While associated with LPL, the Representative caused five LPL customers to transfer funds from their LPL accounts, or from annuity contracts that the customers held, directly to the Entity or to accounts held at a third-party custodian for which the Entity was the advisor. The transferred funds were ultimately converted by a third party. From September 2018 through August 2019, LPL failed to investigate red flags that the Representative was conducting undisclosed, investment-related business activities through the Entity. 

First, LPL knew that the Representative conducted minimal business through LPL. In September 2018, the Representative - who had earned less than $900 in annual compensation from LPL that year - stopped working for the investment advisory firm that was his primary source of income. The following month, the Representative's branch office supervisor informed the firm that he would no longer supervise the Representative due to his low production. LPL therefore instructed the Representative that it would terminate his registration unless he joined a new branch office or submitted a written request to remain under home office supervision by November 2018. The Representative did not join a new branch office or request to remain under home office supervision at any time prior to his resignation in August 2019. Nonetheless, LPL did not take reasonable steps to investigate whether the Representative was conducting outside business activities. 

Second, in October 2018, the Representative disclosed in an annual firm compliance questionnaire that he used a social media networking website for business purposes without obtaining LPL's approval to do so. Despite such notice, LPL never reviewed the Representative's account on the social media networking website. Had LPL done so, the firm would have learned that the Representative identified himself on his account profile as "Vice President, Investor Relations" for the Entity and that he failed to disclose to LPL his affiliation with an investment-related outside business activity. 

Third, LPL failed to identify or investigate red flags contained in emails sent to and from the Representative's LPL email address. For example, the firm failed to identify that, from February through July 2019, the Representative's LPL email account received approximately 40 emails from the social media networking website reflecting that the Representative had updated his profile to include references to work he performed on behalf of the Entity. LPL also failed to identify that beginning in February 2019, the Representative sent multiple emails from his LPL email account to an email address associated with the Entity, including one email to which Representative attached paperwork concerning an LPL customer. Likewise, LPL failed to identify that in February 2019, the Representative received an email from an outside annuity company indicating that Representative had changed his contact email address from his LPL email address to an email address associated with the Entity. 

In February 2019, the Representative caused three LPL customers to surrender variable and fixed annuities and to send the proceeds via check to the Entity. In addition, for one of the customers, the Representative requested LPL send the total value of the customer's accounts held at LPL via check to the Entity. Because LPL had failed to identify the red flags that the Representative conducted outside business activities on behalf of the Entity, the firm did not take reasonable steps to investigate the Representative's transfer of customer funds to the Entity.. 

In total, the Representative caused five LPL customers to transfer over $650,000 to the Entity or to accounts held at a third-party custodian for which the Entity was the advisor, after which the funds were converted by a third party.³ 

By failing to reasonably supervise the Representative, LPL violated FINRA Rules 3110 and 2010.

= = =

Footnote 2: FINRA barred the Representative from associating with any FINRA member firm in March 2021.

Footnote 3: Two customers independently recovered their funds; LPL provided restitution to three customers. 

Customer A is a 64-year-old construction business owner from Colorado. Between August 2016 and July 2018, Muharemovic recommended that Customer A place 101 trades in his account-nearly all of which were executed using margin-and Customer A routinely accepted Muharemovic's recommendations. Although Customer A's account had an average month-end equity of approximately $126,702 for 24 months, Muharemovic recommended purchases with a total principal value of $3,736,956, which resulted in an annualized turnover rate in the account of 14.75. This trading resulted in an annualized cost-to-equity ratio of 54.18 percent-meaning Customer A's investments had to grow by 54.18 percent just to break even. As a result of Muharemovic's unsuitable recommendations, Customer A had a loss of approximately $185,966. Collectively, the trades that Muharemovic recommended caused Customer A to pay approximately $119,061 in commissions and fees and another $18,244 in margin interest for a total of approximately $137,305. 

