Securities Industry Commentator by Bill Singer Esq

Sexism on Wall Street: The Cowardly Silence of FINRA's Board of Governors (BrokeAndBroker.com Blog)

NOTICE TO CFP® PROFESSIONALS REGARDING FINANCIAL ADVICE ABOUT CRYPTOCURRENCY-RELATED ASSETS

Virtu Financial Sues SEC Citing Violation of the Freedom of Information Act

Virtu Financial, Inc., Plaintiff, v. United States Securities and Exchange Commission, Defendant (Complaint, SDNY)

FTX Was Not Regulated: John Reed Stark (Bloomberg Crypto Show)

 

Wall Street Whistleblowers Tip Off SEC -- But Hear Nothing Back (Bloomberg, DEEP DIVE by John Holland)

 

Corporate Insider Sentenced to 10 Years' Imprisonment for Conspiring with Long Island Boiler Room to Pump and Dump Stock on Unsuspecting Elderly Investors / Illegal Stock Promotion and Manipulation Scheme Cost Victims Millions of Dollars (DOJ Release)

Former Seattle area resident convicted of conspiracy and multiple counts of mail and wire fraud plus various bankruptcy fraud counts / Operated a Ponzi scheme under the guise of a work-at-home offering (DOJ Release)

Former Florida Attorney Indicted For Racketeering Relating To Operation Of His Tallahassee Law Firm And Investment Companies (DOJ Release) 

Two British Citizens Arrested For Conspiracy To Defraud Investors In Fraudulent Co-Working Space Business / James Robinson and David Kennedy, Principals of United Property Group, Arrested in Spain For Fraudulently Soliciting Millions of Dollars From Investors in Bar Works Inc. and Related Entities (DOJ Release)

Wisconsin Man Indicted for $35 Million Bank Fraud Scheme (DOJ Release)

 

Man Pleads Guilty To Defrauding Customers Who Bought Cryptocurrency-Mining Computers And Miner Hosting Services (DOJ Release)

 

Virginia man pleads guilty to defrauding the United States (DOJ Release)

 

Home Health Aide Sentenced to 57 Months in Prison for Stealing U.S. Savings Bonds from Elderly Woman (DOJ Release)

 

Las Vegas Man Sentenced To Prison For Fraud Scheme Targeting Church Funds (DOJ Release)

 

Former CEO Of Iconix Brand Group Convicted At Trial Of Accounting Fraud (DOJ Release)

 

SEC Charges Additional Parties in Fraudulent Office Space Investment Scheme (SEC Release)

SEC Charges New Defendant and Adds Whistleblower Impeding and Retaliation Claims in $149 Million Offering Fraud Case (SEC Release)

SEC Obtains Final Judgments Against Index Manager and Friend for Insider Trading (SEC Release)

SEC Obtains Final Judgment Against Former Owner of California Film Distribution Company Charged with Defrauding Publicly Traded Fund (SEC Release)

 

In the Matter of the Application of Laurence G. Allen for Review Taken by FINRA (SEC Order Denying Motion for a Stay)

SEC Orders $2.5 Million Whistleblower Award to Claimant 1 But Denies Award to Claimant 2 

Order Determining Whistleblower Award Claims

 

SEC Orders $20 Million Whistleblower Award to Claimant 1, Claimant 2, and Claimant 3 But Denies Award to Claimant 4 

Order Determining Whistleblower Award Claims

 

SEC Orders $20 Million Whistleblower Award to Claimant 1 But Denies Award to Claimant 2 and Claimant 5 

Order Determining Whistleblower Award Claims

Remarks at the ICI Global Asset Management Asia Forum by SEC Commissioner Mark T. Uyeda

Federal Court Orders Rhode Island Man to Pay More than $2.8 Million in Restitution for Virtual Currency Fraud (CFTC Release)

Statement of Commissioner Kristin N. Johnson Regarding CFTC Consent Order of $2.8 Million in Restitution for Virtual Currency Fraud / A Call to Action: Let's Use Our Existing Authority to Stop Crypto-Fraud

FINRA Fines and Suspends Firms for GPB Disclosures

In the Matter of FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc. and Woodbury Financial Services, Inc., Respondents (FINRA AWC)

FINRA Fines and Suspends Rep for OBA

In the Matter of Sean C. Gordon, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Facebook Posts

In the Matter of Richard L. Langer, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Falsifying Rep Code

In the Matter of Barry Lee Garapedian, Respondent (FINRA AWC)

 

FINRA Fines and Suspends Rep for Forging Customer Signatures

In the Matter of Todd Michael Seymour, Respondent (FINRA AWC)

 

FINRA Censures and Fines Firm and  Rep for Suitability Supervision

In the Matter of FFEC Wealth Partners LLC (Respondent) (formerly, First Financial Equity Corporation) and Jeffrey Scott Graves, Respondents (FINRA AWC)

FINRA Arbitration Panel Awards Customers over $11.5 Million in Damages Against Morgan Stanley

In the Matter of the Arbitration Between Dr. Anthony E. Nowak, Individually and as Trustee of the Anthony E. Nowak Revocable Trust, Claimants, v. Morgan Stanley, Respondent (FINRA Arbitration Award)

 

FINRA Arbitration Panel Recommends "Defemetion" Expungement for "Call Avoidance" (or not?)

In the Matter of the Arbitration Between Jack A. Thomas, Claimant, v. USAA Investment Management Company, USAA Financial Advisor, Inc., and USAA Investment Services Company, Respondents (FINRA Arbitration Award)

[C]hen used a fraudulent power of attorney to gain access to the victim's checking account. Chen then allegedly arranged for $520,000 to be fraudulently wired out of the account.

According to the charges, Chen converted the fraud proceeds into Bitcoin before moving it across multiple cryptocurrency exchanges to conceal his scheme. In addition, Chen allegedly used the victim's identity to access and open accounts. The indictment further alleges Chen then used the stolen money to fund his lifestyle and luxury purchases, including two brand new vehicles.  

[T]hus, even before the adoption of Rule 21F-9(e), Claimant 2 would not have qualified for an exception to the filing requirements because he/she waited eighteen months to submit a TCR and did so well after significant investigative steps had occurred. 

Claimant 2 further contends that he/she is particularly suited for a waiver because he/she suffered from ineffective assistance of counsel throughout his/her whistleblower application. According to Claimant 2, his/her attorney failed to communicate with the SEC, failed to open messages from SEC staff, and failed to familiarize himself with the basic requirements of a whistleblower application, which caused Claimant 2 to file his/her Form TCR after the required deadline. Claimant 2 further claims that his/her attorney was unaware that submitting the Form TCR late and jointly with the entity might impact Claimant 2's whistleblower eligibility. In support of Claimant 2's argument for a waiver, Claimant 2 references two whistleblower matters where waivers were granted. The first matter involved counsel who used information from the claimant to submit an application as a whistleblower on behalf of themselves. The second matter involved, among other circumstances, counsel who misunderstood communications from the staff about whether the claimant met the procedural requirements for participating in the whistleblower program, but who made clear at the outset that the claimant intended to be a whistleblower. Neither of these matters are instructive here. Claimant 2 does not allege that his/her counsel misappropriated Claimant 2's information and sought to pass it off as their own. Nor does Claimant 2 allege a misunderstanding of communications from the staff or demonstrate the existence of the unique combination of other facts and circumstances the Commission pointed to in that matter as justifying an exemption under Section 36(a). Claimant 2 provides no explanation as to why the TCR was submitted eighteen months after the general counsel's original contact with SEC staff. As a result, Claimant 2 has not demonstrated a sufficient reason for not timely filing a TCR that reflects the type of limited circumstance supporting the Commission's exercise of general exemptive authority under Exchange Act Section 36(a) or how a waiver would be necessary or appropriate in the public interest in this matter. Accordingly, Claimant 2 does not qualify for a waiver pursuant to Section 36(a) and his/her claim should be denied.

From 2014 to 2016, Isen, Chartier and others working with a Melville, New York-based boiler room artificially inflated the price and trading volume of stock in struggling companies with poor prospects, and off-loaded it onto unsuspecting victims who were often elderly and vulnerable. 

The evidence at trial proved that from approximately 2014 to 2016, Chartier paid the boiler room to illegally prop up the stock price of National Waste Management Holdings, Inc., trading under the ticker symbol NWMH, and CES Synergies, Inc., trading under ticker symbol CESX, through manipulative trading, and also to dump his own NWMH and CESX shares on innocent investors through illegal matched trades.  NWMH and CESX were previously profitable private companies that were each run by individuals seeking to retire.  Chartier persuaded them to pay him in large blocks of stock to take their companies public on promises that doing so would sustain the companies for the future.  Instead, Chartier hired the boiler room, which fraudulently inflated these companies' share prices using high-pressure sales tactics, and then dumped his own shares through matched trades, which caused the companies' stock prices to plummet. As part of the sentencing, the Court ordered the repatriation of Chartier's remaining shares in NWMH and CESX.

The evidence at trial showed that Isen colluded with crooked investors, both in the United States and overseas, to dump large volumes of shares in Hydrocarb Energy Corp., trading under the ticker symbol HECC, and Intelligent Content Enterprises, Inc. trading under the ticker symbol ICEIF, on the victims.  He did so by, among other things, connecting the investors with the boiler room; negotiating the terms of the arrangements between them; and managing the relationships between them.  Isen assisted the boiler room in its illegal cold call campaigns that used lies and high-pressure sales tactics to lure victims, by, among other things, transferring money and stock required by the boiler room for the campaigns; working with the boiler room to fill the duped victims' orders with Isen's crooked investors' stock; and creating fraudulent stock purchase agreements, consulting agreements and invoices to cover up the illegal conduct. 

The government has calculated that the conspiracy's market manipulation fraudulently inflated the stock price of HECC, ICIEF, NWMH and CESX and one other company by more than $147 million.  All 16 defendants charged in this case have been convicted. 

According to records filed in the case and testimony at trial, the company Pigida and his spouse formed, Trend Sound Promoter AMG Corp., was supposed to conduct advertising and music promotion over the internet. The couple sold ad-promoting packages whereby those who bought a package were to be paid for email marketing. The couple made claims to those purchasing the packages that they could make big money for sending emails on Trend Sound's behalf. In reality, the only significant money being generated was from those purchasing the packages, and it was used to pay earlier purchasers as in a typical Ponzi scheme. Over time the company brought in over $22 million, and total losses to those purchasing the packages was over $11 million. As purchasers got wise and the money started to run out, Pigida and Bondarenko accelerated their looting of the company, eventually transferring $3.3 million out of the company for their personal benefit.

Between May 2013 and March 2014, the pair used more than $3 million in company funds to purchase four properties, a yacht, and numerous cars. When the company filed for bankruptcy protection, Pigida never revealed to the bankruptcy court that they had looted the company coffers and transferred assets purchased with that money to ten trusts they had established.  In all, the pair attempted to conceal $3,334,750 in assets from the bankruptcy court and creditors.

