Real Estate Investor Pleads Guilty to $3 Million Wire and Bankruptcy Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-edmi/pr/real-estate-investor-pleads-guilty-3-million-wire-and-bankruptcy-fraud-scheme
In the United States District Court for the District of Michigan, Sean Tissue a/k/a "Sean Ryan} ped guilty to wire fraud and bankruptcy fraud. As alleged in part in the DOJ Release:

[T]issue was the owner of numerous companies, including The Centureon Companies LLC, Greystone Home Builders LLC, Sycamore Homes LLC, Lenovo Homes LLC, NROL Holdings LLC, Phillip Ryan LLC, Boardwalk Heights B2R LLC, NROL Property and Investment LLC.

. . .

[T]issue engaged in a real estate investment fraud scheme from 2015 through 2021. During that period, Tissue made, or caused others to make, false and fraudulent representations to induce potential investors from Israel, India, South Africa, and other countries to invest in real estate in Michigan, Texas, and other locations. Tissue, either directly or through agents, provided false and fraudulent material information to investors to induce them to invest and send him money through interstate or international wire transactions. To further the scheme, Tissue caused various false documents to be provided to investors, including fake deeds, fake wiring instructions, fake bank statements, fake leases, and fake inspection reports. Tissue also provided a fake name to investors (“Sean Ryan”). Tissue operated the scheme in the Eastern District of Michigan, and fraudulently obtained over $3 million.

In November 2017 through May 9, 2019, Tissue also engaged in bankruptcy fraud scheme by fraudulently withholding recorded information pertaining to his assets and financial affairs from the Bankruptcy Trustee after filing for Chapter 7 bankruptcy. Tissue was initially arrested on a complaint charging him with wire fraud and has been in custody ever since.

Former Bank Employee Charged With Million-Dollar Fraud And Embezzlement Scheme (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-bank-employee-charged-million-dollar-fraud-and-embezzlement-scheme
In the United States District Court for the Southern District of New York, Kevin Chiu was charged in a Complaint with one count of bank fraud, one count of embezzlement by a bank employee, one count of money laundering, and one count of aggravated identity theft.
https://www.justice.gov/usao-sdny/press-release/file/1570631/download As alleged in part in the DOJ Release:

From at least on or about October 28, 2020, through on or about June 29, 2022, CHIU engaged in a scheme to steal from his clients’ accounts by using fraudulent transaction forms to transfer funds out of their accounts.  He asked at least one elderly client to sign blank transaction forms when she was meeting with CHIU in person and provided that client with fake account statements so she would not know the true balance of her account, which CHIU had largely drained. 

In addition, CHIU transferred stolen funds from some client accounts to others from which he already had stolen to conceal the fraud.  In total, CHIU stole over $2 million from his former clients, several of whom were elderly individual clients. 

CHIU used the money he stole to purchase securities and trade in the market.  He also used the funds for personal expenses.

CEO of Publicly Traded Health Care Company Charged for Insider Trading Scheme / First Insider Trading Prosecution Based Exclusively on Use of Rule 10b5-1 Trading Plans (DOJ Release)
https://www.justice.gov/opa/pr/ceo-publicly-traded-health-care-company-charged-insider-trading-scheme

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SEC Charges Ontrak Chairman Terren Peizer with Insider Trading / Healthcare executive avoided more than $12 Million in losses by selling shares through Rule 10b5-1 trading plans before stock freefall (SEC Release)
https://www.sec.gov/news/press-release/2023-42

In the United States District Court in the Central District of California, an Indictment was filed charging the SEC filed a Complaint charging the Chief Executive Officer /Chair of Ontrak Inc., Terren S. Peizer with one count of engaging in a securities fraud scheme and two counts of securities fraud for insider trading.
https://www.justice.gov/opa/press-release/file/1570711/download As alleged in part in the DOJ Release:

[B]etween May and August 2021, Peizer, 63, a resident of Puerto Rico and Santa Monica, California, allegedly avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract. In May 2021, Peizer allegedly entered into his first 10b5-1 trading plan shortly after learning that the relationship between Ontrak and the customer was deteriorating and that the customer had expressed serious reservations about continuing its contract with Ontrak. The indictment alleges that Peizer later learned that the customer informed Ontrak of its intent to terminate the contract. Then, in August 2021, Peizer allegedly entered into his second 10b5-1 trading plan approximately one hour after Ontrak’s chief negotiator for the contract confirmed to Peizer that the contract likely would be terminated.

In establishing his 10b5-1 plans, Peizer allegedly refused to engage in any “cooling-off” period – the time between when he entered into the plan and when he sold stock – despite warnings from two brokers. Instead, Peizer allegedly began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 19, 2021, just six days after Peizer adopted his August 10b5-1 plan, Ontrak announced that the customer had terminated its contract and Ontrak’s stock price declined by more than 44%. 

. . .

Rule 10b5-1 trading plans can offer an executive a defense to insider trading charges. However, the defense is unavailable if the executive is in possession of material, nonpublic information at the time he or she enters into the 10b5-1 trading plan. Additionally, a plan does not protect an executive if the trading plan was not entered into in good faith or was entered into as part of an effort or scheme to evade the prohibitions of Rule 10b5-1.

In the United States District Court in the Central District of California, the SEC filed a Complaint charging the Executive Chair of Ontrak Inc., Terren S. Peizer, and  Acuitas Group Holdings, LLC with violating antifraud provisions of the federal securities laws.
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-42.pdf A parallel criminal action was filed against Peizer. As alleged in part in the SEC Release:

[P]rior to May 2021, when Peizer established a Rule 10b5-1 trading plan in the name of Acuitas Group Holdings, LLC, his investment vehicle, to sell Ontrak stock, he had learned that Ontrak’s relationship with its then-largest customer—representing more than half its revenue—was tenuous. Nevertheless, Peizer attested at the time that he was unaware of any material nonpublic information concerning the company, executed the 10b5-1 plan, and sold nearly 600,000 of Ontrak shares worth more than $19.2 million. In August 2021, the complaint alleges, Peizer learned the same relationship was on the verge of being terminated, which prompted him to adopt a second Rule 10b5-1 trading plan and sell 45,000 more shares of stock worth more than $1.9 million.

When Ontrak announced on August 19, 2021 that the customer had terminated the contract, Ontrak’s stock price fell more than 44 percent and, as a result, the SEC complaint alleges, Peizer avoided more than $12.7 million in losses by executing the two trading plans. The SEC’s complaint alleges that Peizer and Acuitas adopted the Rule 10b5-1 plans while Peizer was aware of material nonpublic information and as part of a scheme to evade insider trading prohibitions and that, therefore, Peizer cannot take advantage of any affirmative defense available to corporate insiders under Rule 10b5-1.

