Securities Industry Commentator by Bill Singer Esq

Claimant Wins $57 Million in FINRA Arbitration Award and Once More Around The Loop with Bill Singer (BrokeAndBroker.com Blog)

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, DCCir)

How Regulatory Sandbox Programs Can Promote Technological Innovation and Consumer Welfare / Insights from Federal and State Experience (OnPoint, Competitive Enterprise Institute by Ryan Nabil)

Barred Broker Dealer Charged with $1 Million Investment Scheme and Fraudulently Obtaining $96,000 Cares Act Loan (DOJ Release)

Former Member of Congress Charged with Multiple Fraud Schemes (DOJ Release)

SEC Charges Eagle Bancorp and Former CEO with Failing to Disclose Related Party Loans (SEC Release)

Federal Reserve Board announces it has fined EagleBank $9.5 million for violation of the Board's insider lending regulation and has permanently barred its former CEO and chairman from the banking industry (FRB Release)

SEC Charges Three Chicago-Area Residents with Insider Trading Around Equifax Data Breach Announcement (SEC Release)

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)

FINRA Fines and Suspends Rep for His and Customers' Investments in Hedge Fund

FINRA Department of Enforcement, Complainant, v. Daniel T. Minich, Respondents (FINRA Order)

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. 

Around the world, leading financial centers seek to attract companies capable of developing innovative financial products and services. From blockchain-based payments to alternative credit scoring systems, technological innovation is critical to maintaining a globally competitive financial sector that benefits consumers, investors, and entrepreneurs. However, the financial services industry, especially in the United States, remains heavily regulated. Such cumbersome regulations can deter both established companies and startups from offering innovative financial products and services. Governments can use various policy tools to address this challenge and promote innovation. 

Among the options gaining popularity are "regulatory sandbox" programs, which allow companies to test innovative products and services under a modified and frequently lightened regulatory framework for a limited period. These programs allow companies to test new financial products and enable regulators to become more familiar with technological innovation and its impact on businesses. By allowing regulators to evaluate how different rules impact businesses, sandbox programs can provide crucial information to help regulators craft business- and innovation-friendly rules. 

In 2016, Mastroianni consented to being permanently barred by the Financial Industry Regulatory Authority (FINRA), which prohibited him from acting as a broker or intermediary in securities transactions. Despite that debarment, from January 2017 to August 2022, Mastroianni defrauded victim investors, many of whom were senior citizens, by falsely and fraudulently claiming that he would generate large investment profits for them through his company, Global Business Development & Consulting Corp. Instead of investing the money as promised, Mastroianni used victim funds on personal expenses, including household rent, automobile payments, credit card bills, and cash withdrawals. Mastroianni defrauded 10 victims out of $1 million.

Mastroianni also exploited the ongoing global pandemic by submitting a false and fraudulent application to obtain $96,300 from a federal COVID-19 emergency relief loan meant for distressed small businesses. As with his investment fraud scheme, Mastroianni misused the loan proceeds to make personal purchases and cash withdrawals.

[C]ox perpetrated multiple fraud schemes targeting companies he was affiliated with and their clients and vendors. Cox created unauthorized off-the-books bank accounts and diverted client and company money into those accounts through false representations, pretenses and promises. From 2013 to 2018, across two different fraud schemes, Cox illicitly obtained over $1.7 million in diverted client payments and company loans and investments he solicited and then stole.

In addition, Cox allegedly received mortgage loan funds from a lender for a property purchase by submitting multiple false representations to the lender, including fabricated bank statements and false statements that Cox intended to live in the property as his primary residence. However, the indictment alleges Cox intended to and did buy the property to rent it to someone else.

According to allegations in the indictment, Cox also fraudulently obtained a $1.5 million construction loan to develop the recreation area in Fresno known as Granite Park. Cox and his business partner's nonprofit could not qualify for the construction loan without a financially viable party guaranteeing the loan. Cox falsely represented that one of his affiliated companies would guarantee the loan, and submitted a fabricated board resolution which falsely stated that at a meeting on a given date all company owners agreed to guarantee the Granite Park loan. No meeting took place, and the other owners did not agree to back the loan. The loan later went into default causing a loss of more than $1.28 million.

According to allegations in the indictment, when Cox was a candidate for the U.S. House of Representatives in the 2018 election, he perpetrated a scheme to fund and reimburse family members and associates for donations to his campaign. Cox arranged for over $25,000 in illegal straw or conduit donations to his campaign in 2017.

