The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

October 19, 2022






DOJ RELEASES





SEC RELEASES

SEC Files Action Against Former NewAge CEO (SEC Release)

SEC Obtains Nine Final Judgments in $345 Million Ponzi-Like Scheme (SEC Release)

SEC Charges Company and Estate with Fraudulent Investment Scheme (SEC Release)

Final Judgment Entered Against Former Microcap CEO (SEC Release)



CFTC RELEASES

FINRA RELEASES




= = =
10/19/2022

https://www.brokeandbroker.com/6721/bgc-deferred-compensation/
Few things inflame the passions on Wall Street more than deferred compensation. Parties often disagree whether deferred comp disputes are subject to mandatory FINRA intra-industry arbitration or can be diverted to a non-FINRA arbitration forum or have to be litigated in a federal court or a state court. Without question, this is a quagmire created by the broker-dealers in order to make it all that more painful and costly for reps to move to another firm; as evidenced by the layers of entities involved in employing the rep versus those issuing an employee-forgivable-loan/promissory note versus those handling the deferred comp plan. Recently, a messy lawsuit highlights many of the issues.

Finra Pulls Out All The Stops in Barring Ex-Wells Broker Who Expensed Football Ticket (AdvisorHub)
https://www.advisorhub.com/finra-pulls-out-all-the-stops-in-barring-ex-wells-broker-who-expensed-football-ticket/
Oh my -- it's one of those annoying regulatory cases in which the regulator is right, the respondent is wrong, the facts compel the charges, and, in the end, there's not much to get upset with. On the other hand, you still look at the facts and scratch your head. Three FINRA lawyers were needed to go after this one pro se Respondent? Three FINRA lawyers against one non-lawyer? Does anyone at FINRA know about triage?

https://www.reuters.com/legal/transactional/how-do-you-serve-dao-you-dont-say-crypto-amici-ooki-lawsuit-2022-10-18/
Alison Frankel, one of my all-time favorite reporters, slowly, methodically, and perfectly dissects the mess facing the CFTC as to how to serve papers (or virtual papers) on a decentralized crypto collective. It's sort of fun to just use the term "decentralized crypto collective." Also makes me wonder if Captain Jean Luc Picard could have served a subpoena on the Borg -- or would their in-house counsel have turned him back into Locutus? Will the CFTC become one with the Borg . . . y'know, that decentralized crypto collective?


https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially
An important bit of corporate policing by DOJ/Antitrust Division to ensure that companies are robustly served by their Directors and that conflicts are now compromising such roles. Section 8 of the Clayton Act prohibits directors and officers from serving simultaneously on the boards of competitors, subject to limited exceptions; and this DOJ action was designed to prevent interlocking directorates from adversely coordinating anti-competitive activities. As alleged in part in the DOJ Release:

In response to DOJ's competition concerns, the following companies and directors unwound the interlocks without admitting to liability:
    1. Definitive Healthcare Corp. and ZoomInfo Technologies Inc. - Definitive and ZoomInfo operate go-to-market information and intelligence platforms used by third-party sales, marketing, operations, and recruiting teams across the United States. One director served simultaneously on the boards of both companies and resigned from Definitive's board in response to the Division's concerns about the alleged interlock.

    2. Maxar Technologies Inc. and Redwire Corp. - Maxar and Redwire are providers of space infrastructure and communications products and services. One director served simultaneously on the boards of both companies and resigned from Redwire's board in response to the Division's concerns about the alleged interlock.

    3. Littelfuse Inc. and CTS Corp. - Littelfuse and CTS are manufacturers of components and technologies for use in transportation applications, including sensors and switches for use in passenger and commercial vehicles. One director served simultaneously on the boards of both companies and resigned from CTS's board in response to the Division's concerns about the alleged interlock.

    4. Skillsoft Corp. and Udemy Inc. - Skillsoft and Udemy are providers of online corporate education services. One director served simultaneously on the boards of both companies, as did the investment firm Prosus, through that director, because he represented Prosus on both boards at the same time. The director resigned from Udemy's board in response to the Division's concerns about the alleged interlock.