According to the indictment, between in or about December 2015, and in or about January 2018, Howard, a Florida attorney, along with others, was associated with and employed by an Enterprise, that is, his Tallahassee law firm (Howard & Associates, P.A.), and several Tallahassee investment companies (Cambridge Capital Group, LLC; Cambridge Capital Wealth Advisors, LLC; Cambridge Capital Advisors, LLC; Cambridge Capital Funding, Inc., Cambridge Capital Group Equity Option Opportunities, L.P.; and Cambridge Capital Partners, L.P.).  The indictment further alleges that during this time, Howard, along with others, knowingly, willfully, and unlawfully conducted and participated in the conduct of the affairs of the Enterprise, through a pattern of racketeering activity, namely, wire fraud and money laundering. Specifically, the indictment alleges that Howard engaged in such racketeering activity in three ways. 

First, it is alleged that Howard represented former NFL players in a class-action lawsuit who were eligible for settlement payouts from the NFL, and as part of that representation, Howard fraudulently enticed his clients to invest their retirement funds with his investment companies.  However, it is also alleged that Howard failed to disclose and misrepresented to these former NFL player investors the structure of the Enterprise, and the conflicts of interest and the criminal background of persons associated with or employed by the Enterprise.  It is further alleged that Howard failed to disclose and misrepresented the true nature of investment companies' funds and the actual investments made by the former NFL player investors.  The indictment also alleges that despite reassuring investors that their money was secure, Howard never informed them that almost none of investment funds yielded a return and failed to disclose that the investment funds had been commingled with funds used to operate his law firm and to issue payroll for its staff, pay Howard's home mortgages, and otherwise personally enrich Howard.  It is alleged that Howard and others fraudulently obtained and attempted to obtain over $4 million through such conduct.

Second, the indictment alleges that Howard sought third-party lenders that would be willing to lend money to Howard's former NFL clients in advance of their potential NFL concussion settlements as part of the NFL class-action lawsuit, and also to Howard as litigation funding for the NFL class-action lawsuit.  To obtain such funds for himself and his clients, it is alleged that Howard provided false and fraudulent information, including numerous material misrepresentations and omissions, to the lenders. It is alleged that Howard and others fraudulently obtained and attempted to obtain over $10 million from third-party lenders through such conduct.

Third, the indictment alleges that Howard solicited a person to invest in a real estate project located in Jacksonville, Florida, and in doing so, promised the investor certain returns on the investment within a specified period of time.  It is further alleged that after the investor money transferred money to the investment company, Howard and an employee falsely told the investor that additional money was needed in order to close that real estate deal, and that the investor was guaranteed to receive a certain return on that investment within a specified period of time.  In reliance on this false promise, it is alleged that the investor transferred additional proceeds to the investment company.  The indictment alleges that several months later, the investor was falsely told by Howard that the real estate investment funds were secure and would be returned to her.  It is alleged that Howard fraudulently obtained and attempted to obtain over $520,000 from this investor through this conduct.

ROBINSON, KENNEDY, and co-conspirators Renwick Haddow and James Moore are citizens of the United Kingdom (the "UK").  At all times relevant to the Indictment, United Property Group and related entities (collectively, "UPG") was a company based in Spain that was controlled in part by ROBINSON and KENNEDY.  UPG sold real estate and other investing opportunities to potential investors.  Bar Works was a private co-working space company controlled by Haddow, which operated locations in New York City and elsewhere between in or about 2015 through 2017 and accepted millions of dollars in investments from investors recruited through UPG, among others.  Prior to launching Bar Works, Haddow had been disqualified as a director of any UK company for eight years and was later sued by the Financial Conduct Authority, a British regulator, for operating investment schemes through misrepresentations that lost investors substantially all of their money.  These sanctions and the lawsuit were publicized online.  

In exchange for millions of dollars in commissions, ROBINSON, KENNEDY, and Moore partnered with Haddow in soliciting investments into workspace leases in Bar Works through material misrepresentations concerning, among other things, the identity of Bar Works' management and the operations of Bar Works.  Specifically, as ROBINSON and KENNEDY knew, notwithstanding Haddow's control over Bar Works, Haddow caused the Bar Works offering materials to omit his name entirely, list a fictitious individual named "Jonathan Black" as the Chief Executive Officer of Bar Works, and claim that "Black" had an extensive background in finance and past success with start-up companies.

Through UPG, ROBINSON and KENNEDY recruited agents to sell workspace leases in Bar Works and provided them with fraudulent offering documents and other information.  An account controlled in whole or in part by JAMES ROBINSON and DAVID KENNEDY received over $2 million in commissions from Bar Works in exchange for soliciting victims to invest at least approximately $7.5 million in this scheme.  Separately, Moore received another approximately $1.6 million from Bar Works.  Overall, prior to its collapse in or about June 2017, Bar Works obtained over $57 million from over 800 investors worldwide.

. . .

Renwick Haddow, 54, pled guilty pursuant to a cooperation agreement on May 23, 2019, to one count each of wire fraud and wire fraud conspiracy relating to the Bar Works scheme and one count each of wire fraud and wire fraud conspiracy relating to a separate Bitcoin-related investment scheme.  Haddow's sentencing is currently scheduled for April 28, 2023, before United States District Judge Laura Taylor Swain.

James Moore, 62, was found guilty on June 7, 2019, of wire fraud and conspiracy to commit wire fraud following a week-long jury trial before United States District Judge Richard M. Berman.  On February 1, 2022, Moore was sentenced to 140 months in prison by Judge Berman.

Savraj Gata-Aura, 36, pled guilty on November 18, 2019, to one count of wire fraud conspiracy for his participation in the scheme and was sentenced to 48 months in prison on July 27, 2020, by United States District Judge Jed. S. Rakoff.

[B]etween approximately September 2015 and July 2016, Robinson and Kennedy raised over $7.5 million from over 100 investors in the fraudulent scheme. The complaint further asserts that Robinson and Kennedy recruited a network of sales agents to sell investments in co-working spaces operated by Bar Works, Inc. and Bar Works 7th Avenue, Inc. using false and misleading offering materials. According to the SEC's complaint, the materials falsely touted the background of Bar Works' purported CEO, "Jonathan Black," and omitted any mention of Renwick Haddow, the actual individual controlling the entities. According to the complaint, Robinson and Kennedy knew that "Black" was fictitious, that Haddow secretly ran the Bar Works companies, and that Haddow had previously been charged by the United Kingdom's securities regulator for an unrelated investment scheme. In return for their roles in the Bar Works scheme, Robinson and Kennedy, through a company they jointly owned called United Property Group, received at least $2 million from Haddow and the Bar Works companies.

The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, charges Robinson and Kennedy with violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder. The complaint also charges Robinson and Kennedy with aiding and abetting Haddow's and the Bar Works companies' violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. The SEC previously charged Haddow and the Bar Works companies with violating the antifraud provisions of the federal securities laws. On September 10, 2019, the District Court for the Southern District of New York entered a judgment against Haddow, permanently enjoining him from future violations of the securities laws, and leaving open monetary relief to be determined at a later date. In a separate administrative proceeding, instituted on November 22, 2019, Haddow agreed to be barred from the securities industry.

[F]rom at least 2018 through June 2020, Rogas falsified NS8's revenue figures and, in multiple securities offerings, provided investors and potential investors with false financial information.

The amended complaint alleges that in August 2019, Rogas limited an NS8 employee's access to NS8's systems in an attempt to impede the employee from communicating directly with the SEC staff, and ultimately retaliated against the employee by firing him.

The amended complaint also alleges that Korol participated in and helped perpetrate the fraud. According to the amended complaint, Korol was aware that revenue numbers used by NS8 and provided to investors were falsified. Despite this, between late 2018 and mid-2019, Korol allegedly solicited numerous potential investors for NS8. Further, the amended complaint alleges that in August 2019, Korol and Rogas devised a scheme for Korol to offload his shares in NS8 in a transaction funded by a third-party investor. Korol allegedly earned approximately $6.22 million from the transaction.

The SEC's amended complaint charges Rogas with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), as well as Rule 10b-5 thereunder. It also charges Rogas with violating whistleblower protections in Exchange Act Rule 21F-17 and with aiding and abetting NS8's violation of Section 21F(h) of the Exchange Act. Finally, it charges Korol with violating Sections 17(a)(1) and (3) of the Securities Act, and Section 10(b) of the Exchange Act, as well as Rules 10b-5(a) and (c) thereunder. Korol is also charged with aiding and abetting Rogas' violations of Sections 17(a)(1) and (3) of the Securities Act, and Section 10(b) of the Exchange Act, as well as Rule 10b-5 thereunder. The SEC seeks injunctions, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and officer and director bars.

[F]rom approximately December 2017 through April 2019, Spence, at times as Coin Signals, operated a Ponzi scheme in which he fraudulently solicited and obtained more than $5 million of digital assets such as bitcoin and ether from customers. Spence's trading resulted in significant trading losses and, as in all Ponzi schemes, his payouts of supposed profits to customers were actually misappropriated funds from other customers. The order also found that Spence engaged in numerous efforts to conceal his misconduct, including misrepresenting his trading profitability and the amount of assets he had under management, misappropriating customer funds, and issuing false performance statements. According to the order, Spence eventually admitted to customers that he had engaged in "lies and deceit."

. . . 

In a separate action, the U.S. Attorney's Office for the Southern District of New York filed a criminal complaint against Spence on January 26, 2021, charging him with one count of commodities fraud in violation of the CEA and CFTC regulations and one count of wire fraud. United States v. Jeremy Spence, No. 1:21-cr-00116 (S.D.N.Y.). Spence was subsequently indicted on those charges.  Spence pled guilty to commodities fraud under the CEA and CFTC regulations and was sentenced on May 11, 2022 to 42 months of incarceration and three years of supervised release. He was also ordered to pay restitution of $2,847,743. 