Customer B was a construction business owner from Virginia who was 74 years old when his first account was opened at Arive. During the relevant period, Muharemovic engaged in excessive trading in two accounts Customer B held at Arive. Between October 2016 and January 2019, Muharemovic recommended that Customer B place 29 trades-most of which were executed using margin-in the first account, and Customer B routinely accepted Muharemovic's recommendations. Although Customer B's first account had an average month-end equity of approximately $24,570 for 28 months, Muharemovic recommended purchases with a total principal value of approximately $1,103,916, which resulted in an annualized turnover rate in the account of 19.26. This trading in the first account resulted in a cost-to-equity ratio of 74.25 percent-meaning Customer B's investments had to grow by 74.25 percent just to break even. Between December 2017 and March 2019, Muharemovic recommended that Customer B place 35 trades -- all of which were executed using margin -- in the second account, and Customer B routinely accepted Muharemovic's recommendations. Although this second account had an average month-end equity of approximately $79,113 for 16 months, Muharemovic recommended purchases with a total principal value of approximately $602,038, which resulted in an annualized turnover rate in the account of 5.71. This trading in the second account resulted in an annualized cost-to-equity ratio of 30.12 percent-meaning Customer B's investments had to grow by 30.12 percent just to break even. As a result of Muharemovic's unsuitable recommendations, Customer B had a loss in this second account of approximately $51,857. Collectively, the trades that Muharemovic recommended in the two accounts caused Customer B to pay approximately $64,658 in commissions and fees and another $9,680 in margin interest for a total of approximately $74,338. 

Muharemovic's recommended securities transactions in the accounts of Customers A and B were excessive and unsuitable. Therefore, Muharemovic violated FINRA Rules 2111 and 2010.

RIKESH THAPA co-founded and was the Chief Technology Officer ("CTO") of the Victim Company, which during the relevant period was involved in using blockchain and other technology to provide a ticketing platform for live events.  Between December 2017 and September 2019, THAPA used his position to carry out a scheme to defraud the Victim Company.

In 2018, the Victim Company sought to diversify its banking because of its understanding that certain financial institutions were reluctant to maintain relationships with companies, such as the Victim Company, involved in cryptocurrency transactions.  In furtherance of that effort, THAPA agreed to receive and hold $1 million of the Victim Company's money in his personal bank account (the "THAPA Account") while the Victim Company explored banking options.  Soon after receiving the $1 million, however, THAPA began using the funds on personal expenses.  Nevertheless, THAPA repeatedly acknowledged what was supposed to be the temporary nature of his possession of the funds, representing to a colleague, in substance and in part, that the money was "a stationary 1mil in my account" that was held "for safe keeping."  THAPA then falsified records to conceal his theft, providing the Victim Company with a forged bank statement, which falsely represented that THAPA held over $21 million, approximately $1 million of which was held in a particular savings account (the "Purported Account").  In fact, THAPA did not have the Purported Account and held much less than $21 million at the relevant bank.  In 2019, THAPA refused to return the $1 million, which he spent on, among other things, nightclubs, travel, and clothing.

In addition, between December 2017 and September 2019, THAPA used his control over the Victim Company's cryptocurrency holdings to embezzle at least 10 Bitcoin from the Victim Company.  For example, in August 2018, THAPA diverted at least one of the Victim Company's Bitcoin for his own benefit, selling the Bitcoin for approximately $6,500 and depositing the proceeds into the THAPA Account (the "August 2018 Bitcoin Transaction").  To avoid detection, THAPA falsified trading records and deleted emails.  In July 2019, THAPA sent the Victim Company's CEO a fraudulent transaction report that misrepresented the August 2018 Bitcoin Transaction.  After the CEO, copying THAPA, thereafter requested and received a transaction report directly from the Victim Company's cryptocurrency brokerage, THAPA disabled the CEO's email account at the Victim Company (the "CEO Email Account"), deleted the cryptocurrency brokerage's email from the CEO Email Account, and then deleted the entire CEO Email Account.

In yet another facet of the scheme, THAPA stole the Victim Company's utility tokens.  Such tokens are a type of cryptocurrency that can be used to access particular services, products, or features.  In July 2019, unbeknownst to the Victim Company's CEO, THAPA set up a meeting in Italy between THAPA and individuals who claimed to be interested in purchasing the Victim Company's utility tokens.  Before the meeting, THAPA provided account information for the THAPA Account so that the purported investors could wire him funds.  During the meeting, however, THAPA agreed to receive cash in exchange for utility tokens.  After the meeting, THAPA transferred, without authorization, approximately 174,285 of the Victim's utility tokens to the purported investors.  THAPA later determined that the cash he had received from the purported investors was counterfeit.     

