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Securities Industry Commentator by Bill Singer Esq

January 10, 2023

FINRA NAC Fines and Suspends Rep For Paying Commissions to an Unregistered Person (BrokeAndBroker.com Blog)

Did You Hear The One About The Zombie Who Requested An IRA Distribution? (BrokeAndBroker.com Blog)

DOJ RELEASES

Defendant Sentenced In Groundbreaking Cryptocurrency Insider Trading Case / Nikhil Wahi Was Sentenced to 10 Months in Prison for Trading Using Misappropriated Information About Crypto Asset Listings on an Exchange (DOJ Release)

Man Sentenced for Integral Role in Sophisticated International Fraud Scheme / Defendant Laundered Over $3.5 Million in Fraudulent Online Auction Proceeds as Part of a Scheme that Defrauded Over 900 American Victims (DOJ Release)


SEC RELEASES



CFTC Releases



FINRA Release


https://www.brokeandbroker.com/6828/finra-nac-makkai/
A recent FINRA National Adjudicatory Council Decision considered the appeal of a former LPL rep, who was found by a FINRA Office of Hearing Officers Hearing Panel to have wrongfully paid commissions to a former colleague. The relatively esoteric nature of the misconduct at issue -- the failed purchase of another rep's book of business -- is underscored by the modest sanctions imposed by the OHO of a $2,000 fine and a 10-businsess day suspension, and, thereafter, increased by the NAC to a $5,000 fine and a 30-calendar-days suspension. All well and fine as far as BrokeAndBroker.com Blog publisher Bill Singer, Esq. is concerned; however, Bill is quite angered by FINRA's lack of transparency when it comes to the NAC and its upward revision of the OHO sanctions.

https://www.justice.gov/usao-sdny/pr/defendant-sentenced-groundbreaking-cryptocurrency-insider-trading-case
In the United States District Court for Southern District of New York, Nikhil Wahi pled guilty to one count of conspiracy to commit wire fraud; and he was sentenced to 10 months in prison and ordered to pay $892,500 in forfeiture. As alleged in part in the DOJ Release:

Beginning in approximately October 2020, NIKHIL WAHI obtained from his brother, an employee of Coinbase working on highly confidential crypto asset listings, secret tips about which crypto assets would be listed on Coinbase.  Using that insider information, NIKHIL WAHI used anonymous Ethereum blockchain wallets and accounts held under pseudonyms at centralized cryptocurrency exchanges to acquire those crypto assets shortly before Coinbase publicly announced that it was listing these crypto assets on its exchanges.  On multiple occasions following Coinbase's public listing announcements, NIKHIL WAHI sold the crypto assets for a profit.

https://www.justice.gov/usao-edky/pr/man-sentenced-integral-role-sophisticated-international-fraud-scheme
In the United States District Court for the Eastern District of Kentucky, the following Defendants pled guilty to conspiracy to commit a Racketeer Influenced and Corrupt Organizations Act ("RICO") offense and were sentenced to federal prison terms as noted:
  • Ionut-Razvan Sandu, 35: 89 months;
  • Rafael-Liviu Cucu, 33: 61 months; 
  • Alexandru-Catalin Calin, 40:61 months; 
  • Ciprian-Ionut Filip, 37:70 months; and 
  • Gabriel Constantin Georgescu, 37: 63 months.
As alleged in part in the DOJ Release:

[B]eginning as early as October 2014, Sandu and other members of the criminal organization collectively developed a process and offered a service by which co-conspirators based in the United States and abroad would launder the proceeds of online auction fraud.

According to court documents, Georgescu, Filip, and other co-conspirators posted false advertisements to popular online auction and sales websites, such as eBay, for goods that did not actually exist. Members of the conspiracy created fictitious online accounts to post these advertisements and communicate with victims, sometimes using the stolen identities of Americans to do so. The advertisements typically marketed the sale of used vehicles or similar goods and targeted working-class Americans.

