The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 23, 2022


































= = =
September 23, 2022

https://www.brokeandbroker.com/6662/cedar-brooks-schlang-finra/
In 2016, Bradley Schlang's interest in a company was purchased pursuant to a Redemption Agreement providing for 10 years of quarterly payments. A few years later, Covid stopped the world. The folks who bought out Schlang's interest suspended further payments citing a negotiated, contractual right. Suffice it to say that when you're supposed to get paid, you want to get paid, and, Schlang argues that he never executed a Settlement Agreement, never executed Mutual Releases, and, well, things went from bad to worse, and into court -- but should they be in a FINRA arbitration? '

https://riabiz.com/a/2022/9/22/making-lemonade-of-legal-lemons-new-wave-of-erisa-class-actions-accuse-fiduciaries-of-imprudently-using-low-fee-high-rated-funds-like-blackrock-tdfs
As RIABiz's Oisin Breen report (warns?), about two years into the Department of Labor's Fiduciary Rule, there's an explosion of 401(k) class actions. Initially, BlackRock LifePath target-date funds bore the brunt but lawyers are looking at other TDFs and beyond. 

https://www.justice.gov/opa/pr/two-men-plead-guilty-30-million-foreign-exchange-fraud-scheme
As alleged in part in the DOJ Release:

[P]atrick Gallagher, 44, of Middleborough, Massachusetts, and Michael Dion, 49, of Orlando, Florida, devised a scheme in which they would solicit victims to invest in their foreign exchange company, Global Forex Management, by promising them large returns based on previous trading results that they had fabricated. They told the victims that their funds would be traded using an online trading platform provided by a co-conspirator's company, IB Capital. Instead, Gallagher and Dion were working with other co-conspirators in the Netherlands to steal the victim investors' money. In May 2012, Gallagher and Dion executed their scheme by intentionally creating losing trades for the investors and effectively stole $30 million from their victims. After fabricating the massive trading loss, Gallagher and Dion routed the stolen money through shell companies they had set up all over the world.

Gallagher and Dion each pleaded guilty to one count of conspiracy to commit securities fraud, and each face a maximum penalty of five years in prison. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.
https://www.sec.gov/news/press-release/2022-170
Without admitting or denying the findings in SEC Orders that they negligently violated the antifraud provisions of federal securities laws, The Boeing Company 
https://www.sec.gov/litigation/admin/2022/33-11105.pdf and its former Chief Executive Officer Dennis A. Muilenburg https://www.sec.gov/litigation/admin/2022/33-11106.pdf consented to cease-and-desist orders that include penalties of $200 million and $1 million, respectively. As alleged in part in the SEC Release [Ed: "Maneuvering Characteristics Augmentations System ("MCAS")]:

[O]ne month after Lion Air Flight 610, a 737 MAX airplane, crashed in Indonesia in October 2018, Boeing issued a press release, edited and approved by Muilenburg, that selectively highlighted certain facts from an official report of the Indonesian government suggesting that pilot error and poor aircraft maintenance contributed to the crash. The press release also gave assurances of the airplane's safety, failing to disclose that an internal safety review had determined that MCAS posed an ongoing "airplane safety issue" and that Boeing had already begun redesigning MCAS to address that issue, according to the SEC's orders.

Approximately six weeks after the March 2019 crash of Ethiopian Airlines Flight 302, another 737 MAX, and the grounding by international regulators of the entire 737 MAX fleet, Muilenburg, though aware of information calling into question certain aspects of the certification process relating to MCAS, told analysts and reporters that "there was no surprise or gap . . . that somehow slipped through [the] certification process" for the 737 MAX and that Boeing had "gone back and confirmed again . . . that we followed exactly the steps in our design and certification processes that consistently produce safe airplanes."

https://www.sec.gov/litigation/litreleases/2022/lr25516.htm
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25516.pdf, the SEC charged Michael Weiss with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the SEC Complaint's  allegations, Weiss agreed to the entry of a final judgment enjoining him from violations of the charged provisions, order disgorgement and prejudgment interest, and impose a one-time civil penalty for a total of $23,900. As alleged in part in the SEC Release:

The Securities and Exchange Commission charged Michael Weiss with insider trading in the stock of four Ernst & Young LLP ("EY") clients or prospective clients ("EY Client Companies") made while he was employed as an EY Business Development Director. The SEC's complaint, filed in federal court in Manhattan, alleges that Weiss' work on EY business development teams or "pursuits" provided him with access to clients' and prospective clients' confidential and sensitive information. On four separate occasions between July 2014 and September 2015, while in possession and on the basis of that material nonpublic information, and in breach of his duties to EY and its clients, Weiss purchased EY Client Companies' shares in advance of earnings and acquisition announcements. As alleged in the complaint, Weiss obtained illicit profits from those trades of approximately $10,286.

CFTC Charges New York Introducing Broker with Failing to Maintain Required Audio Recordings (CFTC Release) 
https://www.cftc.gov/PressRoom/PressReleases/8591-22
In response to a CFTC Order charging XP Investments US, LLC with failing to maintain certain records required to be kept under the Commodity Exchange Act and CFTC regulations, the company agreed to settle by paying a $500,000 civil monetary penalty and to cease and desist from any further violation of the CEA and CFTC regulations as charged. As alleged in part in the CFTC Release:

Specifically, the order finds that XP failed to maintain certain audio recordings for dates in May and June 2019, which as a registered introducing broker, it was required to make and keep for at least one year. This failure occurred after XP relocated its New York office, which was responsible for maintaining the relevant audio recording system. The audio recording system was improperly installed at XP's new office location by an external vendor, causing the inconsistent and incomplete recording of audio calls on 25 days. Neither spot checks nor XP's "heartbeat" outage warning system detected the error. Only after XP could not find a specific recording, did it realize that there was an error. Once the error was discovered in June 2019, XP promptly took steps to remediate the problem.

The unrecorded calls included oral communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and/or prices that led to the execution of a transaction in a commodity interest and/or related cash or forward transactions.   

https://www.cftc.gov/PressRoom/PressReleases/8589-22
The CFTC filed Complaints against:
 As alleged in part in the CFTC Release:



In response to a CFTC Order, bZeroX, LLC (bZeroX) and its founders Tom Bean (Bean) and Kyle Kistner (Kistner) 
https://www.cftc.gov/media/7676/enfbzeroxorder092222/download) alleging that the Respondents had illegally offered leveraged and margined retail commodity transactions in digital assets; engaged in activities only registered futures commission merchants ("FCMs") can perform; and failed to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs, the Respondents settled the allegations for a $250,000 civil monetary penalty and agreed to cease and desist from further violations of the cited provisions. Simultaneously, the CFTC filed a Complaint in the United States District Court for the Northern District of California charging the Ooki DAO (a decentralized autonous organization and successor to bZeroX that operated the same software protocol as bZeroX) 
https://www.cftc.gov/media/7681/enfookicomplaint092222/download with violating the same laws as the above-named Respondents. As alleged in part in the CFTC Release:

[F]rom approximately June 1, 2019 to approximately August 23, 2021, the respondents designed, deployed, marketed, and made solicitations concerning a blockchain-based software protocol that accepted orders for and facilitated margined and leveraged retail commodity transactions (functioning similarly to a trading platform). This protocol (the bZx Protocol) permitted users to contribute margin (collateral) to open leveraged positions whose ultimate value was determined by the price difference between two digital assets from the time the position was established to the time it was closed. The bZx Protocol purported to offer users the ability to engage in these transactions in a decentralized environment-i.e., without third-party intermediaries taking custody of user assets.

These transactions were unlawful because they were required to take place on a designated contract market, but did not. Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, bZeroX illegally operated as an unregistered FCM. bZeroX also failed to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs. Bean and Kistner, who co-founded, co-owned and controlled bZeroX, were held liable as controlling persons who knowingly induced the underlying violations or failed to act in good faith.

As the order finds and as alleged in the complaint, on approximately August 23, 2021, bZeroX transferred control of the bZx Protocol to the bZx DAO, which subsequently renamed itself and is currently doing business as the Ooki DAO. The Ooki DAO operates the Ooki Protocol (formerly the bZx Protocol) in the exact same manner as bZeroX and thus is continuing to violate the law in the same manner as bZeroX. By transferring control to a DAO, bZeroX's founders touted to bZeroX community members the operations would be enforcement-proof-allowing the Ooki DAO to violate the CEA and CFTC regulations with impunity, as alleged in the federal court action. The order finds  the DAO was an unincorporated association of which Bean and Kistner were actively participating members and liable for the Ooki DAO's violations of the CEA and CFTC regulations. 

