The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

November 23, 2022













SEC RELEASES

CFTC RELEASES

FINRA RELEASES


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11/23/2002

Agencies announce results of resolution plan review for largest and most complex domestic banks (Joint Release: Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation)
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20221123a.htm
In part the Joint Release asserts that:

The Federal Reserve Board and the Federal Deposit Insurance Corporation announced on Wednesday the results of their joint review of the resolution plans-also known as living wills-that the eight largest and most complex domestic banking organizations submitted in 2021. Resolution plans must describe a financial company's strategy for rapid and orderly resolution in bankruptcy in the event of its material financial distress or failure. The agencies identified a shortcoming in Citigroup Inc.'s resolution plan and did not identify any other shortcomings or deficiencies in the plans from the other banking organizations.

See:


https://www2.ca3.uscourts.gov/opinarch/212889np.pdf
Thomas Lanzana, 54, pled guilty in the United States District Court for the District of New Jersey to wire fraud, and he was sentenced to 36 months in prison plus three years of supervised release. Kansas Man Sentenced to Three Years in Prison for Engaging in $900,000 Foreign Currency Ponzi Scheme (DOJ Release)
https://www.justice.gov/usao-nj/pr/kansas-man-sentenced-three-years-prison-engaging-900000-foreign-currency-ponzi-scheme. As alleged in part in the DOJ Release:

Lanzana fraudulently solicited approximately $900,000 from at least 20 customers to invest in what he claimed were highly successful, algorithm-based trading pools in foreign currency derivatives ("forex") and other financial instruments.

To maintain the victims' trust, Lanzana sent false account statements to his customers, posted false monthly account statements to his companies' websites showing balances and trading activity for forex trading accounts that did not exist, and generated and sent false tax documents to customers reporting earnings that did not exist.

Lanzana misappropriated hundreds of thousands of dollars in investor funds, using some to repay earlier investors in the manner of a Ponzi scheme, and to pay for his personal expenses, including purchases on Amazon.com, payments to a luxury car dealer and a jewelry retailer, and golf expenses.

Lanzana appealed his 36-month sentence to the United States Court of Appeals for the Third Circuit ("3Cir"). United States of America v. Thomas Lanzana, Appellant (Opinion, 3Cir, No. 21-2889)
https://www2.ca3.uscourts.gov/opinarch/212889np.pdf Lanzana argued that DNJ failed to adequately consider 18 U.S.C. § 3553(a) factors such ase 18 U.S.C. § 3553(a) his history and characteristics, and the need for him to remain at home to care for his fiancée; and that the sentence was unreasonable. In affirming DNJ's sentencing, 3Cir noted in part that:

During Lanzana's sentencing, the District Court weighed each of the § 3553(a) factors. With respect to Lanzana's history and characteristics, the District Court acknowledged Lanzana's age, the loss of his father and mother, his relationship with his sisters, his upbringing, his family's financial situation, his divorce, and his long-term relationship with his fiancée. The District Court further acknowledged Lanzana's physical and mental health, lack of substance abuse problems, his work history, and lack of prior criminal history. However, the District Court highlighted the ongoing nature and length of his fraud scheme, including the amount of time that Lanzana dedicated to operating this scheme. Finally, the District Court also addressed Lanzana's status as the primary caretaker for his ill fiancée and generously granted a 5-month downward variance.

Given the District Court's sufficient consideration of the § 3553(a) factors, balancing of mitigating factors, and explained reasoning on the record, we find no procedural error. 

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11/22/2002

https://www.brokeandbroker.com/6772/finra-arbitration-jpm/
I like a good mystery. I just don't like a mystery in the form of a FINRA Arbitration Award. As I see it, a public, published, FINRA Arbitration Award owes the litigants some clarity as to what was found by the arbitrators and how they calculated the awarded damages, fees, and costs. Frankly, that's not asking much. Unfortunately, when you read many FINRA Arbitration Awards, things often don't add up. In a recent Award, it's almost impossible to understand what did or didn't happen and how the arbitrators calculated the final award of damages. In the end, we're taken a magical mystery tour to nowhere, and have no idea how we got there. 

https://oce.house.gov/reports/investigations/oce-referral-regarding-rep-carolyn-maloney
As alleged in part in the OCE Release:

On June 23, 2022, the Office of Congressional Ethics transmitted a referral to the Committee on Ethics of the United States House of Representatives regarding Rep. Carolyn Maloney. 

Nature of the Review 

Representative Carolyn Maloney may have accepted impermissible gifts associated with her attendance at the Met Gala in 2018, 2019, and 2021.

If Rep. Maloney accepted impermissible gifts, then she may have violated House rules, standards of conduct, and federal law.

OCE Recommendation 

The Board recommended that the Committee further review the above allegation concerning Rep. Maloney because there is substantial reason to believe that she solicited or accepted impermissible gifts associated with her attendance at the Met Gala.

Committee Action 

On October 27, 2022, the Committee on Ethics released a statement indicating it would extend the matter regarding Rep. Maloney pursuant to Committee Rule 17(a).

On November 21, 2022, the Committee on Ethics released a statement announcing it would continue to gather the information necessary to complete its review. The Committee published the OCE report and findings and announced the allegations would be further reviewed pursuant to Committee Rule 18(a). 

Bill Singer's Comment: Ah yes, the important stuff of those we elect to serve in Congress! Nothing like being jilted by those who issue invitations to the Met Gala. Ethics in Congress? Since when? Sort of like FINRA's insistence that Wall Street has "high standards of commercial honor and just and equitable principles of trade." In the end, we're all taken advantage of by Big Government and bureaucracies run amok. 

https://www.justice.gov/usao-sdca/pr/four-defendants-indicted-securities-fraud-conducting-international-pump-and-dump-scheme
In the United States District Court for the Southern District of California, an Indictment was filed charging David Stephens, Donald Danks, Jonathan Destler, and Robert Lazerus with securities fraud; and, additionally,  Danks was charged with money laundering. As alleged in part in the DOJ Release:

[I]n 2014, Stephens acquired control over a publicly-traded "shell" entity whose free-trading shares were held in various offshore nominee entities, and in 2015 worked with Danks and Destler to conduct a reverse-merger of the shell with Loop, thereby generating publicly tradable Loop shares. Without disclosing his controlling interest in all, or nearly all, freely tradeable Loop shares, Stephens directed sales of shares on the open market and transferred large blocks to Danks, a Loop board member, and Destler, a controlling shareholder. In turn, Danks and Destler made material false statements and omissions about their interests in Loop, failed to disclose those interests, and directed and conducted transactions in Loop stock. Danks and Destler worked with Lazerus to promote the stock, including by having Lazerus successfully persuade an elderly investor to purchase millions of dollars of shares in 2017. Stephens, Danks, Destler and Lazerus then divided the proceeds from the sales among themselves.

