Securities Industry Commentator by Bill Singer Esq

94 Days And Counting For FINRA's Independent Review Of Its Arbitration Selection Process  (BrokeAndBroker.com Blog)

SEC Charges BNY Mellon Investment Adviser for Misstatements and Omissions Concerning ESG Considerations (SEC Release)

UDF Executives Sentenced to Combined 20 Years in Prison (DOJ Release)

Virginia Beach Woman Sentenced for Lottery Scheme Defrauding Elderly Victims (DOJ Release)

Indiana Woman Sentenced To 48 Months' Imprisonment For Conspiracy To Commit Mail Fraud, Wire Fraud, And Money Laundering In Advance-Fee Fraud Scheme Targeting Deaf And Elderly (DOJ Release)

SEC Charges Wells Fargo Advisors With Anti-Money Laundering Related Violations (SEC Release)

FINRA Fines and Suspends Rep for Misrepresentations About Fund Performance

In the Matter of Blakely Page, Respondent (FINRA AWC)

[F]rom July 2018 to September 2021, BNY Mellon Investment Adviser represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case. The order finds that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.

Founded in 2003 and headquartered in Grapevine, UDF utilized a family of five funds - UDF I, II, III, IV, and V - to invest in various residential real estate developers and private homebuilders.

When developers failed to repay money they borrowed from one fund, triggering multi-million dollar shortfalls, the defendants transferred money out of another fund in order to pay distributions to the original fund's investors, all without disclosing the transfers to the SEC and the investing public.

signed a cease-and-desist order with the United States Postal Service in June 2019, in which she agreed to stop participating in fraudulent lottery and sweepstakes schemes. In those schemes, victims would be falsely told they had won millions of dollars but needed to first pay thousands of dollars in taxes and fees to receive their winnings. After signing the order, Miller immediately resumed her participation in the scheme and continued until she was arrested in May 2021. Miller would deposit the money the victims sent her into her personal bank accounts, and then convert it and funnel it to her co-conspirators. Miller also forged victim signatures on fraudulent checks and mailed locked briefcases to victims. The victims were told the briefcases contained their winnings and that they would receive the combination to the lock when they paid their taxes and fees. However, Miller had packed the briefcases with Hampton Roads newspapers and magazines. In sum, about ten victims were defrauded of over $220,000. Some victims lost their life savings.

[S]ummerlin was convicted in June 2021, of accepting over $1.2 million from victims of cross-border advance-fee schemes following a seven-day jury trial.  Many of the identified victims were either elderly, deaf, or both.  In these schemes, victims were contacted through Facebook and told that they were winners of a "deaf lottery" or that they had been selected for special and exclusive government grants or other programs.  Summerlin herself is deaf, and the trial and other court proceedings were conducted with a team of American Sign Language (ASL) interpreters. 

In order to claim their supposed prize, grant, or other financial reward, victims were directed to prepay expenses such as taxes and customs fees.  Victims were persuaded to do so with the false promise of a much larger payoff.  After making an initial payment, victims were directed to make additional larger payments.  In some cases, fraudsters were successful at getting multiple payments from victims, who never received any financial reward. 

Fraudsters contacting potential victims through Facebook, email, and text messages used fake names and photographs to disguise themselves.  These fraudsters also took over the accounts of victims so that they could lure their friends into sending money and to reassure them of the scheme's legitimacy when victims had doubts about participating.  Victims were instructed to send these payments to Summerlin, who worked as a "money mule" or intermediary for these fraudsters for approximately four years, from 2012 to 2016. 

At trial, the Government showed that Summerlin received over $1.2 million from over 100 people across the country and, in some cases, other countries such as Canada and Australia.  Victims mailed Summerlin checks, cash, and money orders.  They also wired her funds through bank-t-bank electronic wire transfers and sent her money through Western Union and MoneyGram money transfers.  The victims included a deaf elderly couple that resided in this District during the time period of the conspiracy.  The Government showed that this couple sent Summerlin around $500,000, depleting their life savings.

After receiving these funds, Summerlin rapidly withdrew them from the more than 40 bank accounts she used for these activities.  Typically, she wired a portion of the funds to coconspirators in Nigeria and Great Britain.  She also made large cash withdrawals, which were used to send funds to coconspirators and for personal use.  Finally, she sent a large number of Western Union and MoneyGram money transfers to many of the same recipients in Nigeria and Great Britain. 

Evidence at trial showed that Summerlin retained funds received from fraud victims for personal use as well.