Dissenting Statement of Commissioner Summer K. Mersinger Regarding Enforcement Actions Against: 1) bZeroX, LLC, Tom Bean, and Kyle Kistner; and 2) Ooki DAO
https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement092222

Overview

Today the Commission is called upon to consider novel and complex questions about how our governing statute, the Commodity Exchange Act (CEA), applies in a world of digital assets, blockchain technology, and decentralized autonomous organizations (DAOs) -technology that did not exist when the statute was enacted in 1974, and that has just started to develop since Congress last amended the statute as part of the Dodd-Frank Act in 2010.

Unfortunately, I cannot support the Commission's approach to this particular matter.[1]  While I do not condone individuals or entities blatantly violating the CEA or our rules, we cannot arbitrarily decide who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing.  For these reasons, I am respectfully dissenting in this matter.

As I mentioned, I do not approve of or excuse activity that violates the CEA or those who direct others to participate in unlawful activity.  Thus, there are parts of the Commission's two related enforcement actions in this matter that I support:

First, the Commission is issuing a settlement Order finding that bZeroX, LLC, a limited liability company, violated exchange-trading and registration requirements in the CEA and the CFTC's anti-money laundering rules with respect to a blockchain-based software protocol that accepted orders for, and facilitated, margined and leveraged retail commodity transactions.  The settlement Order further finds that Tom Bean and Kyle Kistner, co-founders and co-owners of bZeroX, LLC, are liable for those violations pursuant to the provisions in Section 13(b) of the CEA regarding control person liability for violations by a corporate entity.[2]  There is nothing particularly new or unusual about these charges, and I would vote to approve this settlement if it were based solely on those findings.

Second, because Bean and Kistner transferred control of the protocol to the Ooki DAO, and the protocol continues to operate in the same illegal manner, the Commission also is filing an injunctive enforcement action through a Complaint charging the same violations by Ooki DAO as an unincorporated association.  Certainly, I agree that conduct illegal under the CEA and CFTC rules, is not acceptable whether done by a corporation or an unincorporated association.

However, in its settlement Order and Complaint, the Commission defines the Ooki DAO unincorporated association as those holders of Ooki tokens that have voted on governance proposals with respect to running the business.  Because Bean and Kistner fall into that category, the settlement Order also finds them liable for violations of the CEA and CFTC rules by the Ooki DAO based solely on their status as members of the Ooki DAO unincorporated association-relying on a State-law doctrine that members of a for-profit unincorporated association are jointly and severally liable for the debts of that association.

I cannot agree with the Commission's approach of determining liability for DAO token holders based on their participation in governance voting for a number of reasons.
  1. First, not only does this approach fail to rely on any legal authority in the CEA, it also does not rely on any case law relevant to this type of action.  Instead, the Commission's approach imposes governmental sanctions for violations of the CEA and CFTC rules based on an inapplicable State-law legal theory developed for contract and tort disputes between private parties;

  2. Additionally, this approach arbitrarily defines the Ooki DAO unincorporated association in a manner that unfairly picks winners and losers, and undermines the public interest by disincentivizing good governance in this new crypto environment;

  3. This approach constitutes blatant "regulation by enforcement" by setting policy based on new definitions and standards never before articulated by the Commission or its staff, nor put out for public comment; and

  4. Finally, the Commission ignores an alternative, well-established basis for imposing liability for the Ooki DAO's violations of the CEA and CFTC rules in this case - i.e., aiding and abetting liability-that is specifically authorized by Congress and that would solve all of these problems.

Although there are no allegations of any fraud having occurred here, we all are mindful of the need to protect customers who are participating in the largely unregulated crypto space.  But those good intentions do not entitle the Commission to act through enforcement without proper legal authority, notice, or public input. 

Absence of Applicable Legal Authority

There is no provision in the CEA that holds members of a for-profit unincorporated association personally liable for violations of the CEA or CFTC rules committed by the association based solely on their status as members of that association.  Yes, the CEA applies to an association.  The distinction here is that the Commission is attempting to determine who is, and who is not, liable for violations of the CEA and CFTC rules by the association.[3]

The CEA sets out three legal theories that the Commission can rely upon to support charging a person for violations of the CEA or CFTC rules committed by another:  i) principal-agent liability;[4] ii) aiding-and-abetting liability;[5] and iii) control person liability.[6]  The Commission's settlement Order does not cite a single provision of the CEA, or of Federal common law,[7] to support the notion that the Commission can impose liability for the violations of another if none of these three legal theories set out in the CEA applies (or, worse, if the Commission thinks that establishing the CEA legal theories would be hard to do). 

Yet, the settlement Order holds Bean and Kistner personally liable for violations of the CEA and CFTC rules by Ooki DAO based on their status as voting token holders of the Ooki DAO.  In doing so, the Commission relies solely on two contract disputes and one tort case - all between private parties and all decided under State law - which stand for the proposition that individual members of a for-profit unincorporated association are personally liable for the debts of the association.[8]

But the Commission here is not simply collecting an unpaid contractual debt of Ooki DAO.  Rather, it is imposing sanctions that only the Government can impose - civil monetary penalties ($250,000), a cease-and-desist order, and a prohibition on future participation in the activities of the Ooki DAO - against Bean and Kistner (and, potentially, in the future against others who have voted Ooki Tokens on governance questions) based solely on their status as voting token holders of the Ooki DAO.

I am skeptical of any Federal or State governmental agency wielding its power to sanction in this manner, i.e., based on a legal theory from State common law contract and tort cases between private parties.  Nor have I seen any indication that Congress intended the CFTC to do so-rather than relying on the principal-agent, aiding-and-abetting, and control person liability provisions that it specifically set out for the CFTC in the CEA.

An Arbitrary, Unfair, and Misguided Definition of the Unincorporated Association

As previously discussed, the Commission's settlement Order and Complaint arbitrarily define the Ooki DAO unincorporated association as comprising those who vote their Ooki tokens.[9]  It is natural to suspect that the Commission chose this definition of the Ooki DAO unincorporated association because this definition likely is the best position for an enforcement action against the Ooki DAO.  But that choice has consequences.  From a broader policy and societal perspective, the Commission has drawn the definitional line in a place that leads to inequitable results and undermines the public interest.

Defining the Ooki DAO unincorporated association as those who have voted their tokens inherently creates inequitable distinctions between token holders.  For example, suppose that during the period in which token holders A and B hold voteable DAO tokens:  i) there is a single vote on a governance proposal, which has nothing to do with compliance with the CEA or CFTC rules; and ii) token holder A votes on it, but token holder B does not.  Under the Commission's definition, token holder A has now become a member of the unincorporated association and (possibly unknowingly) assumed personal liability and is subject to CFTC sanctions for any violations of the CEA by the Ooki DAO-whereas token holder B, by the happenstance of not voting on this random governance proposal, has not.

The Commission's approach thus picks winners and losers, in an unfair manner.  What is more, it affirmatively disincentivizes voting participation in DAO governance generally-and particularly those who may want to vote in a manner that effectuates change to comply with the law.  The Commission's approach will have a chilling effect that discourages voting, thereby hindering good governance and the development of a culture of compliance in this setting.  The unmistakable take-away from the Commission's definitional approach in these enforcement actions is that those in a DAO community should not vote, even if the governance vote encourages following the law.
Simply put:  By insisting on drawing a line with respect to who is in and who is out of a DAO unincorporated association, the line the Commission has chosen in its definition of the Ooki DAO unincorporated association inevitably leads to inequitable results and undermines the public interest in good governance.

Regulation by Enforcement

But even more fundamentally problematic is the Commission drawing that line in the context of an enforcement action in the first place.  As demonstrated above, the Commission's approach in these actions will have public policy implications that extend far beyond this particular settlement and lawsuit.  Yet, the Commission has made this consequential decision with no public notice or input whatsoever.  It is regulation by enforcement, plain and simple.

True, the CEA does not provide the Commission with authority to regulate the Ooki DAO.[10]  However, I am aware of no reason why the Commission could not undertake a public notice-and-comment rulemaking to adopt rules addressing the novel and difficult public policy questions that are raised here.  Specifically:  i) who is a member of a DAO that is an unincorporated association; and ii) within the bounds of the statutory authority granted by Congress in the CEA, who will the Commission hold personally liable for a DAO's violations of the CEA and CFTC rules, and under what circumstances?

Proceeding by rulemaking would benefit the Commission by providing us with information, views, and public input from interested parties.  Such public input could, for example:  i) address the potential consequences for the developing ecosystem of decentralized finance from the approach the Commission has adopted here; ii) highlight possible consequences of the Commission's approach for unincorporated associations other than DAOs; and iii) provide alternative approaches that we might conclude would better achieve our mission as set forth in the CEA.  We benefit from public input on a wide variety of rulemakings relating to our administration of the CEA - surely these questions are of sufficient importance for us to seek such input here as well.

