Securities Industry Commentator by Bill Singer Esq

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SCOTUS Says Securities Exchange Act and Federal Trade Commission act do not prevent a challenge to the constitutionality of the SEC or FTC in federal District Court.
UNITED STATES SUPREME COURT (Opinion, April 14, 2023, 598 U.S. ____ (2023))
https://brokeandbroker.com/PDF/AxonSCOTUS230414.pdf

AXON ENTERPRISE, INC., PETITIONER 21–86 v. FEDERAL TRADE COMMISSION, ET AL. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

SECURITIES AND EXCHANGE COMMISSION, ET AL., PETITIONERS
21–1239 v. MICHELLE COCHRAN ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

https://brokeandbroker.com/PDF/AxonSCOTUS230414.pdf

As set forth in the "Syllabus":

Michelle Cochran and Axon Enterprise, Inc.—respondents in separate enforcement actions initiated in the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC)—each filed suit in federal district court challenging the constitutionality of the agency proceedings against them. When, as in the enforcement actions against Cochran and Axon, a Commission elects to institute administrative proceedings to address statutory violations, it typically delegates the initial adjudication to an Administrative Law Judge (ALJ) with authority to resolve motions, hold a hearing, and then issue a decision. As prescribed by statute, a party objecting to the Commission proceedings makes its claims first within the Commission itself, and then (if needed) in a federal court of appeals. But the parties here sidestepped that review scheme and brought their claims in district court, seeking to enjoin the administrative proceedings. Cochran and Axon asserted that the tenure protections of the agencies’ ALJs render them insufficiently accountable to the President, in violation of separation-of-powers principles. Axon also attacked as unconstitutional the combination of prosecutorial and adjudicatory functions in the FTC. Each suit premised jurisdiction on district courts’ ordinary federal-question authority to resolve “civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U. S. C. §1331.

Cochran’s and Axon’s suits initially met the same fate: dismissal for lack of jurisdiction. The district court in Cochran’s case held that the review scheme specified in the Securities Exchange Act—“administrative review followed by judicial review in a federal court of appeals”— “implicitly divest[s] district courts of jurisdiction” over “challenges to SEC proceedings,” including Cochran’s constitutional ones. Likewise, the district court in Axon’s case found that the FTC Act’s comparable review scheme displaces §1331 jurisdiction for claims concerning the FTC’s adjudications. On appeal, the Ninth Circuit affirmed the district court’s dismissal of Axon’s constitutional challenges to the FTC proceeding, concluding that the claims were the type that fell within the FTC Act’s review scheme. But the en banc Fifth Circuit disagreed as to the equivalent SEC question, finding that Cochran’s claim would not receive “meaningful judicial review” in a court of appeals; that the claim was “wholly collateral to the Exchange Act’s statutory-review scheme”; and that the claim fell “outside the SEC’s expertise.”

Held: The statutory review schemes set out in the Securities Exchange Act and Federal Trade Commission Act do not displace a district court’s federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the SEC or FTC. Pp. 7–18.

(a) Although district courts may ordinarily hear challenges to federal agency actions by way of §1331’s jurisdictional grant for claims “arising under” federal law, Congress may substitute an alternative review scheme. In both the Exchange Act and the FTC Act, Congress did so: It provided for review of claims about agency action in a court of appeals following the agency’s own review process. The creation of such a review scheme divests district courts of their ordinary jurisdiction over covered cases. But the statutory scheme does not necessarily extend to every claim concerning agency action. See, e.g., Thunder Basin Coal Co. v. Reich, 510 U. S. 200, 207–213. This Court has identified three considerations—commonly known as the Thunder Basin factors—to determine whether particular claims concerning agency action are “of the type Congress intended to be reviewed within th[e] statutory structure.” Id., at 212. First, could precluding district court jurisdiction “foreclose all meaningful judicial review” of the claim? Id., at 212–213. Next, is the claim “wholly collateral” to the statute’s review provisions? Id, at 212. And last, is the claim “outside the agency’s expertise”? Ibid.

The Court has twice held specific claims to fit within a statutory review scheme, based on the Thunder Basin factors. In Thunder Basin itself, a coal company subject to the Mine Act filed suit in district court instead of asserting its claims—as a statutory scheme prescribed— first before a mine safety commission and then (if needed) a court of appeals. The crux of the dispute concerned the company’s refusal to provide employee-designated union officials with access to the workplace in accordance with the Mine Act. The company also objected on due process grounds to the agency’s imposition of a fine before holding a hearing. See 510 U. S., at 205. The Court held that the district court lacked jurisdiction over those claims, emphasizing the commission’s “extensive experience” in addressing the statutory issues raised, as well as its ability to resolve them in light of its “expertise” over the mining industry. Id., at 214–215. The Court acknowledged the company’s constitutional challenge was less tied to the agency’s experience and expertise, but concluded it could be “meaningfully addressed in the Court of Appeals.” Id., at 215.

The Court applied similar reasoning in Elgin v. Department of Treasury, 567 U. S. 1, which involved a statutory review scheme that directed federal employees challenging discharge decisions to seek review in the Merit Systems Protection Board (MSPB) and then, if needed, in the Federal Circuit. Elgin filed suit in district court when the government fired him for failing to register for the draft. This Court held that the district court lacked jurisdiction even though Elgin mainly claimed that the draft’s exclusion of women violated the Equal Protection Clause. Although the MSPB might not be able to hold the draft law unconstitutional, the Court of Appeals could—and that was sufficient to ensure “meaningful review” of Elgin’s claim. Id., at 21. Further, Elgin’s challenge to his discharge was neither collateral to the MSPB’s ordinary proceedings nor unrelated to its expertise in the employment context.

In contrast, the Court in Free Enterprise Fund applied the Thunder Basin factors to determine that an accounting firm’s Article II challenge to the structure of the Public Company Accounting Oversight Board—an agency regulating the accounting industry under the SEC’s oversight—landed outside the Exchange Act’s review scheme. Because not all Board action culminates in Commission action—which alone the statute makes reviewable in a court of appeals—the Court determined that the Exchange Act provided no “meaningful avenue of relief.” 561 U. S., at 490–491. And even if the SEC took up a matter arising from the Board’s investigation of the firm, the firm’s constitutional challenge to the Board’s existence would be “collateral” to the subject of that proceeding, as well as “outside the Commission’s competence and expertise.” Ibid. Pp. 7–10.

(b) The Court must decide if the constitutional claims here are “of the type” Congress thought belonged within a statutory review scheme. Thunder Basin, 510 U. S., at 212. Like the accounting firm in Free Enterprise Fund, Cochran and Axon assert sweeping constitutional claims: They charge that the SEC and FTC are wielding authority unconstitutionally in all or broad swaths of their work. Applying the Thunder Basin factors here, the Court comes out in the same place as in Free Enterprise Fund.

First, preclusion of district court jurisdiction “could foreclose all meaningful judicial review.” Id., at 212–13. Adequate judicial review does not usually demand a district court’s involvement. And the statutes at issue in this case provide for judicial review of adverse SEC and FTC actions in a court of appeals. But Cochran and Axon assert a “here-and-now injury” from being subjected to an illegitimate proceeding, led by an illegitimate decisionmaker. Seila Law LLC v. Consumer Financial Protection Bureau, 591 U. S. ___, ___. That injury is impossible to remedy once the proceeding is over, which is when appellate review kicks in. Judicial review of the structural constitutional claims would thus come too late to be meaningful. To be sure, “the expense and disruption” of “protracted adjudicatory proceedings” on a claim do not alone justify immediate review. FTC v. Standard Oil Co. of Cal., 449 U. S. 232, 244. But the nature of the injury here is different: As with a right “not to stand trial” that is “effectively lost” if review is deferred until after trial, see Mitchell v. Forsyth, 472 U. S. 511, 526, Axon and Cochran will lose their rights not to undergo the complained of agency proceedings if they cannot assert those rights until the proceedings are over.

The collateralism factor also favors Axon and Cochran. The challenges to the Commissions’ authority have nothing to do with either the enforcement-related matters the Commissions regularly adjudicate or those they would adjudicate in assessing the charges against Axon and Cochran. Elgin, 567 U. S., at 22. The parties’ claims are thus “ ‘collateral’ to any Commission orders or rules from which review might be sought.” Free Enterprise Fund, 561 U. S., at 490.

Finally, Cochran’s and Axon’s claims are “outside the [Commissions’] expertise.” Thunder Basin, 510 U. S., at 212. The Court in Free Enterprise Fund determined that claims that tenure protections violate Article II raise “standard questions of administrative” and constitutional law, detached from “considerations of agency policy.” 561 U. S., at 491. That statement covers Axon’s and Cochran’s claims that ALJs are too far insulated from the President’s removal authority. And Axon’s constitutional challenge to the combination of prosecutorial and adjudicative functions in the FTC is similarly distant from the FTC’s “competence and expertise.” Ibid. The Commission knows a good deal about competition policy, but nothing special about the separation of powers. For that reason, “agency adjudications are generally ill suited to address structural constitutional challenges”—like those maintained here. Carr v. Saul, 593 U. S. ___, ___. The Court concludes that the claims here are not the type the statutory review schemes at issue reach. Pp. 10–18.

No. 21–86, 986 F. 3d 1173, reversed and remanded; No. 21–1239, 20 F. 4th 194, affirmed and remanded

United States Supreme Court:
AXON ENTERPRISE, INC. V. FEDERAL TRADE COMMISSION (21-86)
DECISION BELOW: 986 F.3d 1173
LIMITED TO QUESTION 1 PRESENTED BY THE PETITION
CERT. GRANTED 1/24/2022
https://www.supremecourt.gov/qp/21-00086qp.pdf

QUESTION PRESENTED:

After petitioner acquired an essentially insolvent competitor, it found itself subjected to the review of the Federal Trade Commission (FTC), rather than the Department of Justice (DOJ). While the DOJ route promises early access to judicial review, the FTC track is an altogether different matter. Petitioner faced a series of unreasonable demands from the FTC, and the prospect of "litigating" before administrative law judges insulated by unconstitutional double-for-cause removal restrictions and subject to review by an unaccountable Commission. Rather than resign itself to the ongoing unconstitutional injuries inflicted by the FTC's process, petitioner filed suit in district court seeking to enjoin the unconstitutional FTC proceedings. That lawsuit focused on constitutional issues collateral to the underlying antitrust issues, but the district court nonetheless dismissed it for want of jurisdiction based on implications drawn from a statutory grant of jurisdiction to review the FTC's cease-and-desist orders. A divided Ninth Circuit affirmed, with the majority acknowledging that dismissal "makes little sense," and the dissent contending that dismissal contradicted this Court's precedents.