In early 2017, Page formed a hedge fund (the Feeder Fund). The Feeder Fund was formed to pool investor funds and make an investment in another, unaffiliated hedge fund (the Master Fund). During the first two quarters of 2017, Page gathered information from the Master Fund, which he and others used to create marketing materials for the Feeder Fund. Specifically, the Master Fund provided unaudited financials claiming that the fund had realized, net of fees, a rate of return exceeding 80% in 2016. Page did not independently verify the accuracy of the performance results provided by the Master Fund, but asked others to conduct due diligence on the Master Fund. 

The marketing materials for the Feeder Fund included the performance numbers for the Master Fund that were provided by the Master Fund. However, the performance numbers provided by the Master Fund significantly overstated the Master Fund's historic rate of return, a material fact. 

Between October 2017 and October 2018, Page distributed the marketing materials for the Feeder Fund, which contained the materially inaccurate performance numbers for the Master Fund, to more than two dozen prospective investors. Page also exchanged emails with multiple prospective investors in which he affirmed the accuracy of the Master Fund's performance results as set forth in the Feeder Fund's marketing materials. He did so even after others at the Feeder Fund received information that called those performance results into question; Page did not review that information because he relied on others to do so. 

Seven different investments were made in the Feeder Fund totaling approximately $1.7 million. When the Master Fund stopped providing continuing performance information and other customary investment materials to the Feeder Fund, the Feeder Fund redeemed its investors' investments, and the investors received full redemptions. 

By making negligent misrepresentations of material fact to prospective investors, Page violated FINRA Rule 2010. 

FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

"We take this matter very seriously. FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner," said FINRA President and CEO Robert Cook. "In keeping with that commitment, FINRA's Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public."

[W]hat one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.

Court Finds FINRA Arbitration Process Not Fundamentally Fair (BrokeAndBroker.com Blog / February 4, 2022)

http://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/

Brian Leggett and Bryson Holdings, LLC, Claimants, v. Wells Fargo Clearing Services, LLC and Jay Windsor Pickett III, Respondents (FINRA Arbitration Award / 17-01077 / July 31, 2019)

https://www.finra.org/sites/default/files/aao_documents/17-01077.pdf

Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Memorandum of Law in Support of Petitioners' Motion to Vacate Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)

https://brokeandbroker.com/PDF/LeggettMotVacFultonCo191030.pdf

Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Order Granting Motion to Vacate Arbitration Award and Denying Cross Motion to Confirm Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)

https://brokeandbroker.com/PDF/LeggettOrderFultonCo220125.pdf

Federal Court Can't Find Any Basis For FINRA Arbitration Decision In HSBC Managing Director Case (BrokeAndBroker.com Blog / February 10, 2022)
http://www.brokeandbroker.com/6280/finra-gross-expungement/

In the Matter of the Arbitration Between Adam Gross, Claimant, v. HSBC Securities (USA) Inc., Respondent (FINRA Arbitration Award 21-00392 / September 3, 2021) https://www.finra.org/sites/default/files/aao_documents/21-00392.pdf

Adam Gross, Plaintiff, v. HSBC, Defendant (Complaint, United States District Court for the Southern District of New York, 21-CV-08636 / October 21, 2021)

https://brokeandbroker.com/PDF/GrossSDNYComp211021.pdf

Adam Gross, Petitioner, v. HSBC, Respondent (Order and Opinion, SDNY, 21-CV-08636 / February 8, 2022)

https://brokeandbroker.com/PDF/GrossSDNYOrdOp.pdf

FINRA Hires Firm to Conduct Independent Review of Arbitrator Selection Process (FINRA Press Release / February 18, 2022)

https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selection

WASHINGTON-FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

"We take this matter very seriously. FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner," said FINRA President and CEO Robert Cook. "In keeping with that commitment, FINRA's Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public."

Christopher Gerold, a partner in Lowenstein's Securities Litigation and Corporate Investigations & Integrity Practice Groups, will lead the independent review and report the firm's findings directly to the Audit Committee of FINRA's Board of Governors. Prior to joining Lowenstein in January, Gerold was Chief of the New Jersey Bureau of Securities from 2017-2021 and served as President of the North American Securities Administrators Association.

"We trust Lowenstein's ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.

DRS administers an arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees. Although securities firms and investment advisers often include mandatory arbitration clauses in their customer account agreements, FINRA rules do not require this practice. The arbitration forum operates in accordance with rules that have been approved by the SEC, after a finding that the rules are in the public interest. The SEC regularly examines DRS's operations.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry-brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

Audit Committee

Sec. 5.  (a) The Board shall appoint an Audit Committee. The Audit Committee shall consist of four or five Governors, none of whom shall be officers or employees of the Corporation. The Audit Committee shall include at least two Public Governors. A Public Governor shall serve as Chair of the Committee. An Audit Committee member shall hold office for a term of one year. . . .