Today, the Commission reopened the comment period for the proposed rulemaking on Share Repurchase Disclosure Modernization.[1] The comment period was reopened to add a memorandum prepared by the Division of Economic and Risk Analysis ("DERA") to the public comment file, and to seek public feedback on the memorandum. The memorandum analyzes the impact of section 4501 of the Internal Revenue Code of 1986 (the "Internal Revenue Code") [2] on the potential economic effects of the proposed rulemaking. Section 4501, which was added to the Internal Revenue Code by the Inflation Reduction Act of 2022 (the "Inflation Reduction Act"),[3] imposes upon a covered corporation a non-deductible excise tax equal to 1% of the fair market value of any stock repurchased by the corporation, subject to certain exceptions.

When the Commission initially proposed the Share Repurchase Disclosure Modernization rulemaking on December 15, 2021,[4] the Inflation Reduction Act had not become law. Accordingly, the proposing release's discussion of the rulemaking's costs and benefits did not consider the impact that the excise tax would have on the incidence and level of share repurchases. A potential implication of the excise tax is that it might cause companies to decrease their share repurchase activity and to possibly favor dividends (including special dividends) as the preferred method of returning capital to shareholders. Any such decrease in share repurchase activity could, in turn, affect the costs and benefits analysis in the proposing release. To satisfy its statutory rulemaking obligations,[5] the Commission must understand, to the furthest extent possible, the qualitative and quantitative impacts that the excise tax will have on share repurchase activity and the proposed rulemaking's costs and benefits.

I appreciate the efforts by the DERA staff to address these issues in its memorandum and by the staff of the Divisions of Corporation Finance and Investment Management to prepare the reopening release. While I support the addition of the DERA memorandum to the public comment file and the reopening of the comment period generally, I disagree with the 30-day comment period for the public to provide feedback. This 30-day period is especially problematic when it commences shortly before, and will overlap with, major holidays later this month.

One might ask: what is the purpose of the comment period? Is it merely an item to be checked off to satisfy the lowest acceptable standard of process required by the Administrative Procedures Act?[6] Or is it a vital component of a discussion between an administrative agency and the public in order to better understand the effects of a proposed rule, especially under a changed factual scenario? I believe it is the latter.

A longer period, such as 45 days, would increase the likelihood that the Commission receives more thoughtful responses. Even for commenters who can provide feedback within the 30-day period, they likely would appreciate the additional time to fine tune their analysis, while continuing their regular duties and spending quality time with their family and friends during the holidays.[7]

[1] Reopening of Comment Period for Share Repurchase Disclosure Modernization, SEC Release No. 34-96458 (Dec. 7, 2022), available at https://www.sec.gov/rules/proposed/2022/34-96458.pdf.

[2] 26 U.S.C. 4501.

[3] See Pub. L. No. 117-169, 136 Stat. 1818, 1828 (2022).

[4] Share Repurchase Disclosure Modernization, SEC Release No. 34-93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)], available at https://www.sec.gov/rules/proposed/2021/34-93783.pdf.

[5] See 15 U.S.C. 78c(f) (requiring the Commission, whenever it is engaged in rulemaking, to "consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation") and 15 U.S.C. 78w(a)(2) (requiring the Commission to consider "the impact any [rulemaking] would have on competition" and prohibiting the Commission from adopting any rule that "would impose a burden on competition not necessary or appropriate in furtherance of the purpose of [the Securities Exchange Act of 1934]").

[6] See, e.g., National Association of Manufacturers v. SEC, (W.D. Tex.) (Dec. 4, 2022) (stating that the "[c]ourt will not introduce its own policy preferences [over that of the Commission] about what is a 'meaningful opportunity' [to comment on a rulemaking proposal]" and denying the plaintiff's motion for summary judgment that a 31-day comment period covering Christmas and Hanukkah violated the Administrative Procedures Act), available at https://assets.law360news.com/1555000/1555037/https-ecf-txwd-uscourts-gov-doc1-181129330034.pdf.

[7] I have previously spoken about my concerns with the short comment periods for recent Commission rulemaking and the 30-day comment period in this instance is the latest example of those concerns. See Mark T. Uyeda, Remarks at the APABA-DC Awards and Installation Reception (Oct. 19, 2022), available at https://www.sec.gov/news/speech/uyeda-apaba-dc-20221019, and Mark T. Uyeda, Statement on Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants (Oct. 12, 2022), available at https://www.sec.gov/news/statement/uyeda-statement-electronic-recordkeeping-requirements-101222.

After the Bernie Madoff scandal, the SEC created a whistleblower program that encouraged people to provide information by promising them a cut of the recovered funds.