Over the last several months, and with increasing escalation in recent weeks, liquidity crises and a lack of responsible governance at cryptocurrency exchanges and other prominent crypto-intermediaries have roiled the digital asset ecosystem. A series of bankruptcy filings reveals a grim portrait of some of the most egregious corporate governance and risk management failures in recent financial markets history.[1] All too often, the details reveal little, if any, attempt to effectuate even minimal corporate governance through board oversight; management remarkably characterized by dereliction of duty; staggering, undisclosed conflicts of interest; commingling of customer funds with the proprietary assets of trading firms or related entities; lending or reinvestment of customer funds in highly risky asset classes; no evidence of audited financial statements; and sophisticated Ocean's Eleven cyber-heists as well as traditional garden variety-styled fraud.[2]

Five years ago, concerned that events like these might unfold in our markets, on our shores, or across multiple jurisdictions, I began to raise alarms. As I previously warned, "infrastructure challenges, consumer protection concerns, mismanagement, misconduct, fraud, market manipulation, and predatory trading tactics" throughout the crypto-ecosystem may present a clear and present danger for customers and creditors and, depending on correlations and the creep of contagion, threaten the integrity of traditional financial markets.[3]

As we unravel the tangled web of interconnected financial transactions and relationships among cryptocurrency trading platforms facing liquidity crises, we should anticipate a season of mergers, acquisitions, and consolidation. It will be important to consider not only the effects of contagion among related entities, but the importance of due diligence and related acquisition processes. We must ensure effective competition among the robust, resilient, well-supervised, exchanges and intermediaries that operate in the cryptocurrency ecosystem. 

The events that we have witnessed should encourage us to take two steps with all deliberate speed. First, I have continuously advocated internally and externally for the Commodity Futures Trading Commission (CFTC) to use our existing authority to further mitigate potential risks to all customer assets held by all current registrants or licensed participants operating in our markets, as well as prospective registrants.[4] We have, in the context of certain regulated market activities, carefully crafted customer protections that require the segregation of customer assets. Beyond relying on fraud and market manipulation enforcement actions, we should explore ways to ensure that these rules apply in the context of proposed alternative market structures as well. Such efforts would close a regulatory gap and ensure a parallel standard applies to segregation of custodied customer assets or customer property in all contexts. Second, I am hopeful that Congress will identify a whole-of-government approach to ensure that we prevent schemes that rely on regulatory arbitrage or take advantage of the regulatory gap that currently limits our visibility into digital asset trading markets and stymies our ability to adopt rules necessary to effectuate our mission in these markets - to protect customers, ensure market integrity, and foster fair, orderly, and transparent markets.

I note that today we see an illustration of one more instance of the CFTC's best efforts to use our existing authority to protect customers. Today, the CFTC announced the entry of a consent order for permanent injunction and other equitable relief against Defendant Jeremy Spence ("Consent Order") by the Hon. John G. Koeltl of the United States District Court for the Southern District of New York. Specifically, the Consent Order finds that, from approximately December 2017 to April 2019, Spence operated a digital Ponzi scheme under the name "Coin Signals" designed to defraud cryptocurrency investors. Spence's scheme captured more than $5 million in cryptocurrencies from approximately 175 user accounts.

Spence enticed customers using various social media platforms and touting an engineered trading record, imagined list of assets under management, and creatively crafted description of highly profitable returns. Through his duplicity, Spence was able to rack up significant trading losses. Consistent with Charles Ponzi's original, old-school scheme Spence distributed current customer funds to newly solicited investors describing the same as "profits."

I want to recognize the hard work of the Division of Enforcement expressly. I also want to commend the Division staff for bringing this action, including Elizabeth Brennan, Brent Tomer, Lenel Hickson, Jr., and the Office of the General Counsel.

While Spence's prison term will limit his ability to continue this scheme, other bad actors stand ready, willing, and able to take his place and prey on victims' hopes and fears. Accordingly, I strongly encourage members of the public to stay informed about the potential scams and abuses in the digital assets markets by visiting our investor advisory page.[5]

[1] See In re FTX Trading Ltd., No. 22-BK-11068 (Bankr. D. Del.); In re BlockFi Inc., No. 22-BK-19361 (Bankr. D.N.J.); In re Celsius Network LLC, No. 22-BK-10964 (Bankr. S.D.N.Y.); In re Three Arrows Capital, Ltd., No. 22-BK-10920 (Bankr. S.D.N.Y.); In re Voyager Digital Ltd., No. 22-BK-10944 (Bankr. S.D.N.Y.); see also David Yaffe-Bellany & Erin Griffith, How a Trash-Talking Crypto Founder Caused a $40 Billion Crash, N.Y. Times, May 18, 2022 (describing the crash of the TerraUSD Luna stablecoin pair).

[2] See, e.g., Declaration of John J. Ray III in Support of Chapter 11 Petitions and First Day Pleadings at ¶ 5, In re FTX Trading Ltd., No. 22-BK-11068 (Bankr. D. Del. Nov. 17, 2022), ECF No. 24 ("Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.").

[3] See e.g.,Kristin N. Johnson, Regulating Cryptocurrency Secondary Mkt. Trading Platforms, 1/8/2020 U. Chi. L. Rev. Online 1 (2020); https://lawreviewblog.uchicago.edu/2020/01/07/298/, 

Kristin N. Johnson, Disintermediation and Decentralization in Fin. Mkts., Regul. Rev., May 4, 2021, https://www.theregreview.org/2021/05/04/johnson-disintermediation-decentralization-financial-markets/.   

[4] Kristin N. Johnson, Commissioner, CFTC, Keynote Address at the Stanford Crypto Policy Conference (Nov. 15, 2022); Kristin N. Johnson, Commissioner, CFTC, Keynote Address at the 2022 Federal Reserve Bank of Chicago Financial Markets Group Fall Conference on Innovation in Trade Execution, Governance, and Post-Trade Clearing and Settlement of Exchange Traded and Centrally Cleared Products (Nov. 16, 2022).

[5] See, CFTC Customer Advisory: Be Alert and Share Information to Help Seniors Avoid Fraud (issued June 15, 2022); CFTC Customer Advisory: Avoid Forex, Precious Metals, and Digital Asset Romance Scams (issued Feb. 2, 2022); CFTC Investor Alert: Watch Out for Fraudulent Digital Asset and "Crypto" Trading Websites (issued Apr. 26, 2019); CFTC Customer Advisory: Use Caution When Buying Digital Coins or Tokens (issued July 16, 2018); CFTC Customer Advisory: Beware Virtual Currency Pump-and-Dump Schemes (issued Feb. 15, 2018); CFTC Customer Advisory: Beware "IRS Approved" Virtual Currency IRAs (issued Feb. 2, 2018); and CFTC Customer Advisory: Understand the Risks of Virtual Currency Trading (issued Dec. 15, 2017), available https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/index.htm.

On July 10, 2017, GPB Capital filed a lawsuit in New York against one of its former operating partners who had allegedly failed to acquire certain automotive dealership interests (the New York Litigation). In connection with the New York Litigation, the former partner asserted various counterclaims against GPB Capital and alleged that GPB Capital had falsified financial statements to conceal that GPB Capital was defrauding its investors. GPB Capital denied the former partner's allegations and the litigation remains pending. 

On April 27, 2018, GPB Capital released what it characterized as important updates regarding the audited financial statements for certain of its limited partnerships, including Automotive Portfolio. The letters, which were sent to certain individuals at the brokerdealers that sold GPB Capital-related investments, including representatives at FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial, stated that GPB Capital was in the process of registering certain classes of securities issued by certain of the limited partnerships, including Automotive Portfolio, with the SEC. As part of that process, Automotive Portfolio was required to file audited financial statements. The letters further stated that the delivery of Automotive Portfolio's audited financial statements (which were due to be filed by April 30, 2018) would be delayed pending the completion of a forensic audit. Specifically, GPB Capital disclosed that it and its auditors "determined that it would be prudent to hire a third-party firm to complete a forensic audit in order to endeavor to put [the former partner's] counterclaims and other allegations to rest." The offering documents for Automotive Portfolio were not timely amended to disclose that the partnership would be delayed in filing its audited financial statements with the SEC. 

While representatives at FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial received the letter from GPB Capital notifying them of the delays and GPB Capital's stated intention to complete a forensic audit, FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial sold limited partnership interests in Automotive Portfolio after that announcement. FSC Securities made 60 sales with a total principal amount of $4,265,890, earning $298,612 in commissions. Royal Alliance made 32 sales with a total principal amount of $2,450,000, earning $171,500 in commissions. SagePoint Financial made 56 sales with a total principal amount of $4,951,546, earning $343,308 in commissions. Woodbury Financial made 55 sales with a total principal amount of $4,638,928, earning $324,725 in commissions.

In connection with these sales, however, the firms' representatives did not inform the customers that Automotive Portfolio had not timely filed its audited financial statements with the SEC or the reasons for the delay. The delay in filing audited financial statements was material information that should have been disclosed.3 

By negligently omitting material facts, FSC Securities, Royal Alliance, SagePoint Financial, and Woodbury Financial each violated FINRA Rule 2010. 

= = =

Footnote 3: In February 2021, the SEC filed a complaint against GPB Capital and other defendants alleging, among other things, that the defendants engaged in securities fraud in violation of Section 1 0(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. (Case No. 1:2l-cv-00583, E.D.N.Y.). The United States Department of Justice also brought criminal charges against GPB Capital's founder and CEO and two other executives, charging, among other things, securities fraud, mail fraud and wire fraud. (Case No. 1:21-cr-54, E.D.N.Y.).

Between August 2019 and May 2021, while he was associated with J.P. Morgan, Gordon operated an insurance business. During that time, Gordon serviced insurance policies on behalf of his customers and he received compensation of approximately $33,000 from the business. Gordon also applied for and received a loan in connection with his insurance business. 

The above-described business activity was outside the scope of Gordon's relationship with J.P. Morgan. Gordon did not provide prior notice to J.P. Morgan, written or otherwise, of his involvement in his outside business activity when he associated with the firm in August 2019. In approximately December 2019, Gordon notified his manager at J.P. Morgan that he was operating an insurance business, and the firm told him that he was not allowed to do so. Nonetheless, Gordon continued to operate his insurance business, including collecting compensation, until J.P. Morgan terminated his employment in May 2021. 

Therefore, Gordon violated FINRA Rules 3270 and 2010.  

Between January 2016 and November 2019, Langer maintained a public Facebook page for an investment club he operated. Langer authored 20 posts on the Facebook page regarding the performance, investment returns, industry standing, and purported successes of the investment club and a separate hedge fund at which Langer traded.⁵ 

For example, on January 9, 2018, Langer posted: "Good Day to all! Hope everyone had a wonderful Holiday season and wishing everyone a healthy and happy 2018 ! We did it yet again! #2 top performing options hedge fund for November 2017, 1.93% return. With a year to date return on invest of29.12% We still remain the Top performing options Hedge fund in 2017 ! ! i can tell you that December record breaking return(to be released in 2 weeks) put us over 34% return for 2017 making [Hedge Fund A] the #1 options strategy hedge fund on the street for 2017,, That's back to back years we took # 1 best performing options strategy hedge fund on the Planet ! ! interested in putting your money to work for you? Ask us." 

Similarly, on November 13, 2019, Langer posted: "Good afternoon all, I'm extremely pleased to announce Our monthly performance for September 2019 . [Hedge Fund A] took 3rd place for an options hedge fund with a monthly return of 2. 79%. and with that, we are currently the TOP performing options strategy hedge Fund on the street. Our 2019 YTD return of 35.38% is over 100% higher than the second best performing options fund as we have beat the S&P every year since our 2015 inception! Who has your best interests in mind,? WE DO !" 

