The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 8, 2022
















https://www.brokeandbroker.com/6648/saliba-finra-sec/
Today's traveling regulatory circus makes its way back to FINRA's fairgrounds. The tents will be raised yet again. The lawyers hired. The festivities will begin. And then, after the tents come down and the animal shit swept up, yet again, this whole carnival will likely wind its way back to the SEC and, who knows, maybe back to the 9Cir. By that time, if past is prologue, maybe another five or so years will have come off the calendar. And who knows how many tens-of-thousands of dollars in legal fees will be paid by Respondent for a second bite at a rotten appeal. And who knows how much otherwise valuable regulatory time at FINRA and the SEC will be wasted on this nonsense. For the sake of argument, let's say that Respondent likely engaged in some misconduct and will likely find himself barred for something when this is all said and done. The question that I raise, like the aforementioned circus tents, is what is the consequence for FINRA's misconduct in failing to render an intelligible decision? What sanctions (likely none) will the SEC impose upon FINRA for not saying what it meant, and not meaning what it said? Of more import, how does this failed system of self regulation protect the public and the industry? 

https://www.financial-planning.com/news/finra-ex-board-member-kovack-settles-enforcement-cases
Saddled with a lackluster Board of Governors, Wall Street's self-regulatory-organization fails to enact necessary in-house reforms in order to proactively clean its own house. A few months ago, a state court found that FINRA's arbitration process was fundamentally unfair; and although an appellate court reversed the decision, the allegations were not without some merit. Recently, as industry reporter Tobias Salinger reveals, FINRA's regulatory settlements are not disclosing to the public the existence of conflicts (potential or otherwise) and whether steps were taken to internally protect an investigation's integrity.

EmpiresX Head Trader Pleads Guilty to Global Cryptocurrency Investment Fraud Scheme that Amassed Approximately $100 Million from Investors (DOJ Release)
https://www.justice.gov/opa/pr/empiresx-head-trader-pleads-guilty-global-cryptocurrency-investment-fraud-scheme-amassed
Joshua David Nicholas pled guilty to conspiracy to commit securities fraud in the United States District Court for the Southern District of Florida. As alleged in part in the DOJ Release:

[J]oshua David Nicholas, 28, of Stuart, was the "Head Trader" for EmpiresX, a purported cryptocurrency platform. Nicholas admitted that he and others fraudulently promoted EmpiresX by making numerous misrepresentations regarding, among other things, a purported proprietary trading bot and fraudulent "guaranteed" returns to investors and prospective investors in the company. Nicholas and his co-conspirators claimed that EmpiresX operated a trading bot that used artificial and human intelligence to maximize profitability for investors. Instead, EmpiresX operated a Ponzi scheme by paying earlier investors with money obtained from later EmpiresX investors. In addition, despite representations to the contrary, EmpiresX never registered, nor took steps to register, EmpiresX's investment program as an offering and sale of securities with the U.S. Securities and Exchange Commission, nor did EmpiresX have a valid exemption from this registration requirement.

https://www.justice.gov/usao-sdny/pr/manhattan-woman-who-operated-fraudulent-investment-scheme-charged-securities-and-wire
https://www.justice.gov/usao-sdny/press-release/file/1533651/download, Lakenya Hopkins was charged with one count of securities fraud and one count of wire fraud for her alleged role in a purported fraud involving over 110 investors in Money Magnet Platinum Membership Initiative LLC ("MMPMI"). As alleged in part in the DOJ Release:

From in or about August 2020 through in or about April 2021, HOPKINS operated MMPMI as a fraudulent "investment club." HOPKINS specifically marketed MMPMI to people of color as a way for them to build generational wealth for their families. During her scheme, HOPKINS solicited money from investors by falsely promising them, among other things, that she would provide them with an $8,000 monthly return for every $1,000 investment they made in MMPMI. HOPKINS also falsely told investors that she could guarantee this return because she would pool investor money and invest it into a hedge fund that guaranteed a three to five percent daily return.

The investments were memorialized in documents known as "MMPMI Membership Promissory Notes." The terms of those investment contracts generally provided that, for every $1,000 an investor invested in MMPMI, the investor would receive an $8,000 monthly return, $5,000 of which would be paid directly to each investor. These documents and HOPKINS' false representations deceived investors into believing that their principal and return were guaranteed.

Despite her representations to investors, however, HOPKINS never invested any of the investors' money in a hedge fund or made any other investments for the benefit of investors. Instead, HOPKINS stole the investors' money and used it for her own personal gain. Between in or about November 2020 and in or about April 2021, Hopkins used most of the investors' money to (i) make large cash withdrawals, (ii) purchase high-end luxury goods, (iii) rent a luxury apartment, (iv) pay for food, travel, and other goods, and (v) purchase cryptocurrency for her own benefit.

In or about January 2021, after she had failed to make the first guaranteed monthly payments to investors, HOPKINS told investors she was pausing MMPMI and giving out refunds. When investors questioned her about the status of their investments, HOPKINS continued to lie. For example, on a videoconference with investors in or about January 2021, HOPKINS told investors that their money was still in the hedge fund, that they would "not take a loss," and that she was "not keeping any money." Despite these representations, HOPKINS gave only approximately five investors a refund payment. To date, HOPKINS has not paid any investors the promised returns.

As a result of this investment scheme, HOPKINS fraudulently obtained over $290,000 from over 110 investors.
 

https://www.sec.gov/news/speech/gensler-sec-speaks-090822

Thank you. It is good to be back with SEC Speaks.