    5. Solarwinds Corp. and Dynatrace, Inc. - Solarwinds and Dynatrace are providers of Application Performance Monitoring (APM) software. One director served simultaneously on the boards of both companies, as did the investment firm Thoma Bravo, through this director, because he represented Thoma Bravo on both boards at the same time. Two additional directors also represented Thoma Bravo on the Solarwinds board. All three directors resigned from Solarwinds's board in response to the Division's concerns about the alleged interlock.
https://www.justice.gov/usao-nj/pr/nevada-woman-charged-7-million-advance-fee-ponzi-scheme-and-obstruction-justice-0
In an Indictment filed in the United States District Court for the District of New Jersey, Anna Kline, f/k/a Jordana Weber was charged with two counts of wire fraud, 11 counts of money laundering, four counts of transacting in criminal proceeds, and two counts of obstructing justice. As alleged in part in the DOJ Release:

From April 2017 to July 2019, Kline owned and operated several shell companies that falsely purported to offer lending services to customers, typically small business owners seeking high value loans, often in excess of $100 million. As part of the scheme, Kline required the victim borrowers  to pay up to 5 percent of a potential total loan amount as a "fee" prior to the loan being funded. 

After the victim's "fee" was paid, Kline purported to conduct due diligence on the loans.  During this period, Kline frequently gave victims bogus explanations for why the funding of their loan was delayed. It was also common for the victims to be provided with falsified or fraudulent documents, including bank statements that purported to show that the shell companies had sufficient money to fund the loan.

Kline and her significant other, Jason Torres, used the "fees" paid by the victims for their daily living expenses and other purchases. The "fees" were also used to pay back previous victims of the fraud, in the manner of a traditional Ponzi scheme. Torres is charged by complaint, and those charges remain pending.

Six victims have been identified with approximately $7 million being transferred to bank accounts controlled by Kline.

Kline was arrested on charges related to the fraudulent advance fee scheme in July 2019. While released on bail on those charges, Kline, through her then-attorney, provided the government with a PDF document that purported to be a portion of a Cellebrite report showing iMessages between Kline and Torres that appeared to show Torres making threats toward Kline and insinuating that Torres was primarily responsible for the fraudulent advance fee scheme.

A forensic review of the PDF document Kline provided to the government revealed that it had been falsified. Further investigation revealed that Kline presented the fake Cellebrite report to a family court in California as part of a custody dispute between Kline and Torres. During that hearing, Kline represented that the report had been generated by a forensic examiner named "Drew Andrews." Investigation revealed that "Andrews" did not exist, but was actually an alter-ego of Kline's that Kline used to deceive the California Family Court, her then-attorney, and a forensic expert into believing that the fraudulent Cellebrite Report was legitimate.

In addition to the fraudulent Cellebrite report, Kline also provided the government a computer that she claimed contained an iTunes backup that included the alleged text messages from Torres. A forensic review of the computer revealed that data on the computer, including the iTunes backup, had been manipulated. Kline changed, or caused to be changed, certain time stamps on the computer to make it appear as if the iTunes backup and other files stored on the computer were created in April 2020, when the fictional "Andrews" purportedly ran the fraudulent Cellebrite Report.

SEC Files Action Against Former NewAge CEO (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25562.htm
In a Complaint filed in the United States District Court for the District of Colorado
https://www.sec.gov/litigation/complaints/2022/comp25562.pdf, charged Brent David Willis (former former Chief Executive Officer of NewAge, Inc. f/k/a New Age Beverages Corporation) with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and aiding and abetting violations of Regulation FD and Section 13(a) of the Exchange Act. In part the SEC Release alleges that: 

[B]etween 2017 and 2019, Willis, while CEO, both through his role in drafting and authorizing NewAge press releases and in statements he made in earnings calls, investor conferences, and in media interviews and appearances, made numerous false and misleading public statements concerned a wide range of matters material to NewAge's business. As alleged, these matters included NewAge's alleged development of a portfolio of CBD-infused beverages and its purported deals with the U.S. military and several large domestic and international distributors and retailers. According to the complaint, Willis orchestrated this multiyear fraud and disseminated the false and misleading public statements to create the illusion that: (i) NewAge was a pioneer and first mover in the potentially lucrative CBD beverage market and was well-positioned to capitalize once CBD products became legal to sell in the United States and internationally; and (ii) NewAge's overall beverage portfolio was gaining traction with major retailers and distributors around the world. The complaint alleges that Willis engaged in this fraudulent conduct in order to artificially inflate NewAge's stock price, improve its financial position, and financially benefit himself. The complaint further alleges that in 2018, Willis aided and abetted NewAge's selective disclosures of material non-public information concerning its purported deal with the U.S. military and its alleged development of a CBD-infused beverage.