Bill Singer's Comment: Read: "Rule 10b5-1: Insider Trading Arrangements and Related Disclosure" (SEC Fact Sheet)
https://www.sec.gov/files/33-11138-fact-sheet.pdf

SEC Charges Hawaii Investment Adviser with Running Ponzi Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25654.htm
In the United States District Court for the District of Hawaii, the SEC filed a Complaint charging Stephen Keith Woodward, Sr.
https://www.sec.gov/litigation/complaints/2023/comp25654.pdf with violating the antifraud and registration provisions of Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. As alleged in part in the SEC Release:

[F]rom 2016 to mid-2021, Woodard raised approximately $6 million from about 30 purchasers of promissory notes issued by Morganwood Ltd., an entity he controlled. According to the complaint: Woodard told investors, some of whom were also his investment advisory clients, that he employed a risk-free trading strategy that focused on the preservation of capital but still yielded impressive returns. However, as alleged in the complaint, Woodard invested only a small amount of investor capital, made increasingly risky bets on the market, and sustained heavy losses. The complaint further alleges that Woodard used the majority of investor monies to pay investors phantom returns on their investments, and that instead of disclosing his mounting trading losses, Woodard provided his investors with false account statements showing illusory gains in the value of their investments.

SEC Charges Virginia Investment Adviser with Orchestrating a Fraudulent Investment Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25653.htm
In the United States District Court for the Eastern District of Virginia, the filed a Complaint charging Ryan R. Riley with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Riley has consented to the entry of a judgment which, if approved by the court, would permanently enjoin him from violating the charged provisions and bar him from acting as an officer or director of a public company, with disgorgement and civil penalties to be decided later by the court. Parallel criminal charges were filed against Riley. As alleged in part in the SEC Release:

[F]rom at least January 2014 through September 2019, Ryan R. Riley, of Leesburg, Virginia, solicited advisory clients and other individuals to invest in securities issued by his companies, Green Light Energy, LLC and Mustang Resources, Inc. According to the complaint, Riley induced investors to invest by claiming that he would use their funds to acquire, develop, and operate oil & gas drilling projects in Texas. The SEC alleges that, in reality, Riley misappropriated the funds, using some for personal expenses and losing the majority through risky day trading.

FINRA Censures and Fines Member Firm for Private Placement Supervision
In the Matter of Lighthouse Capital Group, LLC, Respondent (FINRA AWC 2017056516801)
https://www.finra.org/sites/default/files/fda_documents/2017056516801
%20Lighthouse%20Capital%20Group%2C%20LLC%20%20CRD%20169135%20AWC%20lmp.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 Lighthouse Capital Group, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Lighthouse Capital Group, LLC has been a FINRA member firm since 2014 with about 25 registered representatives. In accordance with the terms of the AWC, FINRA imposed upon Lighthouse Capital Group, LLC a Censure and $250,000 fine. As alleged in part in the AWC:

In 2017 and 2018, Lighthouse sold approximately 65 private placements in reliance on the Rule 506(b) safe harbor, raising approximately $273 million in capital for issuers.

During this period, Lighthouse’s supervisory system and written supervisory procedures were not reasonably designed to prevent general solicitations of private placements. In particular, Lighthouse’s supervisory system did not consistently monitor and document when the firm established a substantive relationship with a prospective investor, or to confirm—before a prospective investor was solicited for an offering—that the firm had a substantive relationship with that investor. The firm failed to systematically collect complete information regarding prospective investors and failed to have a reasonable system to determine the date the firm first developed a substantive relationship with each prospective investor. Accordingly, the firm was not able to always confirm that it had a pre-existing, substantive relationship with a prospective investor prior to soliciting the prospective investor for an offering. As a result, with respect to certain of the actual or prospective investors in at least eight of the offerings referenced above, the firm was unable to reasonably supervise the solicitations to ensure that a pre-existing, substantive relationship existed prior to the solicitation in compliance with applicable rule requirements.

Further, during this period, the firm’s written supervisory procedures did not define what constituted general solicitation or give sufficient guidance or instruction to the firm’s supervisors about whether, when, or how to review the activities of firm personnel to ensure that general solicitation was not occurring.

Subsequent to the relevant period herein, Lighthouse revised its supervisory systems and written procedures in this area by, among other things, requiring the firm’s representatives to consistently obtain and document each potential investor’s accreditation, investment experience and goals, and other financial information within the firm’s books and records prior to any solicitation being made.

Therefore, Respondent violated FINRA Rules 3110 and 2010. 

Guam Uniform Securities Act Cited in FINRA Arbitration / Panel Awards Public Customer Over $3 Million in Compensatory and Punitive Damages
In the Matter of the Arbitration Between Michael Phillips, Claimant, v. Asia Pacific Financial Management Group, Inc., Respondents (FINRA Arbitration Award 21-02729)
https://www.finra.org/sites/default/files/aao_documents/21-02729.pdf
In a FINRA Arbitration Statement of Claim filed in October 2021 and as amended by public customer Claimant Phillips, Claimant asserted "negligence; failure to recommend suitable investments; failure to supervise broker, account, and transactions; unauthorized trading; violations of FINRA Rule 2020 and FINRA Rule 2150; breach of fiduciary duty; breach of contract; violations of the Guam Uniform Securities Act; and respondeat superior.. . ."

Respondent Asia Pacific Financial Management Group, Inc, generally denied the allegations and asserted affirmative responses.

The FINRA Arbitration Panel found Respondent liable and ordered it to pay to Claimant Phillips $1,520,768.65 in compensatory damages plus interest, $1,520,768.65 in punitive damages plus interest, and $625 in filing fees.

Bill Singer's Comment: Among the items on my bucket list was to report about a case involving the Guam Uniform Securities Act. Now, I can check off that item. 

Supreme Court Pegs The Bank Secrecy Act's $10,000 maximum penalty for the nonwillful failure to file a compliant report to a per-report and not per-account basis.
Alexandru Bittner, Petitioner v. United States (Opinion, United States Supreme Court, No, 20-1195 / February 28, 2023)

https://www.supremecourt.gov/opinions/22pdf/21-1195_h3ci.pdf
As set forth in the Supreme Court's Syllabus:

The Bank Secrecy Act (BSA) and its implementing regulations require U. S. persons with certain financial interests in foreign accounts to file an annual report known as an “FBAR”—the Report of Foreign Bank and Financial Accounts. The statute imposes a maximum $10,000 penalty for nonwillful violations of the law. These reports are designed to help the government trace funds that may be used for illicit purposes and identify unreported income that may be subject to taxation. Petitioner Alexandru Bittner—a dual citizen of Romania and the United States—learned of his BSA reporting obligations after he returned to the United States from Romania in 2011, and he subsequently submitted the required annual reports covering five years (2007 through 2011). The government deemed Bittner’s late-filed reports deficient because the reports did not address all accounts as to which Bittner had either signatory authority or a qualifying interest. Bittner filed corrected FBARs providing information for each of his accounts—61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. The government neither contested the accuracy of Bittner’s new filings nor suggested that Bittner’s previous errors were willful. But because the government took the view that nonwillful penalties apply to each account not accurately or timely reported, and because Bittner’s five latefiled annual reports collectively involved 272 accounts, the government calculated the penalty due at $2.72 million. Bittner challenged that penalty in court, arguing that the BSA authorizes a maximum penalty for nonwillful violations of $10,000 per report, not $10,000 per account. The Fifth Circuit upheld the government’s assessment.

Held: The BSA’s $10,000 maximum penalty for the nonwillful failure to file a compliant report accrues on a per-report, not a per-account, basis. Pp. 4–14, 16. 