I'd like to thank the Practising Law Institute for working with our agency on this program, and my colleagues Gurbir Grewal and William Birdthistle for co-chairing this event. As is customary, I'd like to note my views are my own, and I'm not speaking on behalf of the Commission or SEC staff.

Joseph Kennedy, the first Chairman of the SEC, had a saying: "No honest business need fear the SEC."[1]

In the depths of the Great Depression, Congress and President Franklin Delano Roosevelt (known for a slightly more famous quotation about "fear") enacted the first federal securities laws.

The Securities Act of 1933 was about companies raising money from the public. Investors could decide which risks to take; companies that issued securities to the public were required to provide full, fair, and truthful disclosures to the public. FDR called this law the "Truth in Securities Act."

Congress knew, however, that their job wasn't done. The following year, they passed the Securities Exchange Act of 1934. That statute covered intermediaries, such as the exchanges themselves and the broker-dealers. The basic idea was that the public deserves disclosure and protections not only when a security is initially issued, but also on an ongoing basis when the security is traded in the secondary markets.

Congress knew the job still wasn't done. They understood that, when advisers manage someone else's money, there may be additional opportunities for conflicts of interest between those advisers and clients. Thus, six years later, Congress said funds and advisers had to register, under the Investment Company Act and Investment Advisers Act of 1940.

Over the generations, Congress has refined and amended these key statutes, adding, amongst other things, oversight of clearing agencies and the over-the-counter market for securities.

The core principles from these statutes apply to all corners of the securities markets. That includes securities and intermediaries in the crypto market.

Nothing about the crypto markets is incompatible with the securities laws. Investor protection is just as relevant, regardless of underlying technologies.

In this context, I will first discuss crypto tokens and then crypto intermediaries.

Crypto Tokens

Of the nearly 10,000 tokens in the crypto market,[2] I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered under the securities laws.

Some tokens may not meet the definition of a security - what I'll call crypto non-security tokens. These likely represent only a small number of tokens, even though they may represent a significant portion of the crypto market's aggregate value.

Why do I think a majority of crypto tokens are securities?

As Justice Thurgood Marshall put it in describing the scope of the securities laws, Congress painted the definition of a security "with a broad brush."[3] He further stated, "Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called."[4]

In general, the investing public is buying or selling crypto security tokens because they're expecting profits derived from the efforts of others in a common enterprise.

These are the core considerations under the Supreme Court's 1946 Howey Test in determining what is an investment contract - one of the categories of a "security." This test has been reaffirmed by the Supreme Court numerous times[5] - the Court cited Howey as recently as 2019.[6] As the Supreme Court noted in the Howey case, the securities laws were designed "to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits."[7]

My predecessor Jay Clayton said it, and I will reiterate it: Without prejudging any one token, most crypto tokens are investment contracts under the Howey Test.

Some in the crypto industry have called for greater "guidance" with respect to crypto tokens.

For the past five years, though, the Commission has spoken with a pretty clear voice here: through the DAO Report, the Munchee Order, and dozens of Enforcement actions, all voted on by the Commission.[8] Chairman Clayton often spoke to the applicability of the securities laws in the crypto space.[9]

Not liking the message isn't the same thing as not receiving it.  

Investors are following crypto projects on social media and scouring online posts about them. These tokens have promotional websites, featuring profiles of the entrepreneurs working on the projects.

It's not about whether you set up a legal entity as a nonprofit and funded it with tokens. It's not whether you rely on open-source software or can use a token within some smart contract. These are not laundromat tokens: Promoters are marketing and the investing public is buying most of these tokens, touting or anticipating profits based on the efforts of others.[10]

Therefore, investors deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder. Investors deserve to be protected against fraud and manipulation. The law requires these protections.

Thus, I've asked the SEC staff to work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities.[11]

A handful of crypto security tokens have registered under the existing regime.

Given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements. Tailored disclosures exist elsewhere - for example, asset-backed securities disclosure[12] differs from that for equities.

Our fundamental goal is to provide investors with the protections and disclosures they deserve - and that are required by law.

By contrast, in the case of a small number of crypto non-security tokens, they might meet some parts of the Howey Test or other tests of a security, but not necessarily all of them, and may not be securities.

Bitcoin, the first crypto token, is referred to by some as "digital gold": trading like a precious metal, a speculative, scarce - yet digital - store of value.[13]

I have a question for the lawyers in this audience. Do you represent any clients regarding their token projects?

How exactly were you hired? Did you enter into an engagement letter?

I'm going to guess that you had a client. I'm going to guess that you did not take on the work on behalf of a dispersed, unidentified group of individuals in an "ecosystem."

The public deserves the same protections from your clients that they get with other issuers of securities. Other issuers in our capital markets also deserve to compete on a fair playing field.

Before I turn to intermediaries, let me briefly discuss so-called stablecoins. Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues.

As discussed in the President's Working Group Report on Stablecoins,[14] it is important to ensure that we have appropriate safety and soundness protections, investor protections, and safeguards against illicit activity.

Some stablecoins purportedly are backed by reserves of U.S. dollars. Other stablecoins, so-called algorithmic stablecoins, are not backed fully by fiat moneys and bear heightened risks related to whatever mechanisms are used purportedly to maintain a stable value.

Currently, stablecoins primarily are used as means to participate in, or as so-called settlement tokens inside of, crypto platforms.

