Securities Industry Commentator by Bill Singer Esq

FINRA Arbitration Panel Finds TD Ameritrade Grossly Negligent With Form U5  (BrokeAndBroker.com Blog)

Federal Court Finds SEC Approval of FINRA Reporting Requirements "Arbitrary and Capricious" -- Cites Cost of FINRA Build-Out

Bloomberg L.P., Petitioner, v. Securities and Exchange Commission, Respondent / Financial Industry Regulatory Authority, Intervenor (Opinion, United States Court of Appeals for the District of Columbia Circuit, No. 21-1088 / August 16, 2022)

SEC Sues Three Entities and Their Founder for Unregistered Crypto Asset Securities Offerings (SEC Release)

SEC Charges 18 Defendants in International Scheme to Manipulate Stocks Using Hacked US Brokerage Accounts (SEC Release)

SEC Obtains Final Judgment Against Broker Charged with Defrauding Customers (SEC Release)

Self-Professed Bodybuilder Sentenced to Federal Prison After Stealing Money from the U.S. Department of Veterans Affairs (DOJ Release)

Platinum Partners Portfolio Manager Daniel Small Convicted of Defrauding Bondholders in a Multi-Million Dollar Scheme / Defendant Orchestrated a Rigged Vote Relating to $150 Million in Bonds (DOJ Release)

Federal Court Grants UBS Petition to Dismiss Chapter 7 Bankruptcy

In Re: Robert Earl Turner, Jr., Debtor (Opinion WDTX)

FINRA Censures and Fines Axiom Capital Management for Due Diligence As Sub-Placement Agent

In the Matter of Axiom Capital Management, Inc., Respondent (FINRA AWC)

FINRA Fines and Suspends Ascendant's CEO for Due Diligence, Supervision, and Text Messaging

In the Matter of Mark D. Martino, Respondent (FINRA AWC)

U.S. Bancorp Investments Loses FINRA Customer Arbitration

In the Matter of the Arbitration Between David Budzianowski and Helga Daftarian, jointly, on behalf of David Budzianowski Helga Daftarian, JTWROS, and David Budzianowski, individually, Claimants, v. U.S. Bancorp Investments, Inc, Respondent (FINRA Arbitration Award)

Petitioner Bloomberg L.P. ("Bloomberg") seeks review of the Securities and Exchange Commission's (the "Commission" or "SEC") decision to approve new reporting requirements proposed by the Financial Industry Regulatory Authority, Inc. ("FINRA"), Intervenorfor-Respondent, affecting underwriter members in the corporate bond market. FINRA represented to the SEC that market inefficiencies in the corporate bond market reduce market participation, decrease liquidity, and increase transaction and opportunity costs. To address these problems, FINRA proposed to consolidate and provide market-wide access to "core" reference data for new issues of corporate bonds through a subscription-based service. The Commission ultimately concluded that FINRA's proposal would impose a limited burden on competition and enable market participants to obtain broad, uniform access to corporate bond reference data before the first transaction in a new-issue bond. Accordingly, the Commission approved FINRA's proposal. 

Importantly, though, during the rulemaking process, various commenters raised concerns about FINRA's proposed data service. In relevant part, Bloomberg commented that FINRA did not provide any information about how much it will cost to build and maintain the database, and to what extent FINRA will pass those costs along to market participants. 

For the reasons explained below, we find that pursuant to the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), the Commission's approval of FINRA's proposal was arbitrary and capricious because the Commission neglected to give a reasoned explanation in response to Bloomberg's significant concerns about the costs that FINRA, as well as market participants, will incur in connection to the creation and maintenance of the data service. Accordingly, we grant Bloomberg's petition for review on the grounds that the Commission's failure to respond to significant public comments about the costs associated with FINRA's proposal was arbitrary and capricious. We deny Bloomberg's petition for review with respect to itsremaining arguments. We remand without vacatur for the Commission to respond appropriately. 