(a) The Court begins with the terms of the most immediately relevant statutory provisions—31 U. S. C. §5314, which delineates an individual’s legal duties under the BSA, and §5321, which outlines the penalties that follow for failing to discharge those duties. Section 5314 provides that the Secretary of the Treasury “shall” require certain persons to “keep records, file reports, or keep records and file reports” when they “mak[e] a transaction or maintai[n] a relation” with a “foreign financial agency.” The statute states that reports “shall contain” information about “the identity and address of participants in a transaction or relationship,” “the legal capacity in which a participant is acting,” and “the identity of real parties in interest,” along with a “description of the transaction.” Section 5314 does not speak of accounts or their number but rather the legal duty to file reports which must include various kinds of information about an individual’s foreign “transaction[s] or relationship[s].” Violation of §5314’s reporting obligation is binary: One files a report “in the way and to the extent the Secretary prescribes,” or one does not; multiple willful errors may establish a violation of §5314 but even a single mistake, willful or not,
constitutes a §5314 violation. The only distinction the law draws between a report containing a single mistake and one containing multiple mistakes concerns the appropriate penalty.

Section 5321 authorizes the Secretary to impose a civil penalty of up to $10,000 for “any violation” of §5314. The “nonwillful” penalty provision in §§5321(a)(5)(A) and (B)(i) does not speak in terms of accounts but rather pegs the quantity of nonwillful penalties to the quantity of “violation[s].” Section 5314 provides that a violation occurs when an individual fails to file a report consistent with the statute’s commands.Multiple deficient reports may yield multiple $10,000 penalties, and even a seemingly simple deficiency in a single report may expose an individual to a $10,000 penalty. But penalties for nonwillful violations accrue on a per-report, not a per-account, basis.

To be sure, for certain cases that involve willful violations, the statute does tailor penalties to accounts. Section 5321 specifically addresses a subclass of willful violations that involve “a failure to report the existence of an account or any identifying information required to be provided with respect to an account.” §5321(a)(5)(D)(ii). In such cases, the Secretary may impose a maximum penalty of either $100,000 or 50% of “the balance in the account at the time of the violation”—whichever is greater. §5321(a)(5)(C) and (D)(ii). The government maintains that because Congress explicitly authorized per-account penalties for some willful violations, the Court should infer that Congress meant to do so for analogous nonwillful violations. But the government’s interpretation defies a traditional rule of statutory construction: When Congress includes particular language in one section of a statute and omits it from a neighbor, the Court normally understands that difference in language to convey a difference in meaning (expressio unius est exclusio alterius). Here the statute twice provides evidence that when Congress wished to tie sanctions to account-level information, it knew exactly how to do so. Congress said in §§5321(a)(5)(C) and (D)(ii) that penalties for certain willful violations may be measured on a per-account basis. And Congress said in §5321(a)(5)(B)(ii) that a person may invoke the reasonable cause exception only on a showing of per-account accuracy. But Congress did not say that the government may impose nonwillful penalties on a per-account basis. Pp. 5–8.

(b) The Court finds a number of additional contextual clues that cut against the government’s theory in this case. First, the government has repeatedly issued guidance to the public—in various warnings, fact sheets, and instructions—that seems to tell the public that the failure to file a report represents a single violation exposing a nonwillful violator to one $10,000 penalty. While the government’s guidance documents do not control the Court's analysis, courts may consider the inconsistency between the government’s current view and its past views when weighing the persuasiveness of any interpretation it offers. Skidmore v. Swift & Co., 323 U. S. 134, 140. Second, the drafting history of the nonwillful penalty provision undermines the theory the government urges the Court to adopt. In 1970, the BSA included penalties only for willful violations. In 1986, Congress authorized the imposition of penalties on a per-account basis for certain willful violations. When Congress amended the law again in 2004 to authorize penalties for nonwillful violations, Congress could have, but did not, simply use language from its 1986 amendment to extend per-account penalties for nonwillful violations.

Still other features of the BSA and its regulatory scheme suggest the law aims to provide the government with a report sufficient to tip it to the need for further investigation, not to ensure the presentation of every detail or maximize revenue for each mistake. Consider that Congress declared that the BSA’s “purpose” is “to require” certain “reports” or “records” that may assist the government in various kinds of investigations. §5311. Absent is any indication that Congress sought to maximize penalties for every nonwillful mistake. Similarly, the Secretary’s regulations implementing the BSA require individuals with fewer than 25 accounts to provide details about each account while individuals (like Bittner) with 25 or more accounts do not need to list each account or provide account-specific details unless the Secretary requests more “detailed information.” 31 CFR §1010.350(g)(1). Finally, the government’s per-account penalty reading invites anomalies—for example, subjecting willful violators to lower penalties than  nonwillful violators—avoided by reading the nonwillful penalty to apply on a per-report basis.

The government replies that the per-report interpretation risks the anomaly that the Secretary could formulate reporting requirements to require a separate report for each account and in that way effectively achieve a per-account penalty for nonwillful violations. What this proves is unclear, as the Secretary's discretion to require more (or fewer) reports is not at issue here, and in any event does not answer whether the Secretary may impose nonwillful penalties on a per-report or per-account basis. Pp. 9–14. 

(c) Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000. P. 16. 19 F. 4th 734, reversed and remanded. 

GORSUCH, J., announced the judgment of the Court, and delivered the opinion of the Court except as to Part II–C. JACKSON, J., joined that opinion in full, and ROBERTS, C. J., and ALITO and KAVANAUGH, JJ., joined except for Part II–C. BARRETT, J., filed a dissenting opinion, in which THOMAS, SOTOMAYOR, and KAGAN, JJ., joined.  

SEC Charges Nishad Singh with Defrauding Investors in Crypto Asset Trading Platform FTX (SEC Release)
https://www.sec.gov/news/press-release/2023-40
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CFTC Charges FTX Co-Owner with Fraud by Misappropriation and Aiding and Abetting Fraud Related to Digital Asset Commodities / Nishad Singh to Concede Liability in Proposed Consent Order (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8669-23 

In the United States District Court for the Southern District of New York, the SEC filed a Complaint charging former Co-Lead Engineer of FTX Trading Ltd. Nishad Singh with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.
http://www.sec.gov/litigation/complaints/2023/comp-pr2023-40.pdf Singh consented to a bifurcated settlement under which he will be permanently enjoined from violating the federal securities laws, subject to a conduct-based injunction, and an officer and director bar. Parallel actions were filed by the United States Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission. As alleged in part in the SEC Release:

[S]ingh created software code that allowed FTX customer funds to be diverted to Alameda Research, a crypto hedge fund owned by Bankman-Fried and Wang, despite false assurances by Bankman-Fried to investors that FTX was a safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets and that Alameda was just another customer with no special privileges. The complaint alleges that Singh knew or should have known that such statements were false and misleading. 

The complaint also alleges that Singh was an active participant in the scheme to deceive FTX’s investors. The complaint further alleges that, even as it became clear that Alameda and FTX could not make customers whole for the funds already unlawfully diverted, Bankman-Fried, with the knowledge of Singh, directed hundreds of millions of dollars more in FTX customer funds to Alameda, which were used for additional venture investments and loans to Bankman-Fried, Singh, and other FTX executives.  Moreover, according to the complaint, as FTX neared collapse, Singh withdrew approximately $6 million from FTX for personal use and expenditures, including the purchase of a multi-million dollar house and donations to charitable causes. 

