The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

February 10, 2022












http://www.brokeandbroker.com/6280/finra-gross-expungement/
Another day and another court is forced to ponder an imponderable FINRA Arbitration Award. In today's installment, a federal court read the record of the denial of an expungement claim but can't discern "any basis on which the FINRA panel could have rested its decision." Not a glowing endorsement of FINRA's mandatory arbitration protocol. And as our publisher Bill Singer angrily notes, not a glowing endorsement of FINRA's lackluster and apparently lackadaisical Board of Governors. At what point does even one FINRA Governor stand up for fairness and due process? 

https://www.justice.gov/usao-wdny/pr/investment-club-treasurer-going-prison-two-years-embezzling-hundreds-thousands-dollars
Thomas Mann, 74,  pled guilty to an Information filed in the United States District Court for the Western District of New York to one count of wire fraud, and he was sentenced to 24 months in prison and ordered to pay $273,571.66 in restitution. As set forth in part in the DOJ Release:

[T]he Transport Investment Club (TIC), which had approximately 25 investing members, was formed in 1958, in the small community of Wellsboro, PA. Mann, a well-known high school math teacher and long-time friend of most of the TIC members, was elected treasurer of TIC in 1994. Mann's duties included collecting and disbursing funds, buying, and selling stocks as directed by TIC and its members, maintaining a set of books covering operations and assets, and preparing a monthly statement documenting the club's liquidating value, which was the total value of the club's stock holdings. Mann had sole control over the TIC bank account at Citizens and Northern Bank (C&N Bank) and the TIC investment accounts at brokerage firms. Funds collected at TIC monthly meetings were supposed to be used to purchase stocks in the TIC investment accounts as directed by the club members. Over the years, Mann regularly embezzled TIC's funds for his personal use rather than investing the funds. By February 2020, TIC's investments should have been worth approximately $290,614.05.  In actuality, Mann had embezzled all but $707.74 of TIC's stock holdings. For more than a decade, Mann routinely provided TIC members with fraudulent liquidation statements, which misrepresented the actual values of TIC's purported investments.  As one of the victims stated: "Mann's soulless duplicity and clear cunning fooled us all."

https://www.justice.gov/usao-sdny/pr/five-defendants-charged-84-million-boiler-room-fraud-and-money-laundering-scheme
-and-
SEC Charges Six U.S. Citizens in Connection with Overseas Boiler-Room Schemes (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25326.htm

In an Indictment filed in the United States District Court for the Southern District of New York
https://www.justice.gov/usao-sdny/press-release/file/1470416/download, Robert Lenard Booth a/k/a "Trevor Nicholas," Michael D'Urso, Alyssa D'Urso, Jay Garnock, and Antonella Chiaramonte were charged with one count of conspiracy to commit securities fraud and operate unlicensed money transmitting businesses, one count of conspiracy to commit wire fraud, and one count of conspiracy to commit money laundering. Further, Michael D'Urso was charged with three counts, and Alyssa D'Urso, Garnock, and Chiaramonte with one count each, of operating an unlicensed money transmitting business. As alleged in part in the DOJ Release:

Beginning in at least June 2019 and lasting through August 2021, ROBERT LENARD BOOTH, a/k/a "Trevor Nicholas," MICHAEL D'URSO, ALYSSA D'URSO, JAY GARNOCK, and ANTONELLA CHIARAMONTE participated in a sophisticated international mass-marketing investment fraud scheme to defraud investors from around the world of millions of dollars, and to launder the fraud proceeds and distribute those proceeds among the conspirators.

BOOTH ran a boiler room operation in Thailand that lied to investors and told them the boiler room was in fact a Manhattan-based investment firm. BOOTH and his co-conspirators propped up their lies with fake identities and false and misleading webpages, email addresses, and phone numbers. While purporting to sell investors from around the world securities in privately held and publicly traded American companies, BOOTH stole more than $1 million from victim-investors, depriving them of their savings.

MICHAEL D'URSO, ALYSSA D'URSO, GARNOCK, and CHIARAMONTE (the "D'URSO Crew") ran a network of shell companies and associated bank accounts in New York. Using these shell companies, the D'URSO Crew partnered with multiple boiler rooms, including BOOTH's, to receive the stolen "investment" funds from victims and then launder the money and distribute it to the various conspirators. All told, the D'URSO Crew used its shell companies to receive more than $8.4 million that was stolen from victims of the scheme. They then used their shell companies to launder more than $4.6 million of the stolen money and send it back overseas.