The indictment further alleges that Lazerus, assisted by Danks and Destler, sought to promote Loop shares by passing material, non-public information about Loop to an investor, who was in fact an undercover agent for the FBI. Finally, the indictment alleges that Danks used more than $500,000, procured as a margin loan from Loop shares, to finance the purchase of a home in Southern California.

https://www.justice.gov/usao-mdfl/pr/moldovan-national-and-technical-mastermind-xdedic-marketplace-extradited-spain
In the United States District Court for the Middle District of Florida, a Superseding Indictment was filed charging Alexandru Habasescu with conspiracy to commit access device fraud and counts of access device fraud. Habasescu was taken into custody by Spanish authorities in Tenerife, Canary Islands on March 14, 2022, and extradited to the United States pursuant to the extradition treaty between the United States and Spain. As alleged in part in the DOJ Release:

[T]he xDedic Marketplace, established around October 2014, illegally sold login credentials (usernames and passwords) to compromised servers and social security numbers belonging to U.S. citizens. Habasescu, who resided in Chisnau, Moldova, acted as the lead developer and technical mastermind for the Marketplace.

Under U.S. law, fraudulently obtained passwords and social security numbers are considered unauthorized access devices. Once purchased, criminals used these credentials to facilitate a wide range of illegal activity that included tax fraud, credit card fraud, and ransomware attacks. In total, Marketplace offered over 700,000 compromised credentials for sale-including at least 150,000 in the United States and at least 8,000 in the State of Florida. The victims span the globe and all industries, including local, state, and federal government infrastructure, hospitals, 911 call centers and emergency services, major metropolitan transit authorities, accounting and law firms, pension funds, and universities.

The xDedic Marketplace operated across distributed infrastructure and utilized Bitcoin in order to hide the locations of its underlying servers and the identities of its administrators, buyers, and sellers. Buyers could search for compromised computer credentials on xDedic by desired criteria, such as price, geographic location, and operating system. On January 24, 2019, seizure orders were executed against the domain names of the xDedic Marketplace, effectively ceasing the website's operation. The international operation to dismantle and seize this infrastructure was the result of close cooperation with law enforcement authorities in Belgium and Ukraine, the European law enforcement agency Europol, the National High Tech Crime Unit from the Dutch National Police and the German Bundeskriminalamt provided assistance in the operation to seize xDedic's infrastructure.

https://www.justice.gov/usao-mdfl/pr/georgia-woman-convicted-role-international-conspiracy-launder-proceeds-boiler-room
In the United States District Court for the Middle District of Florida, a jury found Rachael Maia Winslow guilty of conspiracy to commit money laundering. As alleged in part in the DOJ Release:

[W]inslow was a member of an international conspiracy to launder funds generated via boiler room fraud. The boiler rooms sold foreign victims what they were led to believe were legitimate investments, such as shares or stock in reputable companies such as Facebook, Chesapeake Energy, or Toys R Us. In fact, the investments were worthless, and the boiler rooms defrauded victims of over $14 million dollars, at least $4.7 million of which passed through accounts controlled by Winslow. 

Winslow formed shell companies in various states, and then opened bank accounts in the names of those shell companies for the purpose of receiving fraud proceeds from victim-investors. Fraud proceeds were then wired back overseas and used to pay expenses and boiler room workers and otherwise perpetuate the scheme.  Fraud proceeds were also wired to accounts controlled by coconspirators in the money laundering operation in the United States and overseas, including to Winslow's overseas accounts, to compensate them for their roles in the conspiracy and otherwise for their personal enrichment. Winslow participated in this scheme while living in Barcelona, Spain, and in Miami, Florida.  

https://www.justice.gov/usao-ndga/pr/television-personalities-sentenced-years-federal-prison-fraud-and-tax-evasion
In the United States District Court for the Northern District of Georgia, after a three-week jury trial, a jury convicted Todd Chrisley, 54, and his wife Julie Chrisley, 49, on charges of conspiracy to commit bank fraud, bank fraud, wire fraud, and conspiracy to commit tax evasion; and, additionally, Julie Chrisley was convicted on obstruction of justice. Also, Peter Tarantino, 60, was convicted on multiple tax charges. Todd Chrisley was sentenced to 12 years in prison plus three years of supervised released; Julie Chrisley to 7 years in prison plus three years of supervised release; and Tarantino to three years in prison plus three years of supervised release. The Chrisleys were ordered to pay restitution. As alleged in part in the DOJ Release: 

Todd and Julie Chrisley conspired to defraud community banks in the Atlanta area to obtain more than $36 million in personal loans. The Chrisleys, with the help of their former business partner, submitted false bank statements, audit reports, and personal financial statements to Georgia community banks to obtain the loans. The Chrisleys spent the money on luxury cars, designer clothes, real estate, and travel - and used new fraudulent loans to pay back old ones.  After spending all the money, Todd Chrisley filed for bankruptcy and walked away from more than $20 million of these fraudulently obtained loans.

Later, while earning millions from their TV show, Todd and Julie Chrisley, along with their accountant, Peter Tarantino, conspired to defraud the Internal Revenue Service. Throughout the conspiracy, the Chrisleys operated a loan-out company. To evade collection of half a million dollars in delinquent taxes owed by Todd Chrisley, the Chrisleys opened and kept the corporate bank accounts only in Julie Chrisley's name. But after the IRS requested information about bank accounts in Julie Chrisley's name, the Chrisleys transferred ownership of the corporate bank account to a relative to further conceal their income from the IRS. 

In addition, the Chrisleys failed to file tax returns or pay any taxes for the 2013, 2014, 2015, or 2016 tax years. As a part of the tax evasion scheme, Tarantino was convicted of filing two false corporate tax returns for the loan-out company, which falsely claimed that the company earned no money and made no distributions in 2015 and 2016. 

The Chrisleys also attempted to obstruct justice before being charged as well as during the trial. After learning of the grand jury investigation, Julie Chrisley submitted a fraudulent document in response to a grand jury subpoena to make it appear that the Chrisleys had not lied to the bank when they transferred ownership of the loan-out company's bank account to their relative.

https://www.justice.gov/usao-cdca/pr/arcadia-woman-sentenced-20-years-prison-multimillion-dollar-fraud-targeting-investors
In the United States District Court for the Central District of California, Ruixue "Serena" Shi, 38, pled guilty to one count of wire fraud; and she was sentenced to 240 months in prison and ordered to pay $35,842,329 in restitution. As alleged in part in the DOJ Release:

From November 2015 to July 2018, Shi was the general manager of Global House Buyer LLC (GHB), a China-based real estate company that had an office in Los Angeles. Shi had reached an agreement with Dakota Development, a real estate development subsidiary of the Los Angeles-based lifestyle hospitality company SBE Entertainment, to build a real estate development in the City of Coachella under SBE's brand name "Hyde." Hyde Resorts was supposed to be a 207-unit luxury condominium and hotel complex with 95,000 square feet of conference facilities, a pool, spa, fitness center and other amenities.

Shi solicited investments in the Hyde complex from victims, the majority of whom were Chinese investors, by giving sales presentations at hotels and contacting victims over WeChat, a Chinese messaging, social media and mobile payment application.