Members of the conspiracy used several tactics to convince victims to send money for the advertised goods. For example, they impersonated a military member who needed to sell the advertised item before deployment. In furtherance of the scheme, the defendants delivered invoices to the victims bearing trademarks of reputable companies to make the transaction appear legitimate. The defendants also set up call centers to impersonate customer support, address questions, and alleviate concerns over the advertisements.

Once victims had sent payment, members of the conspiracy engaged in a complex money laundering scheme offered by Sandu and others wherein U.S.-based conspirators received victim funds, converted those funds to cryptocurrency, and transferred proceeds in the form of cryptocurrency to foreign-based money launderers. Those foreign-based money launderers, such as Cucu and Calin, would then work with other members of the conspiracy to convert the bitcoin back into fiat currency. Sandu was held responsible for laundering over $3.5 million worth of fraudulent proceeds. To date, law enforcement has identified over 900 victims of this scheme.

2023 Report on FINRA's Examination and Risk Monitoring Program
https://www.finra.org/sites/default/files/2023-01/2023-report-finras-examination-risk-monitoring-program.pdf As noted in part in the Report's "Introduction":

The 2023 Report on FINRA's Examination and Risk Monitoring Program (the Report) provides member firms with insight into findings from the recent oversight activities of FINRA's Member Supervision, Market Regulation and Enforcement programs (collectively, regulatory operations programs). The Report reflects FINRA's commitment to providing greater transparency to member firms and the public about our regulatory activities as well as the increasing integration among our regulatory operations programs. We hope that this integrated approach will also increase the Report's utility for member firms as an information source they can use to strengthen their compliance programs. As a result, this year's Report addresses a materially broader range of topics than in prior years (particularly in the Market Integrity section). Additionally, the Report introduces a new Financial Crimes section, consisting of three topics-Anti-Money Laundering (AML), Fraud and Sanctions; Cybersecurity and Technological Governance; and Manipulative Trading-that highlight FINRA's increased focus on protecting investors and safeguarding market integrity against these ongoing threats. . . .


= = =
1/9/2023

https://www.brokeandbroker.com/6830/zombie-ira-finra/
Indeed, death is certain. What is less certain on Wall Street is whether on a post-mortem basis the dead are capable of transferring their IRA accounts to living relatives. You'd sort of think that the answer to the question was "no;" however, as a recent FINRA regulatory settlement demonstrates, what we think is an obvious answer isn't always so. Life and death have ways of surprising us!

https://www.justice.gov/usao-edla/pr/former-amtrak-employee-sentenced-wire-fraud
It's been a  slow post-New Year when it comes to the fraud-on-Wall-Street news cycle; and, as such, when I saw "wire fraud" in a DOJ headline involving a case in the United States District Court for the Eastern District of Louisiana, I was hoping it involved some juicy industry fraud. It didn't. I'm not complaining because the absence of such a press release means that some poor soul wasn't victimized by some low-life broker or advisor; however, the ensuing case involves one of those truly idiotic fact patterns that will leave you wondering as to just what the Defendant was (or wasn't) thinking:

NEW ORLEANS - U.S. Attorney Duane A. Evans announced that KENYA BUTLER-SMALL was sentenced on January 5, 2023 for conduct alleged to have occurred while she was employed by Amtrak as an On-board Services Train Attendant.

U.S. District Judge Sarah S. Vance ordered BUTLER-SMALL to serve concurrent terms of six months of incarceration for each of the two wire count charges to which BUTLER-SMALL previously pleaded guilty. Judge Vance also ordered BUTLER-SMALL to serve two years of supervised release following her incarceration, the first six months of which will consist of home incarceration with location monitoring as well as a mandatory $100 special assessment fee for each count. Additionally, Judge Vance ordered that BUTLER-SMALL pay restitution to the victims.