The questions presented are:

1. Whether Congress impliedly stripped federal district courts of jurisdiction over constitutional challenges to the Federal Trade Commission's structure, procedures, and existence by granting the courts of appeals jurisdiction to "affirm, enforce, modify, or set aside" the Commission's cease-and-desist orders.
2. Whether, on the merits, the structure of the Federal Trade Commission, including the dual-layer for-cause removal protections afforded its administrative law judges, is consistent with the Constitution.

LOWER COURT CASE NUMBER: 20-15662

ORAL Argument:
https://www.supremecourt.gov/oral_arguments/audio/2022/21-86

Transcript of Oral Argument:
https://www.supremecourt.gov/oral_arguments/argument_transcripts/2022/21-86_4f15.pdf

United States Supreme Court:
SECURITIES AND EXCHANGE COMMISSION V. COCHRAN (21-1239)
DECISION BELOW: 20 F.4th 194
CERT. GRANTED 5/16/2022
https://www.supremecourt.gov/qp/21-01239qp.pdf

QUESTION PRESENTED:

Whether a federal district court has jurisdiction to hear a suit in which the respondent in an ongoing Securities and Exchange Commission administrative proceeding seeks to enjoin that proceeding, based on an alleged constitutional defect in the statutory provisions that govern the removal of the administrative law judge who will conduct the proceeding.

LOWER COURT CASE NUMBER: 19-10396

ORAL Argument:
https://www.supremecourt.gov/oral_arguments/audio/2022/21-1239

Transcript of Oral Argument:
https://www.supremecourt.gov/oral_arguments/argument_transcripts/2022/21-1239_bq7d.pdf

Man Convicted Of Defrauding Elderly Widow Of $1.2 Million (DOJ Release)
https://www.justice.gov/usao-mdtn/pr/man-convicted-defrauding-elderly-widow-12-million
In the United States District Court for the Middle District of Tennessee, Karl Hampton and his wife were indicted for conspiracy and money laundering; and Hampton was also charged with wire and mail fraud; after a week-long jury trial, Karl Hampton was convicted of twelve felony counts. As alleged in part in the DOJ Release:

[H]ampton met the victim while he was working as an exterminator in her home. Between 2018 and 2020, Hampton tricked the victim into believing that he would care for her personally and financially. He held himself out as the victim’s “personal representative,” her “son” or her “godson,” and pretended that he was acting on her behalf.

In April 2019, Hampton convinced the victim to sign over her Power of Attorney and to name him in her Revocable Living Trust and in her will. He then methodically drained the victim’s bank accounts, took out a $500,000 line of credit in her name using her property as collateral, and amassed huge charges on her credit cards for his own personal expenses.

In total, Hampton defrauded the victim of approximately $1.2 million. He used her money to purchase luxury items and often spent over $1,000 per day on lottery tickets. The defendant’s lavish spending using the victim’s money included purchasing a Lexus GX460, a 4.3-karat diamond ring, and a $170,000 interest in a pest control business.

Sentencing is scheduled for August 11, 2023. The defendant’s wife pleaded guilty to one count of money laundering in February 2023 and will be sentenced on June 16, 2023.

Pages 1 - 2 of the SEC Order [Ed: footnotes omitted]:

The proposed rule change, as modified by Amendments Nos. 1 and 2, (hereinafter referred to as the “proposed rule change” unless otherwise specified) would amend the Codes to: (1) set forth requirements on expungement requests (a) filed during an investment-related, customer initiated arbitration (“customer arbitration”) by an associated person, or by a party to the customer arbitration on behalf of an associated person (an “on-behalf-of request”), or (b) filed by an associated person separate from a customer arbitration (“straight-in request”); (2) establish a roster of experienced public arbitrators from which a three-person panel would be randomly selected to decide straight-in requests (the “Special Arbitrator Roster”); (3) establish procedural requirements for expungement hearings; and (4) codify and update FINRA’s Notice to Arbitrators and Parties on Expanded Expungement Guidance (“Guidance”) that arbitrators and parties would be required to follow. In addition, the proposed rule change would amend the Customer Code to specify procedures for requesting expungement of customer dispute information arising from simplified arbitrations. The proposed rule change would also amend the Codes to establish requirements for notifying state securities regulators and customers of expungement requests and allow participation of state securities regulators in straight-in requests.

Page 157 of the SEC Order [Ed: footnotes omitted]:

For the reasons set forth above, the Commission finds that the proposed rule change, as modified by Amendments Nos. 1 and 2, is consistent with the provisions of Exchange Act Section 15A(b)(6), which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission also finds that the proposed rule change is consistent with Section 15A(b)(5) of the Exchange Act, which requires, among other things, that FINRA rules provide for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility or system that FINRA operates or controls.

= = =
4/13/2023

Four People Indicted for Roles in Romance and Internet Frauds, Illegal Money Transmitting (DOJ Release)
https://www.justice.gov/usao-nj/pr/four-people-indicted-roles-romance-and-internet-frauds-illegal-money-transmitting
In the United States District Court for the District of New Jersey, an Indictment was filed charging Martins Inalegwu, Steincy Mathieu, and Moses Chukwuebuka Alexander with various charges of conspiracy to commit mail and wire fraud, wire fraud, mail fraud, conspiracy to commit money laundering, money laundering, transacting in criminal proceeds, and tax evasion. Additionally, Oluwaseyi Fatolu was indicted for conducting an unlawful money transmitting business. As alleged in part in the DOJ Release:

Between April 2016 and May 2020, Inalegwu, Mathieu, Alexander and their conspirators, several of whom reside in Nigeria, allegedly participated in an online romance scheme, defrauding more than 100 victims throughout the country. The conspirators made initial contact with victims through online dating and social media websites, then corresponded with victims via email and phone, pretended to strike up a romantic relationship with victims, wooed them with words of love, and then requested the victims send money to them, or their associates, for fictitious emergency needs. In all instances, the individuals whom the victims believed they were speaking to did not exist, and instead they were speaking to the conspirators of this scheme. Inalegwu, Mathieu and their conspirators engaged in apartment rental scams wherein they advertised the rental of a property, not owned or controlled by them, for the purpose of collecting money from the victims in the form of application fees and security deposits. After Inalegwu, Mathieu and conspirators collected the money, the victims never heard from them again.

Conspirators used myriad email accounts and phone numbers to communicate with the victims and instruct them on where to wire the money, including recipient names, addresses, financial institutions and account numbers. Victims wired money to bank accounts held by Inalegwu and Mathieu in the United States, and also mailed checks directly to Inalegwu and Mathieu. Some victims transferred money to the conspirators via money transfer services, such as Western Union or MoneyGram, and others wired money to bank accounts held by conspirators overseas.

Federal law enforcement agents have identified more than 100 victims who sent a total of $4.5 million directly to Inalegwu and Mathieu, who spent the money on personal expenses, withdrew money in cash, transferred money to other bank accounts they personally controlled, and transferred money to bank accounts held by Alexander and other conspirators in Nigeria and Turkey. Inalegwu also used the unlicensed money transmitting business run by Fatolu to send money to Nigeria. Fatolu operated a “hawala system,” wherein she directed Inalegwu and other customers to deposit money into her bank accounts and the accounts of her associates in the United States, and thereafter facilitated the movement of corresponding money into the destination bank account overseas, as directed by the customer. Fatolu charged a fee for this service. Inalegwu and Mathieu failed to report the income derived from the victims, and evaded the payment of tax on the entirety of this victim money.

Westport Investment Advisor Sentenced to Prison for Tax Offense (DOJ Release)
https://www.justice.gov/usao-ct/pr/westport-investment-advisor-sentenced-prison-tax-offense
In the United States District Court for the District of Connecticut, Thomas Pacilio, 64, pled guilty to one count of filing a false tax return and admitted that, for the 2015 through 2018 tax years, he filed individual income tax returns that omitted about $1,476,425 that should have been reported either as ordinary income or as capital gains, which resulted in a tax loss of $286,328 to the IRS. Pacilio has paid the taxes he owed. Pacilio was sentenced to six months in prison plus one year of supervised release, and ordered to pay a $50,000 fine. As alleged in part in the DOJ Release:

[I]n 2011, Pacilio and his partner started Clapboard Hill Advisors LLC, a financial services business headquartered in Westport. In 2013, Pacilio created Alcamo Holding Corporation Inc. (“Alcamo”), an 1120S corporation, and transferred his Clapboard Hill Advisors partnership interest to Alcamo. In 2014, Pacilio, through Alcamo, and his partner, through a separate 1120S corporation, sold Clapboard Hill Advisors to McGladrey Wealth Management LLC (“McGladrey”). Under the sale agreement, McGladrey agreed to make a lump sum payment at closing. Thereafter, Pacilio was to become an employee of McGladrey for three years subject to a non-competition provision. In addition to being paid a salary by McGladrey, if Pacilio remained an employee, Pacilio would receive a $350,000 payment on each anniversary of the sale for three years. He would also receive a portion of McGladrey’s annual gross revenue of up to $150,000 for the first year, $350,000 for the second year, and $450,000 for the third year.

SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25692.htm
In the United States District Court for the Southern District of New York, the SEC filed a Complaint charging Terraform Labs PTE Ltd. and Do Hyeong Kwon with violating Sections 5(a), 5(c), and 5(e) of the Securities Act, Section 17(a) of the Securities Act, and Sections 10(b), 6(l), and 20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder.
http://www.sec.gov/litigation/complaints/2023/comp-pr2023-32.pdf As alleged in part in the SEC Release:

[F]rom April 2018 until the scheme's collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions. These included "mAssets," security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an "algorithmic stablecoin" that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants' crypto asset securities, LUNA. The complaint further alleges that Terraform and Kwon offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR-or "mirror" tokens-and LUNA itself.

[T]erraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. For example, they touted and marketed UST as a "yield-bearing" stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol. The SEC's complaint also alleges that, while marketing the LUNA token, Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. Meanwhile, Terraform and Kwon also allegedly misled investors about the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.

SEC Awards Almost $1.9 Million to Whistleblower Claimant 1
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97295; Whistleblower Award Proc. File No. 2023-50)
https://www.sec.gov/rules/other/2023/34-97295.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending almost $1.9 million Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

[C]laimant used specialized access and expertise, Claimant expended efforts to identify the violations, Claimant’s tip alerted Enforcement staff to the alleged violations, and the conduct would have been difficult to detect in the absence of Claimant’s information.

FINRA Fines and Suspends Rep For Conversion of Premiums
In the Matter of Stephenie Ashley Collins, Respondent (FINRA AWC 2023078014501)
https://www.finra.org/sites/default/files/fda_documents/2023078014501
%20Stephenie%20Ashley%20Collins%20CRD%205903192%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, Stephenie Ashley Collins submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Stephenie Ashley Collins was first registered in 2011 with State Farm VP Management Corp. and was also an independent contractor with affiliate State Farm Mutual Automobile Insurance Company. In accordance with the terms of the AWC, FINRA imposed upon Collins a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

During the time Respondent was registered with FINRA through State Farm, she was also appointed as a State Farm Insurance Agent and sold insurance products offered by the firm’s insurance affiliate, SFMAIC. Pursuant to SFMAIC’s requirements, Respondent maintained a premium fund account, a bank account in her name into which she was required to deposit insurance customers’ premium payments. The insurance customers’ premium payments deposited into the premium fund account became the property of SFMAIC. Only customer premiums were permitted to be deposited into this account, and Respondent had no right to use customer premium funds for any other purpose.

Between June 2022 and December 2022, Respondent converted in excess of $13,000 from the customer premium fund account for her own personal and business use by improperly withholding funds tendered to her by customers that should have been
deposited in the premium fund account. Respondent additionally created inaccurate deposit records for the premium fund account.

Therefore, Respondent violated FINRA Rule 2010.

= = =
4/12/2023

After Thanking Very Helpful Whistleblower,The SEC Then Stabs The Tipster In The Back (BrokeAndBroker.com Blog)

https://www.brokeandbroker.com/6986/sec-markopolos-whistleblower-thank-you/

There is the effective regulation of Wall Street. Then there is what I call the mere "appearance" of regulation. Effective regulation proactively detects fraud, pursues the fraudster, stops the fraud, and protects the investing public -- all of which entails harvesting tips, analyzing data, conducting interviews, filing charges, and sending trial staff into court. In contrast, modern-day regulation has devolved into self-serving publicity by senior regulators posting endless amounts of podcasts, videos, speeches, bulletins, guidances, alerts, and press releases. The bureaucracy tells you what it would like to do rather than what it has accomplished; hence, the appearance of regulation rather than the substance.

Osceola County Mortgage Loan Officer Convicted Of Bank Fraud And Aggravated Identity Theft Charges Involving Forging Of Judges’ Signatures (DOJ Release)
https://www.justice.gov/usao-mdfl/pr/osceola-county-mortgage-loan-officer-convicted-bank-fraud-and-aggravated-identity
In the United States District Court for the Middle District of Florida, a jury found Omayra Ujaque guilty of three counts of bank fraud and one count of aggravated identity theft. As alleged in part in the DOJ Release:.

[U]jaque, in her capacity as a licensed mortgage loan officer, created and executed a mortgage fraud scheme targeting the financial institution where she worked. To ensure that otherwise unqualified borrowers were approved for mortgage loans, Ujaque falsified the borrowers’ income by fabricating or inflating the amounts of their monthly child support payments on mortgage loan applications that she signed and certified to the financial institution’s underwriting department. In furtherance of her scheme, Ujaque created fictitious Final Judgments of Dissolution of Marriage and Final Orders Modifying Child Support that fraudulently represented that the borrowers were entitled to receive non-existent monthly child support payments. Ujaque then used the names of judges from the Circuit Court of the Ninth District of Florida and forged their signatures on the fabricated Final Judgments of Dissolution of Marriage or Final Orders Modifying Child Support.

Ujaque also created bogus Florida Department of Revenue Statements listing fraudulent monthly child support payments, as well as phony prepaid debit card statements listing fake borrower withdrawals of the non-existent monthly child support payments. In most cases, the borrowers did not, in fact, have the listed children and/or had never been married. Ujaque submitted bogus paperwork to the financial institution to support the false monthly income on the loan applications. Based on Ujaque’s misrepresentations, the financial institution approved and funded the mortgage loans.

Fugitive financial advisor indicted for $10 million investment fraud scheme (DOJ Release)
https://www.justice.gov/usao-ndga/pr/fugitive-financial-advisor-indicted-10-million-investment-fraud-scheme
In the United States District Court for the Northern District of Georgia, an Indictment was filed charging Christopher Burns with wire fraud, mail fraud, and money laundering . As alleged in part in the DOJ Release:

[B]urns, an Atlanta financial adviser, conducted business through several entities, including Investus Advisers, LLC, Investus Financial, LLC, Dynamic Money, and Peer Connect, LLC. Investors were promised that their money would be loaned to businesses that needed financing and with little to no risk. In some cases, Burns falsely described the investments as secured by the protection of collateral and personal guarantees. In other cases, he falsely claimed that he would pool investors’ money to lend it to startup businesses and charities. But in reality, he used investors’ money to repay prior investors and to fund his business and his lavish lifestyle. Burns is alleged to have defrauded dozens of victims of at least $10 million.

On April 11, 2023, a federal grand jury charged Christopher Burns, age 40, of Berkeley Lake, Georgia, with 10 counts of wire fraud, two counts of mail fraud, and four counts of money laundering. Burns was previously charged in a criminal complaint on October 23, 2020, with one count of mail fraud.

Burns has not been seen since he left his home on September 24, 2020, one day before he was scheduled to relinquish documents related to his businesses to the Securities and Exchange Commission. The vehicle he was driving was found abandoned in Dunwoody, Georgia. Inside the vehicle were copies of three cashier’s checks totaling more than $78,000. If you have any information about Burns’s location or if you think you were defrauded, please contact the FBI-Atlanta field office at 770-216-3000 or go to tips.fbi.gov

Federal Court Orders Florida Man and His Two Entities to Pay Over $16 Million for Fraud, Misappropriation, and Making False Statements to the CFTC (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8687-23
In the United States District Court for the Southern District of Florida, Damian Castilla entered into a Consent Order
https://www.cftc.gov/media/8391/enfcastillaconsentorder120622/download; and an Order of Final Default Judgment was entered against DCAST Capital Investments LLC and Five Traders LLC
https://www.cftc.gov/media/8386/enfcastillafinaldefaultjudgment040623/download. The Orders found the Defendants liable for defrauding over 50 pool participants by fraudulently soliciting investments and misappropriating pool participants’ funds; and, further, the Orders resolve CFTC charges that the defendants made false statements to the CFTC during its investigation. As alleged in part in the CFTC Release:

The orders require the defendants to pay $2,687,440 in restitution to those defrauded as well as $3,350,000 in disgorgement. The orders also require Castilla to pay a $3 million civil monetary penalty and DCAST Capital and Five Traders, collectively, to pay a $10,050,000 civil monetary penalty. Additionally, the orders enjoin the defendants from further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged, and impose permanent trading and registration bans against defendants.

Case Background

The orders find that, from January 2014 to May 2022, the defendants made various material misrepresentations to solicit pool participants, including that they earned significant profits trading futures for pool participants. The defendants’ limited futures trading was unprofitable, and instead of trading as promised, they misappropriated the vast majority of pool participant funds. The defendants used pool participant funds for car payments, home remodeling, lawn services, clothing, dining, and other personal expenses. The defendants continued their fraud by issuing false account statements that showed profitable trading in nonexistent trading accounts and by using a portion of the funds obtained from pool participants to pay fake profits to earlier pool participants. The orders also find the defendants failed to register with the CFTC, as required. Finally, the orders find the defendants made false statements in responding to a subpoena the CFTC’s Division of Enforcement issued during the investigation into their conduct. For example, in response to a subpoena, the defendants provided false information about their customers—failing to disclose over 40 pool participants that collectively provided almost $2 million.

FINRA Fines Firm For Variable Annuities Supervision and Net Capital
In the Matter of Gary Goldberg & Co., LLC, formerly known as Bruderman Brothers LLC, Respondent (FINRA AWC 2019064776202)
https://www.finra.org/sites/default/files/fda_documents/2019064776202
%20Gary%20Goldberg%20%26%20Co.%2C%20LLC%20
%28formerly%20known%20as%20Bruderman%20Brothers
%20LLC%29%20CRD%2047957%20AWC%20vr.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,Gary Goldberg & Co., LLC, formerly known as Bruderman Brothers LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Respondent has been a FINRA member firm since 2000 and terminated its FINRA registration via a Form BDW on December 22, 2022. In accordance with the terms of the AWC, FINRA imposed upon Respondent a Censure and $500,000 in partial restitution. As alleged in the "Overview" of the AWC:

From July 2018 through June 2019, the firm failed to establish and maintain a supervisory system, and failed to establish, maintain, and enforce written supervisory procedures (WSPs), that were reasonably designed to supervise the suitability of sales of variable annuities (VAs) to customers who held both brokerage and advisory accounts. As a result, the firm failed to detect that several representatives recommended that customers purchase VAs in their brokerage accounts—when nearly identical but lowercost advisory shares were available to be purchased in their advisory accounts held at the firm’s affiliated investment advisory firm—and subsequently transferred those positions to the customers’ advisory accounts. These transfers were usually within one day of the
initial purchase, and they resulted in the customers unnecessarily paying both higher product costs and advisory fees. As a result the firm violated Rules 3110, 2330,and 2010.