To induce victims to invest in the Hyde complex, Shi falsely told them that their money would only be used to fund the Hyde development project. In reality, Shi used much of the victims' money on her own personal expenses, including spending nearly $300,000 to purchase two luxury cars, spending approximately $2.2 million at a company that provided luxury travel and concierge services, and spending almost $800,000 in victim funds at a full-service styling agency in Beverly Hills, as well as using hundreds of thousands of dollars of victims' money on high-end clothing designers, restaurants, and other stores.

In connection with the sentencing hearing, more than two dozen victims submitted statements to the court, with many describing the substantial financial hardship they experienced. Several discussed their reliance on Shi's false promises that their investments would assist them in securing visas to immigrate to the United States. One victim even wrote that, after losing his retirement savings to Shi's scheme, he "even contemplated suicide," according to court papers filed by prosecutors.

https://www.justice.gov/usao-cdca/pr/santa-clarita-man-sentenced-nearly-6-years-prison-stealing-17-million-investors-his
In the United States District Court for the Central District of California, Matthew Skinner, 45, pled guilty to one count of securities fraud; and he was sentenced to 77 months in prison and ordered to pay $1,744,946 in restitution. As alleged in part in the DOJ Release:

In 2014, Skinner founded a company called Empire West Equity Inc. and later established another business named Simple Growth LLC. Skinner used social media platforms such as Facebook and YouTube to promote himself, falsely claiming to be an experienced and successful real estate investor with more than $200 million in deals under his belt.

After Empire West experienced financial troubles - Skinner was unable to pay his staff and investors - he established Simple Growth in 2018 and falsely told investors who purchased Simple Growth coupon bonds "that their money would be used to purchase real estate that [Skinner] and Empire West would develop and resell at a profit," according to court documents.

Skinner did not intend to purchase, develop or resell real estate, and that he instead used investor funds to pay older investors, his employees and himself. Instead, Skinner used investor funds from those entities and accounts to pay for personal trips, his mortgage, his utility bills, cosmetic surgery, and alimony payments to his ex-wife.

Simple Growth raised approximately $1,744,946 from more than 20 investors - none of whom received any of their money back.

In the United States District Court for Southern District of New York, James Velissaris, the founder and former chief investment officer of Infinity Q Capital Management ("Infinity Q") pled guilty to one count of securities fraud. As alleged in part in the DOJ Release:

Background

VELISSARIS was the founder and chief investment officer of Infinity Q, an investment adviser that ran both a mutual fund (the "Mutual Fund"), started in about 2014, and a hedge fund (the "Hedge Fund," and collectively the "Investment Funds"), started in about 2017.  As of 2021, the two funds purported to have approximately $3 billion in assets under management.  Infinity Q was headquartered in New York, New York, and employed a small staff, including a chief compliance and chief risk officer ("Employee-1"). 

A major component of both the Mutual Fund and the Hedge Fund's holdings were over-the-counter ("OTC") derivative positions that involved customized contracts that allowed the counterparties to take positions on the volatility, or price movement, of underlying assets or indices.  VELISSARIS, through Infinity Q, represented to its investors that it valued these OTC derivative positions based on fair value, and that in order to do so, it utilized the services of an independent third-party provider.  In particular, Infinity Q represented to investors and other stakeholders that it used Bloomberg Valuations Service ("BVAL") to independently calculate the fair value of these positions, in accordance with the terms of the underlying derivative contracts.  These OTC derivative positions comprised hundreds of millions of dollars of the Investment Funds' portfolios.   

VELISSARIS' Scheme to Lie to Investors and Inflate Derivative Swap Positions

In fact, however, VELISSARIS defrauded Infinity Q's investors by taking an active role in the valuation of Infinity Q's positions and by modeling the positions in ways that were not based on the actual terms of the underlying contracts and were inconsistent with fair value.  VELISSARIS' input into the BVAL valuation process was inconsistent with Infinity Q's representations about the independence of the process and allowed VELISSARIS to fraudulently mismark positions in BVAL.  VELISSARIS engaged in the mismarking of positions in BVAL by making false entries in BVAL's system including by secretly altering the computer code employed by BVAL that caused BVAL to alter and disregard certain critical terms.  Altering and disregarding terms in this fashion caused BVAL to report values that were artificially inflated and, often, much higher than fair value. 

By manipulating OTC derivative positions in BVAL in this way, VELISSARIS caused numerous positions in the Investment Funds to have anomalous and, at times, impossible valuations.  For example, at times, VELISSARIS made manipulations in either the Mutual Fund and/or the Hedge Fund that caused certain identical positions that were held by both the Mutual Fund and the Hedge Fund (namely, a position where all the material terms are the same) to have substantially divergent values.  In other cases, some of VELISSARIS' manipulations caused certain positions held by the Investment Funds to have impossible values, such as where, under the true terms of the swap, the value adopted by VELISSARIS could only be true if volatility were negative - a condition which is mathematically impossible.

Ultimately, after VELISSARIS' mismarking scheme was uncovered in or about February 2021, Infinity Q liquidated the Investment Funds and sold its OTC derivative positions.  These positions were sold for hundreds of millions of dollars less than their purported market values in BVAL, thereby resulting in substantial losses to the investors in the Investment Funds.

VELISSARIS Lies to Auditors and Obstructs the SEC's Investigation

In order to hide this scheme and prevent its detection, VELISSARIS lied to numerous outside stakeholders and regulators.  First, in order to prevent Infinity Q's outside auditor (the "Auditor") from discovering the fraud, VELISSARIS provided the Auditor with falsified term sheets from counterparties that he had altered to change the true terms of certain OTC derivative positions.  In particular, in connection with a number of audits, the Auditor selected certain OTC positions that it would independently value in order to confirm the reasonableness of Infinity Q's values from BVAL.  In order to ensure that the Auditor would not arrive at materially different results when independently valuing positions that VELISSARIS had manipulated in BVAL, VELISSARIS altered the terms of certain deal documents and provided them to the Auditor.  After receiving these falsified documents and relying on them in its independent evaluation, the Auditor confirmed the reasonableness of VELISSARIS' valuations in BVAL.

Furthermore, beginning in May 2020, the SEC opened an inquiry and later an investigation into Infinity Q's valuation practices.  In connection with that investigation, VELISSARIS provided false and misleading information to the SEC.  For example, when the SEC asked for original documents that had been provided to investors, VELISSARIS altered the documents before providing them to the SEC, including certain alterations that would help hide his mismarking scheme.  For example, Infinity Q's original investor materials stated that "[o]nce a price is established for a portfolio security, it shall be used for all Funds that hold the security."  As explained above, this was untrue, and on numerous occasions, manipulations in BVAL made by VELISSARIS caused the same positions in the Mutual Fund and the Hedge Fund to have substantially different values.  To conceal the falsity of Infinity Q's disclosures, VELISSARIS, along with Employee-1, removed this line from investor documents that were provided to the SEC.