Opponents of FINRA's proposal, including Bloomberg, the Heritage Foundation, and the Healthy Markets Association, submitted comments arguing that FINRA failed to establish the existence of a market structure problem that requires regulatory intervention, as mandated under Section 15A(b)(6) of the Exchange Act, 15 U.S.C. § 78o-3(b)(6). Assuming that a problem exists, Bloomberg suggested that it was "questionable whether a single [self-regulatory organization] would provide more accurate, complete and timely service than competing private sector providers" and FINRA provided no evidence that its proposal would reduce broken trades and errors. J.A. 193 n.28 (internal quotation marks and citation omitted). Further, Bloomberg submitted that the impact of any errors in a centralized system would be magnified. Id. The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness commented that FINRA's proposal would increase regulatory and liability burdens for underwriters without any clear benefit. Bloomberg echoed this concern, contending that the rule's imposition of additional burdens on underwriters would disproportionately impact smaller underwriters. 

In addition, Bloomberg commented that FINRA's proposal was "antithetical to the most foundational principles of administrative law and cost-benefit analysis" because FINRA failed to quantify the direct and indirect costs of its proposed service (or explain why certain costs could not be quantified). J.A. 162. Bloomberg cautioned that self-regulatory organizations and agencies should not be "permitted to ignore regulatory burdens in this manner." Id. Otherwise, "agencies could propose laudable programs heedless of their pricetags, seek their provisional approval without respect to cost, and then-once established-propose a fee that was by now necessary to sustain an already approved program." Id. "[A]t a minimum," Bloomberg commented, "the Commission must . . . know what [the] costs [of the proposed rule] are." See id.

All in all, by suggesting that the Commission's decision rests on speculation that a reference data access problem exists, Bloomberg overlooks substantial evidence submitted by FINRA-not merely anecdotes from supposedly biased market participants-that there are information asymmetries and inefficiencies in the market for new issue corporate bond reference data. For all these reasons, Bloomberg's argument- that the SEC merely took FINRA's word for the existence of a reference data access problem-does not hold water.

All in all, Bloomberg's argument that FINRA's data service will impose an unnecessary burden on competition lacks merit. First, Bloomberg mischaracterizes FINRA's proposed data service as a competitive endeavor that will displace incumbent data vendors, and not a supplementary service that will foster competition and improve efficiency and timeliness in the reference data market. Also, Bloomberg overlooks the existence of underwriters' existing data reporting processes, which make continued data collection "less burdensome than if new processes had to be established." Resp.'s Br. at 40. 

Moreover, Bloomberg's own comments during the agency proceedings undermine its arguments here. As the Commission mentioned in its January 2021 order, Bloomberg acknowledged that "market participants currently demand more reference data fields than FINRA is proposing to collect." J.A. 298 n.249. In other words, FINRA's proposal will facilitate additional competition by imposing data reporting requirements on underwriters, which will in turn level the playing field for private data providers who face a reference data access problem. Underwriters would still be free to provide a broader scope of reference data elements to data vendors, and in turn, data vendors can meet the market's demand for more comprehensive data.

The Commission's analysis overlooks a key problem: if FINRA's data service ends up being unreasonably expensive, then the agency cannot protect market participants from footing the bill for it at the fees stage. To be sure, the Commission is right that it could suspend and disapprove FINRA's proposal at the fees stage, see id., but at that point, FINRA will have already incurred the financial burden of building the service. That cost-which could be millions, or even tens of millions, of dollars-must be paid by someone, whether the subscribers 26 of the service or the broker-dealers who make up FINRA. In short, the Commission approved FINRA's proposal without responding to comments that urged it to assess not only the financial impact of the service on FINRA, but also the entities that fund FINRA. That is not reasoned decisionmaking.

First, we find that on remand, "the Commission can redress its failure of explanation" by analyzing the costs 27 FINRA will incur in building and maintaining its data service and how the costs of building the data service will be remunerated if the fee proposal is ultimately disapproved by the Commission. See id. at 1332. Second, we find that vacatur of the order would "needlessly disrupt" the Commission and FINRA's efforts to address market inefficiencies resulting from untimely, inconsistent, and inaccurate collection and dissemination of new issue reference data in the corporate bond market. See id. 