BUTLER-SMALL recruited more than 40 victims to purchase spots on a purported trip from New Orleans to New York City. BUTLER-SMALL told the victims that she had booked roundtrip Amtrak train travel for the trip, as well as activities, such as shows and museum visits. In truth, BUTLER-SMALL had not booked the Amtrak travel or the activities. When the date of the trip approached, BUTLER-SMALL told the victims, from whom she had taken a total of approximately $23,000 to $26,000, that Amtrak had canceled the trip because an incident occurred in which one of the trip's passengers assaulted an Amtrak employee and made a bomb threat. In truth, no such incident had occurred.

BUTLER-SMALL also submitted fraudulent sick benefit claims to the Railroad Retirement Board, a federal agency that provides benefits to Amtrak employees. BUTLER-SMALL claimed that she was too sick to work when, in truth, she was working another job. This caused the government to pay BUTLER-SMALL approximately $4,679 in sick benefits for days she falsely claimed to have been unable to work.

https://www.sec.gov/news/press-release/2023-4
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/33-11144.pdf:

  • former McDonald's Corporation Chief Executive Officer Stephen J. Easterbrook consented to entry of the SEC's cease-and-desist order, which imposes a five-year officer and director bar and a $400,000 civil penalty; and findings that he had violated the anti-fraud provisions of the Securities Act and the Securities Exchange Act; and

  • McDonalds Corporation consent to findings that it had violated Section 14(a) of the Exchange Act and Exchange Act Rule 14a-3.
As asserted in part in the SEC Release:

[T]he Commission determined not to impose a financial penalty on McDonald's in light of the substantial cooperation it provided to SEC staff during the course of its investigation, including voluntarily providing information not otherwise required to be produced in response to the staff's requests, as well as the remedial measures undertaken by McDonald's, including seeking and ultimately recovering the compensation Easterbrook received pursuant to the separation agreement.

In pertinent part, the SEC Release alleges that:

[M]cDonald's terminated Easterbrook for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald's employee in violation of company policy. However, McDonald's and Easterbrook entered into a separation agreement that concluded his termination was without cause, which allowed him to retain substantial equity compensation that otherwise would have been forfeited. In making this conclusion, McDonald's exercised discretion that was not disclosed to investors.

Subsequently, in July 2020, McDonald's discovered through an internal investigation that Easterbrook had engaged in other undisclosed, improper relationships with additional McDonald's employees. According to the SEC's order, Easterbrook knew or was reckless in not knowing that his failure to disclose these additional violations of company policy prior to his termination would influence McDonald's disclosures to investors related to his departure and compensation.
We are unable to support the charges against McDonald's Corporation ("McDonald's") for failing to disclose sufficient information regarding the termination of its former CEO, Stephen Easterbrook, in its 2020 proxy statement.  The Order[1] casts McDonald's, the victim of Mr. Easterbrook's deception, as a securities law violator through a novel interpretation of the Commission's expansive executive compensation disclosure requirements.

The Commission's Order finds, among other things, that McDonald's violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-3 thereunder because the company failed to provide the disclosure required by Item 402(b) and (j)(5) of Regulation S-K.  Item 402(b) requires companies to disclose all material elements of compensation of named executive officers.  Item 402(j) requires disclosure of material factors regarding agreements that provide for payments to a named executive officer in connection with his or her termination.  The Order states that McDonald's violated the aforementioned paragraphs of Item 402 by failing to disclose its use of discretion in treating Mr. Easterbrook's termination as "without cause" (as opposed to "with cause") after finding that Mr. Easterbrook violated the company's Standards of Business Conduct.  The Order states that the exercise of discretion by McDonald's allowed Mr. Easterbrook's stock options and performance-based restricted stock units to continue to vest, which would not have occurred if the termination were "with cause."  We have concerns that this action creates a slippery slope that may expand Item 402's disclosure requirements into unintended areas - a form of regulatory expansion through enforcement.