In the United States District Court for the Southern District of New York, the CFTC filed a Complaint charging Nishad Singh with fraud by misappropriation and with aiding and abetting fraud committed by Samuel Bankman-Fried, FTX Trading Ltd. d/b/a FTX.com (FTX), and Alameda Research LLC (Alameda). https://www.cftc.gov/media/8226/enfsinghcomplaint022823/download Singh entered into a Consent Order of Judgment as his liability on the charges in the CFTC Complaint.https://www.cftc.gov/media/8231/enfsinghconsentorder022823/download As alleged in part in the CFTC Release:

[F]rom approximately May 2019 through November 11, 2022, FTX represented that customers’ assets were held in “custody” by FTX and segregated from FTX’s own assets. To the contrary, FTX customer assets were routinely held by FTX’s sister digital asset trading company, Alameda, and were misappropriated by Alameda, FTX, and Alameda executives for improper purposes such as luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.

As alleged, Singh was responsible for creating or maintaining various undisclosed components in the code underlying FTX that, operating together with other features, granted Alameda functionalities that allowed it to misappropriate FTX customer assets. Among other things, these features in the FTX code favored Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including, critically, a “can withdraw below borrow” functionality that allowed Alameda to withdraw billions of dollars in customer assets from FTX.

The complaint further charges that Singh personally misappropriated millions of dollars of assets, including FTX customer assets, through poorly documented “loans” from Alameda and other improper withdrawals of funds from FTX for various personal expenditures, and did so even after Singh knew or should have known the source of those assets was, at least in part, FTX customer assets.

FINRA Censures and Fines Member Firm for Risk Management Controls and Supervisory Procedures
In the Matter of Fenix Securities, LLC, Respondent (FINRA AWC 2018057732801)
https://www.finra.org/sites/default/files/fda_documents/2018057732801
%20Fenix%20Securities%2C%20LLC%20CRD%20159481%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, Fenix Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Fenix Securities, LLC has been a FINRA member firm since 2012 with about 10 registered representatives at its NYC headquarters and a Buenos Aires, Argentina branch. In accordance with the terms of the AWC, FINRA imposed upon Fenix Securities, LLC a Censure, $100,000 fine and an undertaking to certify compliance with the cited supervisory/risk management issues. As alleged in part in the AWC:

[F]rom October 2016 to the present, Fenix failed to establish, document, and maintain a system of risk management controls reasonably designed to manage the financial risks of its market access business activity. During this period, Fenix provided its customers direct access to multiple ATSs through the firm's order management systems. The firm implemented certain pre-trade controls within its order management systems, including order size and price controls, however the firm's controls were not reasonably designed to prevent the entry of erroneous orders. From October 2016 to at least January 2020, the firm's single order size and price variance controls relied on static numbers that did not consider the individual trading characteristics of individual securities or customers, and that were too high to be reasonably designed to prevent the entry of erroneous orders absent additional reasonably designed controls, such as an ADV control, which the firm did not have. The furn maintained no documentation of its rationale for setting those controls. Similarly, from October 2016 to at least March 2019, the firm relied on a price variance control that, once triggered, routed a warning message to a firm principal but did not stop the order from being routed to the market. The firm had no policies or procedures for how the warning messages should be reviewed or how such reviews should be documented and did not document such reviews.

Further, from October 2016 to at least August 2018, the firm, for some of its customers, relied on the pre-trade order price and size controls maintained by an ATS. The ATS's price and size controls were unreasonable, in part because they relied on static numbers that were too high to be reasonably designed to prevent the entry of erroneous orders, absent additionally reasonably designed controls. Further, Fenix did not document for which customers the firm relied on such controls and had no process to determine or document whether such controls were reasonably designed for those customers.

Finally, from October 2016 through the present, the firm did not maintain accurate documentation of its pre-trade market access controls implemented within its systems or documentation of its rationale for selecting its pre-trade controls on a firm-wide or per customer basis.

Therefore, Fenix violated Exchange Act § 15( c )(3), Exchange Act Rules 15c3-5(b) and (c)(l )(ii), and FINRA Rules 3110 and 2010. 

. . .

From October 2016 to the present, the firm failed to conduct an annual review of the business activity of the firm related to market access to assure the overall effectiveness of its risk management controls and supervisory procedures as required under Rule 15c3-5( e )( l ). Likewise, the firm failed to complete the corresponding CEO certifications that the firm's risk management controls and supervisory procedures comply with 15c3-5(b) and (c), and that the firm conducted a review of the business activity of the firm related to market access, as required under Rule 15c3-5(e)(2).

Therefore, Fenix violated Exchange Act §15(c)(3), Exchange Act Rule 15c3-5(e), and FINRA Rule 2010. 

FINRA Fines and Suspends NRF for Unauthorized Materials at SIE Exam
In the Matter of Thomas M. O'Keefe, Respondent (FINRA AWC 2022074814601)
https://www.finra.org/sites/default/files/fda_documents/2022074814601
%20Thomas%20M.%20O%27Keefe%20CRD%207421625%20AWC%20lp-1.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, Thomas M. O'Keefe submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Thomas M. O'Keefe was associated with Fidelity Brokerage Services LLC as a non-registered fingerprint person ("NRF") in July 2021. In accordance with the terms of the AWC, FINRA imposed upon Thomas M. O'Keefe a $5,000 fine and an 18-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On November 18, 2021, O’Keefe sat for the SIE examination at his home using a remote delivery platform. Prior to the beginning of the exam, O’Keefe attested that he had read and would abide by the Rules of Conduct, which among other things, prohibit the use or attempted use of any electronic device or phone during the exam. The SIE Rules of Conduct also require candidates taking online examinations to store all personal items outside the room in which they take the exam. During the examination, O’Keefe possessed and accessed his cellular phone in violation of the Rules of Conduct. Therefore, O’Keefe violated FINRA Rules 1210.05 and 2010.

Niagara Falls Woman Going To Prison For Stealing Hundreds Of Thousands Of Dollars From Investment Firm Clients (DOJ Release)
https://www.justice.gov/usao-wdny/pr/niagara-falls-woman-going-prison-stealing-hundreds-thousands-dollars-investment-firm
In the United States District Court for the Western District of New York,  Jennifer Campbell, 48, pled guilty to wire fraud; and she was sentenced to 36 months in prison and ordered to pay $371,332.11 in restitution. As alleged in part in the DOJ Release: 

[C]ampbell was employed as the Office Manager and Chief Compliance Officer at an investment advisory firm based in Buffalo, with access to client accounts. Between November 2018, and May 2021, Campbell used this access to steal over $500,000 from several clients and from the firm itself, primarily by writing checks from client accounts, forging the signatures of either the client or a principal at the firm, and then depositing the checks into her own personal account. 

Campbell took various steps to conceal her theft. In one instance, she sent a victim a falsified account statement that purported to show an account balance of approximately $148,000, when in fact the account at the time had a balance of only $93. In another instance, Campbell took funds from a client and transferred them to the bank account of one of her earlier victims. Finally, Campbell gained access to the email accounts of the firm’s principals and diverted emails that they received from anti-money laundering and financial crimes personnel at the firm’s broker-dealer, who had begun to raise questions about some of the transactions that Campbell had engaged in. In an effort to put off these inquiries, Campbell sent several emails using the email account of a firm principal. In these emails, Campbell made various false statements and submitted fake documentation in an effort to make the transactions appear legitimate. 