Depending on their attributes, such as whether these instruments pay interest, directly or indirectly, through affiliates or otherwise; what mechanisms are used to maintain value; or how the tokens are offered, sold, and used within the crypto ecosystem,[15] they may be shares of a money market fund[16] or another kind of security. If so, they would need to register and provide important investor protections.[17]

This is by no means an exhaustive list. The point is, it is important to look at the facts and circumstances of a product, not its label, to determine whether it is a crypto security token, a crypto non-security token, or another instrument.

Intermediaries

Given that many crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity.[18] 
Crypto intermediaries - whether they call themselves centralized or decentralized (e.g., DeFi) - often are an amalgam of services that typically are separated from each other in the rest of the securities markets: exchange functions, broker-dealer functions, custodial and clearing functions, and lending functions.

These platforms match orders in crypto security tokens of multiple buyers and sellers using established non-discretionary methods. If that sounds legalistic, that's because it is - these are the regulatory criteria for being an exchange.

Crypto investors should benefit from exchange rulebooks that protect against fraud, manipulation, front-running, wash sales, and other misconduct.

Crypto intermediaries also engage in the business of effecting transactions in crypto security tokens for the account of others, which makes them brokers, or engage in the business of buying and selling crypto security tokens for their own account, which makes them dealers.

Crypto investors should get the protections they receive from regulated broker-dealers.

Finally, many crypto intermediaries provide lending functions for a return.[19] Make no mistake: If a lending platform is offering and selling securities, it too comes under SEC jurisdiction.

If you fall into any of these buckets, come in, talk to us, and register. 

The commingling of the various functions within crypto intermediaries creates inherent conflicts of interest and risks for investors. Thus, I've asked staff to work with intermediaries to ensure they register each of their functions - exchange, broker-dealer, custodial functions, and the like - which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protection.

Further, the nature of the current crypto market is that investors often trade and invest in both crypto security tokens and crypto non-security tokens, with crypto intermediaries generally handling both. Thus, I've asked staff to sort through how we might best allow investors to trade crypto security tokens versus or alongside crypto non-security tokens.

To the extent the Commodity Futures Trading Commission (CFTC) needs greater authorities with which to oversee and regulate crypto non-security tokens and related intermediaries, I look forward to working with Congress to achieve that goal consistent with maintaining the regulation of crypto security tokens and related intermediaries at the SEC. Further, to the extent that crypto intermediaries may need to register with both the SEC and the CFTC, I would note we currently have dual registrants in the broker-dealer space and in the fund advisory space.

Conclusion

After the Exchange Act was passed, as Kennedy later wrote, "it was prophesied that the securities markets of the country would dry up within a few months."[20] Of course, the opposite happened. Instead, "every important stock exchange" in the U.S. registered with the SEC,[21] and our markets thrived.

Investors, issuers, and our overall economy have benefited from those securities laws and the SEC's engagement for nearly 90 years.

That oversight should not change just because the issuance and trading of certain securities is based on a new technology. The investing public benefits when they receive disclosures and related protections about a project's prospects and business. The investing public benefits when intermediaries are registered and overseen.

I look forward to working with crypto projects and intermediaries looking to come into compliance with the laws. I also look forward to working with Congress on various legislative initiatives while maintaining the robust authorities we currently have. Let's ensure that we don't inadvertently undermine securities laws underlying $100 trillion capital markets. The securities laws have made our capital markets the envy of the world.

On all of these projects, I've asked staff to consider using our regulatory toolkit to possibly fine-tune compliance for crypto security tokens and intermediaries.[22]

I can't make promises. I can't speak on behalf of my colleagues on the Commission. I can only say that true cooperation benefits everybody here. Meaningful engagement is always welcome.

For those who are starting up in this space now - either from traditional finance or as crypto-native companies - work with us on compliance from the beginning. It's far less costly to do so from the outset.

As Joseph Kennedy put it, "No honest business need fear the SEC."

[1] See TIME Magazine, "Reform & Realism" (July 22, 1935), available at https://content.time.com/time/subscriber/article/0,33009,754995-1,00.html.

[2] See CoinMarketCap.com.


[3] Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990).


[4] Ibid.


[5] See, e.g., Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 847-48 (1975), SEC v. Edwards, 540 U.S. 389, 395 (2004). The Supreme Court has articulated additional standards that may apply to other kinds of securities, such as notes.


[6] Lorenzo v. SEC, 139 S. Ct. 1094, 1103 (2019). SCOTUS, per Justice Breyer: "the basic purpose behind these laws: 'to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.' Capital Gains, 375 U.S. at 186, 84 S.Ct. 275.


[7] SEC v. W. J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).


[8] See, "SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities" (July 25, 2017), available at https://www.sec.gov/news/press-release/2017-131; "Company Halts ICO After SEC Raises Registration Concerns" (Dec. 17, 2017), available at https://www.sec.gov/news/press-release/2017-227; and "Crypto Assets and Cyber Enforcement Actions," available at https://www.sec.gov/spotlight/cybersecurity-enforcement-actions. See also "Framework for 'Investment Contract' Analysis of Digital Assets," available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets. This framework represents the views of the Strategic Hub for Innovation and Financial Technology of the Securities and Exchange Commission (the "Commission"). It is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content.