Additionally, between January 2015 and September 2022, the firm conducted a securities business while failing to maintain its minimum required net capital. As a result, the firm violated Section 15(c) of the Securities Exchange Act of 1934, Exchange Act Rule 15c3-1, and FINRA Rules 4110 and 2010. During that same period, the firm failed to timely file with the SEC and FINRA a notice of its net capital deficiency, filed inaccurate Financial and Operational Combined Uniform Single (FOCUS) reports with FINRA, and failed to maintain books and records reflecting an accurate computation of its aggregate indebtedness and net capital. As a result, the firm violated Exchange Act §17(a), Exchange Act Rules 17a-3, 17a-5, and 17a-11, and FINRA Rules 4511 and 2010.

= = =
4/11/2023

FINRA Arbitrators Award Damages Against Morgan Stanley In Case Alleging Customer Lacked Mental Capacity (BrokeAndBroker.com Blog)

https://www.brokeandbroker.com/6987/finra-mssb-arbitration/

FINRA Code of Arbitration Procedure for Customer Disputes Rule 12904: Awards provides that an award "may contain a rationale underlying the award." If you'd like some rationale with your lawsuit, FINRA offers a so-called "Explained Decision" replete with the arbitrators' "general reason(s)" for their decision; however, that's gonna cost ya extra and requires your adversary's consent. I ain't gonna pull my punches here: FINRA Rule 12904 is absurd and anti-consumer. Bad enough that customers are forced to use FINRA's arbitration forum, but, worse, a FINRA Arbitration Award often raises more questions than it answers, as demonstrated in today's featured case.

Former Investment Banker and Registered Broker Charged with Operating Cryptocurrency Investment Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-edny/pr/former-investment-banker-and-registered-broker-charged-operating-cryptocurrency
-and-
CFTC Charges New York Resident with Fraud and Misappropriation in Digital Assets Trading Scheme (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8686-23

In the United States District Court for the Eastern District of New York, an Indictment was filed charging Rashawn Russell (former investment banker and registered broker) with one count wire fraud
https://www.justice.gov/d9/2023-04/23-cr-152_indictment.pdf. As alleged in part in the DOJ Release:

[R]ussell engaged in a scheme to defraud multiple investors by falsely promising that their money would be used for cryptocurrency investments that would generate large—and sometimes “guaranteed”—returns. In truth, much of the investors’ money was misappropriated by Russell and used for his personal benefit, to gamble, and to repay other investors. Russell formerly worked as an investment banker and was a registered broker with the Financial Industry Regulatory Authority.

As part of the scheme, Russell lied to investors about the status of their investments and fabricated multiple documents that he sent to investors. As alleged, Russell sent one investor an altered image of a bank balance displayed on a bank website that purported to show Russell’s substantial liquidity. When another investor sought to recoup their investment, Russell never sent the money and instead sent the investor a fabricated bank wire transfer confirmation that purported to show the return of the investor’s money.

In the United States District Court for the Eastern District of New York, the CFTC filed a Complaint charging Rashawn Russell with fraudulently soliciting retail investors to invest in a digital asset trading fund and with misappropriating at least $1 million in investor assets.
https://www.cftc.gov/media/8396/enfrussellcomplaint041123/download. As alleged in part in the CFTC Release:

[F]rom approximately November 2020 through July 2022, Russell solicited retail investors to contribute bitcoin, ether, and fiat currency to invest in his purported proprietary digital assets trading fund. Russell guaranteed no losses to investors and, in some instances, a minimum 25 percent return on investment. As alleged in the complaint, Russell intentionally and/or recklessly made false and misleading statements regarding the fund’s structure, size, and performance; traded little, if any, of the money and digital assets as represented; and, falsely promised to pay withdrawal requests, including falsely promising that he would pay investors in the stablecoin USDC. At least $1 million in investor assets are alleged to have been misappropriated by Russell through his fraudulent scheme and used, among other things, to pay personal expenses, entities associated with gambling activities, and Ponzi-like payments to current investors.

SEC Obtains Final Judgment Against Former Chief Credit Officer of Wilmington Trust
https://www.sec.gov/litigation/litreleases/2023/lr25691.htm
Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the District of Delaware
https://www.sec.gov/litigation/complaints/2015/comp-pr2015-81.pdf, William B. North (former Chief Credit Officer of Wilmington Trust) consented to the entry of a judgment that enjoins him from future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Securities Exchange Act and Rules 10b-5 and 13b2-1 thereunder; and further enjoins him from aiding and abetting future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. North is ordered to pay a civil penalty of $10,000. As alleged in part in the SEC Release:

In 2015, the SEC charged North and three other former Wilmington Trust officers with fraud for their roles in Wilmington Trust making false or misleading public statements and omissions regarding its loan portfolio, including its underreporting, by hundreds of millions of dollars, its real estate loans which were 90 days or more past due. The SEC's complaint further alleged that North violated and/or aided and abetted violations of the federal securities laws in connection with false and misleading statements concerning the credit quality of certain of Wilmington Trust's loans.

SEC Awards About $1 Million to Whistleblower Claimant 1 But Denies Whistleblower Award to Claimant 2
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97285; Whistleblower Award Proc. File No. 2023-49)
https://www.sec.gov/rules/other/2023/34-97285.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending about a $1 million Whistleblower Award to Claimant 1; and the denial of an Award to Claimant 2. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

[C]laimant 1’s information and assistance allowed the Commission to devise an investigative plan and to craft its initial document requests from the Firm and other entities. Finally, Claimant 1 was an important source of specific information for the Covered Action.

. . .

Claimant 2 has failed to meet the demanding standard for showing that there were extraordinary circumstances beyond Claimant 2’s control that caused the failure to file his/her award claim by the deadline. Claimant 2’s stated belief that a claimant can only be eligible for an award if his or her tip or testimony to the Commission specifically mentioned the subject of the covered action does not excuse Claimant 2’s failure to file by the deadline. “[A] lack of awareness about the [whistleblower award] program does not . . . rise to the level of an extraordinary circumstance as a general matter [since] potential claimants bear the ultimate responsibility to learn about the program and to take the appropriate steps to perfect their award applications.” Claimant 2’s limited understanding of the whistleblower rules is not an “extraordinary circumstance[]” that should trigger the Commission’s discretion to excuse the fact that Claimant 2 submitted his/her award application more than a year after the deadline. Further, while Claimant 2 was unrepresented at the time of the deadline for submitting his/her Form WBAPP, he/she still waited nearly a year after obtaining representation to file his/her award application. Accordingly, we do not believe it is appropriate here to exercise our discretionary authority under Rule 21F-8(a) to excuse Claimant 2’s untimely filing.

Escaping the Data Swamp: Remarks before the RegTech 2023 Data Summit by SEC Commissioner Hester M. Peirce
https://www.sec.gov/news/speech/peirce-remarks-data-summit-041123

Thank you Craig [Clay] for that introduction. Let me start by reminding you that my views are my own and not necessarily those of the Securities and Exchange Commission (“SEC”) or my fellow Commissioners. I was intrigued when former Commissioner Luis Aguilar extended a speaking invitation for today’s RegTech 2023 Data Summit. Modernizing how we collect, analyze, and facilitate the public’s use of data is important to me, and this Summit was likely to be lively given last year’s passage of the Financial Data Transparency Act (“FDTA”).[1]

Commissioner Aguilar served at the SEC from 2008 to 2015. Among his many contributions,[2] at the end of his tenure he offered advice for future commissioners. After all, as he pointed out, “there is no training manual on how to do a Commissioner’s job.”[3] His advice, which I still find helpful five years into the job, includes an admonition to keep grounded by staying connected to people outside of Washington, DC, and a warning that “if you do not feel very busy—or swamped with work— something is wrong.”[4] I can guarantee you, Commissioner, that I feel swamped, but not too swamped to hear from people outside of the swamp.

Commissioner Aguilar also advised that “When it comes to making decisions, an SEC Commissioner should be wary of simply accepting the status quo. The securities markets are in a state of almost constant evolution, which calls for a degree of open-mindedness and adaptability.”[5] This need for flexibility extends to interacting with the technology of regulation, so-called “RegTech.” As we are swamped with more and more data, we need new tools to receive it, store it, process it, analyze it, and, when appropriate, publicly release it. New technology also can help us to ease the compliance burden for regulated entities.

Structured data—“data that is divided into standardized pieces that are identifiable and accessible by both humans and computers”—is one RegTech tool.[6] The SEC has built structured data into its rulebook for years. The pace has picked up recently, and many rulemakings now incorporate structured data. SEC staff, particularly within our Division of Economic and Risk Analysis (“DERA”), has embraced structured data enthusiastically. I hardly dare admit in this crowd, but I have not always shared the enthusiasm.

Particularly now that Congress’s enactment of FDTA cements structured data into our rules, I am thinking more deeply about these issues in the spirit of Commissioner Aguilar’s advice to have an open mind. As you all know, the FDTA requires financial regulatory agencies, including the SEC, to engage in joint rulemaking to adopt common data standards for information collection and reporting. I continue to believe that there are potential pitfalls with requiring structured data, and I think even now that the FDTA is law they remain relevant: these concerns include the cost of creating structured data, especially for smaller entities; the utility of the structured data to the public; the dangers of embedding in rules technology that inevitably becomes outdated; and the likely result of making it easier for government to process data, which is to increase the appetite for collecting ever more data. Disregarding or downplaying these potential pitfalls could raise the costs and reduce the benefits of structured data disclosures. It could make them less useful and more burdensome, while generating resistance to future attempts to incorporate technological advances into our regulatory framework. In the spirit of beginning a conversation to ensure a better result, I would like to offer four principles that should guide the SEC and other regulators through the process of implementing the FDTA.