The Commission adopted the current version of Item 402(b) and (j)(5) in 2006.[2]  The 2006 amendments to Item 402 introduced a principles-based disclosure regime for executive compensation, primarily in a new Compensation Discussion and Analysis ("CD&A") section.  Over the past sixteen-plus years, the Division of Corporation Finance staff has provided many interpretations[3] and issued numerous comment letters that have helped guide companies' compliance with, and understanding of, these principles-based disclosure requirements.  By the time that McDonald's and other companies were preparing their 2020 proxy statements, an industry practice for drafting the CD&A section had developed.  Most seasoned public companies share a prevailing view of what the industry practice is for Item 402's principles-based disclosure requirements.  Providing disclosure pursuant to Item 402(b) and (j)(5) based on the facts in this action appears to fall outside of this industry practice.

This action is also a case of first impression.  We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does.  Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer "without cause" instead of "with cause," and vice versa, need to be disclosed under Item 402.  Such "hiring and firing discussion and analysis," however, is beyond the rule's scope.  A principles-based disclosure rule does not need to expressly describe every possible factual permutation that falls within its scope; however, it also does not provide the Commission with a blank check to find violations when disclosures outside of the rule's ambit are not made.  Industry practice for complying with Item 402 has developed over many years, so to spring a novel interpretation through an enforcement action is not a reasonable regulatory approach.  If the Commission intends to expand a settled disclosure requirement, the Commission or its staff should publicly articulate its views through rulemaking or formal guidance[4] so that companies understand the requirement before the Commission starts enforcing it.

[1] In the Matter of Stephen J. Easterbrook and McDonald's Corporation, Release No. 33-11144 (Jan. 9, 2023), available at https://www.sec.gov/litigation/admin/2023/33-11144.pdf.

[2] Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)], available at https://www.sec.gov/rules/final/2006/33-8732a.pdf.

[3] See Regulation S-K Compliance and Disclosure Interpretations Sections 117-126, available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.

[4] Additionally, the Commission could issue a report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934.

Bill Singer's Comment: I'm going with dissenting Commissioners Peirce and Uyeda on this one. By no means do I excuse Easterbrook's conduct; however, it does appear that McDonald's was merely a spectator/bystander to the dalliances of its CEO. Be that as it may, Easterbrook's peccadillos aside, nothing here resonates as either a securities law violation or something where a federal regulator ought to be poking its nose. There are shifting tectonics plates in our society as to what now constitutes abuses of personal discretion -- frankly, as a long-time critic of the tolerance of racism and sexism on Wall Street, I welcome the changing mores. That being said, I'm not quite sure that the fact pattern here warranted the SEC's naming McDonald's Corporation -- I have less concern as to the naming of Easterbrook. Perhaps different facts might have altered my response, but as set out here, this just seems like grabbing for headlines rather than serious regulation. Finally, the SEC is certainly guilty of its own dubious uses of discretion as fully set forth in "SEC Buries The Lede About Stunning Misconduct In Its Office Of The Ombudsman" (BrokeAndBroker.com Blog / September 19, 2022) at https://www.brokeandbroker.com/6673/sec-owb-oig/

The complaint alleges that on October 11, 2022, Eisenberg unlawfully misappropriated over $110 million in digital assets from Mango Markets, a purported decentralized digital asset exchange, through "oracle manipulation." To accomplish his scheme, Eisenberg created two anonymous accounts on Mango Markets, which he used to establish large leveraged positions in a swap contract whose value was based upon the relative price of MNGO, the "native" token of Mango Markets, and USDC, a stablecoin. Eisenberg then artificially pumped up the price of MNGO by rapidly purchasing substantial quantities of MNGO on three digital asset exchanges that were the inputs for the "oracle," or data feed, that Mango Markets used to determine the value of Eisenberg's swap positions. 

As a result of Eisenberg's manipulative trading, the price of MNGO as reported by the oracle, jumped over 13-fold during a 30-minute span, resulting in a temporary, artificial spike in the value of Eisenberg's swap positions. Eisenberg then cashed out his illicit profits by using the artificially inflated value of his swaps as collateral to withdraw over $110 million in digital assets from Mango Markets, thereby draining the platform of most of the assets that had been deposited by other users. Subsequently, in an attempt to evade liability, Eisenberg agreed to return a portion of the misappropriated digital assets on the condition that Mango Markets agreed, among other things, to "not pursue any criminal investigations or freezing of funds." Eisenberg ultimately returned approximately $67 million to Mango Markets, while retaining approximately $47 million worth of various digital assets.