[I]n 2017, Roets, Dragonchain, and the Foundation conducted an unregistered offering of Dragon tokens ("DRGN") in two phases: (1) a discounted "presale" in August 2017 to members of a crypto investment club, and (2) an initial coin offering ("ICO") in October and November 2017 marketed predominately to crypto investors. Through this offering, the defendants allegedly raised approximately $14 million from approximately 5,000 investors around the world, including the United States. According to the SEC's complaint, the defendants marketed the offering to crypto investors, and their personnel and agents publicly discussed DRGN's investment value, pricing, and "listing" on trading platforms, among other things. Then, between 2019 and 2022, Roets, Dragonchain, the Foundation, and TDC allegedly offered and sold approximately $2.5 million worth of DRGNs to cover business expenditures to further develop and market Dragonchain technology, some of which occurred after a state regulator found DRGNs to be securities.

[I]n late 2017 and early 2018, hackers accessed at least 31 U.S. retail brokerage accounts and used them to purchase the securities of Lotus Bio-Technology Development Corp. and Good Gaming, Inc. The unauthorized purchases allegedly enabled fraudsters, who already controlled large blocks of Lotus Bio-Tech and Good Gaming stock, to sell their holdings at artificially high prices and reap more than $1 million in illicit proceeds. According to the complaint, Davies Wong of British Columbia, Canada, and Glenn B. Laken of Illinois, respectively, controlled the majority of the Lotus Bio-Tech and Good Gaming stock that was sold while the hacking attacks were being carried out, and Mohamed coordinated with Wong, Laken, and others to orchestrate the attacks. The complaint also alleges that Richard Tang of British Columbia, Canada, was involved with both the Lotus Bio-Tech and Good Gaming schemes.

engaged in a high-cost, in-and-out trading strategy in customer accounts without conducting reasonable due diligence to determine whether the trading strategy could deliver even a minimal profit for his customers. According to the complaint, Barish also engaged in widespread unauthorized trading in customer accounts. As alleged in the complaint, Barish's strategy resulted in over $800,000 in losses to customers, while netting Barish and his firm over $400,000 in commissions.

[A] federal district judge in Ft. Pierce has sentenced a military veteran, and self-proclaimed bodybuilder, to one year in federal prison after lying to the VA in order to obtain disability benefits.

Zachary Barton, a veteran of the United States Army, lied about the extent of his mental and physical impairments to receive U.S. Department of Veterans Affairs (VA) disability benefits to which he was not entitled.  Specifically, Barton manipulated the results of subjective tests of mental health claiming he was in combat, which made him eligible for benefits relating to PTSD and self-reported his inability to lift weights more than 10-20 pounds or walk without the benefit of a cane.  The VA found that Barton was 100% disabled based on the manipulated test responses.

Despite his claimed impairments to the VA, surveillance footage, social media posts, and other evidence showed Barton had no such limitations.  Barton engaged with and provided workout advice to others and performed strenuous weight-lifting activity, including leg pressing 650 pounds and chest pressing over 300 pounds.  He performed activities of daily life such as shopping, driving a car and walking his pet without any difficulty.  

In addition to the one-year prison sentence, the court ordered Barton to pay $245, 932.52 in restitution to the VA.

Platinum was a New York City-based hedge fund founded in 2003.  The evidence at trial established that between approximately November 2011 and December 2016, Small, along with co-conspirators including Mark Nordlicht, the founder and Chief Investment Officer of Platinum, and David Levy, the co-Chief Investment Officer of Platinum, orchestrated a fraudulent scheme to defraud third-party holders of Black Elk's publicly traded bonds (the bondholders) by diverting to Platinum the proceeds from the sale of the vast majority of Black Elk's most lucrative oil fields even though the bondholders had priority over Platinum's equity interests.

To execute this scheme, in early 2014, Small, Nordlicht, Levy and others caused Platinum to secretly purchase Black Elk bonds on the open market and gain control of $98 million of the $150 million of outstanding bonds.  The bonds were then transferred through a number of related entities to conceal their ownership and control by Platinum.  Small, Nordlicht, Levy and their co-conspirators then rigged a consent solicitation vote to amend the Black Elk indenture so that the proceeds from the sale of Black Elk's best assets would be paid to the preferred equity - which was held by Platinum and Platinum insiders - ahead of the other bondholders.  Notably, non-Platinum related bondholders overwhelmingly voted against changing the indenture; one testified that bondholders would never knowingly give up being "as senior as possible in the capital structure" for "nothing" in return, which he characterized as an "irrational choice."