Have a Strategic Implementation Vision.
First, regulators should have a strategic vision for structured data. A strategic vision requires that regulators understand where structured data requirements would be most helpful and that they implement the requirements accordingly. My colleague, Commissioner Mark Uyeda, is my inspiration here: He recently raised questions about the SEC’s piecemeal approach to integrating structured data into our rules and called instead for more thoughtful implementation of structured data requirements and an “overall plan,” with an eye to where these requirements would be most beneficial.[7] Understanding where structured data mandates produce the greatest benefits—and where the data would be of little help—facilitates better prioritization.[8] For example, regulators could acknowledge that for regulatory filings that human regulators review without the aid of technology and that are not available to the public, tagging may not be a priority.

A strategic approach to implementation also should include initiatives to improve the utility and relevance of structured data for all investors. People are more likely to use structured data filings if they are accurate and comparable. Error rates in structured filings appear to be falling, but regulators should continue to work with filers to increase the accuracy.[9] Regulators should resist excessive use of custom tags, which could undermine the comparability of regulatory filings, but also not insist on standardized tags when using them would harm data accuracy by papering over essential distinctions.[10] Just because standardized data seem to be “comparable” across firms does not mean the data reported by different firms are actually comparable; on the other hand bespoke tags from similarly situated regulated entities may mask those similarities. FDTA implementation should avoid both extremes.

The FDTA affords enough flexibility in implementing data standards to accommodate a strategic approach. The FDTA, for example, in multiple places, recognizes the need to scale requirements and minimize disruption.[11] The FDTA is not focused simply on having agencies produce structured data, but on producing data that are useful for investors and the Commission.[12]

Take Cost Concerns Seriously.
Second, regulators need to take costs seriously. In their enthusiasm for the benefits structured data can bring, advocates sometimes sound as though they dismiss cost concerns out of hand. Regulators must consider both expected costs and expected benefits when considering whether and how to impose structured data requirements. Comprehensive regulation at the federal and sometimes the state level can impose significant burdens on financial firms, especially smaller ones. SEC-regulated entities, in particular, face a flood of new SEC rules over the next several years. The cumulative effect of individual mandates that regulators believed would impose only minimal costs can nevertheless be heavy.

Structured data requirements are no different. Even if we assume that every benefit touted by structured data advocates will be realized, we need to consider carefully whether those benefits are worth the costs firms will bear and the potential effect on competition among regulated firms if those costs prove too great, again particularly for smaller firms. Costs will appear especially burdensome to firms implementing structured data mandates if they do not see corresponding benefits.[13] The fees for the requisite legal entity identifier may be low,[14] but other implementation costs are likely to be much more substantial, harder to measure, dependent on the granularity of the tagging requirements, and highly variable across filers. Estimates commonly used as evidence showing the low cost of reporting data in structured form generally relate to financial statements, which may not be representative of the costs of using structured data to comply with the Commission’s various reporting requirements.[15] Consider, for example, a recent SEC rule requiring business development companies to tag financial statement information, certain prospectus disclosure items, and Form N-2 cover page information using Inline XBRL, which was estimated to cost approximately $161,179 per business development company per year.[16] For a closed end fund to tag in Inline XBRL format certain prospectus disclosure items and Form N-2 cover page information, we estimated a cost of $8,855 per year.[17]

Regulators should be particularly sensitive to costs faced by municipal issuers. Encompassed within this category is a wide diversity of issuers, many of which are very small, budget-constrained, and issue bonds only infrequently.[18] Proponents of structured data for municipal issuers argue that structured data could be a “prerequisite for an efficient municipal securities market, which will benefit issuers and investors alike.”[19] The unusual regulatory framework for municipal securities, however, raises questions whether structured data mandates will in fact increase transparency in this market. Critical questions remain about what implementation will look like for municipal securities.[20] The FDTA requires the Commission to “adopt data standards for information submitted to the” MSRB,[21] but much of the data reported by municipal issuers is provided on a voluntary basis. Consequently, a bungled FDTA implementation could cause municipal entities to reduce these voluntary filings or to avoid the costs of reporting structured data.[22] If the costs are high enough, municipal issuers could exit the securities markets entirely and raise money in other ways.[23] As we proceed toward implementation, we should pay close attention to the experiences of local governments around the country. For example, Florida recently implemented a structured data mandate for municipal issuers’ financial statements.[24] I look forward to hearing whether the costs of this endeavor were generally consistent with some of the cost estimates that have appeared in recent months. We should take seriously the FDTA’s directive to “consult market participants” in adopting data standards for municipal securities.[25]

For several reasons, I am hopeful that costs may not be a significant concern in most cases. First, structured data costs appear to have dropped over time.[26] If that trend continues, it could make costs less pressing for smaller entities. Tools that make structured data filing cheaper, more seamless, and less prone to errors will also help. For example, shifting to Inline XBRL imposes initial filer costs, but eliminates the need to prepare two document versions—one for humans and one for machines.[27] Fillable web forms that require the filer neither to have any particular technical expertise nor to hire a third-party structured data service provider can lower filer costs significantly.[28]

Second, companies may find that the up-front cost of integrating Inline XBRL into operations lowers long-run compliance costs, helps managers monitor company operations, and facilitates analysis of company and counterparty data.[29] Responding to regulatory demands for data may be easier for firms with structured data.[30] In that vein, the FDTA envisions a future in which firms no longer have to submit the same data to different regulators on different forms.[31] Moreover, as my colleague Commissioner Caroline Crenshaw has pointed out, small companies making structured filings may enjoy greater analyst coverage and lower capital costs.[32]

Third, the FDTA explicitly preserves the SEC’s (and other agencies’) preexisting “tailoring” authority[33] and, in several places, authorizes regulators to “scale data reporting requirements” and “minimize disruptive changes to the persons affected by those rules.”[34] Further, under the FDTA, the SEC need only adopt the data standards to the extent “feasible” and “practicable.”[35] Relying on this authority, the SEC should explore extended phase-in periods, permanent exemptions for certain entities or filings, or other appropriate accommodations, particularly for smaller entities, including municipal issuers falling under a specified threshold.

Appropriately Constrain the Urge for More Data.
Third, regulators must constrain their appetite for data. Collecting heaps of data without a clear regulatory need undermines regulatory legitimacy. The goal should be to collect only the data regulators need to perform their limited statutory missions, not all data or even all the data it might come in handy someday to have.

As data become cheaper and easier to collect, store, and analyze, regulators tend to want more of it. Structured data mandates, therefore, may look like a great opportunity to demand more data from regulated entities. After all, done right, once companies integrate data tagging into their operations, producing data will take only the click of a button, or maybe not even that much effort.[36] Moreover, because the data are electronic, regulators will no longer trip over boxes in the hallways as they used to,[37] so the cost on our end will be low too. And new data analysis tools enable regulators to analyze the data more efficiently.[38] Better technology for collecting, storing, and analyzing data should not become a license for unfettered regulatory appetites. The FDTA, perhaps reflecting congressional recognition of this concern, did not authorize any new data collections, but rather concentrated on making existing data collection more efficient.[39] Even if the data point exists and we can easily ask for it, store it, and process it, we should ask for it only if we have a legitimate regulatory need for it and collecting the information would not be otherwise inappropriate.[40]

Keep Up With Changing Technologies.
Finally, regulators need to specify standards in a way that preserves flexibility in the face of rapidly changing technology. Rules are hard to write and even harder to rewrite once they are written. Multi-agency rules can be particularly inflexible because the agencies have to act in concert. Experience teaches us that embedding specific technological requirements in rule text can saddle registered entities with unnecessary burdens as technology changes. They find themselves needing to maintain the mandated-but-obsolete system alongside a new, superior system that does not meet our decades-old regulatory requirements. Until very recently, for example, broker-dealers maintained a write once, read many—also known as WORM—technology to comply with our recordkeeping rules alongside the actual recordkeeping system they used for operational purposes and to answer regulatory records requests. When we write rules, we may find it difficult to imagine a technology superior to what is then commonly available; after all, most financial regulators are not technologists. But experience shows us that our rules are generally far more enduring than the technology they mandate.[41] Just last month, we finally proposed to transition many broker-dealer filings from paper to electronic formats, a change that has probably seemed obvious and inevitable for nearly two decades.

Why should structured data standards be any different? We already have seen an evolution in widely accepted standards over time as eXtensible Business Reporting Language (“XBRL”) has given way to Inline XBRL.[42] Regulators should keep this experience in mind as they formulate structured data standards, which may mean looking for ways to avoid embedding any particular structured data technology in our rules. One way to do this may be to set broad objectives—for example, that filings should be human- and machine-readable, inter-operable, and non-proprietary[43]—in regulation and save the technical specifications for filer manuals.

The FDTA may not permit us this degree of flexibility, and to the extent that changing standards impose costs on market participants, it may be more prudent to proceed via notice-and-comment rulemaking. Another possibility may be to specify reporting standards in a free-standing section of our rules, which could make it easier for the Commission and other financial regulators to make updates as warranted by technological changes.

Looking to the Future
Let me close by looking beyond the FDTA to what the future might hold. As regulators impose tagging requirements on regulated entities, they should explore how they might be able to use structured data to make their own rules easier for entities to find, analyze, and follow. Machine-readable rules are one way to facilitate regulatory compliance. Some commentators also have broached the possibility of machine-executable rules, which firms theoretically could use to automate compliance.[44] With the rulebook coded into a firm’s operational system, the system, for example, could automatically and precisely produce a required disclosure.[45] One could even imagine some governments going one dystopian step further and sending substantive requirements via software code directly into a firm’s computer systems. Such a vision might not seem too far afield from some of the SEC’s current proposals, which seem intent on displacing private market participants’ judgment, but machine-readable rules are more in line with my limited government approach.