Wells Fargo Agrees to Training on New Companywide Policy to Improve Telephone Access by Customers Who are Deaf or Hard of Hearing (DOJ Release)
https://www.justice.gov/usao-co/pr/wells-fargo-agrees-training-new-companywide-policy-improve-telephone-access-customers-who
In the United States Attorney's Office for the District of Colorado has resolved a  Americans with Disabilities Act (ADA) Complaint made by a hard-of-hearing Wells Fargo customer. As alleged in part in the DOJ Release:

The complainant, who has difficulty hearing and speaking on the telephone, attempted to use her caregiver to relay information on her behalf on telephone calls with Wells Fargo customer service representatives.  The complainant was a consumer banking and credit card customer with Wells Fargo, and some of her telephone inquiries related to fraudulent charges that had been made using her credit card.  The complainant alleged that Wells Fargo refused to permit the caregiver to assist the complainant, which prevented her from receiving services over the telephone.  This refusal forced the complainant to visit Wells Fargo bank branches in-person during the COVID-19 pandemic in the summer and fall of 2020. 

The ADA requires that places of public accommodation allow individuals with disabilities to use appropriate auxiliary aids and services, including by allowing others to communicate on their behalf, in order to ensure effective communication so that they can receive equal service from businesses and other public accommodations.

To resolve the complaint, Wells Fargo agreed to pay the complainant $10,000. In addition, Wells Fargo made changes to its companywide ADA policy to clarify that companions of individuals with disabilities may provide communication assistance.  Wells Fargo also agreed to train call center employees and other customer service representatives on the policy.   Wells Fargo also agreed to reach out to other customers who had made complaints about the same issue and notify them of the policy change.  These companywide changes and efforts may affect numerous individuals nationwide, as Wells Fargo serves approximately one in three households in the United States, with approximately 4,700 banking locations across the country. 

Former Bank Employee Convicted After Trial for Fraudulently Opening Bank Accounts (DOJ Release)
https://www.justice.gov/usao-md/pr/former-bank-employee-convicted-after-trial-fraudulently-opening-bank-account
In the United States District Court for the District of Maryland, after an eight-day jury trial, Diape Seck was convicted of conspiracy to commit bank fraud; bank fraud; making false entries in bank records; and receipt of a bribe or reward by a bank employee. As alleged in part in the DOJ Release:

[F]rom at least January 2019 to January 2020, Seck, a customer service representative with Bank A, conspired with Mateus Vaduva, Marius Vaduva, Vlad Baceanu, Nicolae Gindac, Florin Vaduva, Marian Unguru, Daniel Velcu, Vali Unguru and others to commit bank fraud.  Specifically, the evidence showed that Seck fraudulently opened bank accounts in fake identities in exchange for cash bribes.  Co-conspirators engaged in fraud that included fraud involving rental cars and the deposit of checks stolen from the incoming and outgoing mail of churches and other religious institutions, into the fraudulently opened bank accounts.  The co-conspirators then withdrew the funds and spent the fraudulently obtained proceeds.

As detailed in the trial evidence, Diape Seck facilitated the opening of hundreds of bank accounts at Bank A for his co-conspirators, who used purported foreign identity documents, often but not universally Romanian, to fraudulently open bank accounts with him at Bank A, as well as bank accounts at other victim financial institutions.  Seck opened accounts for co-conspirators without their presence in the bank, without verifying identity information, and opened accounts for co-conspirators who opened multiple accounts at a time under different identities.  To conceal his improper activities, Seck opened accounts for the co-conspirators at the same time he conducted legitimate bank activities.  The co-conspirators paid Seck cash in exchange for him opening the fraudulent bank accounts.

According to court documents and witness testimony, Seck violated numerous bank policies in opening approximately 412 checking accounts in a one-year period from approximately January 2, 2019 through January 3, 2020, relying predominantly on purported Romanian passports and driver's license information.  Checks payable to and written from churches and other religious institutions from around the country were deposited into many of the 412 checking accounts which were not opened in the names of the churches.

The co-conspirators fraudulently negotiated the stolen checks by depositing them into the victim bank accounts, including the fraudulent accounts opened by Seck at Bank A, often by way of automated teller machine (ATM) transactions.   After depositing the stolen checks into the bank accounts, the conspirators made cash withdrawals from ATMs and purchases using debit cards associated with the bank accounts.

Co-conspirators Vlad Baceanu, age 38; Daniel Velcu, age 43; Marian Unguru, age 36; and Vali Unguru, age 20, all of Baltimore, Maryland, previously pled guilty to conspiracy to commit bank fraud and wire fraud.  Nicolae Gindac, age 52, of Dania Beach, Florida was sentenced to 54 months in federal prison and ordered to pay restitution of $1,096,660.11; Mateus Vaduva, age 29, of Baltimore was sentenced to five years in federal prison and ordered to pay restitution of $1,320,885.84; Florin Vaduva, age 31, of Dania Beach, Florida was sentenced to 51 months in federal prison and ordered to pay restitution of $1,096,660.11; and Marius Vaduva, age 28, of Baltimore was sentenced to 42 months in federal prison and ordered to pay restitution of $1,334,230.84, after they previously pled guilty to conspiracy to commit bank and wire fraud.

SEC Charges Texas Stockbroker for Stealing Funds from Elderly Customers (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25651.htm
In the United States District Court for the Eastern District of Texas, the SEC filed a Complaint charging  Bradley Morgan Holts with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. https://www.sec.gov/litigation/complaints/2023/comp25651.pdf
As alleged in part in the SEC Release:

[H]olts, while a registered representative associated with a broker-dealer based in Denver, Colorado, misappropriated $186,382 from three elderly customers of the broker-dealer. According to the SEC's complaint, Holts falsely told these investors that he would invest their money in mutual funds. The SEC's complaint further alleges that Holts instead stole the investors' money and used it to pay personal expenses, including for clothing, tanning salons, adult and dating websites, and a divorce lawyer.

SEC Orders Affiliated Investment Advisers to Repay Clients for Failing to Disclose Conflicts and Duty of Care Violations (SEC Release)
https://www.sec.gov/enforce/ia-6251-s
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/ia-6251.pdf that finds that they had violated the antifraud and compliance provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, Huntleigh Advisors, Inc. and its affiliate Datatex Investment Services, Inc. consented to a cease-and-desist order and a Censure. Huntleigh agreed to pay disgorgement of $608,251 with prejudgment interest of $105,251 and a civil penalty of $130,000; and Datatex agreed to pay a civil penalty of $50,000. As alleged in part in the SEC Release:

[H]untleigh and Datatex failed to fully and fairly disclose to their advisory clients conflicts of interest associated with: (i) Huntleigh's receipt of transaction fees that advisory clients paid to the affiliated broker-dealer; (ii) revenue sharing payments an affiliated broker-dealer received and shared with Huntleigh from clients' investments in cash sweep vehicles; (iii) mutual fund share class selection practices that paid fees to an affiliated broker-dealer pursuant to Rule 12b-1 under the Investment Company Act of 1940 instead of available lower-cost share classes of the same funds that did not charge those fees; and (iv) revenue an affiliated broker-dealer received and shared with Huntleigh based on the rate of margin interest charged to advisory clients. The order also finds that, although eligible to do so, Huntleigh and Datatex did not self-report their affiliate's receipt of 12b-1 fees to the Commission pursuant to the Division of Enforcement's Share Class Selection Disclosure Initiative.