In June 2020, the SEC requested that Infinity Q provide additional materials, including documents regarding Infinity Q's valuation committee and all of its meeting minutes.  Infinity Q's investor materials had represented that Infinity Q had a valuation committee, including VELISSARIS, that the committee would meet monthly or more often, and that VELISSARIS would be responsible for preparing minutes of such meetings.  In fact, however, VELISSARIS had not kept notes of any such meetings.  Accordingly, days before responding to the SEC, VELISSARIS made up notes purporting to be from valuation committee meetings in 2019 and 2020 and submitted them to the SEC.

https://www.justice.gov/usao-az/pr/tucson-couple-sentenced-5-years-stealing-5-million-investors
In the United States District Court for the District of Arizona, a jury found Michael Feinberg, 73, and Betsy Feinberg, 80, guilty of multiple counts of securities and wire fraud; and each were sentenced to 60 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

Michael and Betsy Feinberg operated Catharon Software Corporation as husband and wife. The Feinbergs claimed they had produced revolutionary software called VDelta that would generate enormous returns for investors and philanthropists. For almost 15 years, the Feinbergs lured investors with false promises about the software's completion, release date, and capabilities. Their victims included friends and associates recruited through various community organizations in Sedona, Arizona, where the Feinbergs resided at the time. In addition to paying themselves salaries, the Feinbergs used investor money for a wide variety of personal expenses, including their home mortgage.

Bill Singer's Comment: Not disagreeing or complaining but mere noting: Wow!!! Five years in prison for an 80 year old. 

https://www.sec.gov/news/press-release/2022-209
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/ia-6189.pdf, Goldman Sachs Asset Management, L.P. ("GSAM") consented to the entry of  finding that it violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7; and, further, GSAM agreed to a cease-and-desist order, a censure, and a $4 million penalty. As alleged in part in the SEC Release:

[F]rom April 2017 until February 2020, GSAM had several policies and procedures failures involving the ESG research its investment teams used to select and monitor securities. From April 2017 until June 2018, the company failed to have any written policies and procedures for ESG research in one product, and once policies and procedures were established, it failed to follow them consistently prior to February 2020. For example, the order finds that GSAM's policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product's investment portfolio prior to the selection; however, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures. GSAM shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the funds' board of trustees.

https://www.finra.org/sites/default/files/fda_documents/2021071745801
%20Hugh%20O.%20Barndollar%20III%20CRD%203027317%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, Hugh O. Barndollar III submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Hugh O. Barndollar III was first registered in 1998 and between March 2013 and December 2021, he was registered with Crown Capital Securities, L.P. and was also associated with a registered investment advisory firm. In accordance with the terms of the AWC, FINRA imposed upon Barndollar a $10,000 fine and a two-year suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

In addition to serving as a registered representative of Crown Capital, Barndollar also provided asset management services as an IAR. From November 2017 to December 2021, Barndollar, in his capacity as an IAR, recommended and/or facilitated investments in more than 10 private securities offerings of alternative investments through the RIA. Barndollar participated in a total of 28 securities transactions through the RIA that raised $1,418,108 from 18 investors.2 Twelve of those 18 investors were Crown Capital customers. Barndollar participated in the transactions by recommending and/or facilitating the investments, including by meeting with the investors to discuss the investments and assisting them with documentation. Barndollar's RIA clients paid advisory fees to the RIA on the assets held in their advisory accounts, including the alternative investments that Barndollar recommended and/or facilitated. 

Barndollar disclosed his RIA as an outside business activity to Crown Capital, stating that he "manage[d] accounts on a fee based platform," which involved third-party money managers. While Crown Capital approved of this outside business activity, Barndollar did not provide Crown Capital with prior written notice of his participation in the sale of alternative investments through the RIA or obtain the firm's written approval to sell those investments. Moreover, Crown Capital's written supervisory procedures required the firm's advance written permission for proposed outside transactions, including advisory transactions, based upon written disclosure of the details of the proposed transaction, the individual's role therein, and an explanation concerning any selling compensation that may be received. Finally, Barndollar falsely certified on the firm's 2018, 2019, 2020, and 2021 annual compliance questionnaires that he had not engaged in any private securities transactions that had not been previously disclosed and approved by the firm. 

Therefore, Barndollar violated FINRA Rules 3280 and 2010.  
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Footnote 2:  In May 2020, Crown Capital placed Barndollar on heightened supervision due to the customer arbitrations that were initiated involving alleged sales practice violations. The heightened supervision plan prohibited Barndollar from selling alternative investments through Crown Capital. Barndollar, however, participated in 13 sales of $742,058 in alternative investments after May 2020 through the RIA

https://www.finra.org/sites/default/files/fda_documents/2019061298301
%20Barclays%20Capital%20Inc.%20%20CRD%2019714%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, Barclays Capital Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Barclays Capital Inc. has been a FINRA member firm since 1987 with about 2,900 registered representatives at 16 branches. In accordance with the terms of the AWC, FINRA imposed upon Barclays a Censure and $175,000 fine. The AWC asserts in part that:

Between January 2014 and February 2019, Barclays Capital used a proprietary system to calculate the volume of the firm's trades and transmit that information to Bloomberg to be advertised. This system suffered from several technology flaws which caused various errors that led to inflated calculations of the firm's trade volume. The system then automatically transmitted these trade volume calculations directly to Bloomberg, which posted them for advertisement. 

The improper calculations that inflated the firm's trade volume included: (i) counting trades that were subsequently canceled or corrected; (ii) counting transactions between Barclays Capital's affiliates as if they were trades between the firm and non-affiliated entities; and (iii) double-counting trades executed in the market when there was a subsequent transfer of the same security in a riskless principal transaction. In total, Barclays Capital overstated its advertised trading volume in more than 4,500 instances, concerning more than 2,600 unique securities, by approximately 147 million shares. The firm corrected the above-described technology flaws by February 2019. 

 Therefore, Barclays Capital violated FINRA Rules 5210 and 2010. 
. . .

Between January 2014 and July 2018, Barclays Capital's supervisory system and WSPs were not reasonably designed to achieve compliance with FINRA Rule 5210. Barclays Capital's WSPs addressed neither how the firm should calculate its trading volume nor how the firm should monitor its advertised trading volumes for accuracy. As a result, Barclays Capital failed to detect thousands of instances where the firm overstated its advertised trading volume. In July 2018, Barclays Capital implemented new WSPs addressing advertised trading volume. 

Therefore, Barclays Capital violated NASD Rule 3010 and FINRA Rules 3110 and 2010. 

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11/21/2002

https://www.supremecourt.gov/orders/courtorders/112122zor_7lhn.pdf at Page 3 (22-368)
As previously decided in Victor Hong, Petitioner, v. United States Securities and Exchange Commission, United States of America, Respondents (Opinion, United States Court of Appeals for the Second Circuit, No. 21-529)
https://brokeandbroker.com/PDF/Hong2Cir220721.pdf, and as set out in the 2Cir's Syllabus:

This case presents the question whether a person who submits information about potential securities laws violations to the Securities and Exchange Commission is entitled under Section 21F of the Securities Exchange Act to receive a whistleblower award from the SEC when other federal agencies use that information to help secure a financial settlement with the alleged wrongdoer. On review, we agree with the SEC that  neither the settlements secured by the other agencies nor any investigative or  information-sharing activities undertaken by the SEC with respect to Hong's tip qualifies as a "judicial or administrative action brought by the [SEC]" under Section 21F. 15 U.S.C. § 78u-6. We further decide that the settlements are not "related actions" to any action brought by the SEC. Having so construed the statute, we reject Hong's arguments that he was entitled to an award and that the SEC was obligated to provide him with additional records regarding its investigation into the wrongdoer.