While the SEC has not taken concrete steps to make its rulebook machine-readable, one of the regulatory organizations with which the SEC works has. Last year, the Financial Industry Regulatory Authority (“FINRA”) started developing a machine-readable rulebook[46] that aims to improve firm compliance, enhance risk management, and reduce costs.[47] FINRA created a data taxonomy for common terms and concepts in rules and embedded the taxonomy into its forty most frequently viewed rules.[48] Although its initial step was limited in scope, it sparked interest.[49] Other regulators have run similar experiments with machine-readable rules.[50]

The SEC could follow its regulatory sisters’ lead and try integrating machine-readable rules into its rulebook, but there are some obstacles. We struggle to write our rules in Plain English; could we successfully reduce them to taxonomies? Would rules become less principles-based and more prescriptive so that they would be easier to tag? To start the ball rolling, we could take more incremental steps like tagging no-action letters and comment letters on filings.[51]

Conclusion
Commissioner Aguilar’s advice to future commissioners included an admonition to “choose your speaking engagements wisely.”[52] I have chosen wisely to speak to a group of people so committed to high-quality regulatory data. Commissioner Aguilar advised, “Do your due diligence and listen to all sides—particularly those whose views may not align with yours. You will become more informed (and wiser).”[53] I look forward to hearing from you, especially on matters where we disagree.

[1] The FDTA requires a joint rulemaking by financial regulatory agencies, including the SEC, on data standards for information collection and reporting. See Financial Data Transparency Act of 2022 ("FDTA"), Pub. L. No. 117-263, tit. LVIII, § 5811(a)(1), 126 Stat. 4145 (2022) (identifying “covered agencies” and establishing a two-year timeline for joint final rules establishing data standards). The data must be interoperable, “non-proprietary,” and “fully searchable and machine-readable,” among other criteria. Id. Once the joint rulemaking is final, the FDTA instructs the individual agencies to take specific steps. See, e.g., id. §§ 5821-25 (setting forth the mandates for the SEC with respect to its own data, filings and reports by regulated entities, filings with the Municipal Securities Rulemaking Board (MSRB), among others).

[2] See Commissioner Luis Aguilar, Biography, SEC https://www.sec.gov/about/commissioners/luis-a-aguilar (last visited Apr. 10, 2023).

[3] Commissioner Luis Aguilar, Commissioner Aguilar's (Hopefully) Helpful Tips for New SEC Commissioners, SEC (Nov. 30, 2015), https://www.sec.gov/news/statement/helpful-tips-new-sec-commissioners.

[4] Id.

[5] Id.

[6] See Office of Structured Data, What is Structured Data, SEC (Mar. 26, 2016), https://www.sec.gov/structureddata/what-is-structured-data (“Structured data is data that is divided into standardized pieces that are identifiable and accessible by both humans and computers. The granularity of these pieces can range from an individual data point, such as a number (e.g., revenues), date (e.g., the date of a transaction), or text (e.g., a name), to data that includes multiple individual data points (e.g., an entire section of narrative disclosure). Structured data can be created and communicated using data standards like XBRL, XML, and JSON, or generated with web and pdf forms.”).

[7] Commissioner Mark Uyeda, Statement on the Final Rule: Insider Trading Arrangements and Related Disclosures, SEC (Dec. 14, 2022), https://www.sec.gov/news/statement/uyeda-insider-trading-20221214 (“The Commission has not given any consideration as to what material, existing disclosures ought to be prioritized for reporting as structured data, like management’s discussion and analysis. This lack of an overall plan is a shortcoming of the Commission and one that should be rectified”).

[8] See, e.g., Commissioner Hester Peirce, Statement on Final Rule of Inline XBRL Filing of Tagged Data, SEC (Jun. 28, 2018), https://www.sec.gov/news/statement/statement-peirce-ixbrl-062818 (raising concerns about particular structured data mandates: “If Interest is low it makes little sense to then mandate that everyone use the unpopular technology. In the early days of home video, it would not have been reasonable for the government to say ‘people aren’t using Betamax. Let’s mandate the use of Betamax!’”).

[9] See, e.g., XBRL.US, Aggregated Real-time Filing Errors, https://xbrl.us/data-quality/filing-results/dqc-results/ (last visited Apr. 10, 2023) (charts compiling the historical error rates “in public company financial reports accepted into the SEC’s EDGAR database” and showing that error rates generally have been falling over time).

[10] For a discussion of custom tags used in filings submitted by issuers to comply with the 2009 Interactive Data rules and trends in their use, see Office of Structured Data, U.S. GAAP – XBRL Custom Tags Trend, SEC (Aug. 12, 2022), https://www.sec.gov/structureddata/gaap_trends_2021.

[11] See, e.g., FDTA § 5823 (allowing steps to scale requirements and minimize disruption in connection with municipal securities).

[12] See, e.g., FDTA § 5825 (establishing a “Data Quality Improvement Program” to, among other things, “make data filed with or furnished to the Commission useful to investors” and requiring that the SEC report to Congress every six months on the “public and internal use of machine-readable data for corporate disclosures”).

[13] See, e.g., Letter from Nasdaq, Inc. at 5 (Mar. 21, 2019), https://www.sec.gov/comments/s7-26-18/s72618-5177722-183507.pdf (“Only 8% of survey participants believe that analysts or investors are using XBRL data, although it costs them on average $20,412 each quarter to comply with XBRL requirements for the Form 10-Q. In our own experience as a self-regulatory organization, the usability of XBRL is limited”).

[14] The Act requires every entity to buy “a common non-proprietary legal entity identifier that is available under an open license. FDTA § 5811. That identifier could be the Legal Entity Identifier (“LEI”), which costs between $50 and $65 annually. See LEI Register, LEI Price List, https://www.lei-identifier.com/lei-price-list/#:~:text=LEI%20application%20and%20registration%20price,%2D%20%24250
(%24%2050%20%2F%20year) (last visited Apr. 10, 2023). A firm obtaining an LEI also incurs other administrative costs in connection with obtaining and maintaining the LEI. See Financial Stability Board, Thematic Review on Implementation of the Legal Entity Identifier: Peer Review Report at 34 (May 28, 2019), https://www.fsb.org/wp-content/uploads/P280519-2.pdf.

[15] One 2017 survey of more than 1,000 small reporting companies found the median price for such companies to prepare financial statements in XBRL was $2,500, and it cost less than $5,500 for almost 70 percent of such companies. See AICPA & CIMA, XBRL Costs for Small Companies Have Declined 45%, According to AICPA Study (Aug. 15, 2018), https://www.aicpa-cima.com/news/article/xbrl-costs-for-small-companies-have-declined-45-according-to-aicpa-study.

[16] Securities Offering Reform for Closed-End Investment Companies, 85 FR 33290, 33328 (Jun. 1, 2020), https://www.govinfo.gov/content/pkg/FR-2020-06-01/pdf/2020-07790.pdf.

[17] Id.

[18] Congress long has been sensitive to the unique concerns raised by federal oversight of the municipal bond markets, including costs. See 15 U.S.C. § 78o-4(d) (prohibition on imposition by the Commission and the Municipal Securities Rulemaking Board of certain types of filing requirements on municipal bond issuers, commonly known as the Tower Amendment). The FDTA includes a provision that expressly provides that the Act does not “affect the operation” of the Tower Amendment. FDTA § 5823(a). Some commentators have suggested that the Act may nonetheless undermine the protections of the Tower Amendment by, for example, allowing the MSRB to use structured data requirements “to impose standards that could dictate both the structure and content of disclosures, and to indirectly prescribe accounting and reporting principles to be used by state and local governments and entities.” See Letter from Government Finance Officers Association, et al. (Sept. 29, 2022), https://gfoaorg.cdn.prismic.io/gfoaorg/cbd44500-5f08-4ce2-9b61-93dc2bc28423_PFN+Ltr+on+FDTA+FINAL.pdf. Although my discussion here is limited to costs, the Commission should ensure that any rules issued or approved in the implementation of the Act are consistent with the Tower Amendment.

[19] Marc Joffe, Machine‐Readable Financial Reporting Is Less Scary than You Think, CATO Institute (Jan. 4, 2023), https://www.cato.org/commentary/machine-readable-financial-reporting-less-scary-you-think.

[20] See, e.g., Ernesto Lanza et al., Structured Data Is Coming to the Municipal Securities Market–Now What? at 8-9, Ballard Spahr LLP (Jan. 2023), https://www.ballardspahr.com/-/media/Main/Articles/Structured-Data-MSM---01-23.pdf (discussing “ambiguity regarding how Municipal Market Data Standards are intended to apply to information currently required to be submitted to the MSRB as documents rather than fielded data . . . . ”).

[21] See FDTA § 5823(a).

[22] See, e.g., Liz Farmer, An AI takeover of the muni market? Long Story Short (Jan. 20, 2023), https://lizfarmer.substack.com/p/the-ai-takeover-of-the-muni-market (subscription required) (“If reporting costs increase, it’s very plausible that smaller governments would find it cheaper to work directly with a bank. The end result is less financial transparency by those particular governments even as the municipal market on the whole becomes more data-analytics-friendly”).

[23] See, e.g., Jenna Magan & Hoang Vu, The Financial Data Transparency Act, Orrick (Dec. 27, 2022), https://www.orrick.com/en/Insights/2022/12/The-Financial-Data-Transparency-Act (observing that “it remains to be seen whether the increased costs associated with implementing the new rules will create a barrier to entry in the municipal market for smaller governmental issuers and nonprofit organizations who may choose to avoid the new requirements by opting for private placement offerings that are exempt from such continuing disclosure obligations”).

[24] My Florida CFO, Florida Open Financial Statement System Project, https://myfloridacfo.com/division/aa/local-governments/florida-open-financial-statement-system-project (last visited Apr. 10, 2023).

[25] FDTA § 5823.

[26] See, e.g., AICPA & CIMA, supra note 15 (stating that, from 2014 to 2017, “the cost of XBRL formatting for small reporting companies . . . declined 45 percent . . . .”).