https://www.finra.org/sites/default/files/fda_documents/2018059121201
%20E1%20Asset%20Management%2C%20Inc.%20CRD
%2046872_Ron%20Itin%2C%20CRD%20%202344151%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, E1 Asset Management, Inc. and Ron Y. Itin submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that E1 Asset Management, Inc. has been a FINRA member since 1999 with 15 registered representatives at four branches; and that Ron Y. Itin was first registered in 1993 and by 1999, he was registered with E1. In its "Background" section, the AWC asserts in part that [Ed: footnote omitted]:

In June 2015, E1 and Itin entered into a Letter of Acceptance, Waiver, and Consent with FINRA through which they consented to the entry of findings that they violated NASD Rules 3010 and 2110 and FINRA Rule 2010 by failing to establish and maintain a reasonable supervisory system concerning, among other things, excessive trading and sales of leveraged exchange traded funds. The AWC censured E1 and fined it $25,000. The AWC suspended Itin in a supervisory capacity for one month.

In accordance with the terms of the AWC, FINRA imposed upon 
  • E1: a Censure; in light of E1's financial status, the sanctions against E1 do not include a monetary fine; $37,627.82 plus interest in restitution, an undertaking to certify compliance with FINRA Rule 2121; and

  • Itin: a $5,000 fine; one-month suspension from associating with any FINRA member in all principal capacities with the exception of activities requiring registration as a Financial and Operations Principal; and an undertaking to complete 20 hours of continuing education in supervisory responsibilities.
As alleged in part in the AWC:

From January 2018 through June 2020, E1's written supervisory procedures (WSPs), which Itin approved, designated Itin as the principal responsible for reviewing the "reasonableness of mark-ups . . . on customer trades." The WSPs identified factors relevant to that review, including the price and availability of the security and the expense of executing and filling the order. In practice, however, E1 and Itin reviewed mark-ups primarily to determine whether they exceeded the five percent guideline. E1 and Itin did not reasonably consider the factors listed in E1's WSPs, such as the type, availability, and price of the security being sold and the firm's expense in executing and filling the order. 

As a result, between January 2018 and June 2020, E1 and Itin failed to identify that the firm charged mark-ups that were not fair and reasonable on 80 corporate bond transactions, when trading for its own account. For such transactions, the firm charged mark-ups of 3.75 percent even though the underlying security was widely available, and the firm incurred minimal expenses executing and filling the customer orders. Moreover, beginning in June 2018, E1 and Itin reviewed monthly reports from FINRA's Trade Reporting and Compliance Engine (TRACE), which compared mark-ups charged by E1 on particular trades with mark-ups charged by other broker-dealers for similar products. Those reports showed the markups charged by E1 on the 80 transactions at issue were unreasonable; indeed, for certain of the transactions identified above, E1 charged a markup of 3.75 percent when the median mark-up was .15 percent. Nonetheless, E1 and Itin did not take any steps to investigate whether the mark-ups charged by E1 were fair or reasonable. 

Collectively, these mark-ups caused customers to pay $37,629.82 in excessive fees. 

As a result of the foregoing, E1 and Itin violated FINRA Rules 3110 and 2010, and E1 violated FINRA Rules 2121 and 2010.

Bill Singer's Comment: Really excellent AWC replete with content and context, and well written. Also, the sanctions seem fairly tailored to the the circumstances of the respondents. Compliments to FINRA and its Staff on this one!

https://www.finra.org/sites/default/files/fda_documents/2021072096101
%20Robert%20Shane%20Sevcik%20CRD%205597558%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, Robert Shane Sevcik submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Robert Shane Sevcik was first registered in 2008; and from June 2009 through July 2021, he was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Sevcik a $2,5000 fine and a one-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

In 2012, Sevcik entered into an agreement with a retired representative through which he agreed to service certain customer accounts, including executing trades for those accounts, under a joint representative code (also known as a joint production number) that he shared with the retired representative (Retired Representative 1). In 2017, Sevcik entered into a separate agreement with another retired representative through which he agreed to service additional customer accounts, including executing trades for those accounts, under a joint representative code that he shared with the retired representative (Retired Representative 2). Each agreement set forth what percentages of the commissions each representative would earn on trades placed using the applicable joint representative code. 