Likewise, on May 22, 2018, Langer posted: "Good Day All ! we are extremely please to announce that April 2018 was the Best monthly % return for [Investment Club X] since its inception in Feb of2013,, we have now just reached over 10%for the 2018 IT'D , while the S&P and DOW are floundering about flat for the year .......... ,,, whos got your best interest in mind all the time? WE DO, have questions? just ask. !" 

These posts, in part, did not provide a sound basis for evaluating the claims Langer made about the investment club and hedge fund, as required by FINRA Rule 2210(d)(l)(A). The 20 posts made only positive claims about the prospects and performance of the investment club and hedge fund, but did not explain any of the risks associated with investing with these entities. 

Langer made eleven posts that were options-related (nine of the 20 posts, and an additional two posts), but his posts failed to reflect the risks attendant to options transactions, and failed to include a warning that options are not suitable for all investors, as required by FINRA Rule 2220(d)(2)(A). Langer's posts went beyond general  descriptions of the options being discussed by describing specific transactions or including performance,⁶ prior to delivery of an options disclosure document, in contravention of FINRA Rule 2220(d)(l)(A). Langer also did not obtain approval in advance for any of his options-related posts from a Registered Options Principal of the firm, as called for by FINRA Rule 2220(b)(l). Nor did he submit the posts to FINRA's Advertising Regulation Department at least ten days prior to use, as called for by FINRA Rule 2220(c(1 ). 

Therefore, Langer violated FINRA Rules 2210, 2220, and 2010.

= = =

Footnote 5:  Langer disclosed his involvement with the investment club and the hedge fund on an outside business activities questionnaire he submitted to Planner in November 2015, in connection with his hiring, which the firm approved.

Footnote 6: For example, Langer stated in an April I, 2016 post that "[issuer I J hype, had us selling puts-202.5 down to 185 puts yesterday for 6 - 33 cents, like shooting fish in a barrel!" 

At the hearing, Claimants requested: lost opportunity damages due to the unauthorized sale of NVDA shares after December 14, 2018, in the amount of $14,334,224.39; lost opportunity damages due to the unsuitable sale of NVDA shares after December 14, 2018, in the amount of $16,344,936.18; the sale and buy-back of 40,000 NVDA shares in the amount of $2,010,088.53; damages for the unauthorized transactions of opening NVDA option contracts in the amount of $5,623,610.55; damages for the unauthorized transactions of opening AAPL option contracts in the amount of $201,982.44; damages for the unauthorized transactions of opening CRM option contracts in the amount of $228,492.60; damages for the unauthorized transactions of opening MSFT option contracts in the amount of $46,934.49; lost opportunity damages due to the unauthorized sale of securities in the amount of $275,815.52; lost opportunity damages due to the sale of 20,000 shares of NVDA on August 17, 2021, in the amount of $15,227,967.68; and Florida Statutes section 517.211 Statutory Interest at the rate of 4.25%. 

The Code and Standards Applies to Financial Advice About Cryptocurrency-Related Assets A CFP® professional makes a commitment to CFP Board to satisfy the duties set forth in the Code and Standards, including the Duty of Competence and the Fiduciary Duty, when providing Financial Advice. Financial Advice includes "communications that, based on their content, context, and presentation, would reasonably be viewed as a recommendation to take or refrain from taking a particular course of action with respect to the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets." "Financial Assets" include "securities, insurance products, real estate, bank instruments, commodities contracts, derivative contracts, collectibles, or other financial products." Cryptocurrency-related assets are financial products that fall within CFP Board's definition of Financial Assets. Cryptocurrency-related assets may include, but are not limited to, cryptocurrency, cryptocurrency exchange-traded funds or mutual funds, cryptocurrency derivatives, and other assets, such as interests in business entities that primarily are focused on the provision of services related to cryptocurrency. Consequently, a CFP® professional's recommendation that a Client invest in, purchase, hold, gift, or sell cryptocurrency-related assets is Financial Advice that is subject to the Fiduciary Duty set forth in CFP Board's Code and Standards, including the Duty of Care. Similarly, Financial Advice about cryptocurrency-related assets is included within the definition of "Professional Services," which must be provided in accordance with the Duty of Competence set forth in CFP Board's Code and Standards. A CFP® professional must be competent to provide Financial Advice about cryptocurrency-related assets and must consider the particular attributes and heightened risks that these assets present when providing Financial Advice about cryptocurrency-related assets. 

1. Plaintiff Virtu Financial, Inc. ("Virtu") by and through its undersigned counsel, Paul, Weiss, Rifkind, Wharton & Garrison LLP ("Plaintiff's counsel"), brings this action under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552, based on the wholesale failure by Defendant, United States Securities and Exchange Commission ("SEC" or the "agency"), to provide a prompt and reasonable response to a FOIA request submitted on behalf of Virtu. Remarkably, more than five months after submission of the request, Defendant has failed to produce a single responsive document, even though such documents plainly exist. 

2. By way of background, SEC Chair Gary Gensler has directed staff to develop new rules concerning retail stock order handling and execution. See, e.g., Chair Gary Gensler, "Market Structure and the Retail Investor": Remarks Before the Piper Sandler Global Exchange Conference, U.S. Securities and Exchange Commission (June 8, 2022), . The type of rules described by Chair Gensler are likely to bring sweeping changes to the routing and processing of retail stock trades, with enormous consequences for investors and other market participants. The changes described will significantly impede, among other things the quality of execution, the no-commission trading ecosystem presently available to retail investors and other benefits realized by investors based on the current U.S. market structure. 

3. Virtu is a leading global market maker with a significant interest in ensuring the success and efficiency of the retail securities market structure in the United States. In order to determine whether the national securities market rulemaking process has involved an appropriate evaluation of investor and market risks, whether the SEC has solicited input from sufficiently broad and informed sources and whether there has been a bias in the rule development process, Plaintiff's counsel served a FOIA request on the SEC in June 2022 on behalf of Virtu. That request sought, among other things, communications between senior members of the SEC Staff and various third-party stakeholders involved in the retail stock trading structure. Plaintiff's purpose in seeking that information is to better understand the rulemaking process in advance of the public comment period on whatever proposed rules the agency promulgates-rules that may be announced as soon as December 14, 2022, according to press reports. 

4. To date, however, Defendant has failed to provide a single document in response to this request, even though such materials plainly exist. Indeed, the failure by the agency to provide responsive materials is particularly alarming because it is clear that the SEC has met with select constituencies, including national stock exchanges and others that stand to benefit financially from the proposals being described by SEC staff. The FOIA request included, as Appendix A, a list of meetings with these constituencies on Chair Gensler's publicly available calendar from April 19, 2021, through March 31, 2022. (Undoubtedly, there have been other meetings since March 2022; however, upon information and belief, the Chair inexplicably stopped publicly releasing his calendar of meetings in June 2022.) The entries in Appendix A show repeated and extensive interactions between Chair Gensler and national stock exchanges. In contrast, the agency has accepted only very limited input from investors and other national securities market participants that are likely to be adversely affected by the forthcoming rules. 

5. Plaintiff seeks to contribute to the rulemaking process in a productive manner by filing comments and engaging with the staff during the forthcoming public comment periods. Among other things, Plaintiff seeks to ensure that the rulemaking process has appropriately weighed the costs and benefits of potential rule changes, including investor and market risks. Plaintiff further seeks to determine whether the agency has received input from sufficiently diverse and informed sources. And Plaintiff seeks to confirm whether there has been impermissible bias in the rulemaking process. 

6. In the five months since submission of the FOIA request, Plaintiff's counsel repeatedly has inquired as to the status of the request and, at the request of the SEC, has narrowed the request in a good-faith effort to expedite Defendant's search and production. Still, no documents have been produced by Defendant. 

7. Defendant's continued delay raises a significant concern that it is engaged in gamesmanship. Proposed rules are expected within weeks according to media reports. See Charles Gasparino, @CGasparino, Twitter (Nov. 21, 2022, 11:38 AM), ; Katherine Doherty and Lydia Beyoud, SEC to Push Bond and Option Brokers for Better Prices on Trades, Bloomberg (Nov. 23, 2022) . Because of Defendant's continuing delay in providing responsive materials, it now appears likely that Plaintiff will not receive responsive materials until after proposed rules already have been announced.

8. Defendant should not be permitted to evade production of responsive materials, until Plaintiff's ability to comment effectively on the proposed rules has expired. The need to have the requested information promptly is particularly acute given Defendant's recent and frequent practice of using short comment periods for newly-proposed rules, which severely limits the public's ability to provide meaningful responses to proposed rules. See, e.g., Commissioner Mark T. Uyeda, Statement on the Final Rule Related to Listing Standards for Recovery of Erroneously Awarded Compensation, U.S. Securities and Exchange Commission (Oct. 26, 2022), ; Commissioner Hester M. Peirce, Exclusion Preclusion: Statement on the Shareholder Proposals Proposal, U.S. Securities and Exchange Commission (July 13, 2022), . 

9. As demonstrated below, Defendant has engaged in a clear pattern of stonewalling and evasion in response to this FOIA request. 

10. National securities market participants and retail investors deserve information about the rulemaking process, including the sources of information received by the agency and the possibility of bias. Without that information, interested parties will be hamstrung in their ability to comment on the proposed rules, including the agency's weighing of the risks to investors and the market. 

11. To that end, Plaintiff seeks declaratory and injunctive relief to ensure that Defendant produces all responsive, non-exempt documents without further delay. 

[B]etween June and October 2019, Yang and Chen repeatedly purchased call or put options of publicly traded companies hours before public announcements that those companies would be added to, or removed from, popular stock market indices, which Yang learned through his employment. When the options increased in value after the announcements, Yang and Chen allegedly liquidated their options positions, generating approximately $912,082 in illicit profits. As alleged in the complaint, the defendants used Chen's brokerage account to conceal the trading from Yang's employer, which required disclosure of all employee brokerage accounts.

The final judgments against Yang and Chen permanently enjoin each of them from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and order Chen to pay a $246,000 civil monetary penalty.

In July 2022, in a parallel criminal action by the U.S. Attorney's Office for the Eastern District of New York, the Court sentenced Yang to time served followed by one year of supervised release, three months of home detention, 100 hours of community service, mandatory financial disclosures to the Department of Probation, and a $100 special assessment. The Court also entered a forfeiture order against Yang for $912,082.

Good afternoon.  It is a pleasure to join you in Singapore.  The capital markets between the United States and Asia share significant interlinks.  Today, I will present some perspectives on matters affecting the Asia-Pacific (APAC) region, reflecting my individual views as a Commissioner at the U.S. Securities and Exchange Commission.[1]  I also will provide an overview of certain regulatory developments in the United States. 