The petition for review is DENIED. The motion to dismiss is DENIED as moot.


Bill Singer's Comment: The stench that reeks from the abuse of whistleblower Hong is set out in all its shame in this lament from 2Cir:

As set forth above, we identify no error in the SEC's interpretation of Section 21F
nor in its finding that, despite his contributions to recoveries obtained from the Bank by
other components of the United States government, Hong is ineligible for a whistleblower award from the SEC. The agency's ruling rests on a reasonable construction of the statute and its own reasonable regulations issued under the statute.
We are mindful that this decision may strike some as inconsistent with the principal
statutory goal of the Program-namely, Congress's desire to incentivize and reward
whistleblowers who may risk their reputations and careers to help hold financial
institutions responsible for unlawful behavior. But it is not our role to rewrite the
limitations on eligibility set forth in the Exchange Act, nor to override the SEC's
reasonable interpretations of that statute, in order to ensure that this goal is satisfied in every instance.

Other considerations, too, assure us that this outcome is consistent with the general statutory framework and purpose of the program. First, the Exchange Act provides that whistleblower awards be paid from the Commission's Investor Protection Fund, which is generally funded by monetary sanctions or civil penalties obtained by the SEC. See 15 U.S.C. § 78u-6(a)(2), (b)(2), (g)(3). Hong points to no basis for believing that recoveries obtained in settlements by DOJ and FHFA are accessible by the SEC to pay an award. We are aware of no reason to believe that the mere existence of the Financial Fraud Enforcement Task Force and its RMBS Group was intended to override the well-established boundaries between agency finances or that Congress intended
such a result.15 Finally, despite Hong's bald claims of bad faith by the SEC, the record provides no basis for believing that individual officials involved denied his claim to avoid having to pay Hong a whistleblower award. Hong cites to no action of the SEC that could reasonably be so construed. To the contrary: the agency reasonably decided that the law did not permit it to pay an award.
= = = = =
Footnote 15: Although the parties do not address the availability of whistleblower awards through other agencies, we note that DOJ has its own provisions designed to reward individuals for sharing helpful information regarding violations of the Financial Institutions Reform, Recovery, and Enforcement Act-which was the basis for DOJ's settlement here-albeit with significant differences to the SEC's whistleblower program. See 12 U.S.C. §§ 4201, 4205 (providing that the Attorney General must pay a percentage-based award to an individual who provided a declaration to DOJ that led to a judgment or settlement pursuant to which the United States acquires funds or assets). Hong may or may not be eligible for this type of award or other non-SEC monetary award programs, but the existence of other such programs makes clear that the SEC's was not contemplated to be a blanket mechanism for rewarding whistleblowers without regard to which agency acts on the information provided.

at Pages 28 - 29 of the 2Cir Opinion

In light of today's United States Supreme Court denial of certiorari, Hong is now dead and buried in a garbage dump of badly drafted and badly administered laws. How oh-so precious that 2Cir wrings its hands for us with this: "We are mindful that this decision may strike some as inconsistent with the principal statutory goal of the Program-namely, Congress's desire to incentivize and reward whistleblowers who may risk their reputations and careers to help hold financial institutions responsible for unlawful behavior. But it is not our role to rewrite the limitations on eligibility set forth in the Exchange Act, nor to override the SEC's reasonable interpretations of that statute, in order to ensure that this goal is satisfied in every instance." In plainer English, a federal appellate court says that it's not its role to rewrite federal whistleblower law even if the end result is to dis-incentivize future whistleblowers and, as a result, endanger the investing public. Should I buy the Court a larger box of salt to pour into Hong's wound?

Okay, fine, I will give the Court the benefit of the doubt. I will go a step farther: As a matter of law, 2Cir may even have it right. That changes nothing. The SEC, the other federal agencies, and those idiots in Congress who should have stepped in years ago and righted this wrong. Closed this loophole. Fixed this broken, gaping hole in the law. The disgrace here is that the bureaucrats were more than happy to squeeze everything out of Hong to make the case but didn't have the time or the inclination to repay his efforts by trying to find a way to reward his whistleblowing. 

To be clear, the SEC's Decision denying Hong's claim was inconsistent with the goal of the Dodd Frank Whistleblower Program; and the SEC and the other agencies knew it at the time and have known it ever since. Victor Hong did everything right and nothing wrong and gets kicked in the teeth by federal agencies and the federal courts. He made the calls and sent the information, and communicated with DOJ, the FBI, FHFA, and SEC. What follows comes off more as bait-and-switch than what we should expect from those charged with protecting the investing public. It is the tawdry stuff of bureaucracies and turf wars and corrosive cynicism. It is the shame of the shameless. And we are all the worse for it.

https://www.justice.gov/usao-cdca/pr/calabasas-man-sentenced-17-years-prison-scamming-cannabis-vaping-business-investors-out
In the United States District Court for the Central District of California, former UCLA decathlete David Joseph Bunevacz, 53, pled guilty to one count of securities fraud and one count of wire fraud; and he was sentenced to 210 months in federal prison and ordered to pay $35,267,851 in restitution. As alleged in part in the DOJ Release:

[A]t today's sentencing hearing, Judge Fischer noted that Bunevacz had "preyed on individuals who believed he was their friend" and that the "seriousness of [his] conduct cannot be captured in mere dollars and cents."

Judge Fischer also found that Bunevacz continued to perpetrate his scheme even while serving probation for a state court conviction, concluding, "Not even a criminal conviction and the threat of jail convinced [Bunevacz] to become a law-abiding citizen."

. . .

Going back to 2010, Bunevacz created various business entities, with names such as CB Holding Group Corp. and Caesarbrutus LLC, that he claimed were involved in the cannabis industry and the sale of vape pens containing cannabis products such as CBD oil and THC.

Bunevacz falsely told at least one investor he had a longstanding relationship with a Chinese manufacturer of disposable vape pens and he obtained "raw pesticide-free oil" that was sent to a "lab that infuses the flavors into the oil with our proprietary custom process that renders the vape flavoring smooth and discrete," according to court documents. Bunevacz also provided investors with forged documents - such as bank statements, invoices and purchase orders - to support his claims of the businesses' success and the need for investor funds.

Instead of using the funds to finance business operations - and while some of his victims were suffering severe financial hardship - Bunevacz misappropriated the vast majority of the funds to pay for his own opulent lifestyle, including a luxurious house in Calabasas, Las Vegas trips, jewelry, designer handbags, a lavish birthday party for his daughter, and horses.

To create the false appearance that his companies were engaged in legitimate business activities, Bunevacz registered various shell companies, including several with names similar or identical to those of legitimate cannabis businesses. To conceal his control of these shell companies and the bank accounts associated with them, Bunevacz listed other individuals, including his stepdaughter, as the corporate officers of the shell companies.