In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25326.pdf, the SEC charged Booth, Michael D'Urso, and Daniel T. Wellcome with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and also charged Alyssa D'Urso, Chiaramonte, and Garnock with violating and aiding and abetting those provisions. Finally, the SEC Complaint charges Booth with violating the broker registration provisions of Section 15(a) of the Exchange Act, and charges D'Urso and Wellcome with aiding and abetting Booth's registration violations. As alleged in part in the SEC Release:

[I]n 2019 and 2020, several overseas boiler rooms defrauded their victims by selling fake investments that purportedly traded on U.S. exchanges. Most victims were foreign investors and were retirees or nearing retirement. The complaint alleges that Booth's boiler room brought in at least $700,000 from 10 investors. According to the complaint, Wellcome, who then lived in the Philippines, acted as the intermediary between the boiler rooms and D'Urso, who used his daughter, Alyssa D'Urso, and Chiaramonte and Garnock, as nominees to open and manage bank accounts in New York for fake companies that D'Urso created. The boiler rooms allegedly told their victims to wire their investment funds to D'Urso's fake companies, as instructed by Wellcome and D'Urso. When investor money was received into the accounts, D'Urso allegedly skimmed a portion of the victims' funds for himself, Wellcome, and his nominees, and wired the rest back overseas to the boiler rooms.

SEC Issues Proposal to Reduce Risks in Clearance and Settlement (SEC Release)
https://www.sec.gov/news/press-release/2022-21
The SEC proposed rule changes to reduce risks in the clearance and settlement of securities
https://www.sec.gov/rules/proposed/2022/34-94196.pdf, including by shortening the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one business day after the trade date (T+1). As alleged in part in the SEC Release:

In addition to shortening the standard settlement cycle, the proposal includes rules directed at broker-dealers and registered investment advisers to shorten the process of confirming and affirming the trade information necessary to prepare a transaction for settlement so that it can be completed by the end of trade date. Further, the proposal includes a new requirement to facilitate straight-through processing, which would apply to certain types of clearing agencies that provide central matching services. Central matching service providers help facilitate the processing of institutional trades between broker-dealers and their institutional customers. The proposed rule would require new policies and procedures directed to straight-through processing and require an annual report on progress with the process.

Statement on Rules Regarding Clearing and Settling by Chair Gary Gensler

Statement on Proposal to Shorten the Settlement by Commissioner Hester M. Peirce

Statement on Proposal to Shorten the Standard Settlement Cycle by Commissioner Allison Herren Lee

Statement on the Proposed Shortening of the Settlement Cycle by Commissioner Caroline A. Crenshaw

https://www.sec.gov/news/press-release/2022-19
The SEC proposed new rules and amendments under the Investment Advisers Act of 1940 to enhance the regulation of private fund advisers and to protect private fund investors by increasing transparency, competition, and efficiency in the $18-trillion marketplace. As set forth in part in the SEC Release:

The proposed rules would increase transparency by requiring registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.

Additionally, the proposed rules would prohibit private fund advisers, including those that are not registered with the SEC, from providing certain types of preferential treatment to investors in their funds and all other preferential treatment unless it is disclosed to current and prospective investors.

The proposed changes also would create new requirements for private fund advisers related to fund audits, books and records, and adviser-led secondary transactions.

The proposals also would prohibit all private fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity; charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services and fees associated with an examination or investigation of the adviser; reducing the amount of an adviser clawback by the amount of certain taxes; charging fees or expenses related to a portfolio investment on a non-pro rata basis; and borrowing or receiving an extension of credit from a private fund client.

In addition, the SEC proposed amendments to the Advisers Act compliance rule that would require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

Statement on Private Fund Advisers Proposal by Chair Gary Gensler

Statement on Proposed Private Fund Advisers; Documentation of Investment Adviser Compliance Reviews Rulemaking by Commissioner Hester M. Peirce

Private Fund Advisers Proposal - Statement in Support of Accountability Enhancing Updates by Commissioner Caroline A. Crenshaw

Statement on Proposed Rules for Private Fund Advisers by Commissioner Allison Herren Lee

The proposed rules would require advisers and funds to adopt and implement written cybersecurity policies and procedures designed to address cybersecurity risks that could harm advisory clients and fund investors. The proposed rules also would require advisers to report significant cybersecurity incidents affecting the adviser or its fund or private fund clients to the Commission on a new confidential form. 

To further help protect investors in connection with cybersecurity incidents, the proposal would require advisers and funds to publicly disclose cybersecurity risks and significant cybersecurity incidents that occurred in the last two fiscal years in their brochures and registration statements.

Additionally, the proposal would set forth new recordkeeping requirements for advisers and funds that are designed to improve the availability of cybersecurity-related information and help facilitate the Commission's inspection and enforcement capabilities.