The Importance of Robust Capital Markets

In 1980, the famed economist Milton Friedman was invited here to deliver the Inaugural Singapore Lecture organized by the Institute of Southeast Asian Studies.[2]  At the time, Singapore had been an independent republic for only 15 years.  Dr. Friedman, in his remarks titled The Invisible Hand in Economics and Politics, observed that Singapore had "promoted a free market" and that "[t]hat free market has enabled Singapore to thrive."[3]

Forty years later, the prominence of Singapore in the global capital markets reflects the importance of its market-based approach to economic development.  Like the United States, the success of Singapore's economy can be tied in part to entrepreneurial spirit.  From the hawker stands to the largest corporations, a sense of economic opportunity drives so many to pursue their dreams and passions.  That is why start-up financing, capital formation, and risk are fundamental to a thriving economy.  Capital markets "help people with ideas become entrepreneurs and help small businesses grow into big companies."[4]

Capital markets also provide individuals and institutions with opportunities to invest.  While investments do not guarantee financial gain - and are always accompanied by the risk of loss - investments can produce greater returns than bank savings over the long run.  In the United States, the securities laws are designed to require public companies to disclose and report relevant financial information necessary to make an informed investment decision.  Rather than eliminating risk, these requirements empower investors to make their own determinations on risk tolerance in pursuit of potential financial return.  Additionally, the U.S. securities laws regulate asset managers and pooled investment vehicles in a manner designed to mitigate potential conflicts of interest while permitting investors to choose a risk-return profile from a wide variety of investment strategies.   

When individuals and institutions seek to limit risk, they often turn to banking products, such as savings accounts and certificates of deposits.  As a tradeoff for this safety, these products offer returns far lower than what a successful investment might offer.  Accordingly, instead of the disclosure regime set forth in the securities laws, banking organizations and their products are subject to prudential regulation, which primarily aims to ensure safety and soundness.

A healthy economy provides opportunities from both a vibrant capital market and a robust banking sector.  Regulators should avoid directing the manner in which market participants allocate their capital among these options.  Importantly, regulators should recognize that risk is an inherent - and necessary - component of properly functioning capital markets.  The application of prudential-like regulations to the capital markets not only hurts businesses and investors, but leads to diminished economic growth, jobs creation, and innovation.

The Importance of the Asset Management Industry to Capital Markets

The role of the asset management industry in the capital markets has continued to increase over the years.  According to one report, global assets under management (AUM) reached $126 trillion in 2022, which represents 28% of global financial assets.[5]  This percentage is an increase from 23% a decade ago.[6]  In the United States alone, nearly 15,000 SEC-registered investment advisers provided asset management services to more than 64 million clients in 2021.[7]  Asset managers serve a broad range of clients, including individuals, pooled investment vehicles, and institutions. 

The asset management industry enables clients to have diversified portfolios at a relatively low cost.  Asset managers also offer expertise that enables clients to allocate capital in a sophisticated manner.  For example, while the average retail investor may not be in a position to review and analyze the lengthy financial disclosures and other information regarding the universe of potential investments, asset managers can do that.  This asset allocation function is crucial to the proper functioning of the capital markets.  Further, the ability to hire asset managers that specialize in specific sectors allows investors to fine tune portfolio risk-return exposures.    

The Growth of the APAC Market

Over the past couple of decades, APAC economies have experienced tremendous growth.  From 2000 to 2021, total gross domestic product (GDP) in the APAC region increased from $9 trillion to $35 trillion.[8]  The total GDP of the APAC region now accounts for roughly 37% of world GDP.[9]  In tandem with this growth, the average annual amount of equity capital raised by Asian companies through initial public offerings (IPOs) increased from $46 billion during the period 2000 - 2008 to $67 billion during the period 2009 - 2018.[10]  This contrasts with a decrease in the amount of equity capital raised by U.S. and European companies through IPOs during comparable periods.[11]  Through the third quarter of 2022, Singapore, Japan, Hong Kong and China collectively account for over 20% of global equity market capitalization.[12]

The future outlook for the APAC region remains largely optimistic.  One recent survey of capital markets participants in selected APAC markets reveals that a majority intend to continue to expand their business presence in the region.[13]  However, despite their plans for future growth in the APAC region, certain survey respondents cited some headwinds - including the regulatory environment - as emerging challenges over the next three years.[14] 

The Importance of Effective Regulation

The development and implementation of effective regulations can provide the APAC region with further opportunities for growth.  On the one hand, there is the U.S. model, which has proven to be historically successful in regulating the capital markets.  In the United States, a disclosure-based regulatory regime allows investors to reach their own decisions on how to allocate capital.  To the extent that investors hire asset managers to make investment decisions on their behalf, federal statutes address the potential conflicts that those arrangements might create.[15]  Importantly, the U.S. securities laws are not designed to limit the freedom of investment decision or opportunities for risk-taking in pursuit of potential returns.

On the other hand, some policymakers advocate for subjecting the capital markets to more prudential regulation.  In April 2009, the G-20 established the Financial Stability Board (FSB) with a mandate to "[promote] international financial stability."[16]  Empowered by this broad mandate, the FSB has issued policy recommendations to ensure that "the structure of asset managers and their funds…does not contribute to undue risk in the global financial system."[17]   These recommendations address supposed vulnerabilities, such as: (1) the liquidity mismatch between portfolio holdings and redemption terms and conditions for open-ended funds, (2) leverage within investment funds, (3) operational risk and challenges at asset managers in stressed conditions, and (4) securities lending activities of asset managers and funds.[18] 

The FSB consists mostly of banking regulators and finance ministry officials.[19]  Its policy posture can reflect the viewpoints of prudential regulators who often do not appreciate how asset management differs from banking.  To the FSB, any market-based financial activity outside of the banking system is a form of "shadow banking" that potentially poses systemic risks justifying the imposition of bank-like regulations on non-bank entities.[20]  As one witness testified during a U.S. Senate hearing on the role of the FSB, "it is a good thing to have capital markets as well as banks. It is a good thing to have lively risk taking as well as lending."[21]  Unlike banks, the ability of U.S. mutual funds and ETFs to use leverage is limited by statute, and asset managers who manage those funds act as agents rather than principals.  The result is that investment risk is spread among the millions of individuals that comprise the investing public.  One industry group remarked that "the systemic risk concerns specific to the asset management industry are misplaced and may reflect a lack of understanding regarding the ways that this industry differs from other financial services industries, such as the banking industry."[22]

Perhaps the FSB's misplaced recommendations about capital markets can be attributed to the fact that the FSB is disproportionately influenced by European prudential regulators.  Not only are European members represented at the national level, but also through European supranational entities, such as the European Central Bank and the European Commission.[23]  On the FSB's steering committee, 20 individuals are from Europe as compared to eight from Asia and seven from North America.[24]  The outsized influence of Europe stands in stark contrast to the relative size of the European Union's (EU) economy and capital markets.  In fact, as of 2021, the GDP of the EU was just over $17 trillion, which is less than half the GDP of the APAC region.[25] 

Additionally, with a market representing only 9.1% of the global equity market capitalization, the EU's equity markets are less than half the size of the combined equity markets of China, Japan, Hong Kong, and Singapore.[26]  Of the 2,700 global IPOs in 2021, less than 12% were in the EU, while more than 60% were in the U.S. and Asia.[27]

As of the Third Quarter of 2022, Source: SIFMA[28]

The limitations on risk-taking within the EU are embedded in regulations, as EU investment firms are subject to prudential rules that "aim to ensure that [they] have sufficient resources to cover potential losses from their activities."[29]  According to the EU, this "reduces the risk of the failure of those firms and hence the risk of undue economic harm to their customers or disruption in markets they operate in."[30]  But limitations on risk also mean limiting the potential to participate in the upside.

The FSB has committed to working jointly with the International Organization of Securities Commissions (IOSCO) in forming recommendations affecting the capital markets.  IOSCO is comprised of securities regulators around the world.  IOSCO's expertise in securities regulation is an important and necessary counterpoint to the FSB perspective.  On November 10, 2022, the FSB released a report that describes progress over the past year and planned work by the FSB to enhance the resilience of non-bank financial intermediation.[31]  The report notes that the FSB, in consultation with IOSCO, plans to revise certain policy recommendations regarding asset managers and investment funds due to "new insights into liquidity management challenges" that have come to light.[32]  Given the track record of the FSB favoring a prudential regulatory regime - even after consulting with IOSCO - I would encourage serious consideration of the report's disclaimer that the FSB's "activities, including any decisions reached in their context, shall not be binding or give rise to any legal rights or obligations."[33]

Current U.S. Regulatory Matters

Perhaps the strongest evidence that prudential regulation of asset managers is unnecessary is the effectiveness of the regulatory framework developed in the United States.  Two federal statutes - the Investment Advisers Act of 1940 (Advisers Act) and the Investment Company Act of 1940 (Investment Company Act) - have contributed to the growth of a thriving independent asset management industry.  These statutes regulate the investment advisers that manage other people's money and the pooled investment vehicles that they operate.  This regulatory framework strikes a balance between investor protection and the freedom to take on risk.

The Advisers Act largely relies on a disclosure framework to ensure that clients of investment advisers are empowered to make informed decisions.  However, recognizing the unique conflicts of interest that an investment adviser might face when managing a pooled investment vehicle, the Investment Company Act goes beyond a disclosure framework by imposing certain substantive requirements on the operation of investment companies.  These requirements govern areas such as the valuation of fund assets,[34] advisory contract approvals,[35] and transactions with affiliates.[36]  The Investment Company Act also limits a fund's ability to use leverage[37] or invest in illiquid assets.[38]  Taken together, these protections address the risks that the FSB cites when it calls for prudential regulation of the asset management space.    

Whether the Commission might deviate from its historic - and successful - approach is a concern.  The Commission currently is in the midst of an ambitious rulemaking agenda.  Many of the recently-proposed rules are geared toward the asset management industry.  One proposed rule would seek to enhance how funds manage their liquidity risks.[39]  The rule would introduce entirely new requirements to the operation of mutual funds, including the use of swing pricing and the institution of a hard close for purchases and redemptions of fund shares at 4:00 pm Eastern time.  While I support the notion that funds should have sufficient liquidity and must be resilient at all times, particularly during market stress, I have strong reservations whether the proposed requirements, which appear very prescriptive and costly, would effectively address such concerns.  Nonetheless, I did appreciate the alternatives to the proposed requirements that were discussed, including redemption fees, dual pricing, and alternatives to a hard 4:00 pm close. 