Equally important, a rulemaking proceeding would provide notice to the public about the way in which the Commission is thinking about these important questions.  Such notice is obviously absent before proceeding with this Order.  One can scour the records of the CFTC and not find a single statement of the Commission, a Chair of the Commission, a Director of one of the Commission's Divisions or Offices, or the staff of the Commission informing the public that:  i) based on State-law contract and tort cases between private parties, the CFTC believes that a member of an unincorporated association, without more, is personally liable for violations of the CEA or CFTC rules by that association; or ii) the CFTC considers anybody voting a DAO's governance token to be a member of that DAO and thus subject to personal liability and sanctions for violations by the DAO.  If for some reason there is a reluctance to engage in rulemaking, nevertheless, the Commission has many other means at its disposal to shine a light on these important policy issues.[11]

In short:  The Commission should not be shrouding its views on these policy issues in obscurity-to be revealed only through enforcement actions.  Nor should it be delegating its policymaking responsibility to federal judges hearing those enforcement actions.  Rather, the Commission should communicate to, and engage with, the public in a transparent manner and seek out the input of those with expertise to share.

It Didn't Have to Be this Way

I am disappointed that the Commission has decided to proceed in this manner since there is a better path available.  The Commission could have decided to proceed in a manner that:  i) is appropriately based on a person's culpability rather than status; ii) is grounded squarely in the authorities granted to the CFTC by the CEA; and iii) would avoid all the concerns that I have expressed above.  That is, the Commission could have found Bean and Kistner personally liable for Ooki DAO's violations based on the aiding-and-abetting provisions of Section 13(a) of the CEA.[12]

Bean and Kistner set in motion Ooki DAO's violations of the CEA and CFTC rules by setting it up to operate a protocol just like the one that they had operated through bZeroX, LLC-and which operated in violation of the CEA and CFTC rules.  They then publicly announced that they were transitioning to a structure that they believed would insulate that activity from any requirement to comply with US law.[13]  Further, the settlement Order finds that Bean and Kistner continued to market and solicit members of the public to trade on the protocol after transferring control to the Ooki DAO.

I believe this compelling evidence demonstrates that Bean and Kistner met the standard for aiding-and-abetting liability under the CEA.  And that finding would make them liable for Ooki DAO's violations of the CEA and CFTC rules.

Thus, utilizing the CEA's well-established aiding-and-abetting standard would have-

  1. Achieved the same result with respect to holding Bean and Kistner personally liable for violations committed by the Ooki DAO; 

  2. Enabled the Commission to make its point - with which I agree - that a decentralized organization is not immune from the legal requirements of the CEA and CFTC rules; and

  3. Addressed the concerns about legal authority, inequitable results, disincentivizing good governance, lack of public notice, and regulation by enforcement set out above.

Concluding Thoughts

The principles that guide our enforcement of the law were intended to be technology neutral.  Regardless of the underlying technology, our enforcement principles remain the same:  i) adherence to the authority that Congress has granted us in the CEA; ii) not picking winners and losers; iii) incentivizing behavior calculated to enhance compliance with the law; iv) soliciting public input on significant policy issues before us; and v) transparency with respect to who we will hold accountable and for what.

These principles have served the Commission well throughout its 45-plus year history, including periods of incredible technological innovation such as the transformation of futures trading from open outcry to electronic trading.  Yet, today's actions abandon these principles.  Accordingly, I respectfully dissent.

[1] This Statement will refer to the agency as the "CFTC" or "Commission."
[2] CEA Section 13(b), 7 U.S.C. § 13c(b).
[3] At the same time, I would not support the idea of taking legal action against every person with any affiliation to the DAO.
[4] CEA Section 2(a)(1)(B), 7 U.S.C. § 2(a)(1)(B) ("The act, omission, or failure of any official, agent, or other person acting for any individual, association, partnership, corporation, or trust within the scope of his employment or office shall be deemed the act, omission, or failure of such individual, association, partnership, corporation, or trust, as well as of such official, agent, or other person").
[5] CEA Section 13(a), 7 U.S.C. § 13c(a) ("Any person who commits, or who willfully aids, abets, counsels, commands, induces, or procures the commission of a violation of any of the provisions of this Act, or any of the rules, regulations or orders issued pursuant to this Act, or who acts in combination or concert with any other person in any such violation, or who willfully causes an act to be done or omitted which if directly performed or omitted by him or another would be a violation of the provisions of the Act or any of such rules, regulations, or orders may be held responsible for such violation as a principal").
[6] CEA Section 13(b), 7 U.S.C. § 13c(b) ("Any person who, directly or indirectly, controls any person who has violated any provision of this Act or any of the rules, regulations, or orders issued pursuant to this Act may be held liable for such violation in any action brought by the Commission to the same extent as such controlled person.  In such action, the Commission has the burden of proving that the controlling person did not act in good faith or knowingly induced, directly or indirectly, the act or acts constituting the violation").
[7] The settlement Order twice refers to "the federal definition of an unincorporated association," but it does not cite any federal common law regarding liability for statutory or regulatory violations by an unincorporated association.  In two of the cases cited in the settlement Order, Southern California Darts Association v. Zaffina, 762 F.3d 921 (9th Cir. 2014) and Seattle Affiliate of October 22nd Coalition to Stop Police Brutality, Repression and the Criminalization of a Generation v. City of Seattle, 2005 WL 3418415 (W.D. Wash. 2005), the unincorporated association was the plaintiff, and the issue was whether it had the capacity to sue in federal court.  And in the third case, Heinold Hog Market, Inc. v. McCoy, 700 F.2d 611 (10th Cir. 1983), the court simply found that the entity before it was an unincorporated association in the course of rejecting an argument by the entity's custodian of records that the entity was a sole proprietorship (which would have allowed the custodian to refuse to produce the entity's records in response to a subpoena based on the custodian's Fifth Amendment privilege against self-incrimination).
[8] See Karl Rove & Co. v. Thornburgh, 39 F.3d 1273 (5th Cir. 1994) (breach of contract); Shortlidge v. Gutoski, 484 A.2d 1083, 1086 (N.H. 1984) (breach of contract); and Libby v. Perry, 311 A.2d 527 (Me. 1973) (slip-and-fall case in which the plaintiff was awarded $7,500 for a broken leg).  Although Thornburgh is a federal case, it was based on diversity jurisdiction and therefore decided under State law.
[9] According to the settlement Order at page 10:  "An unambiguous way that individuals join together to govern the Ooki Protocol is by voting their Ooki Tokens.  Once an Ooki Token holder votes his or her Ooki Tokens to affect the outcome of an Ooki DAO governance vote, that person has voluntarily participated in the group formed to promote the common objective of governing the Ooki Protocol and is thus a member of the Ooki DAO unincorporated association."  Paragraph no. 2 of the Complaint similarly alleges:  "The Ooki DAO is an unincorporated association comprised of holders of OokiDAO Tokens . . . who vote those tokens to govern (e.g., to modify, operate, market, and take other actions with respect to) the . . . 'Ooki Protocol')."
[10] And of course, we do have an interest in protecting consumers from individuals and entities promoting trading that violates the CEA.  But Congress also has stated that the purposes of the CEA include promoting responsible innovation and fair competition among exchanges, other markets and market participants.  CEA Section 3(b); 7 U.S.C. § 5(b).  Balancing these purposes in furtherance of the public interest is the essence of the rulemaking process; it is ill-suited to the enforcement process.
[11] Examples of such tools include roundtables, advisories, FAQs, and guidance, which the Commission and its staff have used multiple times-including the roundtable on non-intermediated trading and the voluntary carbon markets convening held just a few months ago.  See CFTC Staff Announces Roundtable Discussion on Non-intermediation (May 25, 2022), available at https://www.cftc.gov/PressRoom/Events/opaeventstaffroundtable052522; CFTC Announces Voluntary Carbon Markets Convening (June 2, 2022), available at https://www.cftc.gov/PressRoom/Events/opaeventcftccarbonmarketconvene060222.
[12] Aiding-and-abetting liability under the CEA requires that:  i) there be a violation of the CEA or CFTC rules; ii) the aider-and-abettor had knowledge of the wrongdoing underlying the violation (which does not necessarily require knowledge that the conduct is unlawful); and iii) the aider-and-abettor intentionally assisted the primary wrongdoer.  In re Nikkhah, [1999-2000 Transfer Binder] Comm. Fut. L. Rep. (CCH) 28,129, at 49,888 n.28 (CFTC May 12, 2000); In re Lincolnwood Commodities Inc., [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) 21,986, at 28,255 (CFTC January 31, 1984).  See generally, In re ICAP Capital Markets, CFTC Docket No. 18-33, at 12 (CFTC September 18, 2018) (settlement Order), available at enficapcapitalmarketsorder091818.pdf (cftc.gov).
[13] The fact that Bean and Kistner were wrong that Ooki DAO was insulated from CFTC enforcement is irrelevant to the fact that they had knowledge of the Ooki DAO's conduct and intentionally assisted Ooki DAO in its violations of the CEA and CFTC rules

= = =
September 22, 2022

https://www.brokeandbroker.com/6674/finra-and-we-have-skin-in-the-game/ 
FINRA Small Firm veteran Granville Ungerleider is seeking your vote for his candidacy for the 2022 Small Firm Member of the FINRA National Adjudicatory Council ("NAC"). With some 20 years as a trader, market maker, salesperson, and investment banker, and the last 15 years as the owner of a small Broker/Dealer, Ungerleider has the credentials and experience required to do the job. 

https://www.justice.gov/usao-sdin/pr/insurance-broker-charged-4-million-investment-fraud-and-ponzi-scheme
In an Indictment filed inn the United States District Court for the Southern District of Indiana, Brian Simms, 44, of Lebanon, Indiana, with six counts of Wire Fraud. Simms was arrested yesterday and made his initial appearance in federal court in Indianapolis yesterday afternoon.

