Securities Industry Commentator by Bill Singer Esq

FINRA announced that it will be conducting elections of one Large Firm Governor and one Small Firm Governor to the FINRA Board of Governors. Nominee for Upcoming FINRA Board of Governors Election (FINRA Election Notice / May 31, 2023) at https://www.finra.org/rules-guidance/notices/election-notice-05312023
Bill Singer's Comment: FINRA's Board is a lackluster amalgamation that is tone deaf to the legitimate needs of its smaller members and resistant to implementing the necessary reforms to protect the investing public and the industry's financial professionals. FINRA's Small Firm members represent some 90% of the membership but are gerrymandered down to about 13% of the Board Governors. Since the Small Firm Members are of no apparent consequence when it comes to FINRA's governance, I urge the Small Firm community to boycott all 2023 FINRA elections. Also see:

"FINRA Board Of Governors Fails To Confront Goldman Sachs $215 Million Gender Discrimination Settlement" (BrokeAndBroker.com Blog / May 10, 2023)
https://www.brokeandbroker.com/7035/finra-goldman-sachs/

“A Call for Boycott: FINRA Board of Governors’ Cowardly Silence Becomes Thunderous” (BrokeAndBroker.com Blog / May 1, 2023)
https://www.brokeandbroker.com/7021/finra-board-ruemmler-epstein/

SCOTUS Says in Jack Daniels/Bad Spaniels Trademark Dispute That Use of a Mark Does Not Count As Noncommercial Just Because It Parodies, or Otherwise Comments On, Another’s Products.
JACK DANIEL’S PROPERTIES, INC. v. VIP PRODUCTS LLC (Opinion, United States Supreme Court, No. 22–148, 599 U. S. ____ (2023)
https://www.supremecourt.gov/opinions/22pdf/22-148_3e04.pdf
As set forth in the SCOTUS "Syllabus":

The Lanham Act, the core federal trademark statute, defines a trademark by its primary function: identifying a product’s source and distinguishing that source from others. In serving that function, trademarks help consumers select the products they want to purchase (or avoid) and help producers reap the financial rewards associated with a product’s good reputation. To help protect trademarks, the Lanham Act creates federal causes of action for trademark infringement and trademark dilution. In a typical infringement case, the question is whether the defendant’s use of a mark is “likely to cause confusion, or to cause mistake, or to deceive.” 15 U. S. C. §§1114(1)(A), 1125(a)(1)(A). In a typical dilution case, the question is whether the defendant “harm[ed] the reputation” of a famous trademark. §§1125(c)(2)(A), (C).

Respondent VIP Products makes a squeaky, chewable dog toy designed to look like a bottle of Jack Daniel’s whiskey. But not entirely. On the toy, for example, the words “Jack Daniel’s” become “Bad Spaniels.” And “Old No. 7 Brand Tennessee Sour Mash Whiskey” turns into “The Old No. 2 On Your Tennessee Carpet.” These jokes did not impress petitioner Jack Daniel’s Properties, which owns trademarks in the distinctive Jack Daniel’s bottle and in many of the words and graphics on its label.

Soon after the Bad Spaniels toy hit the market, Jack Daniel’s demanded that VIP stop selling it. VIP filed suit, seeking a declaratory judgment that Bad Spaniels neither infringed nor diluted Jack Daniel’s trademarks. Jack Daniel’s counterclaimed for infringement and dilution. At summary judgment, VIP argued that Jack Daniel’s infringement claim failed under the so-called Rogers test—a threshold test developed by the Second Circuit and designed to protect First Amendment interests in the trademark context. See Rogers v. Grimaldi, 875 F. 2d 994. When “expressive works” are involved, VIP contended, that test requires dismissal of an infringement claim at the outset unless the complainant can show either (1) that the challenged use of a mark “has no artistic relevance to the underlying work” or (2) that it “explicitly misleads as to the source or the content of the work.” Id., at 999. Because Jack Daniel’s could not make that showing, VIP claimed, the Lanham Act’s statutory “likelihood of confusion” standard became irrelevant. And as for the dilution claim, VIP urged that Jack Daniel’s could not succeed because Bad Spaniels was a parody of Jack Daniel’s and therefore made “fair use” of its famous marks. §1125(c)(3)(A)(ii).