After the rigged vote was complete, Small, Nordlicht, Levy and their co-conspirators took millions of dollars from the asset sale for themselves, family members and friends, including approximately $7 million to Nordlicht's father, approximately $250,000 to Levy, approximately $100,000 to Small and approximately $2 million to the brother of another co-conspirator.

In July 2019, Nordlicht and Levy were convicted on the same charges by a federal jury following a two-month trial.  Both defendants are awaiting sentencing.   

The Debtor was an employee of UBS from March 1996 until October 21, 2021. While working for UBS, the Debtor provided financial- and investment-advisory services as a member of a team headed by his wife, Stephanie L. Turner. UBS alleges that, while the Debtor was employed with UBS, the Debtor misappropriated over $17 million from at least twenty-eight UBS customers by soliciting sham investments in fake annuities purportedly issued by Fairfax Financial Corporation ("Fairfax"). ² After discovering the Debtor's misappropriations, UBS took steps to reimburse the customers harmed by the Debtor's allegedly fraudulent scheme and, according to UBS's proof of claim, settled with twenty such customers for a total of $12,640,970.09. 

UBS seeks to initiate an arbitration proceeding with the Financial Industry Regulatory Authority against the Debtor ("FINRA Arbitration").³ To that end, and to ensure that the Debtor did not abscond with, hide, or transfer any assets before the FINRA Arbitration, UBS filed a petition for a writ of attachment ("Writ of Attachment") against the Debtor and Stephanie Turner in the 414th Judicial District Court of McLennan County, Texas, on May 6, 2022. Six days later, the Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code. A hearing on the Writ of Attachment was scheduled for the next day, though the automatic stay prevented it from going forward. The Debtor testified at the meeting of creditors that he learned of the Writ of Attachment about two days before the scheduled hearing. He then met with his attorney the day before the hearing and, under the advice of his attorney, decided to file for bankruptcy.

The Debtor filed his chapter 13 petition without schedules, statements, or other required documents, though the Debtor subsequently filed these documents. According to the schedules, the Debtor is now retired and subsists on monthly income of $6,380 from a combination of Social Security, rent received for a rental property, and note payments on a Little Rock, Arkansas mortgage. After expenses, the Debtor claims his monthly net income is only $422. Despite this modest income, the Debtor lists real and personal assets totaling $5,885,467.43.

On the other side of the ledger, the Debtor's schedules list total secured debt of $16,600,all of which is held by the McLennan County Tax Office, and $0 of unsecured debt. McLennan County filed a proof of claim for $3,063.33 for estimated 2022 property taxes. The City of Waco, Midway ISD ("City of Waco") filed a proof of claim for $12,296.82 for estimated 2022 property taxes. These proofs of claim represent estimated, future property taxes that have not yet been assessed or come due.

The Debtor's Schedule E/F lists UBS as holder of an unsecured claim in an unknown amount based on UBS's pending lawsuit. The Debtor shows that this claim is contingent, unliquidated, and disputed. UBS filed an amended proof of claim in the amount of$17,324,217.13, which represents $8 million in total principal investments in Fairfax annuities plus the interest that the various UBS customers believed that they were accruing from these annuities. Still, an addendum to the amended proof of claim states that UBS has settled with only twenty of the twenty-eight customers for a total of $12,640,970.09. 

The Debtor filed a proposed chapter 13 plan concurrently with the schedules. The plan proposes to pay $500 a month for thirty-six months for a base amount of $18,000. The plan lists only one creditor, the McLennan County Tax Office, with a secured claim of $16,600 to be paid at an interest rate of 12%. The plan also contains the following "nonstandard provision": "An adversary will be filed to determine the amount of [l]iability if any owed to UBS Financial, creditor in this case. Once the amount of debt is determined by the Court, the Debtor will provide for payment of the debt, if any, to be paid to this creditor."4 The chapter 13 trustee and UBS have objected to the Debtor's plan, and the plan has not been confirmed. 