According to court documents, Simms was a licensed insurance broker with his company Brendanwood Financial Brokerage LLC. Simms was not licensed to sell securities nor registered to provide financial advising services. Nevertheless, beginning in 2013, Simms began inducing clients to cash out or liquidate their traditional and long-term insurance products and investments and reinvest the funds with Simms at Brendanwood. Simms allegedly made materially false and fraudulent pretenses, claims, representations, and promises to victim investors that he would invest their funds in investment products-when, in fact, he intended to use their funds for his own personal benefit. Rather than investing the victim investors' in investment products as promised, Simms used the funds to pay business expenses related to Brendanwood such as payroll for its employees, or for his own personal expenditures, including payments to credit cards, Amazon, grocery stores, gasoline, restaurants, and utilities.

To conceal his scheme Simms created false financial statements. Simms also misappropriated victim investors' money to make limited, Ponzi-type payments to other victim investors. Simms mislead the victim investors to believe that payments he made to them represented returns on proper investments, when they were in fact funds misappropriated from other victim investors. In total, Simms misappropriated approximately $3,995,535 from Victim Investors.
https://www.justice.gov/usao-cdca/pr/arcadia-man-charged-securities-fraud-stealing-client-funds-and-concealing-his
-and-
SEC Charges Former Business News Commentator with Misappropriating Client and Investor Funds (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25515.htm

In an Indictment filed in the United States District Court for the Central District of California, James Arthur McDonald Jr. was charged with one count of securities fraud. As alleged in part in the DOJ Release:

According to an affidavit filed with the complaint, McDonald frequently appeared as an analyst on the CNBC financial TV news network and was the CEO and chief investment officer of two companies: Hercules Investments LLC, based in downtown Los Angeles, and Index Strategy Advisors Inc. (ISA), based in Redondo Beach.

In late 2020, McDonald lost tens of millions of dollars of Hercules client money after adopting a risky short position that effectively bet against the health of the United States economy in the aftermath of the U.S. presidential election. McDonald projected that the COVID-19 pandemic and the election would result in major selloffs that would cause the stock market to drop. When the market decline didn't occur, Hercules clients lost between $30 million and $40 million, according to the affidavit. By December 2020, Hercules clients were complaining to company employees about the losses in their accounts.

Since McDonald's compensation for his investment advisory services primarily was based on a percentage of assets under his management - typically 2% of a client's total assets held by Hercules - the massive losses to Hercules clients significantly decreased the fees McDonald was entitled to collect.

In early 2021, McDonald solicited millions of dollars' worth of funds from investors in the form of a purported capital raise for Hercules but misrepresented how the funds would be used and failed to disclose the massive losses Hercules previously sustained. McDonald - an avid football enthusiast - stated that he planned to launch a publicly traded mutual fund under the ticker symbol "NFLHX." The losses to Hercules clients and the potential for litigation related to those losses jeopardized the success of that fund because any litigation would have had to be publicly disclosed.

As part of the capital raise, McDonald obtained $675,000 in investment funds from one victim group on March 9, 2021. He then misappropriated those funds in various ways, including spending roughly $174,610 of them at a Porsche dealership. Approximately $109,512 was transferred to the landlord of a home McDonald was renting in Arcadia; and approximately $6,800 was spent on a website that sells designer menswear.

McDonald allegedly also falsely represented to clients that ISA, his other firm, was a registered investment adviser, even though he had withdrawn ISA as a state-registered investment adviser firm in May 2019. He also allegedly sent ISA clients false account statements, including for one client who invested approximately $351,000, later needed the money to make a down payment on a home, was informed by McDonald that much of the money had been lost, and never got his full investment back.

The United States Securities and Exchange Commission subpoenaed McDonald to testify before it in November 2021, but - without advance notice - he failed to appear as required. According to the complaint, McDonald also appears to have terminated his previous phone and email accounts and told one person that he planned to "vanish.

In a Complaint filed in the United States District Court for the Central District of California
https://www.sec.gov/litigation/complaints/2022/comp25515.pdf, the SEC charged McDonald and Hercules with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940; and, further, the Complaint charged McDonald with violating Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. As alleged in part in the SEC Release:

[M]cDonald raised over $3.6 million from investors between May 2019 and October 2021 for the stated purpose of trading securities through an investment vehicle called the Index Strategy Advisors Fund, and that McDonald used less than half those funds for trading and did not engage in any trading with the funds for long stretches of time. Instead, the SEC alleges, McDonald misappropriated more than $1 million of the funds for personal expenses, including luxury vehicles and paying rent on his home, and misappropriated more than $2 million of the funds for Ponzi-like payments, payments to his Hercules' investment adviser clients and expenses associated with operating Hercules. The SEC further alleges that, from February 2021 to October 2021, McDonald raised $1.5 million through the sale of equity investments in Hercules's business. According to the complaint, McDonald falsely represented that investor funds would be used to expand Hercules's business, lied about the firm's financial condition, and failed to disclose that he had promised Hercules clients that the firm would repay earlier losses. The SEC alleges that McDonald commingled the investor funds with Hercules assets and his personal assets, and used $440,000 of those funds for personal expenses, including to pay his personal credit card bills.
https://www.sec.gov/litigation/litreleases/2022/lr25513.htm
In a Complaint filed in the United States District Court for the Northern District of Illinois
https://www.sec.gov/litigation/complaints/2022/comp25513.pdf, the SEC charged David Sheldon Wells with violating Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. . In part the SEC Release alleges that:

The SEC's complaint alleges that from at least October 2020 to July 2021, while working as a representative of an SEC-registered broker-dealer and investment advisory firm, Wells misappropriated over $683,000 from three of his investment advisory clients. The complaint alleges that Wells fraudulently solicited the clients to give him money to invest on their behalf through the broker-dealer and investment advisory firm. According to the complaint, Wells told the clients to purchase cashiers' checks made out to a corporate entity that he created shortly before misappropriating their funds. As alleged in the complaint, Wells then transferred their funds to personal brokerage accounts owned or controlled by him, where he lost nearly all the funds through risky options trading. The complaint alleges that Wells also spent some of his clients' funds on personal expenses.

https://www.sec.gov/litigation/litreleases/2022/lr25514.htm
In a Complaint filed in the United States District Court for the Southern District of Florida
https://www.sec.gov/litigation/complaints/2022/comp25514.pdf, the SEC charged Manhattan Transfer Registrar Company and its former principal, John C. Ahearn with violating a May 17, 2018, SEC Order and the transfer agent associational bar provisions of Section 17A(c)(4)(C) of the Exchange Act. Without admitting or denying the allegations in the SEC Complaint:

  • Ahearn consented to the entry of a civil court judgment permanently enjoining him from violating the charged provision and ordering him to pay a civil penalty of $25,000, and to issuance of a court order pursuant to Section 21(e) of the Exchange Act requiring him to comply with the Commission Order; and
  • Manhattan Transfer consented to the entry of a civil court judgment permanently enjoining it from violating the charged provision and ordering it to pay disgorgement of $1,075 and prejudgment interest thereon of $200.02, and a civil penalty of $75,000.
As alleged in part in the SEC Release:

[A]hearn and Manhattan Transfer violated the Commission Order and the transfer agent associational bar provisions of the Securities Exchange Act of 1934 ("Exchange Act") when Ahearn acted as inspector of elections on behalf of Manhattan Transfer and participated in the conduct of Manhattan Transfer's transfer agent business while he was subject to a bar from association with any transfer agent. The complaint further alleges Manhattan Transfer violated the Commission Order by not complying with its undertaking that it would retain an independent consultant and that, for a period of time, the independent consultant would not enter into any professional relationship with Manhattan Transfer other than its independent consultant work. Despite that undertaking, the complaint alleges that Manhattan Transfer retained the independent consultant to, among other things, revise Manhattan Transfer's written policies and procedures and participate in brokering the sale of Manhattan Transfer.



https://www.finra.org/sites/default/files/fda_documents/2021071041701
%20Jimmie%20Scott%20Griffea%20CRD%206967113%20AWC%20lp.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, Jimmie Scott Griffea submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jimmie Scott Griffea was registered in 2018 with First Command Brokerage Services, Inc. In accordance with the terms of the AWC, FINRA imposed upon Griffea a $2,500 fine and a three-month suspension from associating with any FINRA member in all capacities. The AWC contains this admonition:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.