Another proposal would impose disclosure requirements on investment advisers and investment companies that market themselves on environmental, social, and governance (ESG) factors.[40]  Among other things, the rule would require specific disclosure requirements regarding ESG strategies.  Certain environmentally focused funds would be required to disclose the greenhouse gas emissions associated with their portfolio holdings.  A separate proposal would bring the term "ESG" under the purview of Rule 35d-1 under the Investment Company Act, which is known as the "names rule."[41]  Under the names rule, a fund must invest at least 80% of its assets in the investment focus suggested by the fund's name.[42] 

The federal securities laws already require investment advisers to disclose accurate information about how they invest client assets.  I question the need to adopt unique, highly-prescriptive disclosure requirements specifically targeted at ESG investment strategies.  The current rules appear to provide the Commission with sufficient authority to bring enforcement actions against investment advisers that engage in "greenwashing" by marketing products as ESG-focused without incorporating ESG into their investment strategies.

For example, this past May, the Commission brought an enforcement action against an investment adviser for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed.[43]  Any adviser that materially misstates its investment strategies already violates the law, and the Commission has the authority and resources to address that misconduct.  Given that, the overlay of specific ESG disclosure requirements appears to solve for a problem that is already sufficiently addressed by the Advisers Act and the Investment Company Act.

Nevertheless, I appreciate the discussions that have been prompted by these proposals.  However, it is important that the United States maintains a gold-standard regulatory framework that both fosters capital formation and protects investors.

Conclusion

It has been a pleasure to speak to you today in Singapore, a country that exemplifies the potential that is unleashed with the proper combination of free markets, international trade, and the rule of law.  Due to these factors, Singapore is well-positioned to contribute significantly to the growth of the capital markets in the APAC region. 

Many exciting developments are already underway.  For example, I note that the Singapore Exchange recently joined Euroclear Bank's exchange-traded fund ecosystem.  This partnership resulted in a significant milestone: the first cross-listing of a UCITS international exchange-traded fund on both the Hong Kong and Singapore exchanges.[44]  Singapore can unleash even further potential in the years and decades to come.    

Thank you.

[1] As a reminder, my remarks today reflect solely my individual views as a Commissioner and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

[2] See, The Invisible Hand in Economics and Politics, Milton Friedman (Oct. 14, 1980), available at https://miltonfriedman.hoover.org/internal/media/dispatcher/271090/full

[3] Id. at 4.

[4] See Understanding Capital Markets, Federal Reserve Bank of St. Louis, available at https://www.stlouisfed.org/education/tools-for-enhancing-the-stock-market-game-invest-it-forward/episode-1-understanding-capital-markets.

[5] See The Great Reset: North American asset management in 2022, McKinsey & Company (Oct. 2022), available at https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/
our%20insights/the%20great%20reset%20north%20american%20asset
%20management%20in%202022/the-great-reset-north-american-asset
-management-in-2022.pdf.

[6] Id.

[7] See Investment Adviser Association Industry Snapshot 2022: Evolution Revolution Reimagined, 2nd Edition, available at https://investmentadviser.org/wp-content/uploads/2022/06/Snapshot2022.pdf.

[8] See The ascent of APAC in the global economy, S&P Global Market Intelligence (Aug. 16, 2022), available at https://www.spglobal.com/marketintelligence/en/mi/research-analysis/ascent-of-apac-in-the-global-economy.html.

[9] Id.

[10] See OECD Equity Market Review of Asia 2019, OECD Capital Market Series, available at https://www.oecd.org/corporate/ca/OECD-Equity-Market-Review-Asia-2019.pdf.

[11] Id.

[12] See Research Quarterly: Equities, Securities Industry and Financial Markets Association ("SIFMA") (Oct. 19, 2022), available at https://www.sifma.org/wp-content/uploads/2022/10/US-Research-Quarterly-Equity-2022-10-19-SIFMA.pdf.

[13] See ASIFMA 2022: Asia-Pacific Capital Markets Survey, Asia Securities Industry and Financial Markets Association, available at https://www.asifma.org/wp-content/uploads/2021/12/asifma-2022-apac-capital-markets-survey.pdf.

[14] Id. 

[15] For example, an investment adviser is prohibited from entering into transactions with its clients on a principal basis unless it can satisfy certain conditions that are designed to protect the client.  See Section 206(3) of the Investment Advisers Act of 1940.

[16] See About the FSB, available at https://www.fsb.org/about/.

[17] See Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities, Financial Stability Board (Jan. 12, 2017), available at https://www.fsb.org/wp-content/uploads/FSB-Policy-Recommendations-on-Asset-Management-Structural-Vulnerabilities.pdf.

[18] Id.

[19] See Members of the FSB, available at https://www.fsb.org/about/organisation-and-governance/members-of-the-financial-stability-board/.

[20] See, e.g., Assessment of shadow banking activities, risks and the adequacy of post-crisis policy tools to address financial stability concerns, Financial Stability Board (Jul. 3, 2017), available at https://www.fsb.org/wp-content/uploads/P300617-1.pdf.  ("[A] rise in assets held in certain investment funds has increased the risks from liquidity transformation, underscoring the importance of effective operationalisation and implementation of policies agreed to address this, in particular those to address structural vulnerabilities in asset management activities.")

[21] See Statement of Adam S. Posen, President, Peterson Institute for International Economics, The Role of the Financial Stability Board in the U.S. Regulatory Framework, Hearing Before the Committee on Banking, Housing, and Urban Affairs, United States Congress (Jul. 8, 2015), available at https://www.govinfo.gov/content/pkg/CHRG-114shrg97398/html/CHRG-114shrg97398.htm.

[22] See Regulation of the Asset Management/Advisory Industry, CFA Institute, available at https://www.cfainstitute.org/en/advocacy/issues/regulation-of-asset-management-advisory-industry#sort=%40pubbrowsedate%20descending.

[23] See Members of the FSB, supra note 19.

[24] Id.

[25] See GDP (current US$) - European Union, The World Bank, available at https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=EU.

[26] See SIFMA, supra note 12.

[27] See Capital markets union is key to a sovereign EU, Theodor Weimer, Financial Times (Feb. 25, 2022), available at https://www.ft.com/content/6b5008f0-d101-4ed5-9270-bae5c32d7389.

[28] See SIFMA, supra note 12.

[29] See Prudential rules for investment firms, European Commission, available at https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/financial-markets/prudential-rules-investment-firms_en.

[30] Id.

[31] See Enhancing the Resilience of Non-Bank Financial Intermediation: Progress Report, FSB (Nov. 10, 2022), available at https://www.fsb.org/wp-content/uploads/P101122.pdf.  

[32] Id.

[33] Id.

[34] See Section 2(a)(41) of the Investment Company Act.

[35] See Section 15 of the Investment Company Act.

[36] See Section 17 of the Investment Company Act.

[37] See Section 18 of the Investment Company Act.

[38] See Section 22(e) of the Investment Company Act and Rule 22e-4 under the Investment Company Act.

[39] See Open-End Fund Liquidity Programs and Swing Pricing; Form N-PORT Reporting, Release No. IC-34746 (Nov. 2, 2022), available at https://www.sec.gov/rules/proposed/2022/33-11130.pdf.

[40] See Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release No. IC-34594 (May 25, 2022) [87 FR 36654 (Jun. 17, 2022)], available at https://www.sec.gov/rules/proposed/2022/ia-6034.pdf.

[41] See Investment Company Names, Release No. IC-34593 (May 25, 2022) [87 FR 36594 (Jun. 17, 2022)], available at https://www.sec.gov/rules/proposed/2022/ic-34593.pdf.

[42] See Rule 35d-1 under the Investment Company Act.

[43] See BNY Mellon Investment Adviser, Inc., Release No. IC-34591 (May 23, 2022), available at https://www.sec.gov/litigation/admin/2022/ia-6032.pdf.

[44] See The first cross-listing of iETFs in Asia Pacific, Euroclear (Oct. 20, 2022), available at https://www.euroclear.com/newsandinsights/en/press/2022/2022-mr-16-eb-support-cross-listing-of-ietfs-in-asia.html.

[B]etween 2020 and August 2022, Matthew Thomas Onofrio, 31, of Eau Claire, devised and executed a scheme to defraud multiple federally-insured banks including MidCountry Bank headquartered in Bloomington. As part of his scheme, Onofrio operated a business entity called Northwoods Management LLC which he used to market a real estate investing program for investors to acquire commercial properties. Onofrio allegedly engaged in several fraudulent acts as part of the scheme, including causing false information to be submitted to lenders financing investors' real estate purchases and altering purchase agreements to support higher appraisals of the properties.  According to the indictment, Onofrio withheld information from the lenders, including the fact that he was lending money to the investors to help them purchase the properties and would temporarily wire funds to investors' accounts to create the appearance that they had more available assets than they in fact had. The charges seek forfeiture of more than $35 million seized in the investigation.

From at least 2019 until his arrest in April 2022, STOJANOVICH controlled various companies, including Chet Mining Co. LLC ("Chet Mining").  Starting in or about March 2019, STOJANOVICH engaged in a scheme to defraud people who were seeking to purchase Miners and Miner hosting services through which they expected to obtain "hash power" convertible into cryptocurrency and money.  STOJANOVICH defrauded these victims by falsely telling them that he would purchase, and had purchased, Miners on their behalf and that he would provide them with Miner hosting services and had already obtained such Miner hosting services for them.  

 

In total, STOJANOVICH fraudulently induced more than a dozen customer-victims to pay a total of more than $2 million to STOJANOVICH and his companies, ostensibly in return for Miners and Miner hosting services.  Despite fraudulent representations to the contrary, STOJANOVICH: (1) failed to provide many of the Miners that he told customers he had acquired; (2) failed to provide the Miner hosting services and cryptocurrency hash power that he represented he would provide; (3) employed deceptive practices to create the illusion that such Miners had been acquired and were being used to provide hash power to those customers; and (4) misappropriated his customers' funds and spent the funds on unrelated and personal expenditures, including chartered air flights, hotel rooms, limousines, and private parties.

 

Defrauding at Least 10 Victims in 2019

 

In the spring and early summer of 2019, STOJANOVICH fraudulently induced at least 10 customers to pay a total of more than $2 million to STOJANOVICH and Chet Mining in return for Miners and Miner hosting services.  Based on these and other misrepresentations, STOJANOVICH issued at least 15 invoices to these 10 victims with instructions to make payment to STOJANOVICH or one of his companies.  As directed by STOJANOVICH, these customers paid STOJANOVICH more than $2 million in bank wires and cryptocurrency transfers.  However, STOJANOVICH failed to provide the Miners and Miner hosting services that he had agreed to provide and for which he had been paid.

 

Defrauding Three More Victims in 2021

 

In or about August and September 2021, STOJANOVICH induced at least three additional customer-victims to pay him a total of approximately $179,880 as payment for a total of 127 Miners.  Ultimately, STOJANOVICH provided those customers with only three of the 127 Miners they had paid for and repaid those customers only approximately $61,000 of the $179,880 they had paid, mostly from funds misappropriated from another customer.