The District Court rejected both of VIP’s contentions for a common reason: because VIP had used the cribbed Jack Daniel’s features as trademarks—i.e., to identify the source of its own products. As the District Court saw it, when another’s trademark is used for “source identification,” Rogers does not apply, and instead the infringement suit turns on likelihood of confusion. The court likewise rejected VIP’s invocation of the fair-use exclusion, holding that parodies fall within that exclusion only when they do not use a famous mark to identify the source of the alleged diluter’s product. The case proceeded to a bench trial, where the District Court found that consumers were likely to be confused about the source of the Bad Spaniels toy and that the toy’s negative associations with dog excrement (e.g., “The Old No. 2”) would harm Jack Daniel’s reputation. The Ninth Circuit reversed. Finding the infringement claim subject to the threshold Rogers test, the Court of Appeals remanded the case to the District Court to decide whether Jack Daniel’s could satisfy either prong of that test. And the Court of Appeals awarded judgment on the dilution claim to VIP, holding that because Bad Spaniels parodies Jack Daniel’s, it falls under the “noncommercial use” exclusion. §1125(c)(3)(C). On remand, the District Court found that Jack Daniel’s could not satisfy either prong of Rogers, and so granted summary judgment to VIP on infringement. The Court of Appeals summarily affirmed.

Held:

1. When an alleged infringer uses a trademark as a designation of source for the infringer’s own goods, the Rogers test does not apply. Pp. 10–19.

(a) The Second Circuit created the Rogers test for titles of “artistic works” based on its view that such titles have an “expressive element” implicating “First Amendment values” and carry only a “slight risk” of confusing consumers about the “source or content” of the underlying work. 875 F. 2d, at 998–1000. Over the decades, lower courts adopting Rogers have confined it to similar cases, in which a trademark is used not to designate a work’s source, but solely to perform some other expressive function. See, e.g., Mattel, Inc. v. MCA Records, Inc., 296 F. 3d 894, 901 (use of the Barbie name in band’s song “Barbie Girl” was “not [as] a source identifier”). The same courts, though, routinely conduct likelihood-of-confusion analysis in cases where trademarks are used as trademarks—i.e., to designate source. See, e.g., Tommy Hilfiger Licensing, Inc. v. Nature Labs, LLC, 221 F. Supp. 2d 410, 414–415 (parodic pet perfumes did not trigger Rogers because defendant’s use of Tommy Hilfiger’s mark was “at least in part” for “source identification”). Thus, whatever Rogers’ merit—an issue on which this Court takes no position—it has always been a cabined doctrine: It has not insulated from ordinary trademark scrutiny the use of trademarks as trademarks.

That conclusion fits trademark law, and reflects its primary mission. Consumer confusion about source—trademark law’s cardinal sin—is most likely to arise when someone uses another’s trademark as a trademark. In such cases, Rogers has no proper application. Nor does that result change because the use of a mark has other expressive content. Under the Ninth Circuit’s approach, Bad Spaniels was automatically entitled to Rogers’ protection because it “communicate[d] a humorous message.” 953 F. 3d 1170, 1175. On that view, few trademark cases would ever get to the likelihood-of-confusion analysis. And the Ninth Circuit was mistaken to believe that the First Amendment demanded such a result. When a mark is used as a source identifier, the First Amendment does not demand a threshold inquiry. Pp. 10–17.

(b) In this case, VIP conceded that it used the Bad Spaniels trademark and trade dress as source identifiers. And VIP has said and done more in the same direction with respect to Bad Spaniels and other similar products. The only question remaining is whether the Bad Spaniels trademarks are likely to cause confusion. Although VIP’s effort to parody Jack Daniel’s does not justify use of the Rogers test, it may make a difference in the standard trademark analysis. This Court remands that issue to the courts below. Pp. 17–19.