[27] The Commission discussed the costs and benefits of Inline XBRL filing in its 2017 proposal to require the use of Inline XBRL in certain filings. See Proposed Rule: Inline XBRL Filing of Tagged Data, 82 Fed. Reg. 14282 (Mar. 17, 2017).

[28] See, e.g., Electronic Submission of Certain Materials Under the Securities Exchange Act of 1934; Amendments Regarding the FOCUS Report at 50 (Mar. 22, 2023), https://www.sec.gov/rules/proposed/2023/33-11176.pdf (explaining that for certain disclosures, “filers would be able to input their . . . disclosures into a fillable web form that EDGAR would subsequently convert to custom XML”).

[29] See, e.g., Mike Willis et al., XBRL: One Standard – Many Applications at 49-51, PriceWaterhouseCoopers, https://www.pwc.com/gx/en/xbrl/assets/pwc_xbrl_one_standard_many_applications.pdf (describing how the use of structured data can streamline different processes for financial institutions, including credit analysis, operational risk management, and corporate reporting).

[30] If the experience with bank call reports is instructive, costs and error rates in regulatory filings may fall. After the FDIC’s XBRL transition, the number of call reports with errors fell from 34% to 5%. See Remarks of FDIC Vice Chairman Martin J. Gruenberg at 14th Annual XBRL International Conference at 3 (Dec. 4, 2006), https://archive.fdic.gov/view/fdic/881. Securities regulatory filings may be more complex than bank call reports, but the results are encouraging nonetheless.

[31] The FDTA commissions a Government Accountability Office “report on the feasibility, costs, and potential benefits of building upon the taxonomy [established by the FDTA] a Federal Government-wide regulatory compliance standardization mechanism similar to Standard Business Reporting.” FDTA § 5893. Under Standard Business Reporting (“SBR”), a common data taxonomy could eliminate the need for regulated entities to fill out different forms for different agencies and could reduce costs. See, e.g., Commonwealth of Australia, What Is Standard Business Reporting, https://www.sbr.gov.au (describing Australia’s SBR initiative); Parliament of the Commonwealth of Australia, House of Representatives Standing Committee on Tax and Revenue, 2016 Annual Report of the Australian Taxation Office, Performance Review 2015-16 at 53, https://www.aph.gov.au/-/media/02_Parliamentary_Business/24_Committees
/243_Reps_Committees/TaxRev/2015-16_Annual_Report_ATO/Consolidated.pdf?la=en&hash=0B88E9BAFA7B5D7E1C111B9D6033271B092918CC (reporting that in 2015 and 2016, SBR saved businesses 1.2 billion Australian dollars in regulatory costs).

[32] Commissioner Caroline A. Crenshaw, The Lessons of Structured Data at discussion accompanying notes 20-21, SEC (Nov. 10, 2021), https://www.sec.gov/news/speech/crenshaw-lessons-structured-data-111021 (noting benefits to smaller issuers as described in Lai et al., XBRL Adoption and Cost of Debt, International Journal of Accounting & Information Management (2015); Ra et al., XBRL Adoption, Information Asymmetry, Cost of Capital, and Reporting Lags, iBusiness (2018) and Li et al., Does XBRL Adoption Reduce the Cost of Equity Capital?, SSRN (2012)).

[33] FDTA § 5891(c).

[34] See, e.g., FDTA § 5823(b)(2). The Act uses this language in nine different places.

[35] See, e.g., FDTA § 5821(a)(2).

[36] See, e.g., Commonwealth of Australia, Benefits of SBR, https://www.sbr.gov.au/about-sbr/benefits-sbr#BenefitstoBusiness (“SBR extracts information from your accounting and payroll records and prepares reports directly from your software”).

[37] See, e.g., Securities and Exchange Commission Historical Society, The Enforcement Division: A History, https://www.sechistorical.org/museum/galleries/enf/enf04a_send-message.php (“They seemed driven to show that the SEC was the finest agency in Washington. In some ways these enforcement lawyers differed from traditional prosecutors; according to one observer, ‘[t]hey enforced the law primarily from their offices, pouring over documents, scrutinizing stock data, negotiating on the telephone, writing memos, meeting constantly with coworkers and supervisors. . . . Their cramped offices and the hallways that surround them were piled high with boxes of subpoenaed documents and work papers.’”) (citing Susan P. Shapiro, Wayward Capitalists: Targets of the Securities and Exchange Commission 141-142 (1987)).

[38] For example, the FDIC’s shift to XBRL helped FDIC analysts increase their caseloads from 450-500 banks to 550-600 banks. See Federal Financial Institutions Examination Council, Improved Business Process Through XBRL: A Use Case for Business Reporting at 6, https://xbrl.us/wp-content/uploads/2007/12/20060202FFIECWhitePaper.pdf.

[39] FDTA § 5826 (specifying that the Act imposes no new disclosure requirements).

[40] Our experience with the Consolidated Audit Trail, a project more than a decade in the making, illustrates my concerns. The CAT, as it is known, enables various self-regulatory organizations and the SEC to monitor all activity in the equity and options markets and tie it to individual traders. The project raises cybersecurity and privacy concerns for investors whose data the CAT will collect and store. Absent a belief that someone is engaged in illegal activity, why should the government be able to watch all of her transactions? Using our pre-CAT tools, we already are able to get from brokers information when we suspect illegal activity.

[41] For example, Exchange Act Rule 17a-11 provided for the submission of notices and reports to the Commission by telegraphic transmission until 2019. See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers, 84 FR 68550, 68590 (Dec. 16, 2019), https://www.federalregister.gov/documents/2019/12/16/2019-20678/recordkeeping-and-reporting-requirements-for-security-based-swap-dealers-major-security-based-swap (removing this provision “in light of the fact that telegrams are no longer widely used in the United States, and that Commission staff no longer receive 17a-11 notices by telegram”).

[42] For an overview of the SEC’s structured data rulemaking history, see Office of Structured Disclosure, Structured Disclosure at the SEC: History and Rulemaking, SEC (Mar. 24, 2023), https://www.sec.gov/page/osdhistoryandrulemaking.

[43] These descriptors come from Sections 5811 and 5812 of the FDTA.

[44] See, e.g., Letter from James Nicholls, Managing Director, Braithwate, Response to FINRA Machine-Readable Rulebook Initiative at 1 (Feb, 21, 2023), https://www.finra.org/sites/default/files/NoticeComment/Braithwate_James
%20Nicholls_2.21.23_Response%20to%20FINRA%20Machine-Readable%20Rulebook%20Initiative%20%2821%20Feb%202023%29.pdf (stating that “regulators should aim to publish machine-executable rules-as-code, with the written English version serving as guidance”).

[45] See, e.g., Financial Conduct Authority, Digital Regulatory Reporting: Feedback Statement on Call for Input at 4 (Oct. 2018), https://www.fca.org.uk/publication/feedback/fs18-02.pdf (“[W]e could create a regulatory language that machines could understand and so remove the need for human interpretation. . . . Machines then used this language to automatically carry out (execute) the rules. Once the rules were translated, machines could fulfil the requirements by accessing the information required and then pulling this information directly from a firm’s databases”).

[46] See Special Notice: FINRA Requests Comment on Its Machine-Readable Rulebook Initiative (Oct. 21, 2022), https://www.finra.org/sites/default/files/2022-10/Special-Notice-102122.pdf. For a helpful discussion of the initiative, see FINRA Unscripted Podcast (Feb. 7, 2023), https://www.finra.org/media-center/finra-unscripted/machine-readable-rulebook-initiative.

[47] See News Release, FINRA Launches Machine-Readable Rulebook Initiative (Oct. 21, 2022), https://www.finra.org/media-center/newsreleases/2022/finra-launches-machine-readable-rulebook-initiative.

[48] See id.

[49] See, e.g., Letter from Ian Hollowbread, Managing Director and COO Business Development & Innovation, ING Bank NV in response to FINRA Special Notice at 1 (Feb 1, 2023), https://www.finra.org/sites/default/files/NoticeComment/ING%20Bank_Ian
%20Hollowbread_2.1.2023_Machine%20Readable%20Rulebook.pdf (lauding the move as “a benchmark leading project in innovation”; because “[k]eeping up with regulatory change remains one of the greatest challenges an organisation can expect to face,” ways to “more effectively and efficiently consume regulatory rules” are welcome); Letter from John Byrne, CEO, and Hazel Dowling, Strategic Account Management, Corlytics in response to FINRA Special Notice at 2, (Feb. 13, 2023), https://www.finra.org/sites/default/files/NoticeComment/Corlytics_2.15.23_
FINRA%20Special
%20Notice%20Machine%20Readable%20Rulebook.pdf (“If regulators implement standard taxonomies and digital methods to access rules, this will make accessing regulation easier for firms. This will in turn make it easier for firms to be compliant and reduce the cost of compliance in the industry”).

[50] The Bank of England and the United Kingdom’s Financial Conduct Authority, for example, launched a Digital Regulatory Reporting (“DRR”) initiative in 2018 with the goal of making rules machine-readable and eventually machine-executable. See Financial Conduct Authority, Digital Regulatory Reporting, https://www.fca.org.uk/innovation/regtech/digital-regulatory-reporting#section-project-overview. In a subsequent viability assessment, a working group identified “the potential for financial benefits for firms and regulators, but also the introduction of some new costs” and acknowledged that while “no current solution . . . met all requirements” to turn rules into code, the project lends itself to “small, incremental steps which prove valuable to all each time.” Digital Regulatory Reporting, Phase 2 Viability Assessment at 4 and 38, https://www.fca.org.uk/publication/discussion/digital-regulatory-reporting-pilot-phase-2-viability-assessment.pdf.

[51] See, e.g., Letter from Council of Institutional Investors and CFA Institute regarding Rendering SEC Correspondence with Issuers in Machine-Readable Format at 1 (Sept. 1, 2022), https://www.cii.org/files/issues_and_advocacy/correspondence/2022/CFA%20and
%20CII%20Letter%20to%20SEC%20on%20XBRL%20Comment%20Letters_Final.pdf (calling on the SEC to make “SEC correspondence to, and from, public companies available in structured, machine-readable format”).