From June 2014 through May 2021, Sevcik placed a total of 218 trades in accounts covered by his agreements with Retired Representatives 1 and 2 under representative codes other than those he should have used. Specifically, although Morgan Stanley's system correctly prepopulated the trades with the applicable joint representative codes, Sevcik entered the transactions under different representative codes through which he received a higher percentage of commissions than what he was entitled to receive pursuant to the agreements. Sevcik negligently failed to verify whether the 218 transactions at issue were subject to his agreements with Retired Representatives 1 and 2. As a result, Morgan Stanley's trade confirmations for the 218 trades inaccurately reflected Sevcik's personal representative code or another representative code instead of the joint representative codes that Sevcik shared with Retired Representatives 1 and 2. 

Sevcik's actions resulted in his receiving higher commissions from the 218 trades than what he was entitled to receive pursuant to the agreements. In September 2021 and November 2021, Morgan Stanley reimbursed the retired representatives. 

By causing Morgan Stanley to maintain inaccurate trade confirmations, Sevcik violated FINRA Rules 4511 and 2010. 

= = =
10/18/2022

https://www.justice.gov/usao-cdca/pr/romance-scammer-pleads-guilty-federal-charges-admitting-he-stole-hundreds-thousands
Ze'Shawn Stanley Campbell pled guilty to one count of wire fraud and one count of money laundering in the United States District Court for the Central District of California. As alleged in part in the DOJ Release:

[F]rom April 2014 to April 2020, Campbell convinced his victims that he was reliable by befriending them and starting romantic relationships with them. To enhance his purported creditworthiness in their eyes, he told them lies, such as falsely saying that he had millions of dollars and operated successful businesses, including McDonald's franchises, a security company and a chain of gyms in Texas. Campbell also boosted his stature with the victims by falsely telling them he was a successful investor in real estate and Bitcoin, as well as claiming he had served as a Navy SEAL in the Iraq and Afghanistan wars.

Having convinced his victims of his bona fides, Campbell induced them to provide money and property to him, claiming that he would use the victims' money and property to support his businesses, fund investments made on the victims' behalf and pay his purported medical bills. Rather than use the victims' money as he promised, however, Campbell used it to pay personal expenses and to buy luxury items for himself.

For example, in December 2017, one victim wrote Campbell a check for $61,452, which Campbell deposited via interstate wires into a Wells Fargo bank account he controlled. Campbell promised the victim that the money would be used for an investment in Bitcoin on the victim's behalf. In fact, Campbell spent the money on himself, including by making payments on a BMW and a Mercedes-Benz that he had leased in a different victim's name.

In total, Campbell admitted to causing losses of at least $250,000 and up to $1.5 million to 19 different victims, including 10 individuals and nine companies.

https://www.sec.gov/litigation/litreleases/2022/lr25561.htm
As alleged in part in the SEC Release:

On September 13, 2018, the Commission filed an emergency civil injunctive action in United States District Court for the District of Maryland against Kevin Merrill, Jay Ledford, and business entities controlled by them, charging them with operating a Ponzi-like scheme that raised more than $345 million from over 230 investors across the United States. The Commission later amended its complaint to add Mr. Merrill's wife, Amanda Merrill, and Mr. Ledford's wife, Lalaine Ledford, as relief defendants.

The United States Attorney's Office for the District of Maryland brought a parallel criminal action against Kevin Merrill, Jay Ledford, and Cameron Jezierski for their roles in the scheme. United States v. Merrill, et al., No. 18-cr-00465 (RDB). All three pled guilty. The Court sentenced Merrill to 264 months in prison and Ledford to 168 months in prison and ordered both to pay $189,166,116 in restitution. The Court sentenced Cameron Jezierski to 24 months in prison and ordered him to pay $45,093,384 in restitution.