 As alleged in part in the AWC:

On January 18, 2020, while associated with First Command Brokerage Services, Griffea was charged with one count of misdemeanor theft in U.S. District Court. Although Griffea was aware that he had been charged with a misdemeanor theft in January 2020, he did not amend his Form U4 to disclose the charge within 30 days, as he was required to do. Ultimately, Griffea did not amend his Form U4 to disclose the misdemeanor charge at any point prior to resigning from First Command Brokerage Services in April 2021. 

By willfully failing to disclose the January 2020 misdemeanor theft charge, Griffea violated Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010. 

https://www.finra.org/sites/default/files/fda_documents/2022075812301
%20IBN%20Financial%20Services%2C%20Inc.%20CRD%2042360%20AWC%20lp.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, IBN Financial Services, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that IBN Financial Services, Inc. has been a FINRA Member Firm since 1997 with 70 associated persons at 24 branches. In accordance with the terms of the AWC, FINRA imposed upon IBN a Censure and $30,000 fine. In part, the AWC alleges: 

In March 2021, two registered persons associated with IBN submitted outside business activity forms disclosing their ownership and management of investment funds that were actively involved in private placement offerings.2 As owners of the funds' managers, the registered persons were entitled to and received a management fee. 

IBN received and reviewed the private placement memoranda associated with the investment funds, and approved the representatives' request to engage in the outside business activity. IBN also filed Uniform Applications for Securities Industry Registration or Transfer (Form U4) on behalf of the registered persons, disclosing their participation in six private placement offerings and investment funds. 

The firm's WSPs did not address the requirements of FINRA Rule 3270.01. Specifically, the firm's WSPs did not require it to evaluate the factors enumerated in FINRA Rule 3270.01. The firm's WSPs also did not require it to determine whether the outside business activities should be restricted or prohibited or to evaluate whether the proposed outside business activity was more properly characterized as an outside securities activity. 

As a result, although IBN understood that the registered persons' outside business activities involved private placement offerings and were investment-related, IBN failed to evaluate whether the proposed activities would interfere with or otherwise compromise the registered persons' responsibilities to the firm or the firm's customers, or be viewed as part of IBN's business. The firm also failed to evaluate whether the registered persons' outside activities with the funds should be restricted or prohibited, or whether the Funds should have been treated as an outside securities activity and any transactions recorded on the firm's books and records as required by FINRA Rule 3280 and the firm's WSPs. 

IBN's failure to evaluate whether the funds should have been subject to the requirements of FINRA Rule 3280 allowed the registered persons to raise funds from more than 40 individual investors, none of whom were IBN customers. 

Therefore, IBN violated FINRA Rules 3110, 3270.01, and 2010.

= = =
Footnote 2: The Firm terminated the registered persons in June 2022 after the Securities and Exchange Commission filed a lawsuit against them related to two of the investment funds.

= = =
September 21, 2022

https://www.brokeandbroker.com/6672/wells-fargo-johnson-arbitration/
In 2019, Wells Fargo discharged Robin Johnson. If you go by Wells Fargo's version of events, Johnson was let go because of concerns about the suitability of her recommendations to certain clients and for failing to complete a trade-approval worksheet. If you go by Johnson's version of events, she was terminated because she filed a claim with human resources alleging sex harassment and discrimination. Two very, very different explanations for why Johnson was terminated. On top of everything, Wells Fargo sued Johnson for her alleged failure to repay two Promissory Notes.

https://www.justice.gov/usao-sdny/pr/manhattan-real-estate-fund-manager-sentenced-prison-securities-fraud
Joshua Burrell, 39, pled guilty in the United States District Court for the Southern District of New York to securities fraud; and he was sentenced to 48 months in prison plus one year of supervised release and ordered to pay $5,763,420 in restitution and a $107,688 forfeiture.  As alleged in part in the DOJ Release:

From in or about 2019 through in or about 2021, BURRELL obtained millions of dollars of investments for the Activated Tax Advantaged Opportunity Fund, LLC and Activated Capital Opportunity Zone Fund II, LLC (collectively, the "Activated OZ Funds" or the "Funds") based on fraudulent representations.  BURRELL represented, in substance, that the money invested in the Activated OZ Funds would be used to purchase real estate properties in Opportunity Zones and that investors would receive distribution payments out of the Funds' net real estate investment income.  Contrary to those representations, BURRELL caused the Activated OZ Funds to pay putative distributions in amounts greater than the Funds' net income.  From the inception of the Funds in 2019 through approximately February 2021, BURRELL used investor money to help pay distributions totaling approximately $470,000 in a manner akin to a Ponzi scheme.  BURRELL also falsely inflated Activate Capital's assets under management in communications with prospective investors.

To attract additional investment capital for the Activated OZ Funds, BURRELL sought to establish a partnership with an investment bank headquartered in Manhattan ("Company-1").  As part of Company-1's diligence process, Company-1 asked BURRELL for "[b]acking to show current fund proceeds/acquisitions made."  In response to these requests, BURRELL fabricated documents to make it appear that the Activated OZ Funds were more successful, owned more properties, and were in better financial condition than was actually the case.  For example, BURRELL sent Company-1 fake bank statements making it appear that, for the period July 2019 through October 2019, one of the Activated OZ Funds had ending monthly account balances of between approximately $2,094,450 and $2,463,100 when the real account statements for that period showed ending monthly balances of between only $116,369 and $154,399.  BURRELL fabricated additional documents to make it falsely appear to Company-1 that an Activated Capital affiliate owned nine properties in Detroit, Michigan, that it had not, in fact, acquired.

https://www.sec.gov/news/press-release/2022-169
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/33-11104.pdf, Sheng Fu and Ming Xu were found to have violated the antifraud provisions of the Securities Exchange Act, and Sheng Fu violated the antifraud provisions of the Securities Act and was a cause of Cheetah Mobile's violations of issuer reporting requirements under the Exchange Act. Sheng Fu and Ming Xu agreed to cease-and-desist orders, undertakings relating to their future securities trading, and to pay civil penalties of $556,580 and $200,254, respectively. As alleged in part in the SEC Release:

The Securities and Exchange Commission today charged the CEO of Cheetah Mobile Inc. and the company's former President with insider trading for selling Cheetah Mobile's securities, pursuant to a purported 10b5-1 trading plan, while in possession of material nonpublic information. The SEC's order finds that Sheng Fu, the company's CEO, and Ming Xu, its then-President and Chief Technology Officer, jointly established a purported 10b5-1 trading plan after becoming aware of a significant drop-off in advertising revenues from the company's largest advertising partner.

According to the SEC's order, in 2016, Sheng Fu and Ming Xu sold 96,000 Cheetah Mobile American Depository Shares under the trading plan and avoided losses of approximately $203,290 and $100,127, respectively. Cheetah Mobile is based in China and offers various technology products, including mobile games and other applications.

"This case serves as yet another example of the SEC's resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information," said Joseph G. Sansone, Chief of the SEC Enforcement Division's Market Abuse Unit. "While trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives' plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it."

The order also finds that Sheng Fu made materially misleading public statements about Cheetah Mobile's revenue trends during the company's March 2016 earnings call and caused the company's failure to disclose a material negative revenue trend in its April 2016 annual report.

https://www.sec.gov/litigation/litreleases/2022/lr25512.htm
In a Complaint filed in the United States District Court for the Northern District of California
https://www.sec.gov/litigation/complaints/2022/comp25512.pdf, the SEC charged John P. Mendes and Andre Dabbaghian with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Exchange Act Rule 10b-5. In response, Mendes agreed to the entry of a judgment permanently enjoining him from violating the charged provisions; ordering him to pay $41,985 in disgorgement with prejudgment interest and a $51,579 civil penalty; and to be barred from acting as an officer or director of a public issuer for a period of five years. Without admitting or denying the allegations in the SEC Complaint, Dabbaghian agreed to the entry of a judgment that would permanently enjoin him from violating the charged provisions and to be barred from acting as an officer or director of a public issuer for a period of three years. A parallel criminal action was filed against Mendes.  As alleged in part in the DOJ Release (Ed: On February 14, 2018, Granite Construction Inc. announced that it had agreed to acquire Layne Christensen Company for $565 million):