[9] See, e.g., Jay Clayton, "Hearing Before the Committee on Banking, Housing, and Urban Affairs, United States Senate" (Dec. 11, 2018), available at https://www.govinfo.gov/content/pkg/CHRG-115shrg34221/pdf/CHRG-115shrg34221.pdf. "The Federal securities laws provide important market and investor protections in connection with the offer and sale of securities-regardless of whether they are called shares of stock or digital assets or tokens. If you are offering digital asset or tokens that are securities to U.S. investors, you have two options: (1) comply with an exemption from registration; or (2) register the offering with the SEC. Secondary market activities in the digital asset markets also raise concerns. As currently operating, trading platforms in this space often permit the trading of securities but offer substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation."


[10] For circumstances in which a token may not be a security, see, e.g., Response of the Division of Corporation Finance, Pocketful of Quarters, Inc. (July 25, 2019), available at https://www.sec.gov/corpfin/pocketful-quarters-inc-072519-2a1.


[11] Issuers alternatively could comply with one of the existing exemptions from registration.


[12] The disclosure framework for asset-backed securities was developed by staff through the review program and was ultimately codified in Regulation AB, adopted about 10 years after the first asset-backed deal was registered.


[13] See Nathaniel Popper, Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money (Harper Paperbacks, 2016).


[14] The President's Working Group on Financial Markets, the Federal Depository Insurance Corporation, and the Office of the Comptroller of the Currency, "Report on Stablecoins" (Nov. 2021), available at https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.


[15] See Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230 (2d Cir. 1985) (In finding that certificates of deposit were offered and sold as securities, the court stated: "Each transaction must be analyzed and evaluated on the basis of the content of the instruments in question, the purposes intended to be served, and the factual setting as a whole.").


[16] Former SEC Chairman Jay Clayton: "A stablecoin that promises $1 back to you, in exchange for the coin, and is backed by cash is one item. Such a coin that is backed by commercial paper, whether it's 30, 60 or 90 days, sure looks like a money market mutual fund to me. So the second element really looks like a security. We have decided that a pooled vehicle of commercial paper that you use for daily liquidity is a money market mutual fund and should be regulated as such." See Steven Ehrlich, "Exclusive: Former SEC Chairman Jay Clayton On Stablecoins, DeFi, And Bitcoin ETFs" (Oct. 6, 2021), available at https://www.forbes.com/sites/stevenehrlich/2021/10/06/exclusive-former-sec-chairman-jay-clayton-on-stablecoins-defi-and-bitcoin-etfs/?sh=77b07b8661b1. Federal Reserve Chair Jerome Powell: "Stablecoins are like money market funds, are like bank deposits, but they're to some extent outside the regulatory perimeter and it's appropriate that they be regulated. Same activity, same regulation." See Matthew Fox, "The Fed has 'no intention' to ban cryptocurrencies, Jerome Powell tells Congress" (Sept. 30, 2021), available at https://finance.yahoo.com/news/fed-no-intention-ban-cryptocurrencies-193120137.html.


[17] See supra note 11 and accompanying text.


[18] See Gary Gensler, Prepared Remarks On Crypto Markets at Penn Law Capital Markets Association Annual Conference (April 4, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422.


[19] See Gary Gensler, "The SEC Treats Crypto Like the Rest of the Capital Markets" (Aug. 19, 2022), available at https://www.wsj.com/articles/the-sec-treats-crypto-like-the-rest-of-the-capital-markets-disclosure-compliance-security-investment-mutual-fund-protections-blockfi-bankruptcy-bitcoin-11660937246.


[20] See Joseph P. Kennedy, I'm for Roosevelt, (Reynal & Hitchcock, 1936), p. 94.


[21] See TIME, "Reform & Realism."


[22] See "BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product" (Feb. 14, 2022), available at https://www.sec.gov/news/press-release/2022-26.

https://www.cftc.gov/PressRoom/PressReleases/8583-22
The United States District Court for the Eastern District of New York entered a FinalJjudgment and Consent Order for a permanent injunction, monetary sanctions, and equitable relief against Tae Hung Kang, a/k/a Kevin Kang. The Order requires Kang to pay $835,058 in restitution and permanently prohibits him  from further violations of the Commodity Exchange Act and CFTC regulations, as charged, and imposes a permanent registration and trading ban. In United States v. Kang, et al., 18-cr-184 (E.D.N.Y. April 11, 2018), Kevin Kang pled guilty to securities fraud conspiracy and was sentenced to 24 months in prison plus 24 months of supervisory release. As alleged in part in the CFTC Release:

The order resolves the CFTC's claims against Kevin Kang in the CFTC action filed against him, Sungmi Kang, John Won, Safety Capital Management, Inc., and GNS Capital Inc., both doing business as ForexnPower, on September 25, 2015. [See CFTC Press Release No. 7245-15] The complaint alleged, among other things, fraudulent solicitation, which included misrepresentations in advertisements placed in Korean language newspapers, of over $1.5 million from customers to trade off-exchange foreign currency (forex) and misappropriation of over $800,000 of customer funds. The CFTC action against the other defendants is ongoing.

. . .

The order finds between October 2010 and December 2013, Kevin Kang was the CEO and an associated person of Safety Capital d/b/a ForexnPower, which was a retail forex commodity trading advisor and retail forex commodity pool operator. Kang solicited and accepted clients of Safety Capital d/b/a/ ForexnPower for managed off-exchange retail forex trading accounts and a retail forex commodity pool. The order finds that during this period, Kang solicited pool participants and retail forex customers at a ForexnPower seminar and represented he was the CEO of the company and the company's trading signals program would, in five years, turn a $3,000 investment into profits of over $900,000. According to the order, the latter representation was false or misleading because no Safety Capital d/b/a ForexnPower customer had such high proportionate returns and, in fact, the majority of its customers lost money trading forex with ForexnPower. 