Lance F. Drummond, Chair 

https://www.finra.org/about/governance/finra-board-governors/lance-drummond

Jack B. Ehnes 
https://www.finra.org/about/governance/finra-board-governors/jack-ehnes

Christopher W. Flint

https://www.finra.org/about/governance/finra-board-governors/christopher-flint

Linde Murphy
https://www.finra.org/about/governance/finra-board-governors/linde-murphy

Eileen K. Murray
https://www.finra.org/about/governance/finra-board-governors/eileen-murray

"We trust Lowenstein's ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.

FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

Federal Register Volume 64, Number 198 (Thursday, October 14, 1999)]

[Notices]

[Pages 55793-55796]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 99-26793]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41971; File No. SR-NASD-99-21]

Self-Regulatory Organizations; Order Approving a Proposed Rule 

Change by the National Association of Securities Dealers, Inc. To 

Create a Dispute Resolution Subsidiary

September 30, 1999.

    On April 26, 1999, the National Association of Securities Dealers, 

Inc. ("NASD'' or "Association''), through its wholly owned regulatory 

subsidiary, NASD Regulation, Inc. ("NASD Regulation''), submitted to 

the Securities and Exchange Commission ("Commission''), pursuant to 

section 19(b)(1) of the Securities Exchange Act of 1934 ("Act'') 1 

and Rule 19b-4 thereunder,2 a proposed rule change to create a 

dispute resolution subsidiary. The proposed rule change was published 

for comment in the Federal Register on June 17, 1999.3 The Commission 

received one comment letter on the proposal from the Securities 

Industry Association ("SIA'').4 This order approves the proposal.

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    1 15 U.S.C. 78s(b)(1).

    2 17 CFR 240.19b-4.

    3 See Securities Exchange Act Release No. 41510 (June 10, 

1999), 64 FR 32575.

    4 Letter from Stephen G. Sneeringer, Chairman of the 

Arbitration Committee, SIA, to Jonathan G. Katz, Secretary, 

Commission, dated July 8, 1999 ("SIA Letter'').

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I. Description of the Proposal

    The Association is proposing (i) to create a dispute resolution 

subsidiary, NASD Dispute Resolution, Inc. ("NASD Dispute 

Resolution''), to handle dispute resolution programs; (ii) to adopt by-

laws for the subsidiary; and (iii) to make conforming amendments to the 

Plan of Allocation and Delegation of Functions by NASD to Subsidiaries 

("Delegation Plan''), the NASD Regulation By-Laws, and the Rules of 

the Association.

A. Background

    The Association's arbitration and mediation programs were operated 

by the NASD Arbitration Department until 1996, when those functions 

were moved to NASD Regulation following a corporate reorganization. 

This reorganization in part grew out of recommendations of a Select 

Committee formed by the NASD and made up of individuals with 

significant experience in the securities industry and NASD governance 

("the Rudman Committee'').5 The Rudman Committee reviewed the 

Association's arbitration and mediation programs from December 1994 

through August 1995. The Rudman Report was issued in September 1995.

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    5 Report of the NASD Select Committee on Structure and 

Governance to the NASD Board of Governors (September 1995) ("Rudman 

Report'').

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    In September 1994, the NASD established the Arbitration Policy Task 

Force, headed by David S. Ruder, former Chairman of the SEC ("the 

Ruder Task Force''), to study NASD arbitration and recommend 

improvements. The Ruder Task Force, composed of eight persons with 

various backgrounds in the area of securities arbitration, met from the 

Fall of 1994 to January 1996, when its Report was issued.6

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    6 Report of the Arbitration Policy Task force to the Board of 

Governors National Association of Securities Dealers, Inc. (January 

1996) ("Ruder Report'').

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    Both the Rudman Committee and the Ruder Task Force made 

recommendations that affected the arbitration program. The Rudman 

Committee recommended that the NASD reorganize as a parent corporation 

with two relatively autonomous and strong operating subsidiaries, 

independent of one another. The resulting enterprise would consist of 

NASD, Inc., as parent, The Nasdaq Stock Market, Inc. ("Nasdaq'') as

[[Page 55794]]

one subsidiary to operate Nasdaq, and a new subsidiary, NASD 

Regulation, Inc., to regulate the broker-dealer members of the NASD.7 

The Ruder Report recommended that the dispute resolution program be 

housed either in the parent or in NASD Regulation.8 The Arbitration 

Department was placed in NASD Regulation in early 1996 based on the 

recommendation of the Rudman Committee,9 and the name of the 

department was changed to the Office of Dispute Resolution ("ODR'') 

shortly thereafter, to reflect the full range of dispute resolution 

mechanisms.

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    7 Rudman Report at R-8.

    8 Ruder Report at 151-52.

    9 Rudman Report at R-8.

. . .

• Securities Industry Commentator
• Bill Singer