2. The Lanham Act’s exclusion from dilution liability for “[a]ny noncommerical use of a mark,” §1125(c)(3)(C), does not shield parody, criticism, or commentary when an alleged diluter uses a mark as a designation of source for its own goods. The Ninth Circuit’s holding to the contrary puts the noncommercial exclusion in conflict with the statute’s fair-use exclusion. The latter exclusion specifically covers uses “parodying, criticizing, or commenting upon” a famous mark owner, §1125(c)(3)(A)(ii), but does not apply when the use is “as a designation of source for the person’s own goods or services,” §1125(c)(3)(A). Given that carve-out, parody is exempt from liability only if not used to designate source. The Ninth Circuit’s expansive view of the noncommercial use exclusion—that parody is always exempt, regardless whether it designates source—effectively nullifies Congress’s express limit on the fair-use exclusion for parody. Pp. 19–20.

953 F. 3d 1170, vacated and remanded.

KAGAN, J., delivered the opinion for a unanimous Court. SOTOMAYOR, J., filed a concurring opinion, in which ALITO, J., joined. GORSUCH, J., filed a concurring opinion, in which THOMAS and BARRETT, JJ., joined.

Former Branch Manager of Boston Bank Pleads Guilty to Bank Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-ma/pr/former-branch-manager-boston-bank-pleads-guilty-bank-fraud-scheme
In the United States District Court for the District of Massachusetts, Nathan Wadsworth, 32, pled guilty to one count of bank fraud. As alleged in part in the DOJ Release:

From June 2020 through November 2021, Wadsworth was employed as a branch manager for PNC Bank in Boston. Beginning in or around March 2021, Wadsworth used his position to identify dormant accounts of foreign account holders, transfer the funds in those dormant accounts to a new account he opened in the customers’ names and then moved the funds to his own accounts for personal use. In total, Wadsworth stole approximately $121,000 in customer funds. All the funds have since been repaid to the affected customers.

SEC Obtains Final Judgment Against Investment Adviser Tarek D. Bahgat (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25743.htm
The United States District Court for the Western District of New York entered a Final Default Judgment against Tarek D. Bahgat enjoining Bahgat from violating Sections 206(1) and 206(2) of the Advisers Act; ordering him to disgorge $378,021.97; $142,057.43 in prejudgment interest; and imposing a civil penalty of $378,854.00 pursuant to Section 209(e) of the Advisers Act. Previously, Final Judgments were entered against Defendant Colangelo and Relief Defendant WealthCFO. As alleged in part in the SEC Release:

The SEC's complaint alleged that Bahgat misappropriated over $378,000 from seven of his investment advisory clients. The SEC alleged that Bahgat illicitly obtained internet access to some of his clients' brokerage accounts by impersonating, or having his co-defendant, Lauramarie Colangelo, impersonate Bahgat's clients during telephone calls with broker-dealers holding the clients' accounts. This enabled Bahgat to cause money to be transferred from the clients' account to Bahgat and to his company, relief defendant WealthCFO, LLC. The SEC's complaint charged Bahgat with violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). The complaint sought permanent injunctions, disgorgement, prejudgment interest and civil penalties from Bahgat.

“We’ve Seen This Story Before” (Remarks before the Piper Sandler Global Exchange & Fintech Conference by SEC Chair Gary Gensler
https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-060823
Somewhat Acerbic and Somewhat Sarcastic Comment from Bill Singer: Indeed, just what we need -- more remarks from the Chair of the SEC. Okay, so, Chair Gensler has "seen this story before." That's nice. Then again, what Chair Gensler didn't see and what the other SEC Commissioners didn't see and what Senior Staff didn't see was the SEC's Enforcement Staff wrongly accessing the SEC's Adjudication Staff's memoranda. Perhaps if there was a lot less time wasted preparing for and undertaking all the speechifying, then those who should be seeing things would have the time to see them, right? See: "Commission Statement Relating to Certain Administrative Adjudications (SEC)"

And now that I've had my diatribe, let me return you to Chair Gensler's remarks:

Thank you, Rich, for that kind introduction. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

Well-regulated Markets

Rich, I’m honored to speak at what I’m told is your last of a 20-year run of conferences.

I’d like to focus on one area, which I think sits right at the intersection of the two things you highlight in the title of this conference—Exchanges and Fintech—and that’s crypto.

The U.S. capital markets thrive because we’ve had rules of the road that have helped ensure for investor protection, transparency, and competition for 90 years—since the signing of the Securities Act of 1933. A year after signing that law, President Roosevelt worked with Congress to pass the Securities Exchange Act of 1934 to regulate securities intermediaries, such as exchanges and broker-dealers. That law also created the SEC, and this past Tuesday was our 89th birthday.