The final judgments state that Jay Ledford, Global Credit Recovery, LLC, Delmarva Capital, LLC, Rhino Capital Holdings, LLC, Rhino Capital Group, LLC, DeVille Asset Management Ltd., and Riverwalk Financial Corporation are liable, on a joint-and-several basis, for $183,973,833 in disgorgement, plus $5,671,794 in prejudgment interest. The final judgment against Cameron Jezierski orders him to pay $105,000 in disgorgement and $2,913 in prejudgment interest. These judgments are deemed satisfied in light of the recoveries made by the Court appointed receiver and the restitution ordered against Kevin Merrill, Jay Ledford, and Cameron Jezierski in the criminal matter.

The judgment against Relief Defendant Lalaine Ledford provides for the equitable disgorgement of certain vehicles and luxury items which the SEC has alleged were obtained with the proceeds of Jay Ledford's fraud.

https://www.sec.gov/litigation/litreleases/2022/lr25560.htm
In a Complaint filed in the United States District Court for the District of Utah
https://www.sec.gov/litigation/complaints/2022/comp25560.pdf, the SEC charged the Estate of Stephen Romney Swensen (deceased June 6, 2022) and Crew Capital Group, LLC with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As alleged in part in the SEC Release, Swensen:

fraudulently induced victims into investing in Crew Capital Group, LLC. Swensen falsely told investors that Crew Capital was a fund that was co-managed by a reputable firm and guaranteed investors a minimum 5% annual return and up to 10% if the S&P 500 performed well. According to the complaint, Crew Capital, which was owned and controlled by Swensen, did not invest in any securities. Rather, the SEC alleges, Swensen misappropriated essentially all investor funds to make Ponzi payments to other investors and to pay for Swensen's personal expenses, such as real estate, vehicles and multiple private aircraft, and Swensen's living expenses.

https://www.sec.gov/litigation/litreleases/2022/lr25559.htm
The United States District Court for the Eastern District of New York entered a Final Consent Judgment against former In Ovation Holdings, Inc. Chief Executive Officer Mark Goldberg him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Order imposes an officer or director bar, a penny stock bar, and orders Goldberg to pay disgorgement of $250,000, representing profits gained as a result of the conduct alleged in the complaint, plus pre-judgment interest of $44,889.86 for a total of $294,889.86 (the disgorgement/interest is deemed satisfied by entry of the restitution order and forfeiture order against Goldberg in a related criminal case). In a The SEC's Complaint filed in the United States District Court for the Eastern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25559.pdf, alleged in part that:

[F]rom at least 2014 through 2015, Goldberg, as Ovation's CEO, generated at least seven false or misleading press releases about Ovations' business. According to the complaint, Goldberg caused Ovations to issue the false press releases to fraudulently induce investors to buy shares of Ovations' stock so that one or more stock promoters could sell the shares into the market for a profit. The complaint alleges that Goldberg knew or recklessly disregarded the falsity or misleading nature of each of these press releases and that he received approximately $250,000 in return from one or more stock promoters at least partly for his role in the alleged fraud.

= = =
10/17/2022

https://www.brokeandbroker.com/6720/finra-awc-tzagarakis/
In January 2021, FINRA entered into a regulatory settlement whereby the regulator fined and suspended a stockbroker because of his willful nondisclosure of tax liens. That willful misconduct triggered the broker's statutory disqualification from registration -- so, even after he spends three months on the sidelines, he can't just stroll back into the biz. Except, FINRA can't quite seem to pass by a dead horse without giving the expired beast a couple of extra kicks. Making matters worse, the extra kicks are really, really belated.

https://www.reuters.com/legal/former-wsj-reporter-says-law-firm-used-indian-hackers-sabotage-his-career-2022-10-15/
Wow! As in jaw-droppin'. As in who the hell knew and what the hell were they thinking (or not).  A lurid story filled with intrigue and lots of shocking allegations. Make some popcorn before reading.

https://www.justice.gov/usao-ndfl/pr/former-destin-area-man-sentenced-eleven-years-federal-prison-investment-fraud-scheme
John E. Acker, 53, pled guilty in the United States District Court for the Northern District of Florida to 37 counts of wire fraud and 7 counts of money laundering; and he was sentenced to 135 months in prison and ordered to pay about $3.2 million in restitution. As alleged in part in the DOJ Release:

Between 2013 and 2020, Acker induced numerous individuals and corporations to invest over $4 million with him by making various fraudulent misrepresentations, including that the investment was for a real estate or other business-related "deal" with high guaranteed returns. He told would-be investors the "deal" was for a purchase and sale, or "flip," of a property or business. However, Acker instead used funds meant for investments to pay for his personal expenses or pay back prior investors whose funds he had previously misused. Acker made other false statements to gain investors' trust and influence them to invest, such as mischaracterizing or falsifying his relationship with attorneys, business owners, or other prominent members of the community and claiming he had independent wealth from a trust fund. He used multiple shell corporations to commit the fraud, including Miracle Strip Holdings X LLC, Miracle Strip Holdings XV LLC, Fujimo Development LLC, and Shipwreck Road LLC. Acker further laundered the ill-gotten proceeds of his investment fraud scheme by making large payments and monetary transfers in excess of $10,000.

SEC Obtains Final Judgment Against Recidivist Investment Adviser Charged with Defrauding Retirees (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25557.htm
 Keith Springer and Springer Investment Management, Inc. d/b/a Springer Financial Advisors ("SFA") consented to entry of a Final Judgment in the United States District Court for the Eastern District of California permanently enjoining them from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and ordering them to pay, jointly and severally, a civil penalty of $400,000. Further, Springer agreed to settle an administrative proceeding pursuant to Section 203(f) of the Advisers Act barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. As alleged in part in the SEC Release:

[I]n December 2019, alleged amongst other things, that Springer and SFA engaged in deceptive practices while soliciting new clients, including falsely claiming that they did not receive any incentives to recommend particular investments when they in fact received compensation for recommending certain products. The complaint also alleged that they breached their fiduciary duty by failing to disclose these arrangements and the conflicts of interest that resulted, filed false reports with the Commission, and failed to maintain an adequate compliance program and required books and records.

Meeting Investor Demand for High Quality ESG Data (Speech by SEC Commissioner Jaime Lizárraga)
https://www.sec.gov/news/speech/lizarraga-speech-meeting-investor-demand-high-quality-esg-data

Thank you, Peter, for that kind introduction. It is a pleasure to be here with you today. I look forward to learning from today's discussion, and appreciate the opportunity to participate in this important exchange of ideas and perspectives.

It's an exciting time for ESG. You are working in a dynamic, fast-growing sector of our capital markets that is grabbing headlines and continuing to generate enormous interest among investors and the general public.

You're directly involved with some of the most consequential scientific challenges of our time - from climate change, to artificial intelligence, to big data analytics.

As active participants in this space, your contributions and innovative ideas can enrich the conversation.

I'd like to share with you a snapshot of what's happening in the U.S. ESG has become a lively topic that has moved beyond strictly financial circles. Several states are making headlines for their push against ESG investing, while other states are proactive in their ESG investments.

Against this backdrop, the SEC issued three rule proposals that would each help facilitate comparable ESG disclosures and focus on ensuring statements made to investors are not false or misleading:

  • Enhanced climate risk disclosures by issuers.
  • Enhanced ESG disclosures by registered funds and investment advisers.
  • Modernized rules governing ESG-related fund names.

The common thread that binds these proposals and that guides my work as Commissioner is ensuring investors receive the information they need to make the most informed investment decisions.

We are in the process of reviewing thousands of comments submitted. None of us yet know what the final versions of these rules will look like. We continue to meet with stakeholders and to receive robust public feedback that informs our economic analysis.

To me, the SEC's disclosure framework is most effective when investors benefit from objective, quantitative metrics that provide the highest degree of comparability. I believe the proposed rules are a significant step forward in getting investors this information. I look forward to working to ensure that the final rules are as robust as possible.

The SEC proposed these rules prior to my swearing in. Had I been a Commissioner at the time, I would have voted in favor of them.

Which brings me to the first of the SEC's disclosure initiatives, on climate. Last year, for the first time, the U.S. Financial Stability Oversight Council identified climate change as an "emerging and increasing threat to U.S. financial stability."