Bunevacz's blog touts his success as a former decathlete who competed for the Philippines, and his wife and daughter appeared in a reality television show. Despite Bunevacz's promotion of his background, Bunevacz took efforts to conceal negative information from investors, such as his 2017 felony conviction for the unlawful sale of securities, according to an affidavit submitted in support of a criminal complaint in this case.

After one investor uncovered a lawsuit against Bunevacz, Bunevacz emailed a counterfeit version of the settlement agreement to falsely make it appear that he had been paid $325,000 as part of a settlement. In reality, it was Bunevacz who had agreed to pay $325,000 to settle the claim.

Operating through his cannabis companies, Bunevacz raised approximately $45,227,266 from more than 100 victim-investors, according to the government's filing. Judge Fischer found that Bunevacz caused losses of approximately $35,267,851.

https://www.justice.gov/opa/pr/two-estonian-citizens-arrested-575-million-cryptocurrency-fraud-and-money-laundering-scheme
In the United States District Court for the Western District of Washington, an Indictment was filed charging Sergei Potapenko and Ivan Turõgin
https://www.justice.gov/opa/press-release/file/1553166/download with conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering. As salleged in part in the DOJ Release:

According to the indictment, Potapenko and Turõgin claimed that HashFlare was a massive cryptocurrency mining operation. Cryptocurrency mining is the process of using computers to generate cryptocurrency, such as Bitcoin, for profit. Potapenk and Turõgin offered contracts which, for a fee, purported to allow customers to rent a percentage of HashFlare's mining operations in exchange for the virtual currency produced by their portion of the operation. HashFlare's website enabled customers to see the amount of virtual currency their mining activity had supposedly generated. Customers from around the world, including western Washington, entered into more than $550 million worth of HashFlare contracts between 2015 and 2019.

According to the indictment, these contracts were fraudulent. HashFlare allegedly did not have the virtual currency mining equipment it claimed to have. HashFlare's equipment allegedly performed Bitcoin mining at a rate of less than one percent of the computing power it purported to have. When investors asked to withdraw their mining proceeds, Potapenko and Turõgin were not able to pay the mined currency as promised. Instead, they either resisted making the payments, or paid off the investors using virtual currency the defendants had purchased on the open market-not currency they had mined. HashFlare closed its operations in 2019.

In May 2017, Potapenko and Turõgin offered investments in a company called Polybius, which they promised would form a bank specializing in virtual currency. They promised to pay investors dividends from Polybius's profits. The men raised at least $25 million in this scheme and transferred most of the money to other bank accounts and virtual currency wallets they controlled. Polybius never formed a bank or paid any dividends.

The indictment also charges Potapenko and Turõgin with conspiring to launder their criminal proceeds by using shell companies and phony contracts and invoices. The money laundering conspiracy allegedly involved at least 75 real properties, six luxury vehicles, cryptocurrency wallets, and thousands of cryptocurrency mining machines.

Court Authorizes the Seizure of Domains Used in Furtherance of a Cryptocurrency "Pig Butchering" Scheme (DOJ Release)
https://www.justice.gov/usao-edva/pr/court-authorizes-seizure-domains-used-furtherance-cryptocurrency-pig-butchering-scheme

The U.S. Attorney's Office for the Eastern District of Virginia announced today the seizure of seven domain names used in a recent cryptocurrency confidence crime, known as "pig butchering."

In pig butchering schemes, scammers encounter victims on dating apps, social media websites, or even random texts masquerading as a wrong number. Scammers initiate relationships with victims and slowly gain their trust, eventually introducing the idea of making a business investment using cryptocurrency. Victims are then directed to other members of the scam syndicate running fraudulent cryptocurrency investment platforms, where victims are persuaded to invest money. Once the money is sent to the fake investment app, the scammer vanishes, taking all the money with them, often resulting in significant losses for the victim. And that is exactly what happened in this instance.

According to court records, from at least May through August 2022, scammers induced five victims in the United States by using the seven seized domains, which were all spoofed domains of the Singapore International Monetary Exchange. The term "spoofed" refers to domain spoofing and involves a cyberattack in which fraudsters or hackers seek to persuade individuals that a web address or email belongs to a legitimate and generally trusted company, when in fact it links the user to a false site controlled by a cybercriminal. The scammers - using the confidence-building techniques described above - convinced the victims that they were investing in a legitimate cryptocurrency opportunity. After the victims transferred investments into the deposit addresses that the scammers provided through the seven seized domain names, the victims' funds were immediately transferred through numerous private wallets and swapping services in an effort to conceal the source of the funds. In total, the victims lost over $10 million. . . .

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96366; Whistleblower Award Proc. File No. 2023-16)
https://www.sec.gov/rules/other/2022/34-96366.pdf
The SEC's Office of the Whistleblower ("OWB") issued a Preliminary Summary Determination recommending the denial of a joint Whistleblower Award to Claimants. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

The record shows that Joint Claimants' information did not cause the staff to open the Investigation. Enforcement staff assigned to the Investigation (the "Investigation Staff") confirmed that the Investigation was opened based upon Redacted from the Respondents following Redacted  Joint Claimants' information did not cause the Investigation Staff to open the Investigation. 

The record also demonstrates that Joint Claimants did not cause the Commission to inquire into different conduct as part of the Investigation and did not significantly contribute to the success of the Covered Action. Investigation Staff did not recall communicating with Joint Claimants or receiving any information from Joint Claimants. Further, the email correspondence which Joint Claimants attached to the Response does not bolster their case: Investigation Staff confirmed, in a supplemental declaration, which we credit, that the Commission staff involved in that email correspondence were not assigned to the Investigation and did not contribute to it. Investigation Staff also confirmed that Investigation Staff did not receive or review any information from the Commission staff involved in the email correspondence about the subject matter of the Investigation, nor did Investigation Staff discuss the Investigation with the staff involved in the email correspondence. Accordingly, Joint Claimants' information did not cause  the Investigation Staff to inquire into different conduct or significantly contribute to the success of the Covered Action.
Good afternoon everyone. Thank you to Bruce Carton for the invitation to speak today and for the very kind introduction. I spoke at the Securities Enforcement Forum West in California back in May of this year, and it is a real pleasure to be back with you here today, a little closer to home.

As is customary, my remarks today express my views as Director of the Division of Enforcement, but do not necessarily reflect those of the Commission, the Commissioners, or other members of staff.[1]

Throughout my first year as Director, I have spoken often about the public's declining trust in our institutions and financial markets.[2] I have observed that, while there is no single cause for this decline of trust, it is in part due to the perception that we-the regulators-are failing to hold bad actors accountable, and that there are two sets of rules: one for the big and powerful and another for everyone else.

In those speeches, I also outlined steps that we in the SEC's Division of Enforcement would take, and have taken, to address the decline in public trust. During my speech last May at SEF West, for example, I spoke about the need to push the pace of investigations so that, when the public reads a news story about corporate misconduct, the public knows that we will move quickly and efficiently to investigate what happened and hold wrongdoers accountable, even in the most complex cases.[3]

This is especially true right now given the volatility and uncertainty we are experiencing across the financial markets and in the crypto market.