Crypto Securities

There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.

Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds.

“Congress’s purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”[1] This is not just a talking point. This is the law of the land, as Justice Thurgood Marshall wrote in the Supreme Court’s famous Reves decision.

Congress included a long list of 30-plus items in the definition of a security, including the term “investment contract.”

As articulated in another famous Supreme Court decision, SEC v. W.J. Howey Co.,[2] an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. This test has been reaffirmed by the Supreme Court numerous times—the Court cited Howey as recently as 2019.

In the Howey decision, the Court said that definition of an investment contract “embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

As I’ve said numerous times, the vast majority of crypto tokens meet the investment contract test. Not liking the message isn’t the same thing as not receiving it.

These tokens have teams promoting them with websites and Twitter accounts. Investors may even meet the entrepreneurs. These tokens are not coming out of thin air. They are not growing out of the ground like corn or wheat. That they’re digital doesn’t differentiate them from huge swaths of the capital markets, where securities and currencies already are digital.

Satoshi Nakamoto’s innovation spurred the development of crypto assets and the underlying blockchain ledger technology. Regardless, however, of the ledger being used, be it a spreadsheet, a database, or blockchain technology, when investors put their money at risk, it’s the economic realities of the investment that matter.

Thus, crypto security issuers need to register the offer and sale of their investment contracts with the SEC or meet the requirements for an exemption. For decades, we’ve had rules governing how issuers must do that. We have flexible rules for the disclosures required in registration statements—Regulation S-K and Regulation S-X—and exemptions from registration, including Regulation A or Regulation D.

We’ve also provided years of guidance to market participants on what does or does not constitute a crypto asset security, including the DAO report in 2017[3] and the staff’s “Framework for ‘Investment Contract’ Analysis of Digital Assets” in 2019.[4] More than 100 Commission orders, settled actions, and court decisions also have made clear when the offer and sale of a token is a security, including our actions against Telegram,[5] LBRY,[6] and Kik.[7]

In fact, we alleged just this week that Binance’s chief financial officer and chief compliance officer were aware of the Kik case’s relevance to their own business.[8] According to our complaint against Binance, as a result of the SEC’s action against Kik, Binance insiders realized that they would need to “start prepping everything” for a subpoena and Wells notice relating to their exchange token, BNB, including a “War chest.”

When crypto asset market participants go on Twitter or TV and say they lacked “fair notice” that their conduct could be illegal, don’t believe it. They may have made a calculated economic decision to take the risk of enforcement as the cost of doing business.

Just as in other parts of the securities markets, registration and compliance takes work— something that the debt and equity issuers at this conference know well. This is appropriate, though, because it’s the work that ensures that investors get the full, fair, and truthful disclosure they deserve.

Some promoters of crypto asset securities contend that their token has a function beyond simply being an investment vehicle. As the courts in the Telegram case[9] and others[10] have said, however, some additional utility does not remove a crypto asset security from the definition of an investment contract. The investing public generally buys these crypto assets, at least in part, anticipating profit based on the efforts of those token issuers.

In fact, in that famous Howey decision, the Supreme Court wrote that, if the investment contract test is satisfied, “it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.”[11] Still, for those tokens that are used exclusively within their blockchain ecosystems, the staff has shown willingness to provide no-action letters.[12]

Crypto Intermediaries

Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.

Again, these laws have been on the books for decades. Sections 5, 15(a), and 17A(b) of the Exchange Act require that intermediaries acting as securities exchanges, brokers and dealers, and clearing agencies are subject to the securities laws, and must register or satisfy requirements for an exemption.

Again, these crypto entities know the rules. As Binance’s chief compliance officer put it bluntly to a colleague in 2018, “[w]e are operating as a fking unlicensed securities exchange in the USA bro.”

Registration is not just a process issue. Failure to register isn’t just a foot fault in a tennis game. It’s core to providing the investing public and our markets with basic protections.