 

The March 2022 Deposition

 

Several of the victims of the scheme described in the Indictment brought lawsuits against STOJANOVICH in federal court in Manhattan.  In one such lawsuit, Holmes et al. v. Chet Mining, Chet Stojanovich, et ano., Case No. 20 Civ. 4448 (LJL) (S.D.N.Y.), STOJANOVICH was ordered by the court to appear for a deposition on March 4, 2022.  During that deposition, STOJANOVICH testified falsely on a number of subjects.  For example, in response to several questions, STOJANOVICH testified that he did not know the answers without looking in his personal cellphone and falsely testified that his phone was downstairs in his rental car or in storage.  The deposition was thereupon adjourned for a half-hour, and STOJANOVICH was instructed to retrieve his cellphone and return to the deposition.  Instead, STOJANOVICH left the deposition and loitered in the vicinity of his car until after everyone else participating in the deposition had left.  Shortly thereafter, he returned to Canada, where he resided until he was arrested on April 11, 2022, following his attempt to re-enter the United States.

[B]eginning in January 2005, David Wellington, 62, of Albuquerque, and his business partner Stacy Underwood, 51, of Albuquerque, operated National Business Services, which promoted, sold and created Limited Liability Companies (LLCs) under New Mexico State Law. For many clients, National Business Services would open bank accounts under the names and IRS employer identification numbers (EINs) of the LLCs, and the clients - whose names were not associated with the bank accounts - would have access to the funds in those accounts. Clients received debit cards, online bank access information and pre-signed checks with Underwood's signature, which clients could use to access the money despite the bank never associating the client with the account.

 

In his plea agreement, Shrock admitted that he contacted National Business Services in 2006 for help avoiding federal taxes by incorporating a business in New Mexico. Shrock spoke with Underwood and Wellington, and became a client of National Business Services.

 

Wellington and Underwood created three LLCs in New Mexico for Shrock: White Top Enterprise LLC; Poultry Enterprises LLC; and TALC Properties LLC. Shrock was not listed on the Articles of Organization. Instead, Underwood was listed as the "Organizer," and National Business Services was the initial registered agent for each of the three LLCs.

 

On May 9, 2011, Underwood opened a bank account in the business name of White Top Enterprise, LLC, utilizing the company EIN. Shrock's name was not on the signature card for the account. Underwood provided Shrock with online access to the bank account and a book of pre-signed checks with her signature. Between May 9, 2011, and June 30, 2015, Shrock caused approximately $4,875,940 to be deposited into the White Top Enterprise LLC bank account, and over the same time period, Shrock and his wife withdrew or caused the withdrawal of approximately $4,875,940. Among the withdrawals was a wire transfer of approximately $352,216 for the purchase of a home.

 

Prior to his indictment in this case on June 23, 2021, Shrock did not file a personal or business tax return with the IRS reporting the White Top Enterprises LLC income. At the time of the deposits and withdrawals, Shrock had a large outstanding IRS assessment for unpaid taxes, penalties and interest. Because it was not opened in his personal name, the White Top Enterprises LLC bank account enabled Shrock to generate and deposit income while evading the outstanding assessment and avoiding personal and business taxes on the income.

 

Wellington was arraigned on July 9, 2021, charged with conspiracy to defraud the United States and operation of an unlicensed money transmitting business. Wellington remains on conditions of release pending trial, which is scheduled for June 12, 2023. If convicted, Wellington faces up to 10 years in prison.

 

On Oct. 23, Underwood pleaded guilty to conspiracy to defraud the United States. Underwood is scheduled for sentencing on Jan. 30, 2023.

 

[S]ingh stole hundreds of thousands of dollars in U.S. Savings Bonds from an elderly woman for whom she provided home health services.  The victim had purchased the bonds for her grandchildren and other relatives.  After the victim died, Singh contacted Glen Campbell, also known as "Nick," who enlisted the help of another individual to redeem the stolen bonds at a financial institution and provide Singh and Campbell with a portion of the proceeds.  Between October 2020 and January 2021, as part of an undercover investigation, law enforcement coordinated the purchase of more than 100 savings bonds, with face values ranging from $50 to $1,000, from Singh and Campbell.  Campbell traveled to Connecticut to complete the transactions.

 

Singh and Campbell were arrested on January 29, 2021.  At the time of Singh's and Campbell's arrests, the value of the bonds they had delivered during the undercover investigation was $287,312.39.

 

In June and July 2021, Singh attempted to obstruct the investigation and prosecution of this matter by offering to pay a witness if he agreed to lie and provide false testimony.  Singh has been detained since August 4, 2021.  On August 19, 2022, she pleaded guilty to one count of conspiracy.

 

Campbell pleaded guilty to the same charge on June 15, 2022, and awaits sentencing.

 

Singh faces immigration proceedings when she completes her prison term.

[F]rom November 2017 to July 2018, Akinleye and his co-conspirators conspired to fraudulently obtain money from pension accounts held by members of the Pension Fund of the Christian Church and the Lutheran Church Extension Fund by impersonating those members. The funds provide pension and retirement systems for members of the religious community, including ministers. As part of the scheme, Akinleye and his co-conspirators obtained the names and personal identifying information of account holders, and then used that information to make withdrawals and transfers from the victim accounts to accounts the conspirators controlled. As a result of the scheme, Akinleye and his co-conspirators attempted to fraudulently obtain over $400,000 from the two funds.

The SEC's complaint, filed on May 22, 2020, alleged that BlackRock Multi-Sector Income Trust (BIT), a registered closed-end management investment company, invested approximately $75 million in Aviron Group LLC, a film distribution company Sadleir founded, owned, and operated. The complaint alleged that Sadleir represented that the investments would be used to support the company's distribution of films. Contrary to these representations, Sadleir allegedly used a sham company as a vehicle to fraudulently divert and misappropriate BIT funds and issued fake invoices seeking additional BIT funds for services that were never provided. Sadleir allegedly used the funds to pay personal expenses, including his purchase, furnishing, and renovation of a Beverly Hills mansion. In a parallel action, the U.S. Attorney's Office for the Southern District of New York filed criminal charges against Sadleir in connection with similar conduct. United States v. William Sadleir, No. 20-cr-0320 (S.D.N.Y. filed May 22, 2020).

 

On January 19, 2022, Sadleir pled guilty in the criminal matter, and on May 6, 2022, Sadleir consented to a partial judgment in the SEC matter in which he was permanently enjoined from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and enjoined from participating in the issuance, offer, or sale of any security, except in his own account.  The final judgment in the SEC matter orders Sadleir to pay disgorgement of $13,834,239 plus prejudgment interest of $3,979,140 for a total of $17,813,379, which shall be deemed satisfied by the restitution order entered against Sadleir in the criminal case. On September 9, 2022, the court in the criminal case sentenced Sadleir to 72 months in prison and ordered him to pay restitution of $31.6 million. On September 22, 2022, the court further ordered Sadleir to forfeit a Tesla he acquired from his misconduct.

In May 2021, FINRA's Department of Enforcement filed a nine-cause complaint against NYPPEX, Allen, and Schunk alleging a pattern of misconduct that followed a temporary restraining order issued against Allen and others in December 2018 by a New York state court. That order-issued after the New York Attorney General (NYAG) alleged that Allen was engaging in "fraudulent and deceptive practices arising out of [Allen's and others'] management and operation" of a private equity fund-preliminarily enjoined Allen from engaging in securities fraud and converting investor funds, among other activities.

 

Following an 11-day hearing, the panel ruled in favor of Enforcement on all nine causes of action of the complaint. Specifically, the panel found that, shortly after the December 2018 court order, NYPPEX and Allen launched an aggressive sales campaign to raise $10 million by selling interests in NYPPEX Holdings (NYPPEX's parent company). The panel concluded that during the campaign, NYPPEX and Allen committed securities fraud when they "intentionally or, at a minimum, recklessly" made material misstatements and omissions to prospective investors about NYPPEX Holdings' valuation and financial condition, the New York court's order against Allen, and the ongoing investigation by the NYAG into Allen and NYPPEX-affiliated entities, among other matters.

 

The panel also found that NYPPEX and Allen failed to cooperate with FINRA's investigation into their misconduct and that their "failure to comply completely was intentional, and part of a lengthy pattern throughout the investigation of flouting FINRA 8210 requests." (FINRA Rule 8210 requires registered firms and their associated persons to provide information orally, in writing, or electronically and to testify under oath on any matter involved in a FINRA investigation, complaint, examination, or proceeding.) In addition, the panel found that NYPPEX, Allen, and Schunk submitted a false and misleading response letter to FINRA in which they "attempted to deceive [FINRA] into mistakenly believing, among other things, that they had complied with regulatory requirements" when they had not.

The panel also found that:

 

• Although the December 2018 New York court order statutorily disqualified Allen, he improperly remained associated with NYPPEX, and during that time engaged in securities fraud;
  
  
• NYPPEX and Allen made false and misleading statements to investors during a March 2019 "webinar" and on NYPPEX's website. Allen repeated the false and misleading statements in an affidavit submitted to the New York court and to FINRA; and
  
  
• Schunk failed to reasonably supervise Allen, when he, "abdicated his supervisory responsibilities and rubber-stamped Allen's misconduct." This "lax approach to supervision. . . allowed Allen to act with impunity, leading to serious infractions of the federal securities laws."
  
  

NYPPEX, LLC is expelled from FINRA membership and Laurence Allen is barred from associating with any FINRA member firm in any capacity for responding untimely and incompletely to FINRA requests for information and documents. 

 

In light of the expulsion, no further sanctions are imposed against NYPPEX for its other violations: permitting Allen, a statutorily disqualified person, to remain associated with NYPPEX; making misrepresentations and omissions of material fact to prospective investors in connection with a securities offering; violating FINRA's advertising standards in communications to prospective investors and in material posted on NYPPEX's website; violating just and equitable principles of trade by making false or misleading statements on NYPPEX's website; failing to reasonably supervise Allen; and making false or misleading statements in response to FINRA information requests. 

 

In light of the bar, no further sanctions are imposed against Allen for his other violations: remaining associated with NYPPEX after he became statutorily disqualified; making misrepresentations and omissions of material fact to prospective investors in connection with a securities offering; violating FINRA's advertising standards in communications to prospective investors and in material posted on NYPPEX's website; violating just and equitable principles of trade by making false or misleading statements on NYPPEX's website, to a court, and to FINRA; and making false or misleading statements in response to FINRA information requests.

 

Michael Schunk is fined $70,000 and suspended in all capacities from associating with any FINRA member firm for 18 months for permitting a statutorily disqualified person to remain associated with NYPPEX; barred from acting in any principal or supervisory capacity with any FINRA member firm for failing to supervise Allen; and fined $50,000 and suspended in all capacities from associating with any FINRA member firm for two years for making false or misleading statements in response to FINRA information requests. Schunk's all-capacities suspensions are imposed concurrently.