[M]endes obtained material nonpublic information about the acquisition from his close friend Dabbaghian, who was employed at Granite and helped negotiate the acquisition of Layne. The Complaint alleges that from November 3, 2017 through February 13, 2018, Mendes used the information that Dabbaghian recklessly provided to purchase Layne securities for Mendes's wife, parents, and at least 17 other brokerage customers and advisory clients. As a result of Mendes's allegedly unlawful trades, his wife, parents, and customers and clients made profits of approximately $33,200, $9,200, and $127,400, respectively.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95840; Whistleblower Award Proc. File No. 2022-87)
https://www.sec.gov/rules/other/2022/34-95840.pdf
The SEC's Office of the Whistleblower ("OWB") issued a Preliminary Summary Disposition ("PSD") recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that OWB's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

Claimant's information does not satisfy Exchange Act Rule 21F-4(c)(1) because his/her information did not cause the staff to open the Investigation or inquire into different conduct as part of the investigation. Nor did Claimant provide information that significantly contributed to the success of the Covered Action under Exchange Act Rule 21F-4(c)(2). As noted, Claimant's information was not forwarded to Enforcement staff responsible for the Investigation. Nor did the staff receive any information from, or have any communications with, Claimant. Further, none of Claimant's tips related to the subject matter of the Covered Action. The notebook that Claimant references in the Response does not show that he/she submitted information that significantly contributed to the success of the Covered Action. Claimant provided the notebook to the Commission approximately one month after the filing of the Covered Action. Accordingly, that notebook could not have contributed to the success of the Covered Action. Further, the additional information Claimant provided in the Response lacks any nexus to the subject matter of the Investigation or the Covered Action. 

Further, the subject matter, allegations asserted, and the entities named in Claimant's tips do not relate to the Investigation or the Covered Action. Therefore, the Commission finds that the Claimant's award application was frivolous, and there is no colorable connection between the tips submitted by Claimant and the Commission action for which Claimant has sought an award within the meaning of Rule 21F-8(e) of the Exchange Act.

= = =
September 20, 2022

(BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6673/sec-owb-oig/
The SEC's Office of Inspector General issued a scathing investigative report about the SEC's former Ombudsman. What's set out in the OIG report is just another sordid example of piss-poor management whereby large government bureaucracies are run by folks lacking the ability to effectively manage their agencies. The allegations of misconduct at the SEC's Office of the Ombudsman from 2017 through 2020 during the tenure of former SEC Chair Jay Clayton are disconcerting enough; however, in 2022, we now wrestle with SEC Chair Gary Gensler's lack of disclosure to Congress about OIG's investigative findings during his September 15, 2022, Senate Banking Committee testimony. Gensler's omission is all the more troubling because the former SEC Ombudsman had presented misleading information in four Annual Reports to the Congress. 

Former U.S. Department of Housing and Urban Development Assistant Inspector General Convicted of Falsifying Financial Disclosure Forms (DOJ Release)
https://www.justice.gov/opa/pr/former-us-department-housing-and-urban-development-assistant-inspector-general-convicted
Former Assistant Inspector General for the Department of Housing and Urban Development ("HUD") Eghbal "Eddie" Saffarinia was convicted after a jury trial in the United States District Court for the District of Columbia of one count of concealing material facts, three counts of making false statements, and three counts of falsifying a record or document.  As alleged in part in the DOJ Release:

[S]affarinia, 62, of Alexandria, Virginia, engaged in a scheme to conceal material facts, including the nature and extent of his financial relationship with a personal friend who was the owner and chief executive officer of an information technology company. During a period in which Saffarinia received payments and loans from his friend totaling $80,000, Saffarinia disclosed confidential internal government information to his friend and undertook efforts to steer government contracts and provide competitive advantages and preferential treatment to his friend's company. Saffarinia also failed to disclose this financial relationship and another large promissory note on his public financial disclosure forms.

https://www.justice.gov/usao-sdoh/pr/area-man-who-claimed-be-african-prince-convicted-jury-several-fraud-crimes
After a jury trial in the United States District Court for the Southern District of Ohio, Daryl Robert Harrison a/k/a Prince Daryl R. Attipoe a/k/a Prophet Daryl R. Attipoe was convicted of mail and wire fraud, conspiracy to commit mail and wire fraud, and witness tampering. As alleged in part in the DOJ Release:

[F]rom January 2014 until September 2020, Harrison defrauded victims who thought they were investing in African trucking and mining companies.

Harrison - falsely holding himself out to be a royal prince from the African national of Ghana - told investors he had direct connections with these companies, and that they could expect an investment return of 28 to 33 percent.

Harrison and his stepfather claimed to be ministers with Power House of Prayer Ministries, which sponsored religious services in various church facilities and private residences throughout the Greater Dayton area, Southwestern Ohio area and Parker, Colorado. Many investor victims were members of the congregation.

Harrison routinely withdrew thousands of dollars in cash from the Ministries bank accounts shortly after receiving investments. Harrison and his stepfather used the investment funds to rent a house in Colorado, purchase luxury vehicles, airplane tickets, hotel accommodations and rental cars.


https://www.sec.gov/enforce/ia-6139-s
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/ia-6139.pdf, registered investment adviser Toews consented to a a cease-and-desist order, a Censure, and agreed to pay a $150,000 civil monetary penalty. The SEC Order found that Toews violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-6 thereunder. As alleged in part in the SEC Release:

[F]rom January 2017 through January 2022, Toews directed a third-party service provider it engaged to cast proxy votes on behalf of registered investment companies ("RICs") Toews managed to always vote in favor of proposals put forth by the issuers' management and against any shareholder proposals.  According to the SEC's order, in connection with over two hundred shareholder meetings, Toews caused the third-party service provider to vote the RICs' securities pursuant to this standing instruction without exception and without any review by Toews of the proxy materials associated with those votes. Toews did not otherwise take steps to determine whether the votes were cast in the RICs' best interests and failed to implement policies and procedures reasonably designed to ensure that Toews voted proxies in its clients' best interests, as required by the Investment Advisers Act of 1940.
We are unable to support this action, which may affect how investment advisers shape their proxy voting policies and procedures. The Commission's Order finds that Toews Corporation ("Toews"), a registered investment adviser, violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act"), and Rule 206(4)-6 thereunder (the "proxy voting rule"), when it caused a third-party service provider to vote client proxies pursuant to a standing instruction without any review by Toews of the proxy materials associated with those votes. In particular, Toews instructed the third-party service provider always to vote all client proxies in favor of the proposals put forth by the issuers' management and against any shareholder proposals. Importantly, the Order does not make any findings that the adviser's clients would have been financially better off had the adviser cast any of the votes at issue in an alternative manner. The Order also does not find that any of the votes cast were the product of a conflict of interest.[1]

We are concerned that the Order may be misconstrued regarding an adviser's fiduciary duties with respect to voting proxies on behalf of its clients, as well as the specific requirements imposed by the proxy voting rule.[2]

In stating that the adviser "has revised its proxy voting policies and procedures to address the issues raised by the facts described,"[3] the Order might be read to imply that the adviser's prior proxy voting practices were per se improper and violate the Advisers Act and the proxy voting rule.[4] This implication, however, would be at odds with the Commission's own guidance that "[a] client and its investment adviser may agree that the investment adviser should exercise voting authority pursuant to specific parameters designed to serve the client's best interest," such as by voting in accordance with the voting recommendations of management of the issuer.[5]

Consistent with the adviser's fiduciary duties and in compliance with the proxy voting rule, an adviser and its client can agree that a "standing instruction" approach to proxy voting is in the best interest of the client. For example, the cost of reviewing and analyzing individual matters may outweigh any corresponding increase in the value of the issuers' securities. The adopting release for the proxy voting rule recognizes that the adviser may take cost into account when determining how to satisfy its fiduciary duties. The release recognizes that, at times, "refraining from voting a proxy [may be] in the client's best interest, such as when the adviser determines that the cost of voting the proxy exceeds the expected benefit to the client."[6]

Costs incurred by smaller investment advisers to review and analyze each matter submitted for a shareholder vote likely will be passed on to clients. Toews is not a large adviser with hundreds of employees and trillions under management. According to its most recent Form ADV, Toews reported about $1.25 billion in assets under management and 17 employees who perform investment advisory functions. Given that the majority of investment advisers fall within this category, incorrect implications drawn from the Order potentially could have wide-ranging consequences.[7]

Accordingly, we dissent.

[1] The adopting release for the proxy voting rule states that "[a]n adviser that votes securities based on a pre-determined voting policy could demonstrate that its vote was not a product of a conflict of interest if the application of the policy to the matter presented to shareholders involved little discretion on the part of the adviser." See Proxy Voting by Investment Advisers, Release No. IA-2106 (Jan. 31, 2003) [68 FR 6585, 6588 (Feb. 7, 2003)], available at https://www.sec.gov/rules/final/ia-2106.htm.

[2] The adopting release for the proxy voting rule states that, while the issue of how an adviser must exercise its proxy voting authority is not specifically addressed in the federal securities laws, "[u]nder the Advisers Act . . .an adviser is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client's behalf, including proxy voting." Id., at 6586.