As set forth in the order, Huntleigh and Datatex also breached their duty of care, including their duty to seek best execution, in connection with evaluation of the transaction fees charged to their advisory clients, and the selection of cash sweep account options and mutual fund share classes for clients. According to the order, Huntleigh and Datatex also failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.

Statement Regarding Huntleigh Advisors, Inc. and Datatex Investment Services, Inc. by SEC Commissioner Hester M. Peirce and SEC Commissioner Mark T. Uyeda
https://www.sec.gov/news/statement/peirce-uyeda-statement-huntleigh-datatex-022723

We dissent from the finding in this Order that Huntleigh Advisors, Inc. and Datatex Investment Services, Inc. (together, the “Advisers”) breached their duty to seek best execution “by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds were available to the clients that presented a more favorable value under the particular circumstances in place at the time of the transactions.”[1] In a substantive area where significant efforts have been undertaken to define fiduciary duty through the notice and comment process, it is unfortunate that the Commission chooses to create novel regulatory interpretations through enforcement.

The Advisers are both registered with the Commission as investment advisers. Under the Investment Advisers Act of 1940 (“Advisers Act”), an investment adviser owes a fiduciary duty to its clients.[2] This fiduciary duty comprises a duty of care and a duty of loyalty.[3] The Commission has articulated three components of the duty of care: (1) the duty to provide advice that is in the best interest of the client, (2) the duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (3) the duty to provide advice and monitoring over the course of the relationship.[4] Under an investment adviser’s duty of loyalty, an adviser must not subordinate its clients’ interests to its own.[5] According to the Commission, to satisfy its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship, including eliminating or disclosing all conflicts of interest.[6] The Commission may bring enforcement actions against an adviser that has breached its fiduciary duty under the anti-fraud provisions of Section 206 of the Advisers Act.[7]

The Commission Order makes a compelling case for a violation of Section 206(2) by finding that the Advisers breached their fiduciary duties by failing to “disclose either the existence of a conflict of interest or all material facts regarding the conflict of interest that arose when they invested advisory clients in a share class that would generate 12b-1 fee revenue for [the Advisers’ affiliated broker-dealer] while a share class of the same fund was available that would not provide [that broker-dealer] with that additional compensation.”[8] But the Commission Order goes further by finding that the Advisers breached the component of the duty of care that requires an adviser to seek best execution by selecting a more expensive share class.[9] The Commission Order makes clear that this duty of care violation is separate and distinct from the “failure to disclose” violation.

There is no legal authority cited in the Commission Order for the finding that mutual fund share class selection implicates an investment adviser’s duty to seek best execution. The Commission has stated that this duty means that an adviser must “[seek] to obtain the execution of securities transactions on behalf of a client with the goal of maximizing value for the client under the particular circumstances occurring at the time of the transaction.”[10] Explaining what it means to “maximize value” in this context, the Commission quotes from a Commission release that interprets the scope of Section 28(e) of the Securities Exchange Act of 1934.[11] Section 28(e) provides a safe harbor for persons who exercise investment discretion over beneficiaries’ or clients’ accounts to pay for research and brokerage services with commission dollars generated by account transactions.[12] Taken together, it is our view that the Commission’s interpretations stand for the proposition that an investment adviser’s duty to seek best execution concerns the manner in which the investment adviser places securities transactions through broker-dealers, with a particular focus on the price at which the order is executed and the commission rate paid to the broker-dealer.

The conduct that implicates the duty to seek best execution is inapplicable to purchases of mutual fund shares for two reasons. First, mutual funds are required to sell and redeem their shares at a price based on the net asset value next calculated after the receipt of the purchase or redemption order.[13] Accordingly, execution quality is not relevant to the selection of mutual fund share classes. Second, Rule 12b-1 fees are paid out of the assets of a mutual fund on an ongoing basis. These fees are unlike commissions that are paid to broker-dealers, which are transaction-based, meaning that they are charged by broker-dealers for facilitating the purchase or sale of a particular security at a particular point in time. Whereas brokerage commission rates may vary among broker-dealers, all shareholders of a mutual fund share class are assessed the same Rule 12b-1 fee rate, regardless of who facilitated the purchase of fund shares. In other words, when an adviser selects a mutual fund share class for clients, there is no mechanism by which an intermediary can improve execution price, and any Rule 12b-1 fee is an asset-based fee that applies to all shareholders of the class equally. Scrutinizing this conduct through the lens of the duty to seek best execution is forcing a square peg into a round hole.

Some might argue that a recent district court case affirms the view that mutual fund share class selection implicates an adviser’s duty to seek best execution. In Securities and Exchange Commission v. Ambassador Advisors, LLC, et al,[14] the Commission brought an action in federal district court alleging that a registered investment adviser and its principals breached their fiduciary duties in violation of Section 206(2) of the Advisers Act by investing client assets in mutual fund share classes that charged Rule 12b-1 fees, portions of which were paid back to the adviser. The Commission also alleged that the adviser violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt adequate compliance policies and procedures regarding conflict disclosure.[15] In a memorandum opinion,[16] the court granted the Commission’s motion for summary judgment as to the Section 206(4) and Rule 206(4)-7 allegations and denied the Commission’s motion for summary judgment as to the Section 206(2) allegations.

One of the Commission’s Section 206(2) allegations in Ambassador Advisors was that the adviser failed to seek best execution.[17] In its memorandum opinion, the court found that the duty to seek best execution falls within an adviser’s duty of loyalty, not its duty of care.[18] In that regard, the court failed to grant summary judgment on the best execution allegation because it was not clear “whether Defendants obtained their clients’ consent to engage in this investment practice.”[19] Importantly, the Court found that “[i]f Defendants did give their clients enough information to obtain their consent, then Defendants would not have violated their duties of best interest or best execution by following through with the arrangement.”[20] This is at odds with the Commission’s own interpretation regarding an investment adviser’s standard of conduct, which places the duty to seek best execution within the duty of care.

Because the court framed the issue through the duty of loyalty, the court also ruled that adequate disclosure regarding the mutual fund share class selection arrangement at issue would have satisfied the adviser’s duty to seek best execution, even if the adviser ended up selecting a more expensive share class than what otherwise was available. Accordingly, the Ambassador Advisors court and the Commission Order are referring to two different things when they invoke the duty to seek best execution. The Ambassador Advisors court’s conception of the duty to seek best execution is akin to the “failure to disclose” violation cited in the Commission Order, which is premised on the lack of adequate disclosure regarding a conflict of interest.

The Commission Order in the present action finds that – in addition to a violation stemming from lack of adequate disclosure – the Advisers’ share class selection practices constituted a breach of the duty of care, which even adequate disclosure presumably would not have cured. Since the Ambassador Advisors opinion does not stand as authority for the proposition that certain mutual fund share class selection practices constitute a breach of the duty to seek best execution under the duty of care, the opinion undermines the Commission’s application of the duty to seek best execution in this case.