At first, the agency was inundated with tips. But now, the number of people reporting financial fraud is dwindling. The guests on this week's episode of our weekly podcast, On The Merits, say they know why.

One problem: it's unclear how or why the SEC pays rewards to some whistleblowers but not others. And, even if you're entitled to a reward, it can take years of waiting for the agency to pay out. Bloomberg Law's John Holland speaks with whistleblower Janice Shell and whistleblower attorney Bill Singer about the problems with this program and how they can be fixed.

Between July 2021 and September 2021, Kadmon, which, prior to its acquisition by Sanofi, was a publicly-traded biopharmaceutical company traded under the ticker symbol "KDMN" on the NASDAQ, engaged GLASSNER and the Consulting Firm to provide executive compensation consulting services related to a potential acquisition.  In connection with this engagement, GLASSNER had access to material, non-public information, which he misappropriated and, in violation of the duties that he owed to Kadmon, used to trade Kadmon stock and call options between on or about August 3, 2021, and on or about August 23, 2021.  On September 8, 2021, Kadmon publicly announced that it had agreed to be acquired by Sanofi for a per-share price significantly above the share price at which Kadmon was trading.  That day, Kadmon's share price increased by approximately 71%, and GLASSNER ultimately profited $368,000 on the Kadmon stock and call options he had previously purchased.       

For nearly a decade, FRANK OKUNAK, who was the chief financial officer and later chief operating officer of a leading global public relations firm (the "PR Firm"), embezzled over $16 million from the PR Firm and, ultimately, the shareholders of the PR Firm's publicly traded parent corporation.  OKUNAK used the embezzled funds to finance his personal lifestyle and his own private business ventures.  OKUNAK concealed and facilitated his theft by preparing and causing others to prepare materially false accounting books and records, including invoices and payment records that falsely described expenditures as having been undertaken for the benefit of the PR Firm, when funds were actually used for OKUNAK's personal benefit or for the benefit of his personal business associates.

Specifically, from 2011 through 2020, OKUNAK used his authority as an officer of the PR Firm to cause the PR Firm to make unauthorized payments for OKUNAK's personal and business ventures unrelated to the activities of the PR Firm or its corporate parents.  OKUNAK used the PR Firm's assets to provide the start-up capital for his personal, independent business ventures, to purchase tickets and luxury boxes at sporting events, and even to cover donations to his alma mater.  To hide the illicit nature of these expenditures, OKUNAK frequently prepared or caused others to prepare false or misleading invoices and other documentation to suggest, falsely, that the funds were used for legitimate corporate purposes.

[L]azzaro, who began as a teller and was later promoted to vault manager, admitted she repeatedly stole cash from the FDIC-insured bank.

She purloined cash from her teller drawer, hid it in her pocket or purse, and input false information into the bank's computer system in order to manipulate teller and vault balances.

On May 20, 2021, when Ms. Lazzaro was on duty as vault manager, a cash count revealed that the bank was missing more than $100,000.

[Singh]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 Campbell 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 the arrests, the value of the bonds they had delivered during the undercover investigation was $287,312.39.

[L]andis orchestrated a scheme to manipulate trading in at least 97 microcap stocks, which included placing thousands of manipulative trades over the course of three years using multiple accounts he controlled, including accounts in the name of Ridgeview. In August 2019, the court entered judgments by consent against Landis and Ridgeview that imposed multiple injunctions restricting their future conduct.

Landis was sentenced on January 24, 2020, in a parallel criminal action to six months in prison and two years of supervised release, and ordered to pay a $50,000 fine. The court later ordered Landis to pay forfeiture of $2,505,488. Landis had pleaded guilty in January 2019 to one count of securities fraud and one count of aiding and abetting securities fraud.

Landis and Ridgeview have consented to a final judgment in the SEC action that permanently enjoins them from violating 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 thereunder, and the market manipulation provisions of Section 9(a) of the Exchange Act. The judgment also prohibits Landis and Ridgeview from promoting or participating in the issuance, purchase, offer, or sale of any security, including penny stocks, with the exception for Landis trading in his own name in securities listed on a national securities exchange, and finds them jointly-and-severally liable for disgorgement of $2,505,488, which the court deemed satisfied by the order of forfeiture against Landis in the related criminal proceeding.

Landis was previously found liable in 2003 in a lawsuit brought by the SEC and convicted of related criminal charges in a prior market manipulation scheme.