Statement on Cybersecurity Reforms in the Investment Management Industry by Chair Gary Gensler

Statement on Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies by Commissioner Hester M. Peirce

Statement on Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies by Commissioner Allison Herren Lee

Statement on Cybersecurity Risk Management Proposal for Investment Advisers, Registered Investment Companies, and Business Development Companies by Commissioner Caroline A. Crenshaw

https://www.finra.org/sites/default/files/fda_documents/2020065572901
%20Howell%20Gregory%20Ferguson%20CRD%204400990%20AWC%20DM.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Howell Gregory Ferguson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Howell Gregory Ferguson was first registered in 2001, and from March 5, 2010 until February 26, 2020, he was registered with LPL Financial LLC. In accordance with the terms of the AWC, FINRA imposed upon Ferguson a $10,000 fine and a two-year suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

On December 31, 2019, Ferguson signed a customer's name on two forms to request required minimum distributions from two annuities the customers owned to a bank account owned by the customer, in order to meet the 2019 deadline for the customer's annual required minimum distributions. Ferguson signed the customer's name on the forms without the customer's prior permission. He then caused those forms to be submitted to the annuity companies. 

Therefore, Ferguson violated FINRA Rule 2010.  

. . .

During May 2020, Ferguson provided false written statements to FINRA, including a false denial that he had signed the customer's name on the forms, in response to a request for information that FINRA issued pursuant to FINRA Rule 8210. Eight months later, during January 2021, after FINRA obtained Ferguson's 2019 emails about the forms, and requested information from Ferguson about those emails, Ferguson recanted his false statements and admitted that he had signed the customer's name without her permission. 

Therefore, Ferguson made false statements to FINRA in violation of FINRA Rules 8210 and 2010. 

https://www.finra.org/sites/default/files/fda_documents/202006530101
%20Buy%20the%20Block%20CRD%20287496
%20Linda%20Pierre%20Smith%20CRD%206768264%20AWC%20DM.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Buy the Block and Linda Pierre Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that 
Buy the Block is a FINRA Funding Portal Member since October 2017 and acts as the "intermediary in equity crowdfunding offerings; and that Linda Pierre Smith is the firm's founder/owner/President. In accordance with the terms of the AWC, FINRA imposed upon Buy the Block and Expulsion from funding portal membership and upon Smith a Bar from associating with any FINRA funding portal member in all capacities. The AWC asserts under "Facts and Violative Conduct":

This matter originated from Member Supervision's investigation of Respondents' potential misuse of investor funds and failure to use a qualified third party to hold investor funds as required by Regulation Crowdfunding Rule 303(e). 

FINRA Funding Portal Rule 800(a) provides, with exceptions not relevant here, that funding portal members are subject to the FINRA Rule 8000 series. FINRA Funding Portal Rule 100(a) states that associated persons of funding portals have the same duties and obligations as funding portal members under the Funding Portal Rules. FINRA Rule 8210(a)(1) states, in relevant part, that FINRA may require any "member, person associated with a member, or any other person subject to FINRA's jurisdiction to provide information orally, in writing, or electronically . . . and to testify at a location specified by FINRA staff . . .with respect to any matter involved in the investigation." A violation of FINRA Funding Portal Rule 800(a) and FINRA Rule 8210 is also a violation of FINRA Funding Portal Rule 200(a), which requires a funding portal member, in the conduct of its business, to "observe high standards of commercial honor and just and equitable principles of trade." 

On October 4, 2021, FINRA sent a request for documents and information to Buy the Block pursuant to FINRA Funding Portal Rule 800(a) and FINRA Rule 8210. On November 3, 2021, FINRA requested that Smith appear for on-the-record testimony pursuant to FINRA Funding Portal Rule 800(a) and FINRA Rule 8210. As stated during their counsels' phone call with FINRA on November 30, 2021, and by this agreement, Respondents acknowledge that they received FINRA's requests and will not produce all documents and information requested and will not appear for on-the-record testimony at any time. 

By virtue of the foregoing, Respondents violated FINRA Funding Portal Rules 800(a) and 200(a) and FINRA Rule 8210. 

http://www.brokeandbroker.com/6278/finra-rifkind-arbitration/
The nice thing about saying nothing is that it makes it difficult to put words in your mouth. All of which may be a commendable way to keep the peace. When it comes to judge's ruling on matters of fact and law, biting one's tongue fails to develop a useful record on appeal. A decision is supposed to resolve the dispute, not leave the allegations suspended in the air and open to further interpretation. A recent FINRA customer arbitration shows what happens when arbitrators take "summary" too literally.

http://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/
You know those days when you just want to pull the covers over your head and not get out of bed? Well, FINRA had one of those days. As to what caused all of FINRA's anxiety, let's start with these words in a court's order about a FINRA public customer arbitration hearing: "The transcripts satisfy the Investors' burden of proving the fraud on the panel by clear and convincing evidence. The audio tapes, which were not available to the Investors until after the close of the hearing, confirm that Wells Fargo' s key witness used the delay caused by the medical emergency to materially change his testimony and offer perjured testimony in direct contravention of the earlier testimony. In addition, counsel for Wells Fargo inserted himself as a fact witness and purported to testify to the Panel himself to support the changed story."

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