The order further finds that around the summer of 2012, Kevin Kang, again representing himself as the CEO of ForexnPower, falsely told to a customer the company had yielded 10% profits per month and encouraged that customer to invest because this was a "lifetime opportunity" and the customer should "not miss out." After investing, this customer requested a withdrawal. Kang told the customer that he could pay the customer back in a few weeks because the company was expecting an investment from another investor. The order finds this latter representation was consistent with a Ponzi scheme in which investors are paid with other investors' money. . . .

https://www.sec.gov/litigation/litreleases/2022/lr25498.htm
Without admitting or denying the allegations in a Complaint filed in the United States District Court for the District of New Hampshire
https://www.sec.gov/litigation/complaints/2022/comp25498.pdf, Todd Christopher Doucette consented to a permanent injunction prohibiting him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and Doucette agreed to pay $348,689 in disgorgement, $30,793 in prejudgment interest, and a civil money penalty of $348,689. As alleged in part in the SEC Release, Doucette:

traded on two separate occasions in the securities of his employer, Align Technology, Inc., on the basis of confidential information he obtained as Align's Vice President of Business Transformation. According to the SEC's complaint, Doucette purchased thousands of shares of Align common stock in advance of its first quarter 2018 earnings announcement and third quarter 2020 earnings announcement while in possession of confidential information concerning the company's financial performance and operation of its Americas region. Additionally, the SEC's complaint alleges all of Doucette's trades at issue took place during blackout periods, when Doucette was expressly prohibited from trading in Align stock. As a result, Doucette allegedly realized profits of $348,689 from his trading.

https://www.finra.org/sites/default/files/aao_documents/22-00835.pdf
In a FINRA Arbitration Statement of Claim filed in April 2022, FINRA Member Firm Claimant Aspiration Financial asserted conversion and breach of contract. Claimant Aspiration Financial sought $23,214,36 in damages, interest, fees, and costs. Pro se customer Respondent Keith denied the allegations. As to the substance of Aspiration's lawsuit, the FINRA Arbitration Award characterizes it as follows:

[T]he causes of action related to Claimant's allegation that, on several occasions, Respondent received unauthorized ACH transfers into her deposit account from a third-party financial institution and quickly depleted the transferred funds in the account, which resulted in Respondent having a negative account balance.

The sole FINRA Arbitrator denied Claimant's claims. There is no explanation or rationale provided for the Award.

Bill Singer's Comment: What the hell? The customer purportedly received transfers into her account, which she then "quickly depleted." For starters, oh how I wish the Arbitrator provided some explanation as to why the ACH transfer were sent into Respondent's account, and, what exactly transpired a la "quickly depleted." Was the depletion pursuant to a transfer of funds out of Respondent's account? Did Respondent spend the funds? Did Respondent invest the funds in a losing options position? Like I said, what the hell? Then there's the whole issue of how Claimant permitted Respondent to posture her account, such, that it resulted in a negative balance -- as in less than zero. Finally, let's not lose sight of the fact that Respondent represented herself and Claimant had a law firm, and . . . I dunno, I truly don't get anything about this case.

https://www.finra.org/sites/default/files/fda_documents/2019063821607
%20Joseph%20Stone%20Capital%20L.L.C.%20CRD%20159744%20AWC%20va.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, Joseph Stone Capital L.L.C. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joseph Stone Capital L.L.C. has been a FINRA Member Firm since 2013 with 35 registered representatives at four branches. In accordance with the terms of the AWC, FINRA imposed upon  Joseph Stone Capital a Censure, $825,607.59 in restitution, and an undertaking to certify its implementation of "a reasonable heightened supervision plan for the five registered representatives who are still associated with the firm and had customers who are the subject of this AWC and will maintain the plan for a period of no less than two years," and a further undertaking to certify compliance with its remediation obligations. Two Footnotes in the AWC disclose that:

Footnote 4: Certain Joseph Stone registered representatives have already paid restitution in the amount of $21 l,487.71 to customers pursuant to other A WCs connected to this matter. This AWC orders restitution in the amount of $825,607.59, which includes the total costs (commissions, fees, and margin interest) paid by customers whose accounts were excessively traded ($1,037,095.30) minus the restitution already paid pursuant to other AWCs connected to this matter. 

Footnote 5: Heightened supervision is ordered for the five representatives who remain registered through Joseph Stone and who handled certain of the customer accounts that are the subject of this AWC. The registered representatives are identified in Attachment B.

As alleged in the "Overview" portion of the AWC:

From January 2015 through June 2020, Joseph Stone failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 as they pertain to excessive trading. As a result, Joseph Stone failed to identify or reasonably respond to red flags of excessive trading in 25 customer accounts that caused the customers to pay more than $1,037,000 in commissions, fees, and margin interest. By this conduct, Joseph Stone violated FlNRA Rules 3110(a) and (b) and FINRA Rule 2010. 

Bill Singer's Comment: Compliments to FINRA on a thorough AWC replete with sufficient content and context so as to render the settlement intelligible and compelling. Nice job!

https://www.finra.org/sites/default/files/fda_documents/2022073871001
%20James%20Gingles%20CRD%201332507%20AWC%20gg.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, James Gingles submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that James Gingles was first registered in 1985, and by 2005, he was registered with Okoboji Financial Services, Inc. until 2010, after which time he was associated with other firms. In accordance with the terms of the AWC, FINRA imposed upon Gingles a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC: 

Between May 2007 and November 2009, Gingles received a total of $16,500 in loans from two customers at Okoboji. Gingles was the assigned representative on these firm customers' accounts. None of the loans fit within the five circumstances specified in NASD Rule 2370. 