Although mutual fund share class selection does not implicate an adviser’s duty to seek best execution, one might make a reasonable argument that this practice implicates a different component of an investment adviser’s duty of care: the duty to provide advice that is in the best interest of the client. In fact, when the Commission issued its proposed interpretation regarding the standard of conduct for investment advisers in 2018, the Commission specifically discussed mutual fund share class selection in the context of this duty, not the duty to seek best execution.[21] However, the Commission’s final interpretation, issued in 2019, deleted the reference to mutual fund share class selection entirely.[22] While the Commission’s final interpretation is silent as to which duty might be implicated by this particular conduct, the selection of mutual fund share classes fits more naturally within the duty to provide advice that is in the best interests of clients than within the duty to seek best execution. In this regard, the Commission Order should have referenced only the “best interests” prong of the duty of care rather than taking the extra step of misapplying the duty to seek best execution.

This action is only the latest in a long line of actions alleging that mutual fund share class selection implicates the duty to seek best execution.[23] In these cases, although the Commission could establish a violation of Section 206(2) of the Advisers Act by making findings solely with respect to the advisers’ disclosure failures, the Commission went a step further and alleged best execution violations. This is problematic. If the Commission’s interpretations regarding an adviser’s standard of conduct are to have any meaning, the different categories of duties and the corresponding conduct that those duties implicate must be respected. Forcing a certain set of conduct into a category of duties that does not fit undermines the Commission’s authority to interpret the statutory provisions that it seeks to enforce.

Incorrectly applying an adviser’s fiduciary duty to a specific type of conduct is more than a matter of semantics. The ripple effect has tangible detrimental consequences for all regulated entities. The Commission only should allege violations that are supported by adequate legal authority. For that reason, we cannot support the best execution violations cited in the Commission Order.

[1] In the matter of Huntleigh Advisors, Inc. and Datatex Investment Services, Inc., Release No. IA-6251 (Feb. 27, 2023) (“Commission Order”), at paragraph 30, available at https://www.sec.gov/litigation/admin/2023/ia-6251.pdf.

[2] See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). See also Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019); 84 Fed. Reg. 33669 (July 12, 2019) (“Commission Interpretation”), available at https://www.govinfo.gov/content/pkg/FR-2019-07-12/pdf/2019-12208.pdf.

[3] Commission Interpretation, supra note 2, at 2.

[4] Id. at 12.

[5] Id. at 21.

[6] Id. at 21-23.

[7] Id. at 7.

[8] Commission Order, supra note 1, at paragraph 29. The Commission Order does not specify that this conduct violates the duty of loyalty, but consistent with the Commission Interpretation, we would view the failure to disclose a conflict of interest as implicating the duty of loyalty.

[9] Id. at paragraph 30.

[10] Commission Interpretation, supra note 2, at 19.

[11] See Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters, Release No. 34-23170 0 (Apr. 23, 1986); 51 Fed. Reg. 16004, 16011 (Apr. 30, 1986). (“A money manager should consider the full range and quality of a broker's services in placing brokerage including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness to the money merger.”)

[12] See 15 U.S.C. 78bb(e).

[13] See 15 U.S.C. 80a-22; 17 CFR § 270.22c-1.

[14] Securities and Exchange Commission v. Ambassador Advisors, LLC, et al., Civil No. 5:20-cv-02274 (E.D. Pa. filed May 13, 2020).

[15] Id.

[16] Id., Memorandum Opinion (Dec. 20, 2021), available at https://www.sec.gov/files/ambassador-smj-opinion.pdf.

[17] Id., Complaint (filed May 13, 2020), at paragraph 2, available at https://www.sec.gov/litigation/complaints/2020/comp24817.pdf.

[18] Id., Memorandum Opinion, supra note 16. (“To fulfil their duty of loyalty, investment advisers must disclose their conflicts of interest, act in their clients’ best interest, and seek best execution for their clients’ transactions.”)

[19] Id. at 20.

[20] Id.

[21] Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Release No. IA-4889 (Apr. 18, 2018); 83 Fed. Reg. 21203 (May 9, 2018), at 12, available at https://www.govinfo.gov/content/pkg/FR-2018-05-09/pdf/2018-08679.pdf.

[22] Commission Interpretation, supra note 2.

[23] See, e.g., In the Matter of O.N. Investment Management Company, Release No. IA-5944 (Jan. 11, 2022), available at https://www.sec.gov/litigation/admin/2022/ia-5944.pdf; In the Matter of Northwest Advisors, Inc., Release No. IA-5830 (Aug. 24, 2021), available at https://www.sec.gov/litigation/admin/2021/ia-5830.pdf; In the Matter of Coordinated Capital Securities, Inc., Release No. IA-5581 (Sep. 17, 2020), available at https://www.sec.gov/litigation/admin/2020/34-89900.pdf.

SEC Denies Whistleblower Awards to Claimant 
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-96983; Whistleblower Award Proc. File No. 2023-39)
https://www.sec.gov/rules/other/2023/34-96983.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

[C]laimant asserts that while the Commission’s complaint was filed several months prior to Claimant’s initial contact with the Commission, Claimant provided information about a broader
scheme involving additional entities and individuals, as well as attempts to thwart the Investigation. Claimant maintains that, after a meeting at REDACTED, Enforcement staff told Claimant that the Investigation had been stalled and without the  information and knowledge provided by Claimant, staff “never would have known who the key players were, where to look, or how the business operated.” As stated under penalty of perjury in a supplemental declaration, Enforcement staff assigned to the Investigation has no recollection of having said this, and it is not consistent with the facts, given that the Commission had already filed its detailed complaint. As the record demonstrates, the documents provided by Claimant were largely redundant of materials already within the Commission’s possession, and staff did not view the new documents Claimant provided as materially helpful. 

. . .

Finally, Claimant asserts that staff disclosed Claimant’s identity as a whistleblower to Defendants and their counsel and that such disclosure “is evidence that the information [Claimant] provided led to the cooperation, deal negotiation, and ultimately the SEC’s enforceable action.” According to Claimant, “the SEC’s exposure of my identity as a whistleblower, the information I provided, and the evidence I provided would have caused opposing counsel to consider and take into account those facts when deciding and weighing the option of going to trial or negotiating a deal with the SEC.” Claimant’s assertion is not supported by the record. In a supplemental declaration, Enforcement staff has confirmed that, although Claimant was identified as a potential witness in the Commission’s Rule 26(a) disclosures  REDACTED, staff responsible for the Covered Action never disclosed to Defendants or their counsel that Claimant was an SEC Whistleblower. 

Bill Singer's Comment: Yet again, according to the SEC, another Whistleblower Claimant is full of crap and totally misunderstood everything allegedly told to him by Staff, who, "stated under penalty of perjury in a supplemental declaration" that they had "no recollection of having said this, and it is not consistent with the facts . . ."  A somewhat odd phrasing, no? 

  SEC Staff swears to not having any "recollection" about what Claimant alleges and Staff swears that Claimant's allegation "is not consistent" with what they . . . what they, what? . . . what they don't recollect? Not recollecting and finding something inconsistent doesn't quite amount to a declaration that "I never, ever said that." Maybe I've become too suspicious after some four decades of lawyering. On the other hand, maybe my instincts are spot on. 