A recent climate risk assessment from the Office of Management and Budget found that the U.S. government will need to spend an additional $25 billion to $128 billion annually for policies to mitigate climate-related financial risks. And, an analysis by the Network for Greening the Financial System estimated that, under current policy pathways, climate change could reduce U.S. GDP by 3 to 10 percent by the end of this century.

It is thus not surprising that there's been strong investor demand for climate-related disclosures. Investors with $130 trillion in assets under management have requested that companies disclose their climate risks. And 5,000-plus signatories to the UN Principles for Responsible Investment-a group with a core goal of helping investors protect their portfolios from climate-related risks-manage more than $121 trillion as of June 2022.

The corporate issuer proposed rule would require public companies to disclose climate-related risks that have a material impact on their business, operations, and financial condition. It would also require the disclosure of certain related quantitative information in a company's financial statements, as well as disclosure of a company's greenhouse gas emissions using the widely used GHG Protocol. It's important to understand that a company's greenhouse gas emissions - in particular, emissions from sources that are owned or controlled by the company or that are consumed through the generation of purchased energy - is a widely-used metric by investors.

I would note that on the data front, the climate rule as proposed provides for the use of reasonable emissions estimates. While some may argue that this makes the metric of limited utility, it is not clear to me why this would be different from the assumptions and estimates that companies make in preparing their financial statements today. Investors rely extensively on financial statement disclosures to make informed investment decisions. These quantitative metrics are essential for investors to understand the operations and performance of a company, and the same can be said for climate-related metrics.

More broadly, the data that investors want, and that is available, is always evolving. It would not be possible for the SEC to require disclosures in this area unless there was both demand for climate-related data, and an available supply of it. But due to advances in technology, such as emissions modeling, artificial intelligence, and big data analysis, over the past several years, we are today at a point where this information is both in demand and available. And, that is why the moment is ripe for the SEC to again step in, consistent with precedent, to ensure that investors have the most relevant information for their investment decisions.

The SEC complemented its corporate issuer proposals with rule proposals for asset managers and funds. The Forum for Sustainable and Responsible Investment found that sustainable and impact investing by money managers grew from $178 billion in 2005 to almost $17 trillion in 2020.

These SEC rules were designed to provide investors with decision-useful qualitative and quantitative information on how a fund takes into account ESG factors in its decision-making. Similarly, advisers would be required to disclose information about their ESG factors and strategies, which can help an investor make a decision on whether or not to engage that adviser. These rules would help provide comparability and consistency, but most importantly, would require funds and advisers to stand behind their ESG claims.

The third SEC proposal is often referred to as truth-in-advertising and would focus on how a fund labels itself. When the Commission's rule was proposed, it estimated that approximately $364 billion assets were invested in funds with names suggesting an ESG-focused strategy. This proposal would prohibit funds that consider ESG factors alongside other non-ESG factors from using ESG-related terms in their name. A fund's name can be critical to an investment decision. And, this can help ensure that investment decisions are aligned with financial goals.  

As ESG investment continues to grow, there is greater need for accurate and reliable data to support ESG-related claims and assertions. And that's where quality data comes in.

The principle of transparency underpins the U.S. federal securities laws. The extensive disclosure regime it comes with provides an effective regulatory framework that, for nearly a century, has resulted in the world's largest and most liquid capital markets. This ensures the availability of quality, investor-useful information that benefits all market participants.

That said, markets change, whether driven by technology or other factors, and investor needs and practices evolve. Our challenge and responsibility is to keep up with rapid change and to update our regulatory framework so that it continues to meet investor needs without compromising investor protections. Your challenge and responsibility is to ensure that claims made to investors are supported by verifiable information so as not to make disclosures misleading. The best way to get there is with meaningful disclosures that incorporate the highest quality, reliable, and verifiable data in a standardized and investor-useful format.

My hope is that the Commission's rules will help move market participants forward in producing high-quality data that will allow for more rigorous due diligence, enable investors to more easily differentiate between market participants on ESG-related claims, and ultimately, help investors make more informed investment decisions.