[W]e consider whether (i) there is a strong likelihood that the movant will eventually succeed on the merits of the appeal; (ii) the movant will suffer irreparable harm without a stay; (iii) no other person will suffer substantial harm as a result of a stay; and (iv) a stay is likely to serve the public interest. "The appropriateness of a stay turns on a weighing of the strengths of these four factors; not all four factors must favor a stay for a stay to be granted." "The first two factors are the most critical, but a stay decision rests on the balancing of all four factors." To obtain a stay under this framework, a movant need not establish that it is likely to succeed on the merits, but it must at least show "that the other factors weigh heavily in its favor" and that it has "raised a 'serious legal question' on the merits." Allen fails to satisfy his burden.

With respect to irreparable harm, Allen argues that he and NYPPEX "will suffer tremendous and irreparable harm" and "irreparable damage and hardship which cannot be reversed or compensated for thereafter" if Allen were "forced to terminate his association with NYPPEX pending Commission review." This, we are told, is due to that fact that "NYPPEX depends on Mr. Allen - its founder and principal, and a pioneer in the development of secondary private markets." But Allen did not support his assertions of irreparable harm with a timely declaration or affidavit. And without submitting evidence about an inability to meet financial obligations or continue in business, we cannot find that NYPPEX will suffer irreparable harm absent a stay. For instance, Allen does not explain why other NYPPEX employees would be unable to step in and run NYPPEX while Commission review proceeds. 

[W]hether or not NYPPEX itself participated in the underlying misconduct, it was the direct recipient of millions of dollars of funds that Allen misappropriated from ACP. Moreover, even if NYPPEX's customers suffered no harm, the New York action establishes that Allen has a history of grievously harming investors, specifically the ACP investors through his misappropriation and other fraudulent conduct. In any case, we have long held that an inquiry into the public interest "extends beyond the consideration of particular investors to the public-at-large," and Allen's misconduct demonstrates that he poses a risk to investors generally. Finally, the fact that NYPPEX's investors might all be "sophisticated private investors" does not insulate them from future harm perpetrated by Allen. After all, Allen himself characterizes the ACP investors as "solely . . . 'qualified purchasers' - the most sophisticated investors as defined by federal law." 

 

Finally, we recall that the New York courts found "that Allen engaged in a lengthy and extensive scheme that involved 'a shocking level of self-dealing, breaches of fiduciary duty, misappropriation of enormous sums of [ACP's] capital and outright fraud.'" Allen cannot challenge these findings here, and they establish knowing and serious violations that created a risk of harm to investors and the market as a whole. For all of these reasons, at this stage of the proceedings, the risk of harm to others and the public interest weigh against a stay.

Claimant 4 does not qualify for an award under either of the above-described provisions. We credit Staff's declaration ("Declaration"), provided under penalty of perjury, which confirms that Staff opened the Investigation, in part, because of tips that the Commission received from certain individuals (other than Claimant 4), including Claimant 1 and Claimant 2.

 

Additionally, while Staff communicated with and received information from Claimant 4, Claimant 4 did not provide information that significantly contributed to the success of the Covered Action. Beyond Claimant 4's tip, Claimant 4 spoke to Staff via telephone with his/her counsel in March 2017, subsequently provided a thumb drive of additional internal corporate documents, and sat for testimony before the Commission in Redacted . Claimant 4 argues that in light of the volume of the documents he/she provided in his/her initial tip and then again following Claimant 4's discussion with Staff, it is difficult to believe that none of the documents were documents that the Commission did not already have or did not use in the Investigation. Claimant 4 also argues that the documents he/she provided were from a Company 1 hard drive and were subject to a non-disclosure agreement that contained materials that were not widely circulated or publicly available. Claimant 4 alleges that it is doubtful that the Commission received duplicative information and files from other Company 1 Redacted Claimant 4 believes that the Commission brought the Covered Action based, in part, on at least some of Claimant 4's information; Claimant 4 therefore alleges that he/she dese1ves to receive at least a po1tion of any award issued for the Covered Action. 

 

Despite Claimant 4's contentions, Staff was already aware of Claimant 4's through its own investigative efforts, as confirmed by the Declaration. The Declaration also confirms that Staff obtained the documentation that Claimant 4 provided from other sources. The Declaration explains in detail why Claimant 4's information and documentation did not substantially advance or impact the Investigation and why none of Claimant 4 's information was used in, or had any impact on, the charges brought by the Commission in the Covered Action.

In the Matter of the Arbitration Between Jack A. Thomas, Claimant, v. USAA Investment Management Company, USAA Financial Advisor, Inc., and USAA Investment Services Company, Respondents (FINRA Arbitration Award 20-01934)
https://www.finra.org/sites/default/files/aao_documents/20-01934.pdf

The Panel recommends the expungement of the Termination Explanation in Section 3 of Jack Anthony Thomas' (CRD Number 5721600) Form U5 filed by USAA Investment Services Company (CRD Number 5475) on October 15, 2019, and the Form U5 filed by USAA Financial Advisors, Inc. (CRD Number 129035) on October 15, 2019 and maintained by the CRD. The Reason for Termination shall remain the same. The Termination Explanation shall be deleted in its entirety and replaced with the following language: "At-will employee terminated for call avoidance." This directive shall apply to all references to the Termination Explanation.

In March 2014, Garapedian and other registered representatives working from the same branch office entered into an agreement through which they agreed to service certain customer accounts, including executing trades for those accounts, under a joint representative code (also known as joint production number) that they shared with the estate of a retired representative. The agreement set forth what percentages of the commissions the estate of the retired representative, Garapedian, and the other representatives earned on trades placed using the joint representative code. 

 

From July 2014 through November 2016, Garapedian directed a junior registered representative on his team to place trades in accounts that were covered by the agreement using different joint representative codes than the one Garapedian should have used pursuant to his agreement with the estate of the retired representative. Specifically, although Morgan Stanley's system correctly prepopulated the trades with a joint representative code Garapedian shared with the estate of the retired representative, Garapedian directed the junior registered representative to enter 417 transactions under different joint representative codes through which Garapedian received a higher percentage of commissions than what he was entitled to receive pursuant to the agreement.² Garapedian mistakenly assumed that he had permission to change the representative codes in this manner to equalize commissions earned by him and the other registered representatives across accounts serviced by the branch office, including those covered by the joint production agreement. However, Garapedian had not verified that the estate of the retired representative agreed that Garapedian could change the representative code for the transactions at issue. 

 

As a result, Garapedian's actions caused Morgan Stanley's trade confirmations for the 417 trades to inaccurately reflect another joint representative code instead of the joint representative code that Garapedian shared with the estate of the retired representative. Garapedian's actions resulted in his receiving higher commissions and the retired representative's estate receiving less commissions from the 417 trades than what each was entitled to receive pursuant to the agreement. In January 2021, Morgan Stanley paid restitution of approximately $8,000 to the estate of the retired representative, which is the approximate amount of additional commissions Garapedian received as a result of changing the representative code on the 417 trades. 

 

By falsifying the representative code on the 417 trades, Garapedian violated FINRA Rule 2010. In addition, Garapedian violated FINRA Rules

 

= = =

 

Footnote 2: During this same time period, Garapedian directed the junior registered representative to enter an additional 322 trades under different joint representative codes through which Garapedian received a lower percentage of commissions than what he was entitled to receive pursuant to the agreement. 

FINRA Fines and Suspends Rep for Forging Customer Signatures
In the Matter of Todd Michael Seymour, Respondent (FINRA AWC 2020068811301)
https://www.finra.org/sites/default/files/fda_documents/2020068811301
%20Todd%20Michael%20Seymour%20CRD%203249733%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, Todd Michael Seymour submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Todd Michael Seymour was registered with Morgan Stanley Smith Barney LLC from June 2014 to February 2017; and thereafter from February 2017 to December 2020 with Raymond James Financial Services, Inc. In accordance with the terms of the AWC, FINRA imposed upon Seymour a $5,000 fine and two-month suspension from associating with any FINRA member in all capacities. The AWC asserts in part that:

Before becoming associated with any FINRA member firm, Seymour provided tax preparation and trust administration services through his wife's tax and estate business. Beginning around 2010, Seymour also served as co-trustee of Trust A. Both Trust A and the beneficiaries of Trust A later became customers of Seymour at Morgan Stanley and Raymond James. 

 

Upon associating with Morgan Stanley and Raymond James, Seymour sought to continue working for his wife's tax and estate business. In considering Seymour's requests for approval of his outside business activity, each firm placed restrictions on the scope of his participation in the activity. In June 2014, Seymour disclosed to Morgan Stanley that he served as co-trustee of Trust A, and that he worked for his wife's tax and estate business. Morgan Stanley approved Seymour's work for his wife's business as an outside business activity, but prohibited him from continuing to serve as co-trustee for Trust A. When Seymour later became associated with Raymond James in February 2017, he again requested approval to work for his wife's business, but did not disclose to the firm that he provided trust administration services, including performing the duties of a co-trustee for Trust A, through his wife's business. Instead, Seymour's written request for approval described his responsibilities for his wife's business merely as "[t]ax [p]reparation." Raymond James subsequently approved Seymour's work for his wife's business as an outside business activity, but prohibited him from serving as a trustee or maintaining billpaying authority over any third-party bank account. 

 

Seymour exceeded the scope of his approved outside business activity while he was associated with each firm. From June 2014 to November 2020, Seymour, at the direction of the remaining co-successor trustee, continued to perform the duties of a co-trustee for Trust A, even though both Morgan Stanley and Raymond James had prohibited him from serving as a trustee. And from February 2017 to at least November 2020, Seymour failed to comply with Raymond James's prohibition against having bill-paying authority over any third-party account. Using his check-writing authority for Trust A's bank account, Seymour issued checks, including checks to compensate himself for the services he provided Trust A. In so doing, Seymour engaged in outside business activities without providing full and accurate prior written notice to his firms of those activities. 

 

Additionally, from 2017 to 2020, Seymour submitted five compliance questionnaires to Raymond James, in which he falsely attested that he had not participated in outside business activities that he had not disclosed to the firm. 

 

Therefore, Seymour violated FINRA Rules 3270 and 2010.

During the period Jtne 2017 through September 2019, FFEC failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 as they pertain to margin use. In addition, FFEC and Graves failed to reasonably supervise the use of margin in two customer accounts and failed toreasonably supervise mutual fund switches in two customer accounts. These failures caused the customers to pay more than $112,000 in commissions, fees, and margin interest. By this conduct, FFEC and Graves violated FINRA Rules 3110 and 2010.

• Securities Industry Commentator
• Bill Singer