  As I have said before and I will say it again: "Sorry but I no longer believe the SEC when it comes to the purported rationale for many -- too many -- of the regulator's declinations of an Award." See: "Securities Industry Commentator" at https://www.rrbdlaw.com/6899/securities-industry-commentator/#wb37:

CFTC Whistleblower Alert: Blow the Whistle on Romance Investment Frauds in the Commodities and Derivatives Markets (CFTC Alert)
https://www.whistleblower.gov/system/files/2023/02/1677510939/02.27.2023%20-%20Romance%20Fraud%20WBO%20Alert.pdf
In part the CFTC Release asserts that:

This alert is soliciting information from anyone who can provide the CFTC with helpful information, such as:

• Names and addresses of perpetrators of this fraud who are in the United States, including organizers, money mules, technology providers, potentially complicit bank employees, and others who facilitate or help facilitate the fraud; and
• Information as to where and how the money collected from victims is stored in the United States, such as U.S.-based digital asset exchanges and U.S. bank account information

Bill Singer's Comment: Yeah, sure, all well and fine; however, both the CFTC and the SEC have been denying a lot of claims for whistleblower awards.

• CFTC Denies Whistleblower Awards to Five Claimants 
  Order Determining Whistleblower Award Claims
  
  
• CFTC Denies Whistleblower Award to Claimant
  Order Determining Whistleblower Award Claims 
  
  
• CFTC Approves Whistleblower Award to Claimant 1 and Denies Award to Claimants 2, 3, and 4.
  Order Determining Whistleblower Award Claims 
  
  
• Also see: CFTC Whistleblower Program "FINAL ORDERS/AWARD DETERMINATIONS" at https://www.whistleblower.gov/orders
  [Note the overwhelming number of "Denials" versus "Granted"

The federal regulators ask a lot from public tipsters; however, after they get the tips, those same regulators engage in quite a bit of subterfuge (if not bad faith) when it comes to recommending and paying awards. Hopefully, the CFTC is sincere with its solicitation and will try to up its game.

FINRA Arbitration Panel Slams Morgan Stanley With Multi-Million Dollar Compensatory/Punitive Damages in Charles Schwab Lawsuit
In the Matter of the Arbitration Between Charles Schwab & Co., Inc, Claimant, v. Morgan Stanley, Christopher Robert Armstrong, Randall Brian Kiefner, Respondents (FINRA Arbitration Award 19-00948)
https://www.finra.org/sites/default/files/aao_documents/19-00948.pdf
In a FINRA Arbitration Statement of Claim filed in April 2019 by FINRA member firm Charles Schwab & Co., Claimant asserted "breach of contract; misappropriation of trade secrets (Defend Trade Secrets Act, 18 U.S.C. § 1836 et seq. and the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1); breach of duty of loyalty; tortious interference with contracts and with prospective business relations; unfair competition in violation of N.J.S.A 56:4-1; aiding and abetting and participation in breach of duty of loyalty and other unlawful conduct; and civil conspiracy."

Respondent Morgan Stanley and associated person Respondents Armstrong and Kiefner (the "AP Respondents") generally denied the allegations, and asserted affirmative responses.

Morgan Stanley filed a Cross-Claim against the AP Respondents asserting "abuse of process, and attorneys' fees."

AP Respondents filed a Counter-Claim against Claimant Schwab seeking the expungement of their Form U5s; and, also, the AP Respondents filed a Cross-Claim against Morgan Stanley asserting "tortious interference with an actual business relationship and contract; tortious interference with a prospective business relationship and contract; breach of contract; breach of covenant of good faith and fair dealing; promissory estoppel; contribution and indemnity; civil conspiracy; defamation; and expungement of Form U5."

The FINRA Arbitration Panel set out under "AWARD" the following:

1. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $3,026,485.44 in compensatory damages.

2. Respondent Morgan Stanley is liable for and shall pay to Claimant the sum of $3,026,485.44 in punitive damages pursuant to Federal and Florida law, and New Jersey Trade Secrets Statutes (DTSA, Section 1836; FL-UTSA, Section 688.004; NJ-UTSA, Section 56:15-4) and New Jersey’s Unfair Competition Statute (N.J.S.A. Section 56:4-2).

3. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $104,833.89 in costs.

4. Respondents are jointly and severally liable for and shall pay to Claimant the sum of $1,136,459.08 in attorneys’ fees pursuant to Defend Trade Secrets Act of 2016, DTSA, Section 1836; FL-UTSA, Section 688.005; NJ-UTSA, Section 56:15-6, and as provided for in Armstrong and Kiefner’s Agreements with Claimant. (Florida and New Jersey Uniform Trade Secret Act).

5. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong the sum of $2,850,900.00 in compensatory damages.

6. Morgan Stanley is liable for and shall pay to Randall Brian Kiefner the sum of $1,173,900.00 in compensatory damages.

7. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong and Randall Brian Kiefner the sum of $672,399.00 in attorneys’ fees. Attorneys’ fees are awarded as Morgan Stanley promised to engage legal counsel and to “cover everything” if Claimant sued. Attorneys’ fees are awarded also pursuant to Revised Uniform Arbitration Act (RUAA) Section 21(b); AAA Commercial Rule 49.; R-49 (d)(ii).

8. Morgan Stanley is liable for and shall pay to Christopher Robert Armstrong and Randall Brian Kiefner the sum of $35,371.76 in costs.

9. Morgan Stanley’s Cross-Claim against Christopher Robert Armstrong and Randall Brian Kiefener is denied.

10.The Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of Christopher Robert Armstrong’s (CRD Number 1446768) Form U5 filed by Morgan Stanley (CRD Number 149777) on May 1, 2019 and maintained by the Central Registration Depository (“CRD”). The Reason for Termination shall be changed to “Voluntary”, and the Termination Explanation should be deleted in its entirety and shall appear blank. This directive shall apply to all references to the Reason for Termination and Termination Explanation. The Panel further recommends the expungement of Occurrence Number 2029531 from the registration records maintained by the CRD for Christopher Robert Armstrong. Any “Yes” answers should be changed to “No,” as applicable. The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Christopher Robert Armstrong must forward a copy of this Award to FINRA’s Credentialing, Registration, Education and Disclosure Department for review.

11.The Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of Randall Brian Kiefner’s (CRD Number 2078087) Form U5 filed by Morgan Stanley (CRD Number 149777) on May 1, 2019 and maintained by the CRD. The Reason for Termination shall be changed to “Voluntary”, and the Termination Explanation should be deleted in its entirety and shall appear blank. This directive shall apply to all references to the Reason for Termination and Termination Explanation. The Panel further recommends the expungement of Occurrence Numbers 2029590 and 2029592 from the registration records maintained by the CRD for Randall Brian Kiefner. Any “Yes” answers should be changed to “No,” as applicable. The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Randall Brian Kiefner must forward a copy of this Award to FINRA’s Credentialing, Registration, Education and Disclosure Department for review.

12.Any and all claims for relief not specifically addressed herein are denied.

Bill Singer's Comment: For some context on the above arbitration, read:

"Fired Morgan Stanley Brokers Blame Law Firm for Botched Move" (AdvisorsHub by Jake Martin / April 1, 2021) https://www.advisorhub.com/fired-morgan-stanley-brokers-blame-law-firm-for-botched-move/

"Fired Morgan Stanley Reps Blame Law Firm's Bad Advice / The Morgan Stanley–recommended law firm that represented the transitioning advisors told them their nonsolicit agreements with Schwab were unenforceable, according to their lawsuit against the lawyers." (WealthManagement.com by Patrick Donachie / Mar 26, 2021)
https://www.wealthmanagement.com/regulation-compliance/fired-morgan-stanley-reps-blame-law-firms-bad-advice