[52] See Aguilar, supra note 2.

[53] Id.

FINRA Fines and Suspends Rep For Reg S-P
In the Matter of Gordon Scott Wallace, Respondent (FINRA AWC 2021071850601)
https://www.finra.org/sites/default/files/fda_documents/2021071850601
%20Gordon%20Scott%20Wallace%20CRD%201905279%20AWC%20vr.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, Gordon Scott Wallace submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Gordon Scott Wallace was first registered in 1998 and by 1989, he was registered with Merrill Lynch, Pierce, Fenner & Smith Inc.. In accordance with the terms of the AWC, FINRA imposed upon Wallace a $5,000 fine and a 10-business-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In May 2021, in anticipation of joining another FINRA member firm, Wallace improperly removed his customers' nonpublic personal information from Merrill Lynch, without the firm's or the customers' consent. Specifically, between May 29 and May 31, while associated with Merrill Lynch, Wallace took photographs of account information for approximately 35 customers contained within Merrill Lynch's electronic systems, including customer names, dates of birth, customer account numbers, and social security numbers. In addition, during the same period, Wallace directed junior members of his brokerage team to also photograph account information contained within Merrill Lynch's systems, including nonpublic personal information of at least 100 customers. Following Wallace's resignation from Merrill Lynch on June 3, 2021, Wallace and members of his brokerage team improperly retained the customers' nonpublic personal information. That information was secured by the firm through which Wallace had become registered, and the firm returned the customers' nonpublic personal information to Merrill Lynch prior to its use.

Therefore, Wallace violated FINRA Rule 2010.

= = =
4/10/2023

Pro Se Registered Respondent A No Show At Arbitration Involving Cambridge Capital Group (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6985/cambridge-capital-milon/
In a recent FINRA Arbitration, the Panel determined that the registered representative Respondent had intentionally lied to the public customer Claimant about investments in Cambridge Capital Group. The lies were found to be particularly egregious because over 80% of Claimant's liquid assets were placed in the Cambridge investment. What should arbitrators do when they are confronted with particularly egregious lies involving the bulk of a client's liquid assets? Read today's blog for some ideas and answers.

Grand Jury Charges San Fernando Valley Man Who Allegedly Embezzled $2.2 Million in Money and Real Estate from Elderly Victim (DOJ Release)
https://www.justice.gov/usao-cdca/pr/grand-jury-charges-san-fernando-valley-man-who-allegedly-embezzled-22-million-money
In the United States District Court for the Central District of California, an Indictment was filed charging Jamal Nathan "Jimmy" Dawood with six counts of wire fraud, nine counts of money laundering, and one count of aggravated identity theft. As alleged in part in the DOJ Release:

[D]uring the second half of 2019, Dawood offered to assist the victim with the management of real estate properties and retirement savings that the victim had inherited from the victim’s deceased brother. Specifically, Dawood allegedly helped the victim open a trust account at a bank for the purpose of managing the retirement savings.

Without the victim’s knowledge or authorization, Dawood then initiated wire and online banking transfers from the victim’s trust account to Dawood-controlled accounts, the indictment alleges. Without the victim’s knowledge or permission, Dawood allegedly also wired money from the victim’s trust account to people with whom Dawood had personal and business relationships.

Dawood allegedly convinced the victim to transfer ownership of his home and his late brother’s real estate holdings to various companies. Dawood falsely represented that the victim would retain an ownership interest in his residence and the inherited real estate through these companies. In fact, Dawood and other individuals close to him controlled these companies, according to the indictment.

In total, Dawood allegedly fraudulently obtained at least $2,202,688 in the victim’s money and property. The illicitly obtained funds allegedly were used to purchase real estate in La Crescenta and Fontana.

Founder And Former Chief Investment Officer Of Infinity Q Sentenced To 15 Years In Prison (DOJ Release)
https://www.justice.gov/usao-sdny/pr/founder-and-former-chief-investment-officer-infinity-q-sentenced-15-years-prison
In the United States District Court for the Southern District of New York, James Velissaris (founder/former Chief Investment Officer of Infinity Q Capital Management), 38, pled guilty to one count of securities fraud; and he was sentenced to 15 years in prison plus three years of supervised release, and ordered to pay about $22 million in forfeiture. As alleged in part in the DOJ Release:

Background

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

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

VELISSARIS’s Scheme to Lie to Investors and Inflate Derivative Swap Positions

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

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

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

VELISSARIS Lies to Auditors and Obstructs the SEC’s Investigation

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

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

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

Bakersfield CPA Pleads Guilty to Stealing Over $350,000 from Investors (DOJ Release)
https://www.justice.gov/usao-edca/pr/bakersfield-cpa-pleads-guilty-stealing-over-350000-investors
In the United States District Court for the Eastern District of California, Jeffrey Todd Stewart pled guilty to wire fraud. As alleged in part in the DOJ Release:

[S]tewart was employed as a certified public accountant in Bakersfield. Between September 2014 and June 2018, Stewart solicited and received over $2 million from investors to pay fees and expenses purportedly needed for an overseas business deal. Stewart represented to the investors that their investments were being used for the deal and promised significant returns. Although Stewart used most of the money for the purported deal, he spent $355,000 of the money obtained from the investors on his own personal expenses, including mortgage payments, trips to Las Vegas, and gambling.

SEC Obtains Judgment After Executives Settle Case Alleging an Inflated Truck Pricing Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25690.htm
In the United States District Court for the Southern District of Indiana, without admitting or denying the allegations in an SEC Complaint, former Celadon Group Inc. President/Chief Operating Officer William Eric Meek and Chief Operating Officer Bobby Peavler entered into a Final Consent Judgment in which they agreed to be permanently enjoined from aiding and abetting future violations of Sections 10(b), 13(a), 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder and from committing future violations of Rule 13b2-2; and, further, Peavler also agreed to be enjoined from future violations of Exchange Act Rule 13a-14. Meek and Peavler will pay a civil penalty of $50,000 each and each is barred from acting as an officer or director of a public company for a period of three years. Further, Meek and Peavler agreed to be suspended from appearing and practicing before the SEC as an accountant (with the right to apply for reinstatement after three years). As alleged in part in the SEC Release:

[M]eek, the former president and chief operating officer of Celadon Group, Inc., and Peavler, the former chief financial officer of Celadon Group Inc., participated in a scheme to buy and sell trucks at inflated prices, in some cases double or triple the trucks' fair market value. The complaint alleged these transactions were intended to conceal Celadon's failure to write down the trucks' net book values and take impairment charges. The complaint further alleged that as a result, Celadon overstated its pre-tax income, net income, and earnings per share in its annual report for the period ending June 30, 2016, and in its subsequent filings through the period ending December 31, 2016. Additionally, the complaint alleged Meek and Peavler lied to auditors about the true nature of these transactions.

CFTC Orders Goldman Sachs to Pay $15,000,000 for Violations of Swap Business Conduct Standards / Swap Dealer Failed to Disclose Pre-Trade-Mid-Market Marks and Failed to Communicate in a Fair and Balanced Manner (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8685-23
A CFTC Order settled charges against Goldman Sachs & Co. LLC
https://www.cftc.gov/media/8376/enfgoldmanorder041023/download that the firm failed to disclose dozens of pre-trade-mid-market marks (PTMMM), in violation of Regulation 23.431, and failed to communicate to clients in a fair and balanced manner based on principles of fair dealing and good faith, in violation of Regulation 23.433. Goldman admitted that for nearly all “same-day” swaps executed in 2015 and 2016, it either failed to disclose any PTMMM or failed to disclose an accurate PTMMM, and that this conduct violated a CFTC regulation. The CFTC Order imposed a $15,000,000 civil monetary penalty. As alleged in part in the CFTC Release:

The order finds that in 2015 and 2016, Goldman transacted dozens of “same-day” equity index swaps with U.S.-based clients. In a “same-day” equity index swap, the equity leg of the swap strikes on the “same day” as the other material terms of the swap are agreed upon, rather than—as is typical—the day after the date of agreement. The order finds that Goldman failed to disclose to clients the PTMMM of these swaps—often disclosing a PTMMM for a different swap (the analogous “T+1” swap) instead, thereby obscuring the value of the same-day swap.

The order finds that Goldman opportunistically solicited or agreed to enter into same-day swaps only on days and at times that were financially advantageous to Goldman and disadvantageous to its clients. Moreover, the manner in which Goldman communicated to clients caused the same-day swaps to appear more economically advantageous to the clients than they actually were. As found in the order, in certain instances, Goldman disclosed a PTMMM for the “T+1” swap and then bid over it for the “same-day” swap, giving the client the impression that the same-day swap was a better deal for the client than the T+1 swap when, in fact, it was not. Indeed, the order finds any marginal benefit Goldman offered to clients on the interest rate leg of the swap would be outweighed by the cost to clients on the equity leg when transacting “same day.” The order finds that Goldman failed to communicate in a fair and balanced manner by touting the supposed benefits of same-day swap transactions, but not the corresponding costs.

Bill Singer's Comment: As in this is 2023 and the misconduct took place in 2015/2016 -- as in seven to eight years ago. What took so long? (Don't bother to answer: That's both a rhetorical and cynical question). Also read:

In 2023 FINRA Settles With Goldman Sachs Over Mismarked Short Sales Dating Back to 2015 (BrokeAndBroker.com Blog / April 5, 2023)
https://www.brokeandbroker.com/6974/goldman-sachs-finra/

There are times when Wall Street's regulators just don't seem in much of a rush. When of the industry's whales is involved, everything seems to slow down. If it were one of the small fry, we all suspect that things would have moved quicker and with more devastating sanctions. In a recent FINRA settlement, the regulator alleged that Goldman Sachs had engaged in short selling misconduct from October 2015 to April 2018 involving 60 million short sale orders. And here we are 2023. What took so long?

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