The SEC's order against Eagle finds that, from March 2015 through April 2018, Eagle failed to include loans to Paul's family trusts totaling at times nearly $90 million in the related party loan balances included in its annual reports and proxy statements. The SEC's order also finds that Eagle improperly omitted tens of millions of dollars of loans to Eagle directors and their family members from these related party loan balances. Both SEC regulations and Generally Accepted Accounting Principles (GAAP) required Eagle to disclose these material related party transactions.

The SEC's order also finds that, following a December 2017 short seller's report asserting Eagle had made significant undisclosed loans to Paul's family trusts, Eagle and Paul falsely stated in press releases, news articles, and meetings with investors that the trust loans were not related party loans and that Eagle was in compliance with all related party loan requirements. The SEC's order finds that even though Eagle's independent auditor and primary regulator concluded that the trusts were related parties under GAAP and banking regulations, respectively, Eagle again failed to disclose the trust loans as related party loans in its 2017 annual report.

The Board found that EagleBank had deficient internal controls over insider lending practices between 2015 and 2018, which allowed the bank to extend credit totaling nearly $100 million to entities that Paul owned or controlled, including certain family trusts, without making appropriate disclosures to, or obtaining required approvals from, a majority of the bank's board of directors. These internal control deficiencies also extended to the bank's supervision of lending staff, who permitted Paul to participate in matters in which he had a conflict of interest. The Board also cited EagleBank for third-party risk management deficiencies over the same period that resulted in inadequate oversight of contracts between the bank and a local government official.

In addition, the Board announced that it has permanently barred Paul from employment in the banking industry and assessed a $90,000 fine against him for his central role in the bank's violations of law and unsafe and unsound practices.

Equifax engaged a Chicago-based public relations firm in August 2017 to assist with handling the inquiries expected to be generated by the announcement of the intrusion and breach. According to the complaint, Ann M. Dishinger, who worked as a finance manager at the public relations firm, learned about the Equifax breach through her position and tipped her significant other, Lawrence M. Palmer (L. Palmer), with the nonpublic news. The SEC alleges that L. Palmer then contacted a former business client and arranged for the client to purchase out-of-the-money Equifax put options in the client's brokerage account with the understanding that the client and L. Palmer would split any trading profits obtained. The complaint also alleges that L. Palmer later reimbursed the client by check for the purchase cost of the options, scribbling in the check's memo line the words, "Blue Horseshoe," an apparent reference to the coded language used to convey inside information in the 1987 movie Wall Street. The SEC also alleges that L. Palmer tipped his brother and business partner, Jerrold I. Palmer (J. Palmer), with the nonpublic news about Equifax disclosed to him by Dishinger. The complaint states that J. Palmer then contacted a friend whom he had known since high school and arranged for the friend to purchase the same series of out-of-the-money Equifax put options in the friend's brokerage account with the understanding that they too would split any trading profits obtained. The SEC claims that the illegal trading by L. Palmer's former client and J. Palmer's friend netted approximately $35,000 and $73,000 in profits, respectively, portions of which were shared with L. Palmer and J. Palmer according to their arrangements.

[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.

Between June 2019 and October 2019 (the "Relevant Period"), while associated with Ameriprise Financial Services, LLC (CRD No. 6363) ("Ameriprise" or the "Firm"), Respondent Daniel Minich ("Minich") participated in three private securities transactions totaling approximately $200,000 without providing prior written notice to Ameriprise. 

First, in June 2019, Minich personally invested $50,000 in a hedge fund that purported to invest in cryptocurrency, without providing prior written notice to the Firm. In return for his investment, he received a limited partnership interest in the hedge fund. 

Second, in September and October 2019, Minich facilitated and assisted two Firm customers with investing a combined total of $150,000 into the same hedge fund in return for limited partnership interests in the fund. Again, Minich did not provide Ameriprise with prior written notice of these transactions. 

Minich also falsely certified to the Firm in a January 2020 annual attestation that he had not engaged in any private securities transactions other than those he had received preclearance for from the Firm when, in fact, he had engaged in the three private securities transactions alleged herein without receiving preclearance from the Firm. 

As a result of the foregoing, Minich violated FINRA Rules 3280 and 2010 by participating in private securities transactions without prior written notice to Ameriprise (First Cause of Action), and violated FINRA Rule 2010 by making a false statement on a Firm annual attestation (Second Cause of Action). 

• Securities Industry Commentator
• Bill Singer