[3] In the Matter of Toews Corporation, Release No. IA-6139 (Sept. 20, 2022), at paragraph 6, available at https://www.sec.gov/litigation/admin/2022/ia-6139.pdf.

[4] The Order also focuses on discrepancies between the adviser's disclosures to clients regarding its proxy voting practices and the manner in which the adviser actually voted clients' proxies. However, the cure for a disclosure-related violation presumably would be to revise the deficient disclosures. Here, the Order highlights revisions to the underlying proxy voting policies and procedures as "addressing the issues" described in the Order.

[5] See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) [84 FR 47420, 47422 (Sept. 10, 2019)], available at https://www.sec.gov/rules/interp/2019/ia-5325.pdf. Although the guidance states that such an arrangement "could" be subject to conditions, such as a condition that the investment adviser conduct additional analysis where the voting recommendation concerns a matter that may present heightened management conflicts of interest or involve a type of matter of particular interest to the investment adviser's client, the guidance does not state that such conditions are necessary. Id.

[6] See Release No. IA-2106, supra note 1, at 6587. See also Release No. IA-5325, supra note 5, at 47426.

[7] One recent survey found that over 88% of investment advisers are small businesses employing 50 or fewer people, and two-thirds of investment advisers both employ 50 or fewer people and have less than $1 billion in assets under management. See Investment Adviser Association Industry Snapshot 2022: Evolution Revolution Reimagined, 2nd Edition, available at https://investmentadviser.org/wp-content/uploads/2022/06/Snapshot2022.pdf.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95834; Whistleblower Award Proc. File No. 2022-86)
https://www.sec.gov/rules/other/2022/34-95834.pdf
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending that Claimant receive a Whistleblower Award for about $1.5 million for a Covered Action and Related Action. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[T]he record demonstrates that Claimant voluntarily provided original information to the Commission, and that this information led to the successful enforcement of the Covered Action and the Other Agency Action. REDACTED the information Claimant provided to the Commission was valuable, on point, and conserved Commission resources. And Claimant did provide ongoing assistance to the Other Agency.

https://www.sec.gov/news/press-release/2022-168
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/34-95832.pdf, Morgan Stanley Smith Barney LLC  ("MSSB") consented to finding that the firm violated the Safeguards and Disposal Rules under Regulation S-P when it failed to protec the Personal Identifying Information ("PII") of about 15 million customers. MSSB agreed to pay a $35 million penalty. As alleged in part in the SEC Release:

[A]s far back as 2015, MSSB failed to properly dispose of devices containing its customers' PII. On multiple occasions, MSSB hired a moving and storage company with no experience or expertise in data destruction services to decommission thousands of hard drives and servers containing the PII of millions of its customers. Moreover, according to the SEC's order, over several years, MSSB failed to properly monitor the moving company's work. The staff's investigation found that the moving company sold to a third party thousands of MSSB devices including servers and hard drives, some of which contained customer PII, and which were eventually resold on an internet auction site without removal of such customer PII. While MSSB recovered some of the devices, which were shown to contain thousands of pieces of unencrypted customer data, the firm has not recovered the vast majority of the devices.

The SEC's order also finds that MSSB failed to properly safeguard customer PII and properly dispose of consumer report information when it decommissioned local office and branch servers as part of a broader hardware refresh program. A records reconciliation exercise undertaken by the firm during this decommissioning process revealed that 42 servers, all potentially containing unencrypted customer PII and consumer report information, were missing. Moreover, during this process, MSSB also learned that the local devices being decommissioned had been equipped with encryption capability, but that the firm had failed to activate the encryption software for years.

https://www.sec.gov/news/press-release/2022-167
The SEC's order finds that Sparkster and Daya violated the offering registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. Without admitting or denying the findings in an SEC Order:

  • Sparkster Ltd agreed to destroy its remaining tokens, request the removal of its tokens from trading platforms, and publish the SEC Order on its website and social media channels; and the company will pay $30 million in disgorgement, $4,624,754 in prejudgment interest, and a $500,000 civil penalty; and
  • Chief Executive Officer Sajjad Daya agreed to refrain, for a period of five years, from participating in offerings of crypto asset securities; and he will pay a $250,000 civil penalty.
In a Complaint filed in the United States District Court for the Western District of Texas
https://www.sec.gov/litigation/complaints/2022/comp-pr2022-167.pdf, Ian Balina was charged with violating the offering registration provisions of Section 5(a) and (c) of the Securities Act and with violating Section 17(b) of the Act. As alleged in part in the SEC Release:

According to the SEC's order, Sparkster and Daya raised $30 million from 4,000 investors in the United States and abroad by offering and selling crypto asset securities called SPRK tokens to raise money to further develop Sparkster's "no-code" software platform. As stated in the order, Sparkster and Daya told investors that SPRK tokens would increase in value, that Sparkster management would continue to improve Sparkster, and that they would make the tokens available on a crypto trading platform. The order also finds that the SPRK tokens, as offered and sold, were securities, were not registered with the SEC, and were not applicable for a registration exemption.

According to the SEC's complaint against Balina filed in the United States District Court for the Western District of Texas, he purchased $5 million worth of SPRK tokens and promoted SPRK tokens on YouTube, Telegram, and other social media platforms from approximately May 2018 to July 2018. Balina allegedly failed to disclose that Sparkster had agreed to provide him a 30 percent bonus on the tokens that he purchased, as consideration for his promotional efforts. Balina also allegedly organized an investing pool of at least 50 individuals to whom he offered and sold SPRK tokens, despite not registering the offering with the SEC as required by federal securities laws and despite the lack of an applicable exemption from registration.

https://www.sec.gov/litigation/litreleases/2022/lr25511.htm
Without admitting or denying liability, Aaron B. Fletcher and Twin Spires Financial LLC consented to the entry of judgments the United States District Court for the Western District of Louisiana of Final Judgments
https://www.sec.gov/litigation/litreleases/2022/judg25511.pdf enjoining them from, among other things, future violations of the anti-fraud and municipal advisor registration provisions of the federal securities laws and ordering them to pay, on a joint and several basis: (a) disgorgement of $26,303 and prejudgment interest of $6,642.88; and (2) a $200,000 civil penalty. As alleged in part in the SEC Release:

[I]n 2017 and 2018 the town of Sterlington, Louisiana issued two revenue bonds to finance the development of a water system and improvements to its existing sewer system. As required by state law, Sterlington applied to the Louisiana State Bond Commission (SBC) for approval of the two offerings. The SEC alleged that Sterlington submitted false financial projections, created by Fletcher and Twin Spires, which substantially overstated the number of historical and projected sewer customers in order to mislead the SBC as to the town's ability to cover the debt service for the proposed bonds. The SEC alleged bond investors were not informed that SBC approval of the bonds was based on the false projections. SEC further alleged that Twin Spires and Fletcher provided municipal advisory services to Sterlington without Twin Spires being registered as a municipal advisor with the Commission.

https://www.finra.org/sites/default/files/fda_documents/2021072260201
%20Jared%20Winston%20CRD%207025143%20AWC%20va.pdfFor 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, Jared Winston submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jared Winston was first registered in 2018; and by June 2019, he was registered with Merrill Lynch, Pierce, Fenner & Smith Incorporated until his August 12, 2021 discharge. In accordance with the terms of the AWC, FINRA imposed upon Winston a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Winston enrolled in the firm's childcare reimbursement program and identified a family friend as the informal childcare provider. Each time Winston applied for childcare reimbursement, he clicked a box certifying that he had read the program guidelines and would "only submit expenses for reimbursement which are eligible for reimbursement" under the program. Nonetheless, during the relevant period, Winston applied for childcare reimbursement from Merrill Lynch on approximately 20 days during which he did not pay for childcare and therefore was not entitled to reimbursement from the firm. For those days, the firm paid Winston approximately $2,000 in reimbursement, which Winston retained in his bank account for personal use. As a result, Winston converted the firm's funds. 

Therefore, Winston violated FINRA Rule 2010. 


= = =
September 19, 2022

https://www.brokeandbroker.com/6673/sec-owb-oig/
The SEC's Office of Inspector General issued a scathing investigative report about the SEC's former Ombudsman. What's set out in the OIG report is just another sordid example of piss-poor management whereby large government bureaucracies are run by folks lacking the ability to effectively manage their agencies. The allegations of misconduct at the SEC's Office of the Ombudsman from 2017 through 2020 during the tenure of former SEC Chair Jay Clayton are disconcerting enough; however, in 2022, we now wrestle with SEC Chair Gary Gensler's lack of disclosure to Congress about OIG's investigative findings during his September 15, 2022, Senate Banking Committee testimony. Gensler's omission is all the more troubling because the former SEC Ombudsman had presented misleading information in four Annual Reports to the Congress. 

https://www.sec.gov/news/speech/gensler-remarks-iilp-roundtable-091522

Good afternoon. It is my pleasure to welcome you to today's event with the Institute for Inclusion in the Legal Profession (IILP). My thanks to Sandra Yamate and the entire IILP team for the invitation to participate in this important event.