So today, I would like to talk about how we are working with that sense of urgency to restore public trust by doing three things:

  • obtaining penalties and remedies that deter misconduct and meaningfully hold bad actors accountable, protect investors and, where possible, help harmed investors recover their losses;
  • proactively investigating and charging cases across a spectrum of market participants and harm; and
  • Continuing to incentivize proactive compliance and meaningful cooperation.

The work is obviously not done; but I think we made some real progress over the course of this past fiscal year, which closed on September 30th.

Seeking Penalties and Remedies that Deter Misconduct and Protect Investors

With respect to penalties and remedies, simply put, they must be adequate to both punish and deter wrongdoing. If market participants think that getting fined by the SEC is just another expense to be priced into the cost of doing business, then penalties are neither effective punishment, nor deterrence. Market participants must realize that complying with securities laws is cheaper than violating those laws.

This must be true not only in cases involving fraud, but also in cases based on negligence. After all, investors are harmed equally whether someone violate securities laws with bad intent or through negligence.

So this past fiscal year we sought to re-calibrate penalties to more effectively promote deterrence and get away from the idea that penalties are just another business expense.

To that end, last year we recommended, and the Commission issued, orders imposing nearly $4.2 billion in penalties.[4] This is the highest amount of penalties ever ordered in a year. And it is more than the prior three years combined. We don't expect to break this record and set a new one every year because we expect behaviors to change. We expect compliance.

Look at our off-channel communications sweep. When 17 major Wall Street firms are fined in excess of a 1.2 billion dollars, required to admit their failures, engage consultants and implement safeguards to prevent future violations, not only do those firms improve their culture and practices, but other financial services firms take note and do so as well, the media takes notice, and important to trust-building, the investing public sees accountability.[5]

Similarly, when three senior Allianz portfolio managers allegedly orchestrate a multi-billion dollar fraud scheme that resulted in billions in investor losses, the penalties must be meaningful enough to deter both Allianz and others and demonstrate accountability. That's why Allianz was required to admit that its conduct violated the federal securities laws and pay a $675 million civil penalty, one of the largest in an SEC fraud case since the days of Enron and WorldCom, to settle fraud charges.[6]

And when gatekeepers at the gatekeeper engage in a massive cheating scheme for the second time in 10 years, on of all things the ethics portion of the CPA exam, and then that gatekeeper withholds evidence of the misconduct from us, then we need to not only increase the penalty from the last violation, but also incorporate additional remedies. Because that's what's required for accountability and deterrence and that's why the Commission required EY to pay a record $100 million penalty, admit its misconduct, and implement extensive remedial measures to address the firm's ethical issues.[7]

I want to pause here for a moment because I don't want an important aspect of the nineteen resolutions I just discussed to get overshadowed by the dollar figures at play. Each of them also involved admissions of wrongdoing. Admissions are an incredibly powerful accountability measure and you should expect us to continue seeking admissions in similar cases. And as I've said before, when we put them on the table it's not to gain an advantage in negotiations. We'll litigate those matters.

While the examples I've discussed involved penalties against companies and firms, holding individuals accountable is also critical to our efforts.

As in prior years, more than two-thirds of the SEC's stand-alone enforcement actions over the past fiscal year involved at least one individual defendant or respondent.[8] And these individuals included senior public company executives like the former CEO of Boeing, who was charged with making misleading statements about the safety of Boeing's airplanes following crashes in 2018 and 2019, and ordered to pay $1 million in penalties.[9]

SOX 304 Clawbacks

But more is required to ensure accountability from senior executives at public companies and incentivize them to prevent misconduct at their firms. That's why the Commission employed another tool in fiscal year 2022 and used Sarbanes-Oxley 304 to require several executives to return bonuses and compensation following misconduct at their firms, even though the executives were not personally charged with the underlying misconduct.

For example, three former senior executives of infrastructure company Granite Construction were ordered to return nearly $2 million in bonuses and compensation after their company restated its financials following misconduct by another former official.[10]

Disgorgement

Of course, a penalty is only one of several tools available to us when we seek to impose remedies against bad actors. We also seek disgorgement from market participants to ensure that they do not profit from their violations of securities laws. Where appropriate, we will aggressively seek disgorgement of all ill-gotten gains, regardless of whether the violations are scienter-based. Last year, in total, the Commission ordered market participants to disgorge about $2.2 billion in ill-gotten gains.[11]

For example, as part of global resolutions in the case against Allianz that I mentioned previously, Allianz and its parent company agreed to pay nearly $350 million in disgorgement and prejudgment interest.[12] That's in addition to the $675 million civil penalty.

Here, I think it is helpful to talk a bit about the interplay between penalties and disgorgement. For the five fiscal years prior to this last one, the Commission ordered more than twice as much in disgorgement as it did in penalties. In other words, for each dollar in penalties that was ordered, the violators had received more than $2 in ill-gotten gains. To me, that ratio is backwards because it means, on a macro level, that the potential reward for getting away with violating the securities laws was much greater than the potential downside of being caught. If you get $2 for violating the law, but are only fined $1 if you get caught, and required to return your ill-gotten gains, some people may see that as an acceptable calculated risk.

As demonstrated by the Allianz matter, that ratio has flipped this year. The $4.2 billion in penalties that the Commission ordered is nearly double the $2.2 billion in disgorgement that the Commission ordered, meaning that the potential consequences of violating the law are significantly greater than the potential rewards.

So while disgorgement was slightly down from the prior year, about 6%, it is the first time that the amount ordered to be paid in penalties has been double the amount ordered to be paid in disgorgement. There are of course also legal developments that have affected the Commission's ability to order disgorgement. But whatever the reason, the increased penalty to disgorgement ratio nonetheless demonstrates that the risk-reward calculation is not what it was even a few years ago.

Proactive Enforcement Through the Use of Sweeps and Initiatives

Another way that we work to address the declining trust in the financial markets is by conducting proactive enforcement sweeps and initiatives that specifically target recurring issues.

Filing multiple, coordinated actions simultaneously not only demonstrates accountability, but also has a more pronounced deterrent effect than if the Commission filed separate standalone cases at different times.

For example, we've already discussed the sweep that led to the charges against 17 Wall Street firms for widespread recordkeeping failures. I suspect that it has generated conversation at this conference and will do so at others, as well as among compliance officers and in board rooms.

Another recent sweep conducted by our Asset Management Unit underscored the importance of meeting custody obligations to secure client assets and to protect investors-an important risk area for us. That initiative led to charges against nine registered private fund advisers for failing to comply with the Custody Rule and/or update their Forms ADV to accurately reflect the status of their private fund clients' financial statements.[13]

You can expect to see us employ these strategies more frequently moving forward.

Rebuilding Public Trust Requires Proactive Compliance and Cooperation

But robust penalties and innovative enforcement actions alone cannot restore trust in our financial markets. Rather, we need market participants to help by self-policing and, when things go wrong, to meaningfully cooperate with our investigations.

So even as we seek robust penalties to deter misconduct, we must continue to have a robust cooperation program which can bring significant benefits to cooperators, including reduced penalties.