Parallel Action

In a criminal complaint unsealed on December 27, 2022, the U.S. Attorney's Office for the Southern District of New York charged Eisenberg with commodities fraud and commodities manipulation. The criminal case was filed in the U.S. District Court for the Southern District of New York.

https://www.cftc.gov/PressRoom/PressReleases/8646-23
In the United States District Court for the Eastern District of New York, the CFTC filed a complaint against Mark A. Ramkishun https://www.cftc.gov/media/8051/enframkishuncomplaint010923/download
alleging that he had fraudulently induced individuals in the U.S. to participate in a purported commodity pool called Leo Growl LLC. As alleged in part in the CFTC Release:

[B]eginning in at least March 2019 and continuing through at least September 2021, Ramkishun, acted as an unregistered commodity pool operator to fraudulently solicit and receive funds from more than 30 pool participants for the purpose of trading, among other things, commodity futures and options contracts in the pool. The complaint further alleges that both in the course of soliciting as well as after receiving pool participant funds, Ramkishun knowingly made fraudulent and material misrepresentations and/or omitted material facts about the use of pool participant funds and the profits purportedly earned from Ramkishun's trading. Furthermore, rather than use all of the pool participant funds to trade in the pool as he had promised, Ramkishun traded less than half of these funds (resulting in net trading losses) and ultimately misappropriated a substantial portion of pool participant funds on personal expenditures and to make Ponzi-type payments to pool participants. The complaint also alleges that Ramkishun failed to operate the pool as a separate entity from himself and commingled his personal funds with pool participant funds in violation of CFTC regulations.

Parallel Criminal Action

In December 2022, Ramkishun was arrested in Florida and subsequently arraigned on a 56-count indictment obtained by the Kings County District Attorney's Office in Brooklyn, New York based on much of the same conduct alleged in the CFTC's complaint.   

FINRA Censures and Fines DeLoitte Corporate Finance, LLC for Failing to Retain iMessages
In the Matter of Deloitte Corporate Finance, LLC (, Respondent (FINRA AWC 2022074183401)
https://www.finra.org/sites/default/files/fda_documents/2022074183401
%20Deloitte%20Corporate%20Finance%2C%20LLC%20CRD%20111747%20AWC%20va.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Deloitte Corporate Finance, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Deloitte Corporate Finance, LLC has been a FINRA member firm since 2001 with about 110 registered representatives at six branches. In part the "Background" portion of the AWC asserts that [Ed: footnote omitted]:

In December 2014, DCF was censured and fined $75,000 for failure to retain emails and internal instant messages over a six-year period. The firm failed to retain approximately 60,000 internal instant messages and 850,000 emails due to a technological failure.

In accordance with the terms of the AWC, FINRA imposed upon Deloitte Corporate Finance, LLC a Censure, a $200,000 fine, and an undertaking to certify compliance with the cited issues. As alleged in part in the AWC:

Starting in July 2017, DCF permitted firm personnel to utilize text messages for workrelated purposes on firm-owned mobile phones. By default, Apple iPhones automatically create end-to-end encrypted iPhone-to-iPhone messages, called iMessages, which DCF's third-party archiving system does not have the technological capability to capture. Given that DCF knew it could not archive iMessages, DCF sought to disable or block the iMessage function for the iPhones it had previously issued (and for those going forward) so that text messages would be sent as SMS or MMS messages, and thereafter archived by the firm's third-party service. 

In June 2018, when attempting to apply the disabling control to new employees' iPhones, DCF personnel noticed that the disabling control was not disabling iMessages on new iPhones, possibly because of an issue with a new version of iPhone's operating system. In July 2018, the DCF individual who was coordinating the deployment of the iMessage disabling control left the firm and that person's responsibilities were not fully transitioned to a new person. Accordingly, the original blocking control ceased working, or was never applied, on an increasing number of firm-owned iPhones.