UBS filed the Motion to Dismiss one day before the Debtor filed his schedules and plan. The Court held a hearing on the Motion to Dismiss on June 22, 2022. The Debtor filed a response on the morning of the hearing. At the end of the hearing on June 22, the Court continued the hearing until August 2, 2022, at which point the parties presented more evidence and testimony. The Court then took this matter under advisement.

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Footnote 2: UBS alleges that Fairfax is itself a fraudulent scheme perpetrated by the Debtor and his friend Mark Woodward, who held himself out as the Managing Trustee of Fairfax. 

Footnote 3: UBS asserts that the Debtor signed a written agreement with UBS to arbitrate all disputes between them. As of the petition date, UBS has not yet begun the FINRA Arbitration. This opinion takes no position on the proposed arbitration proceedings.

This bankruptcy case is a paradigmatic two-party dispute between the Debtor and UBS. The Debtor filed this case on the eve of a hearing on a Writ of Attachment filed by UBS in state court in McLennan County. Despite the Debtor's efforts to bring the dispute within the jurisdiction of this Court, the bankruptcy court is not where this sort of litigation belongs. Further, because the Debtor's other creditors are either greatly oversecured, postpetition ad valorem tax claims that would be paid in the ordinary course or are owed insignificant amounts in comparison to UBS's alleged claim, the Court does not believe that this bankruptcy case serves a legitimate reorganizational purpose. For these reasons, the Court will grant UBS's Motion to Dismiss and will dismiss this case under § 1307(c). The Court will enter a separate order consistent with this opinion.

In 2019, Axiom served as a sub-placement agent for a private placement offering by a Canadian start-up company. Axiom conducted due diligence of the company when it was first engaged to serve as sub-placement agent and recognized a lawsuit by the federal government against the company's founder alleging fraud to be a "red flag." While Axiom recognized this red flag, it failed to reasonably conduct ongoing due diligence in connection with the lawsuit during the three-month offering period. Instead, Axiom relied almost exclusively on representations by the company, which minimized the gravity of the lawsuit and its potential effect on the company and its assets. Axiom thus failed to learn of material developments in the lawsuit that later resulted in the company being ordered to place a substantial portion of its assets in receivership and a contempt finding against the company's CEO. As a result of its failure to conduct reasonable ongoing due diligence in connection with the lawsuit, Axiom recommended the offering to customers without a reasonable basis in violation of FINRA Rules 2111(a) and 2010. In addition, Axiom failed to establish and maintain a supervisory system, including written procedures, reasonably designed to ensure that the firm conducted reasonable ongoing due diligence during the entire offering period in violation of FINRA Rules 3110 and 2010. Axiom also failed to timely file the offering documents with FINRA in violation of FINRA Rules 5123 and 2010.  

In 2019, Ascendant was engaged by a Canadian start-up company to serve at the placement agent for a private placement offering. Martino, Ascendant's designated supervisor for private placements, conducted due diligence of the company and identified as a "red flag" a lawsuit by the federal government against the company's founder alleging fraud in connection with the founder's earlier company. Although Martino recognized this red flag, he failed to reasonably conduct ongoing due diligence in connection with the lawsuit during the three-month offering period. Instead, he relied on representations by the company, including its founder, minimizing the gravity of the lawsuit and its potential effect on the company and its assets. Martino thus failed to learn of material developments in the lawsuit that later resulted in the company being ordered to place a substantial portion of its assets in receivership and contempt finding against the company's CEO. As a result of his failure to conduct reasonable ongoing due diligence in connections with the lawsuit, Martino recommended the offering to Ascendant's customers without a reasonable basis in violation of FINRA Rules 2111(a) and 2010. In addition, as the designated supervisor of private placements, Martino failed to establish and maintain a supervisory system, including written procedures, reasonably designed to ensure that his firm conducted ongoing due diligence during the entire offering period in violation of FINRA Rules 3110 and 2010. Martino also used text messaging applications on his personal cell phone to communicate with the company and prospective investors about the offering; as such, he violated FINRA Rules 4511 and 2010 by causing his firm to fail to keep necessary records.

• Securities Industry Commentator
• Bill Singer