This year, we alleged in separate actions that Beaxy,[13] Bittrex,[14] Binance,[15] and Coinbase[16] commingled and unlawfully offered securities intermediation functions without registering them with the SEC. The Commission settled actions against EtherDelta in 2018[17] and Poloniex in 2021.[18]

These alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosures, segregation of customer assets, safeguards against conflicts of interest, oversight by a self-regulatory organization, and routine inspection by the SEC. When intermediaries don’t register, it’s investors who get hurt and the American financial markets that may suffer.

In other parts of our securities markets, the exchange, broker-dealer, and clearing functions are separate. Separation of these core functions helps mitigate the conflicts that can arise with the commingling of such services.

Rich, if one of your earlier speakers said they were combining these functions or that they were surreptitiously trading against their customers without complying with our rules, no one in this room would stand for it.

I disagree with the notion—and recent history disproves it—that crypto intermediary compliance isn’t possible. I do recognize—and, again, think it’s appropriate—that it takes work. It’s not just a matter of “paying lip service to [the] desire to comply with applicable laws”[19] or seeking a bunch of meetings with the SEC during which you’re unwilling to make the changes needed to comply with the securities laws.

Crypto intermediaries may need to separate lines of business, put into place rulebooks that protect against fraud and manipulation, properly segregate customer funds, mitigate conflicts, or change their approach to clearing and custody. These are the things that protect investors. The fact that they didn’t build their platforms with these things in mind shouldn’t be a free pass to put investors at risk.

Each of the registered stock exchanges at this conference has done the hard work of registering and putting in place appropriate rulebooks and surveillance, and each is subject to all of our rules. We shouldn’t undermine 90 years of securities laws.

As SEC Enforcement Director Gurbir Grewal said, “You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great.”[20]

Further, just last month, one firm[21] that limited their business to crypto asset securities was approved by the Financial Industry Regulatory Authority as a special purpose broker-dealer.[22] It can be done.

We have addressed the crypto security industry through rulemaking as well. Though many in the industry who have called for rulemaking have expressed dissatisfaction with said rulemaking.

We issued a reopening release that reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called “DeFi” systems. This release also provided supplemental information for systems that would be included in a new, proposed exchange definition.[23]

While our current investment adviser custody rule already applies to crypto funds and securities, our recent proposal updating it would cover all crypto assets and enhance the protections that qualified custodians provide.[24]

These are just two of the rules we’ve proposed that touch the crypto markets.

Further, recognizing the risk and uncertainties related to crypto assets, the staff has stated their view on public company accounting related to crypto assets and disclosure regarding significant crypto asset market developments.[25]

Lending and Staking as a Service

Another prevalent feature of crypto markets is that intermediaries and promoters offer lending or staking-as-a-service programs that promise returns in exchange for investors’ crypto tokens. They have many names for their products and for their promised returns, which often are used to entice users to their platforms.

Across decades of cases, though, the Supreme Court has made clear that the economic realities of a product—not the labels—determine whether it is a security under the securities laws.

It doesn’t matter what kind of assets investors put into a lending or staking-as-a-service platform—cash, gold, bitcoin, or anything else. It’s what the intermediary says that they are going to do with the assets that determines what protections are provided by the law. Customers invest their assets with the platform, which then onlends them or pools and stakes them, in each case promising a return. These are classic securities, irrespective of whether crypto is involved.

Again, the SEC has been clear on this for a number of years. From BitConnect[26] in 2021, BlockFi[27] in 2022, to a series of actions this year, [28] the SEC has consistently alleged that these lending and staking-as-a-service offerings need to register and provide the investing public with proper disclosures.

Just this week, along with 10 states, we charged Coinbase for never properly registering the offer and sale of its staking program.[29]

Conduct: Fraud, Manipulation, and Bankruptcies

With wide-ranging noncompliance, frankly, it’s not surprising that we’ve seen many problems in these markets. We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place. Hucksters. Fraudsters. Scam artists. Ponzi schemes. The public left in line at the bankruptcy court.

Earlier this week, we alleged that certain Binance entities misled investors about the platform’s risk controls and its corrupted trading volumes while actively concealing who was operating the platforms, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto were custodied.[30]

We also allege that Sigma Chain, an affiliate controlled by Binance founder Changpeng Zhao, acting as the principal market maker on Binance.US, engaged in manipulative trading and conducted wash trading that fraudulently inflated trading volumes on the platform, including around Binance.US’s launch, its subsequent funding round, and when certain new crypto security tokens were recently listed.