In January 2022, a DCF registered representative referenced sending and receiving specific text messages that the firm could not find in its archiving system. Upon investigation, DCF learned that the referenced text messages were iMessages, not SMS or MMS messages, and thus were not being archived by the firm's third-party system.

DCF thereafter collected firm-owned iPhones from its registered representatives and uploaded 676,000 iMessages2 from those iPhones into the firm's archiving system to perform a supervisory review. Only four of the iPhones that DCF collected had the iMessage function disabled, meaning that 95 firm-owned iPhones that were collected were not compliant with DCF's original iMessage blocking control. While conducting the supervisory review, DCF also worked in concert with vendors to deploy a more robust blocking control to disable the iMessage feature on firm-owned iPhones. As a result of the more robust blocking control, text messages are now sent as SMS or MMS messages, which are captured by DCF's third-party service. 

Therefore, DCF violated Section 17(a) of the Exchange Act, Rule 17a-4 of the Exchange Act, and FINRA Rules 4511 and 2010.

Additionally, the AWC discloses under "CREDIT FOR EXTRAORDINARY COOPERATION":

In resolving this matter, FINRA has recognized DCF's extraordinary cooperation. The firm discovered the iMessage issue through its own compliance reviews. The firm engaged computer forensic and e-discovery personnel from DCF affiliates to: (1) assess the nature and extent of the iMessage retention problem; (2) collect all available iMessages from DCF iPhones and add them to DCF's archiving system for supervisory review; (3) investigate why the original blocking control stopped working; and (4) develop a more robust blocking control for iMessages on firm-owned iPhones. DCF conducted a comprehensive internal review involving retrieval, review and analysis of multiple data sources and system logs, input from firm IT personnel and the archiving vendor. The firm also provided substantial assistance to FINRA's investigation, which shortened the time needed to investigate this matter. Throughout its review, DCF provided unprompted, detailed, current information to FINRA about the status of its review, findings, and its planned remedial steps.


https://www.finra.org/sites/default/files/fda_documents/2021070461801
%20Clinton%20F.%20Byrd%20CRD%204673625%20AWC%20lp.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Clinton F. Byrd submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Clinton F. Byrd was first registered in 2003 with Cantella & Co., Inc. In accordance with the terms of the AWC, FINRA imposed upon Byrd a $5,000 fine and a nine-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In December 2012, Byrd, acting on behalf of a musical production company he owned, signed a promissory note through which his company borrowed $550,000 from the Customer A Family. Funding for the principal amount of the note came from Customer A's Cantella brokerage account. Pursuant to the terms of the promissory note, Byrd's company used the note to finance its acquisition of a collection of historical memorabilia. Acting outside the scope of his employment with Cantella, Byrd drafted the promissory note, which was a security; transmitted it to Customer A's daughter; and both Byrd and Customer A's daugheer signed the note. Although the note required Byrd's company to make quarterly interest payments and repay the principal within one year, Byrd's company made no such payments. 

Cantella prohibited its registered representatives from participating in private securities transactions without providing prior written notice to the firm. However, Byrd did not provide written notice to Cantella before causing his company to issue the promissory note, nor did he obtain written approval from the firm. When subsequently asked on six annual firm attestation forms whether he had referred anyone to any investment opportunities outside of Cantella, Byrd falsely responded that he had not. 

Therefore, Byrd violated NASD Rule 3040 and FINRA Rule 2010.

The AWC offers the following clarifications:

In January 2021, the legal representative of the customer whose complaint was referenced in the Form U5 filed a statement of claim, initiating an arbitration against Byrd and Cantella. In that arbitration, the claimant alleged that Byrd executed a promissory note issued by an LLC he owned, and thereafter failed to repay the principal amount of the note. Byrd and Cantella settled the arbitration in May 2021. 

. . .

Footnote 2:  Restitution is not ordered because Byrd has compensated the beneficiaries of the customer's estate through the May 2021 settlement of the arbitration claim brought by the customer's legal representative.

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