Between May 2007 and March 2008, Gingles accepted two loans, totaling $4,500, from DM, a senior customer who held a brokerage account at Okoboji. Neither of these loans was documented by a promissory note or other agreement. To date, Gingles has failed to repay $4,400 owed to DM for the loans. 

Between February 2008 and November 2009, Gingles accepted three loans, totaling $12,000, from a senior firm customer, SJ. Each loan was memorialized by a promissory note, setting forth an interest rate between ten and 12 percent and establishing a due date for repayment from six months to one year. To date, Gingles has failed to repay $11,585.10 owed to SJ in principal and interest for the loans. 

Gingles did not provide prior notice to or obtain written approval from Okoboji for any of the loans from DM or SJ.

Therefore, Gingles violated NASD Rules 2370 and 2110 and FINRA Rule 2010

Bill Singer's Comment: Sigh . . . I mean, geez, it's 2022 and FINRA is only now fining and suspending Gingles for alleged misconduct going back to 2007. Then again, this tidbit in the AWC should be noted: "This matter originated from a tip made to FINRA in January 2022 prior to the filing of a Form U5 reporting Gingles's termination." I'm not feeling much (if any) sympathy for Gingles given his alleged failure to repay the loans and his failure to disclose them to his firm as required by FINRA Rule 3240. As such, maybe it's just me (and it often is) but I'm not quite understanding why FINRA imposed such relatively light sanctions given that "senior" customers were involved and the loans have not been fully repaid.

https://www.justice.gov/usao-cdca/pr/former-stockbroker-sentenced-6-years-prison-32-million-investment-fraud-cheating-taxes
After pleading guilty in the United States District Court for the Central District of California to one count of securities fraud, one count of filing a false tax return, and one count of conspiracy to commit wire fraud, former stockbroker Robert Louis Cirillo, 61, was sentenced to 78 months in prison and ordered to pay $3,948,835 in restitution. As alleged in part in the DOJ Release:

From 2014 to 2021, Cirillo deceived more than 100 victims by lying to them that he would be investing their funds in short-term construction loans that would pay large return rates that ranged from 15% to 30% for a period of up to 90 days. As part of the scheme, Cirillo showed actual and prospective victim-investors fabricated bank statements that purported to show the investments' growth.

In fact, Cirillo never invested the victims' money and instead used it for his own personal expenses, including credit card payments, a trip to Las Vegas, and two automobiles - a Jeep and an Alfa Romeo.

Cirillo targeted members of the Hispanic community, many of whom were of limited means, for his fraudulent scheme. One victim invested her life savings of $20,000 in Cirillo's scheme.

Cirillo admitted in his plea agreement to threatening his victims once they began to realize that he had defrauded them. For example, in July 2019, Cirillo said that if one of the victims tried to sue him, that victim could go "for the [expletive] hole in the [expletive] desert. Tell him to test me," according to court documents.

In a separate scheme that occurred in the spring of 2021, Cirillo participated in a "grandparent scam" in which a senior citizen was tricked into believing that his grandson had been arrested for possession of illegal narcotics, which was false. Cirillo's co-conspirators convinced the 82-year-old victim to send $400,000 for his grandson's "bail" to a bank account that Cirillo had opened and controlled. Cirillo used some of that victim's money for his own personal benefit.

Cirillo also filed false income tax returns for the years 2015, 2016 and 2017 by failing to report a total of more than $3 million in income. For example, on his 2017 federal income tax return, Cirillo reported a total income of $30,985, which failed to include more than $1.9 million in income he received from his investment fraud scheme.

Cirillo's investment fraud resulted in a total loss of $3,237,262; his conspiracy to defraud the senior citizen resulted a total loss of $400,000; and the total tax loss incurred was $675,898.

In a sentencing memorandum, prosecutors argued, "[Cirillo's] behavior was despicable, particularly because he was engaging in an affinity crime by exploiting members of the Hispanic community, most of whom were of modest means, and some of whom lost their life savings to [him]."

https://www.sec.gov/news/press-release/2022-155
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/34-95673.pdf, Perceptive Advisors LLC consented to the entry of finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8, as well as Section 13(d) of the Securities Exchange Act of 1934 and Rule 13d-1; and Perceptive agreed to a cease-and-desist order, a Censure, and a $1.5 million penalty to settle the charges. As alleged in part in the SEC Release:

[I]n 2020, Perceptive formed multiple SPACs whose sponsors were owned both by Perceptive personnel and by a private fund that Perceptive advised. The Perceptive personnel were entitled to a portion of the compensation the SPAC sponsors received upon completion of the SPACs' business combinations. The SEC's order finds that Perceptive repeatedly invested assets of a private fund it advised in certain transactions that helped complete the SPACs' business combinations and did not timely disclose these conflicts.