All of us face the challenge of ensuring investors receive disclosures to allocate their assets consistent with their financial goals. Yet, doing so will mean that our rules will serve the public interest best when they're appropriately tailored to an investor's needs, using our regulator toolbox of quantitative, qualitative, prescriptive, or principles-based disclosures.

Thank you for the invitation to speak today and I look forward to engaging in a dialogue on these important issues going forward.

https://www.finra.org/sites/default/files/fda_documents/2020068495401
%20Mihir%20Patel%20CRD%205000904%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, Mihir Patel submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Mihir Patel was first registered in 2005;, and by January 2019, he was registered with NatAlliance Securities, LLC until October 29, 2020. In accordance with the terms of the AWC, FINRA imposed upon Patel a $5,000 fine and a four-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that [Ed: footnote omitted]:

In January 2019, Patel joined NatAlliance as a proprietary corporate bond trader, responsible for managing a trading book with a nominal value of approximately $20 million. As part of his duties, Patel was responsible for accurately marking to market each of the corporate bonds in his trading book on a daily basis. 

Beginning in April 2020, volatile market conditions contributed to a decline in the value of various positions in Patel's book, particularly certain short positions in the energy sector. From April 2020 through September 2020, Patel largely stopped updating his marks on certain bonds to accurately reflect current fair market values and, to a lesser extent, he updated his marks at incorrect valuations. Patel's discrepant marks generally undervalued the current fair market valuations of bonds he was short and overvalued the current fair market valuations of bonds he was long, at times substantially understating his trading losses on short bond positions by hundreds of thousands of dollars. 

As a result of Patel's failure to maintain accurate marks on his bond positions, NatAlliance incorrectly computed its net capital and thus filed four inaccurate monthly FOCUS reports between April 2020 and July 2020. The firm did not experience a hindsight deficiency. Patel obtained no remuneration or other financial gain as a result of the inaccurate marks. 

Therefore, Patel violated FINRA Rules 4511 and 2010. 

Bill Singer's Comment: Compliments to FINRA on a well-drafted AWC replete with content and context so as to render the settlement compelling. A nice, tight edit -- compliments to the author.

https://www.finra.org/sites/default/files/fda_documents/2021072406801
%20Efrain%20Trujillo%20CRD%203106482%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, Efrain B. Trujillo submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Efrain B. Trujillo was first registered in 1998, and by 2017, he was registered with Western International Securities. The "Background" section of the AWC asserts in part that [Ed: footnote omitted]:

In November 2020, Trujillo entered into an AWC with FINRA consenting to findings that between December 2013 and July 2017, he failed to supervise registered representatives who excessively traded customer accounts, in violation of NASD Rule 3010(a), and FINRA Rules 3110(a), 2360(b)(20), and 2010. The AWC imposed a bar from associating with any FINRA member in any principal capacity and a $20,000 fine. 

On January 7, 2022, FINRA revoked Trujillo's FINRA registration pursuant to FINRA Rule 8320 for failing to "pay fines and/or costs" in connection with the November 2020 AWC.

In accordance with the terms of the October 2022 AWC, FINRA imposed upon Trujillo a $5,000 fine and eight-month suspension from associating with any FINRA member in all capacities. As asserted in part in the AWC:

Western International's written supervisory procedures (WSPs) prohibited registered representatives from borrowing money from a customer unless the customer was a bank that made the loan to the representative "in a normal bank transaction." Trujillo was aware of Western International's prohibition against borrowing money from customers. Nonetheless, between 2018 and 2021, Trujillo borrowed approximately $335,000 from nine firm customers through 15 separate loans. The customers were retail customers who were not immediate family members of Trujillo or in the business of lending money. The amounts of the loans ranged from $5,000 to $50,000, and Trujillo primarily used the funds to pay for personal expenses. Although Trujillo signed promissory notes memorializing the terms, including repayment schedules, for seven of the 15 loans, he did not provide the customers with promissory notes or repayment schedules for the remaining 8 loans. To date, Trujillo has repaid nine of the loans, and he is continuing to repay the remaining six. 

Trujillo did not provide notice (written or otherwise) to Western International about any of the loans. On the contrary, in 2019 and 2020, Trujillo falsely affirmed on compliance questionnaires that he had never received a loan from his customers. Therefore, Trujillo violated FINRA Rules 3240 and 2010. 

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