While meaningful cooperation starts with self-policing and self-reporting, it does not end there. It also means proactively cooperating with our investigations and remediating violations.

Since I spent the bulk of my speech at SEF West talking about ways in which the defense bar and their clients could do more, I think it's only fitting to end this one by detailing several cases from the last fiscal year where firms meaningfully cooperated with our investigations and the Commission credited that cooperation through reduced penalties, or even no penalties at all.

In February, the Commission charged Baxter International with engaging in improper foreign exchange transactions and misstating the company's income.[14] The Commission agreed to substantially limit the penalty imposed for the wrongful conduct due to Baxter's self-reporting, its cooperation with the investigation, and remedial measures it took. As the charging document stated, Baxter provided substantial cooperation to the investigation,

including by providing detailed explanations of how the FX Transactions worked, summarizing witness interviews, and providing other relevant information to the staff, both on their own initiative and at the staff's request.[15]

As I mentioned, in appropriate situation, meaningful cooperation can mean no penalties at all. For example, the Commission charged ProPetro Holding with failing to properly disclose executive perks and stock pledges that its CEO received.[16] The Commission agreed to not impose a civil penalty on ProPetro for its wrongful conduct thanks to ProPetro's cooperation with the staff's investigation and its extensive remediation.

Headspin, Inc. is another example of a case where, because of the company's significant cooperation, the Commission did not impose a penalty on the company for its wrongful conduct.[17]

These last few examples are important because they illustrate that even as we have sought and obtained record penalties, the Commission continues to reward meaningful cooperation. And given the record penalties, there should likewise be a heightened incentive to cooperate. I hope that is a message that those of you in private practice will take back to your clients and companies.

* * *

Thanks again to all those that have worked hard to put this conference together. I look forward to hearing the other speakers and to hopefully connecting with you during a break.

Thank you.

[1] This speech is provided in the author's official capacity as the Commission's Director of the Division of Enforcement but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.

[2] See., e.g., Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm'n, Remarks at SEC Speaks 2021 (Oct. 13, 2021), available at https://www.sec.gov/news/speech/grewal-sec-speaks-101321.

[3] See Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm'n, Remarks at Enforcement Forum West 2022 (May 12, 2022), available at https://www.sec.gov/news/speech/grewal-remarks-securities-enforcement-forum-west-051222.

[4] See Press Release 2022-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), available at https://www.sec.gov/news/press-release/2022-206.

[5] See Press Release 2022-174, SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures (Sept. 17, 2022) available at https://www.sec.gov/news/press-release/2022-174; Press Release 2021-262, JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges (Dec. 17, 2021), available at https://www.sec.gov/news/press-release/2021-262.

[6] See Press Release 2022-84, SEC Charges Allianz Global Investors and Three Former Senior Portfolio Managers with Multibillion Dollar Securities Fraud (May 17, 2022), available at https://www.sec.gov/news/press-release/2022-84.

[7] See Press Release 2022-114, Ernst & Young to Pay $100 Million Penalty for Employees Cheating on CPA Ethics Exams and Misleading Investigation (June 28, 2022), available at https://www.sec.gov/news/press-release/2022-114.

[8] See Press Release 2022-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), available at https://www.sec.gov/news/press-release/2022-206.

[9] See Press Release 2022-170, Boeing to Pay $200 Million to Settle SEC Charges that it Misled Investors about the 737 MAX (Sept. 22, 2022), available at https://www.sec.gov/news/press-release/2022-170.

[10] See Press Release 2022-150, SEC Charges Infrastructure Company Granite Construction and Former Executive with Financial Reporting Fraud (Aug. 25, 2022), available at https://www.sec.gov/news/press-release/2022-150.

[11] See Press Release 2022-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), available at https://www.sec.gov/news/press-release/2022-206.

[12] See Press Release 2022-84, SEC Charges Allianz Global Investors and Three Former Senior Portfolio Managers with Multibillion Dollar Securities Fraud (May 17, 2022), available at https://www.sec.gov/news/press-release/2022-84.

[13] See Press Release 2022-156, SEC Charges Two Advisory Firms for Custody Rule Violations, One for Form ADV Violations, and Six for Both (Sept. 9, 2022), available at https://www.sec.gov/news/press-release/2022-156.

[14] See Press Release 2022-31, SEC Charges Health Care Co. and Two Former Employees for Accounting Improprieties (Feb. 22, 2022), available at https://www.sec.gov/news/press-release/2022-31.

[15] See In the Matter of Baxter International Inc., File No. 3-20781 (Feb. 22, 2022), available at https://www.sec.gov/litigation/admin/2022/33-11032.pdf.

[16] See Press Release 2021-244, SEC Charges Oilfield Services Company and Former CEO With Failing to Disclose Executive Perks and Stock Pledges (Nov. 22, 2021), available at https://www.sec.gov/news/press-release/2021-244.

[17] See Litigation Release No. 25320, SEC's Fraud Case Against Silicon Valley-Based Headspin, Inc.'s Former CEO Is Ongoing (Jan. 28, 2022), available at https://www.sec.gov/litigation/litreleases/2022/lr25320.htm.


https://www.finra.org/sites/default/files/fda_documents/2021073395101
%20Charles%20Paul%20Edward%20Jumet%2C%20Jr.%20CRD
%205958643%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, Charles Paul Edward Jumet, Jr., submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Charles Paul Edward Jumet, Jr., was first registered in 2011, and from 2015 to 2021, he was registered with Chickasaw Securities, LLC. In accordance with the terms of the AWC, FINRA imposed upon Jumet a $5,000 fine and 30-calendar-day suspension from associating with any FINRA member in all capacities. The AWC asserts in part that: 

During January 2021, Jumet requested Chickasaw's approval to become a part owner and operator of a company that conducted land surveys for commercial projects, including in the oil and gas industry. Jumet expected compensation from sharing in the profits of the company and from the proceeds of any future sale of the company. However, the firm did not approve Jumet's request. Rather, the firm requested additional information from Jumet, which Jumet did not provide. Subsequently, during April 2021, Jumet became a partial owner of the company, without providing the information the firm requested and without the firm's knowledge or approval. In addition, from April 2021 until November 2021, Jumet engaged in this outside business activity by developing business strategies for the company and making employment decisions for the company. During November 2021, the firm discovered that Jumet was engaging in this outside business activity and permitted him to resign. No firm customers or customer funds were involved in the outside business activity.

Through this conduct, Jumet violated FINRA Rules 3270 and 2010.

https://www.finra.org/sites/default/files/fda_documents/2021070917301
%20David%20Lau%20CRD%204567411%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, David Lau submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that David Lau was registered from in 2002 with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Lau a $6,000 fine and 20-calendar-day suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

From March through October 2020, Lau exercised discretionary trading authority when he executed 194 securities transactions in five Morgan Stanley customer accounts witoutr prior written authorization. The five customers did not provide Lau with prior written authorization for his use of discretion. and Morgan Stanley did not approve the accounts as discretionary accounts. 

Therefore, Lau violated FINRA Rules 3260(b) and 2010

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