The SEC's order also finds that Perceptive failed to timely file a required report on Schedule 13D concerning its beneficial ownership of stock in a public company. During the lapse in filing, through a private fund it advised, Perceptive improperly acquired beneficial ownership of additional stock in the public company.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95672; Whistleblower Award Proc. File No. 2022-78)
https://www.sec.gov/rules/other/2022/34-95672.pdf
The SEC's Office of the Whistleblower ("OWB") issued a Preliminary Summary Disposition recommending the denial of a Whistleblower Award to Claimant, which Claimant timely appealed. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[F]irst, Claimant misinterprets the eligibility criteria under Rule 21F-4(c)(1): contrary to Claimant's arguments in the Response, our rules do not provide for awards based upon the potential or theoretical use of a claimant's information. Instead, awards are based upon the actual use of a claimant's information by Commission staff. As we have stated, "the standard for award eligibility is not what the staff would have, or could have done in hypothetical circumstances but, rather, what impact the whistleblower's information actually had on the investigation." The Commission will not speculate on the supposed value of Claimant's information in the absence of its actual use during the Investigation. 

Accordingly, while Claimant may have submitted information to the Commission prior to the opening of the Investigation, the record here demonstrates that Claimant's information did not cause Enforcement staff responsible for the Investigation to open the Investigation or cause the staff to inquire into different conduct. A staff declaration, which we credit, confirms that the staff responsible for the Investigation opened the Investigation based upon a referral from REDACTED ("Other Agency 1"). A supplemental declaration from OWB staff, which we also credit, confirms that, after review of Claimant's information, other Enforcement staff referred Claimant's information to the REDACTED ("Other Agency 2") and the REDACTED ("Other Agency 3") and then closed Claimant's submission with a disposition of "no further action." Contrary to Claimant's contentions, there is no evidence in the record that Other Agency 2 or Other Agency 3 had any role in the referral to the Commission from Other Agency 1, and the record demonstrates that Other Agency 1 has no record of receiving any information from Claimant or that Claimant was the source of Other Agency 1's referral to the Commission. And while other Enforcement staff reviewed Claimant's tip and forwarded it to Other Agency 2 and Other Agency 3, there is no evidence in the record that Claimant's information was forwarded to staff assigned to the Investigation.

The record demonstrates that Claimant did not cause the Commission to inquire into different conduct and did not significantly contribute to the success of the action: Claimant's information was not used by staff assigned to the investigation, nor did Claimant ever communicate with staff assigned to the investigation.

https://www.cftc.gov/PressRoom/PressReleases/8581-22
https://www.cftc.gov/media/7606/enfnatixisorder090622/download, and in accordance with the terms of the Order, Natixis will pay a $2.8 million penalty, the bank will cease and desist from violating applicable provisions of the Commodity Exchange Act and CFTC regulations, and comply with certain conditions and undertakings. As alleged in part in the CFTC Release:

The order finds that Natixis failed to diligently supervise the activities of the IRD Desk.  Between January 2015 and at least April 2018, a trader on the bank's IRD Desk submitted false or misleading entries in the bank's internal recordkeeping and accounting system relating to the marking of the end-of-day USD LIBOR forward curve (Closing Curve), for the purpose of inflating the unrealized profit and loss (P&L) of the desk he managed and disguising significant trading losses. Specifically, the trader engaged in a pattern of marking the Closing Curve in a manner that varied from observed broker mid prices and in a manner that aligned with the risk positions of the IRD Desk, while generally staying within the limits of internal controls designed to detect mismarking. Although Natixis maintained certain controls relating to the marking of the Closing Curve, those controls were insufficient to detect the trader's misconduct for over three years. At its peak in early 2018, the trader's mismarking of the Closing Curve overstated the P&L of the IRD Desk by approximately $25 million.

As a result of the bank's supervisory failures, its books and records were inaccurate in several respects, and Natixis further failed to comply with certain obligations to provide accurate daily mark disclosures to certain counterparties, to properly calculate margin, and to report accurate swap valuation data to a swap data repository.

In addition, the order further finds that Natixis failed to diligently supervise the activities of its FAST Desk. Specifically, between February 2017 and November 2019, traders on the FAST Desk made certain manual adjustments to the bank's internal trade booking systems for the purpose of "smoothing" or hiding the FAST Desk's P&L and later releasing the P&L during difficult market conditions.  At its peak, the P&L smoothing understated the unrealized P&L of the FAST Desk by over $6 million. This misconduct rendered the bank's books and records inaccurate. 

In accepting the bank's offer of settlement, the CFTC recognizes its substantial cooperation during the Division of Enforcement's investigation of this matter. The CFTC notes that the bank's substantial cooperation and remediation are recognized in the form of a reduced civil monetary penalty.

The CFTC issued an Order filing and settling charges against former trader Blaise Brochard
https://www.cftc.gov/media/7611/enfbrochardorder090622/download and in accordance with the terms of the Order, Brochard will pay a $250,000 penalty, he will cease and desist from violating applicable provisions of the Commodity Exchange Act and CFTC regulations, and he will comply with certain conditions and undertakings, including a three-year ban on trading commodity interests for or on behalf of other persons or entities. As alleged in part in the CFTC Release:

The order finds that between January 2015 and at least April 2018, Brochard, a trader on the IRD Desk, submitted false or misleading entries in the swap dealer's internal recordkeeping and accounting system relating to the marking of the end-of-day USD LIBOR forward curve (Closing Curve), for the purpose of inflating the unrealized profit & loss (P&L) of the IRD Desk and disguising significant trading losses. Brochard engaged in a pattern of marking the Closing Curve in a manner that varied from observed mid-market prices and in a manner that aligned with the risk positions of the IRD Desk, while generally staying within the limits of internal controls designed to detect mismarking. At its peak in early 2018, Brochard's mismarking of the Closing Curve overstated the P&L of the IRD Desk by approximately $25 million.