As is customary, I'd like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or Securities and Exchange Commission staff.

To me, the mission of the SEC relates directly to diversity, equity, and inclusion. We work every day to protect investors and facilitate capital formation across the spectrum of communities that make America strong, including underserved communities. With respect to the middle part of our mission-to maintain fair, orderly, and efficient markets-fairness literally is embedded in our mission.

In promoting fairness and efficiency, it is important that access to our more than $100 trillion capital markets is inclusive. It means that brokers and investment advisers provide services fairly and equitably. It means that entrepreneurs and companies of every size can tap into our capital markets to fund their ideas and innovations. It means that investors have access to the fair, full, and material information that they need to make informed investing decisions.

Diversity, equity, and inclusion are important not only to our agency's mission but also to our agency's makeup. The most important asset at the SEC is our remarkable staff. In recent years, we have made important gains to help ensure that the agency is a place where everyone on the staff can bring their whole selves to work, make their mark in public service, and rise in the profession, including into senior leadership.

We strive to be a model workplace at the SEC. That means tapping into the commitment of talented individuals of every background. We are dedicated to serving the American public, and we enhance that service when we draw upon every community across our nation.

Building upon earlier efforts, we have made progress with respect to diversity and representation among our senior management, advisory committees, and our Commissioners. We continue to implement our first-ever Diversity and Inclusion Strategic Plan, which the SEC published in 2020. In the near future, we will begin the planning process for the next Diversity and Inclusion Strategic Plan for fiscal years 2023-2025.

We want to make sure that career opportunities like internships are accessible for all. Therefore, we launched a paid internship program, and we have made efforts to ensure that these internships are available to all interested students, including those from underserved communities. We also have enhanced our inclusion-focused efforts regarding our recruiting and financial education programming.

Furthermore, we continue our ongoing work with regulated entities through the Diversity Assessment Report process, through which entities voluntarily provide self-assessments of their diversity policies and practices.

I am proud of the progress we have made. I am also proud that, in recent years, including this year, our staff has rated the SEC among the best places to work in the federal government. We have more work to do, and I look forward to working across the agency to advance these goals.

Throughout all of our work, we benefit from public engagement and public comment, including through venues and conversations like today's concerning the legal profession. I wish you a productive and thoughtful roundtable discussion.

Thank you.

Bill Singer's Comment: Memo to Chair Gensler, when you state "The most important asset at the SEC is our remarkable staff. In recent years, we have made important gains to help ensure that the agency is a place where everyone on the staff can bring their whole selves to work, make their mark in public service, and rise in the profession, including into senior leadership," are you discounting and/or factoring in the troubling revelations in "SEC Investigative Summary" (August 29, 2022) 

U.S. Promoter of Foreign Cryptocurrency Company Sentenced to Prison for Role in Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-sdca/pr/us-promoter-foreign-cryptocurrency-company-sentenced-prison-role-fraud-scheme
Glenn Arcaro, 44, pled guilty in the United States District Court for the Southern District of California to Southern District of California to conspiracy to commit wire fraud; and he was sentenced to 38 month in prison. As alleged in part in the DOJ Release, Arcaro had:

conspired with others to exploit investor interest in cryptocurrency by fraudulently marketing BitConnect's proprietary coin offering and digital currency exchange as a lucrative investment. Arcaro and others misled investors about BitConnect's "Lending Program." Under this program, Arcaro touted BitConnect's purported proprietary technology, known as the "BitConnect Trading Bot" and "Volatility Software," as being able to generate substantial profits and guaranteed returns by using investors' money to trade on the volatility of cryptocurrency exchange markets.

In truth, however, BitConnect operated a textbook Ponzi scheme by paying earlier BitConnect investors with money from later investors. Furthermore, Arcaro and others ensured up to 15 percent of the money invested into BitConnect went directly into a slush fund to be used for the benefit of the owner and promoters of BitConnect. The BitConnect Ponzi scheme ensnared 4,154 victims from 95 countries making it a true worldwide Ponzi scheme.

. . .

Arcaro admitted that he earned no less than $24 million from the BitConnect scheme, all of which, according to court documents, will now be repaid to investors in restitution or forfeited to the government. Arcaro took steps to transmit the BitConnect proceeds that he earned to offshore accounts, transform some of the proceeds into precious metals storage, and obtain foreign passports. Arcaro's goal was to avoid paying federal and state income taxes on his income earned from the scheme and to shield his assets from collection by the Internal Revenue Service.

The United States District Court for the Northern District of Illinois entered a judgment against William Thomas Caniff and his company, Berkley Capital Management, LLC ("BCM"), and two investment pools that BCM operated: BBOT 1, LP ("BBOT") and Berkley II, LP ("Berkley II").
https://www.cftc.gov/media/7641/enfcanifforder082922/download The Order requires Defendants to pay $2,598,632 in restitution and a $3.6 million civil monetary penalty. Separately, the Court entered a Consent Order against Caniff's partner, Arie Bos
https://www.cftc.gov/media/7636/enfbosconsentorder091422/download, who will be jointly and severally liable to pay the $2,598,632 in restitution in addition to a $500,000 civil monetary penalty. As alleged in part in the CFTC Release:

[I]n January 2016, Caniff formed a partnership with Bos called BCM, which offered two pools for trading foreign exchange binary options through accounts at the North American Derivatives Exchange (NADEX). Caniff, a convicted felon, opened a trading account at NADEX by making false statements to NADEX that concealed his criminal record.  

From approximately February 2016 through September 2018, Bos solicited 58 pool participants who paid more than $3.3 million to invest in these pools. All of the participants were in the Netherlands with the exception of one U.S. participant. Caniff was purportedly trading their funds at NADEX. However, rather than depositing their funds in the account he opened at NADEX, Caniff simply misappropriated participants' funds and used them to pay himself approximately $1.2 million and Bos approximately $1.1 million. 

To conceal the misappropriation, Caniff sent bogus trading results to Bos who, in turn, reported false profits and exaggerated pool values to participants. For example, Bos reported profits for months in which there was no trading; grossly exaggerated the size of the fund by claiming a value of $5.5 million in 2016 when the fund's account balance was less than $278,000; and reported an average rate of return of 10% in 2016 when there was, in fact, a negative rate of return. The order finds that Bos committed fraud by ignoring numerous red flags that should have prompted him to seek corroboration of BCM's purported profits at NADEX. Bos was also found to have issued false BCM account statements to participants. The court's order against Caniff also found that Caniff made a false statement to NADEX.

Parallel Criminal Actions

Caniff is facing charges in two criminal cases related to this binary options fraud scheme. In United States v. Caniff, 2:21-cr-00121-MHW (S.D. Ohio, June 30, 2021), a jury trial is scheduled in Ohio on October 31, 2022, where Caniff faces charges of wire fraud and money laundering. In United States v. Caniff, 1:19-cr-00332 (N.D. Ill. Apr. 17, 2019), a criminal case is also pending against Caniff who was charged with making a false statement on his application to open a NADEX trading account. 

https://www.finra.org/sites/default/files/fda_documents/2018058988301
%20Solomon%20Wei-En%20Hua%20CRD%206168816%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, Solomon Wei-En Hua submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Solomon Wei-En Hua entered the industry in 2013, and by April 2016, he was registered with Wells Fargo Clearing Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Hua a $15,000 fine, $61,543.07 disgorgement, and a one-year suspension from associating with any FINRA member in all capacities. As alleged in part in the "Overview" portion of the AWC:

During the period July 27, 2016 to March 13, 2018, Hua recommended new issue preferred securities (NIPs) to his customers without a reasonable basis to believe that the securities were suitable, in violation of FINRA Rules 2111 and 2010. 

Additionally, Hua sent unwarranted and misleading communications regarding NIPs and other securities, in violation of FINRA Rules 2210(d)(1)(A) and (B) and 2010. 

Hua also used his personal cell phone to communicate with a customer regarding firm business, without notice or approval by his firm, thereby causing the firm to maintain incomplete books and records. As a result, Hua violated FINRA Rules 4511 and 2010. 

Deputy Head of FINRA Enforcement Chris Kelly  talks about what makes cases against individual brokers different from those brought against firms and all the considerations involved. 

Permalink

Search RRBDLaw

Related Topics

Previous Entries

No Headlines Found

Tag Cloud

Securities Industry Commentator Bill Singer BrokeAndBroker RRBDLaw Securities Industry Commentator by Bill Singer Esq Bill Singer Esq securities industry commentator Bill Singer RRBDLAW