government or to represent a company.

When the scammer pretended to work for a government agency, the scammer would tell the victim that they were in some type of trouble. Oftentimes, they pretended to be a Social Security Administration employee, claiming that the victim's Social Security Number was compromised in some way.  The scammer would then tell the victim that they needed to pay money immediately, or, if they did not, they would be arrested. The scammer sometimes used actual Social Security Administration employees' names to appear legitimate.

In those instances when the scammer claimed to work for a legitimate company, they reported that the victim was entitled to a company refund. The scammer often convinced the victim to download computer software that, unbeknownst to the victim, allowed the scammer to remotely access the computer. From there, the scammer manipulated the victim's bank accounts to make it appear that, when attempting to refund the victim his or her money, the scammer "accidentally" refunded too much, and thus, the victim now owed a "debt" to the company. If the victim did not pay back this perceived debt, they would face certain consequences.

Once the scammer on the telephone scared the victims, the scammer would instruct the victim on how to pay money. Sometimes the scammer directed the victim to withdraw cash, package the cash in shipping boxes, and deliver the package as instructed. Other times, the individual on the phone would tell the victim to obtain gift cards and provide the redemption code on the back of the card. Oftentimes, the individual on the phone would tell the victim to wire money to a particular bank account; withdraw their money for cashier's checks made payable to a specific company; or deposit cash directly into a specific company's bank account.

The SEC's order finds that McKinsey's affiliate MIO Partners Inc. was investing hundreds of millions of dollars in companies that McKinsey was advising. Certain McKinsey partners oversaw MIO's investment choices and also had access to material nonpublic information as a result of their McKinsey consulting work. These partners were routinely privy to confidential information like financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management at those companies.

According to the SEC's order, MIO did not have reasonably designed policies and procedures to address the dual roles for McKinsey consultants who were involved in MIO's investment choices. For example, the order cites an instance where a McKinsey partner's access to confidential information about MIO's investments in a company through a third-party manager created a risk that one of McKinsey's units could influence the company's Chapter 11 reorganization plan in a way that favored MIO's investment.  

Technology changes faster than regulations do.  An example of this phenomenon is the electronic recordkeeping rule for broker-dealers[1] the Commission proposed to update this week.[2]  We proposed to amend the broker-dealer recordkeeping rules to eliminate the write-once/read-many ("WORM") requirement that has proven outdated and unnecessarily burdensome for firms to implement and maintain.  This rule, at twenty-five, is a dinosaur.[3]  WORM is intended to ensure that records are not altered or erased so that regulators have an accurate picture of firm's activities.  New technologies-if permitted-could give regulators even better insight into what firms do.

Technological change is a constant in our financial markets, and it generally redounds to the benefit of investors, firms, markets, and regulators.  The firms serving investors leverage new technologies to provide cheaper, more efficient, and more user-friendly services and products.  Firms use technology to monitor their own activities and to assist in regulatory oversight.

Regulators need to understand both the risks and benefits of new technology.  We need to ensure that our regulatory framework is capable of accommodating technological change while continuing to advance the regulatory mandate that Congress has entrusted to us.  Rules that, by text or interpretation, lock firms into using a specific technology well beyond that technology's "sell-by" date or that unduly delay prudent adoption of new technologies should not stand.

In the quarter-century since the Commission adopted rules imposing the WORM requirement on broker-dealers, the information technology landscape has changed significantly.  Indeed, it was apparent almost two decades ago that the rules, which mandate static recordkeeping, were unnecessarily restrictive.[4]  Broker-dealers increasingly use dynamically generated content to provide information to internal users and to their customers.  Investors in an increasingly liquid market have come to expect real-time information about market prices and account balances.  Broker-dealers cannot use static records for their own operational and compliance purposes, so many firms have two systems.  Requiring broker-dealers to maintain a wholly separate, redundant, ossified recordkeeping system that can capture only static snapshots has provided questionable benefits at great cost.

I have enjoyed working with the staff on this issue over the past few years and appreciate the hard work and careful thought they put into crafting this proposal.  I look forward to comments from the public.  I particularly want to hear whether the system requirements that the proposed rule would impose are in fact technologically neutral.  Will the proposed rule be sufficiently flexible to enable firms to incorporate new technological developments in the coming years?  After all, we do not need any more WORMs or dinosaurs in our rulebook.

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[1] The Commission also proposed to update electronic recordkeeping rules for security-based swap dealers and major security-based swap dealers.

[2] See Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Exchange Act Rel. No. 93614 (Nov. 18, 2021) available at https://www.sec.gov/rules/proposed/2021/34-93614.pdf.

[3] The current rule was originally proposed in 1993 and adopted in January 1997.  See id. at 8 n.11.

[4] In 2003, the Commission issued an interpretation that was intended to ameliorate some of these concerns with the original rule.  See Electronic Storage of Broker-Dealer Records, Exchange Act Release No. 47806 (May 7, 2003), 68 FR 25281, 25282 (May 12, 2003).  These concerns persisted, however, leading several trade associations to file a petition for rulemaking in 2017.  See Petition 4-713 (Nov. 14, 2017) filed by the Securities Industry Financial Markets Association, Financial Services Roundtable, Futures Industry Association, International Swaps Derivatives Association, and Financial Services Institute available at https://www.sec.gov/rules/petitions/2017/petn4-713.pdf.

• Securities Industry Commentator
• Bill Singer