In accepting Brochard's offer of settlement, the CFTC recognizes his substantial cooperation during the Division of Enforcement's investigation of this matter. The CFTC notes that Brochard's cooperation was recognized in the form of a reduced civil monetary penalty.

In the Matter of the Arbitration Between Donald Robinson, Timothy and Sharon Padden, Rhett Rainey, Kelly A. Rainey Trust, Toucan Holdings L.P., Robert Goodman, Robert Daniel Burgner, Individually and as Trustee of The Burgner Family Charitable Remainder Trust, Douglas Kasemeier, Wesley Callaway and Billy Loveless, Claimants, v. Oppenheimer & Co., Inc., Respondent, v James Woods Michael Mooney Britt Wright Iris Israel Julie Jones, Third-Party Respondents (FINRA Arbitration Award 21-02234)
https://www.finra.org/sites/default/files/aao_documents/21-02234.pdf
In a FINRA Arbitration Statement of Claim filed in August 2021, public customer Claimants asserted violations of FINRA Rules; negligence; breach of fiduciary duty; violation of the Georgia RICO statute; and breach of contract. The FINRA Arbitration Award characterizes the claims as involving "investments in Horizon Private Equity III." Claimants sought over $6 million in compensatory damages, punitive damages, treble RICO damages, interest, fees, and costs. Respondent Oppenheimer generally denied the allegations and asserted affirmative defenses; and the firm sought indemnification via its Third-Party Claim. The FINRA Arbitration Award notes this development:

On or about December 20, 2021, Respondent filed with FINRA Dispute Resolution Services, an Order Granting Receiver's Motion to Temporarily Extend the Stay Provided in the Order Appointing Receiver ("First Order"), dated December 13, 2021, issued by the United States District Court for the Northern District of Georgia, Atlanta Division ("U.S. District Court of GA"). Pursuant to the First Order, all matters concerning Third-Party Respondents were stayed until June 13, 2022. On or about June 23, 2022, and June 24, 2022, Claimants and Respondent respectively filed with FINRA Dispute Resolution Services, an Order Granting Receiver's Motion for Extension of Temporary Stay Provided in the Court's December 13, 2021, Order ("Second Order"), dated June 21, 2022, issued by the U.S. District Court of GA. Pursuant to the Second Order, all matters concerning Third-Party Respondents were further stayed until October 11, 2022. Therefore, the Panel made no determination with respect to the claims against the Third-Party Respondents. 

The FINRA Arbitration Panel rendered the following enumerated Award:

1. Respondent is liable for and shall pay to Claimant Robinson the sum of $700,000.00 in compensatory damages. 

2. Respondent is liable for and shall pay to Claimant T. Padden the sum of $202,750.00 in compensatory damages. 

3. Respondent is liable for and shall pay to Claimant S. Padden the sum of $500,000.00 in compensatory damages.

4. Respondent is liable for and shall pay to Claimants Rainey, Rainey Trust and Toucan Holdings the sum of $800,000.00 in compensatory damages. 

5. Respondent is liable for and shall pay to Claimant Goodman the sum of $1,000,000.00 in compensatory damages. 

6. Respondent is liable for and shall pay to Claimant Burgner the sum of $188,250.00 in compensatory damages. 

7. Respondent is liable for and shall pay to Claimant Burgner Trust the sum of $955,000.00 in compensatory damages. 

8. Respondent is liable for and shall pay to Claimant Kasemeier the sum of $450,000.00 in compensatory damages.

9. Respondent is liable for and shall pay to Claimant Callaway the sum of $603,166.00 in compensatory damages. 

10.Respondent is liable for and shall pay to Claimant Loveless the sum of $300,000.00 in compensatory damages. 

11.Respondent is liable for and shall pay to Claimants the sum of $11,398,332.00 in punitive damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

12.Respondent is liable for and shall pay to Claimant Robinson the sum of $2,100,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

13.Respondent is liable for and shall pay to Claimant T. Padden the sum of $608,250.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

14.Respondent is liable for and shall pay to Claimant S. Padden the sum of $1,500,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial.

15.Respondent is liable for and shall pay to Claimants Rainey, Rainey Trust and Toucan Holdings the sum of $2,400,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

16.Respondent is liable for and shall pay to Claimant Goodman the sum of $3,000,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

17.Respondent is liable for and shall pay to Claimant Burgner the sum of $564,750.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

18.Respondent is liable for and shall pay to Claimant Kasemeier the sum of $1,350,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

19.Respondent is liable for and shall pay to Claimant Callaway the sum of $1,809,498.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorneys' fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

20.Respondent is liable for and shall pay to Claimant Loveless the sum of $900,000.00 in RICO damages pursuant to O.C.G.A. § 16-14-6(c): "Any person who is injured by reason of any violation of Code Section 16-14-4 shall have a cause of action for three times the actual damages sustained and, where appropriate, punitive damages. Such person shall also recover attorney's fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred." 

21.Respondent is liable for and shall pay to Claimants the sum of $98,655.96 in costs. 

22.Respondent is liable for and shall pay to Claimants the sum of $5,315,624.30 in attorneys' fees pursuant to O.C.G.A. § 16-14-6(c) and O.C.G.A. § 13-6-11. 

23.Respondent shall pay Claimants the sum of $800.00, representing reimbursement of the non-refundable portion of the initial claim filing fee previously paid by Claimants to FINRA

24.Claimant Burgner Trust's request for RICO damages is denied. 

25.Any and all claims for relief not specifically addressed herein are denied. 


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