Further, through accounts owned and controlled by Zhao and Binance, billions of dollars of customer funds from both Binance platforms allegedly were commingled into an account held by a Zhao-controlled entity, Merit Peak Limited.

The allegations also describe Zhao and Binance’s attempt to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. Our complaint quoted Binance’s chief compliance officer, who said, “On the surface we cannot be seen to have US users but in reality, we should get them through other creative means,” and that the CCO further said, “CZ will definitely agree to this lol … I have been briefed by top management to always find a way to support biz.”

We also saw deception of investors by FTX.[31] We saw deception with the collapse of Terra and LUNA. Do Kwon and Terraform, we alleged, repeated false and misleading statements to build trust before causing devastating losses for investors.[32]

In the case against Justin Sun and three of his companies, we alleged, among other things, a scheme to pay celebrities to tout tokens without disclosing compensation.[33]

I could go on, but in a market rife with fraud, abuse, and noncompliance, there are too many to list.

We’ve also seen numerous companies—before and after FTX—blow themselves up, hurting countless investors in their wake. As a result of the bankruptcies of BlockFi, Celsius, FTX, Genesis, and other crypto firms, investors often are left lining up in court.

Let me be clear: These types of misconduct and bankruptcies are more likely to happen in markets whose issuers and intermediaries fail to comply with foundational laws. Even when we might not find fraud or such blatant misconduct, investors need proper disclosure, segregation of their hard-earned assets, and confidence that they are not trading against the house.

Conclusion

Markets ultimately are about trust. For 90 years, that trust has relied upon compliance with the securities laws.

The crypto securities markets should not be allowed to undermine the well-earned trust the public has in the capital markets.

The crypto markets should not be allowed to harm investors.

[1] Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990).

[2] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[3] See Securities and Exchange Commission, “SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities” (July 25, 2017), available at https://www.sec.gov/news/press-release/2017-131.

[4] See Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology, “Framework for ‘Investment Contract’ Analysis of Digital Assets” (March 8, 2023), available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.

[5] See Securities and Exchange Commission, “Telegram to Return $1.2 Billion to Investors and Pay $18.5 Million Penalty to Settle SEC Charges” (June 26, 2020), available at https://www.sec.gov/news/press-release/2020-146; Fedance v. Harris, 1 F.4th 1278 (11th Cir. 2021).

[6] See Securities and Exchange Commission, “SEC Granted Summary Judgment Against New Hampshire Issuer of Crypto Asset Securities for Registration Violations” (Nov. 7, 2022), available at https://www.sec.gov/litigation/litreleases/2022/lr25573.htm.

[7] See Securities and Exchange Commission, “SEC Obtains Final Judgment Against Kik Interactive for Unregistered Offering” (Oct. 21, 2020), available at https://www.sec.gov/news/press-release/2020-262.

[8] See Securities and Exchange Commission, “SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao” (June 5, 2023), available at https://www.sec.gov/news/press-release/2023-101.

[9] See Securities and Exchange Commission, “Telegram to Return $1.2 Billion to Investors and Pay $18.5 Million Penalty to Settle SEC Charges” (June 26, 2020), available at https://www.sec.gov/news/press-release/2020-146.

[10] Fedance v. Harris, 1 F.4th 1278 (11th Cir. 2021)

[11] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[12] See, e.g., “Response of the Division of Corporation Finance Re: TurnKey Jet. Inc.” (April 3, 2019), available at https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.htm.

[13] Filed as a litigated case as to two parties—Hamazaspyan and Beaxy Digital—and filed as a settled matter as to other parties. See Securities and Exchange Commission, “SEC Charges Crypto Trading Platform Beaxy and Its Executives for Operating an Unregistered Exchange, Broker, and Clearing Agency” (April 3, 2023), available at https://www.sec.gov/litigation/litreleases/2023/lr25687.htm.

[14] See Securities and Exchange Commission, “SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency” (April 17, 2023), available at https://www.sec.gov/news/press-release/2023-78.

[15] See Securities and Exchange Commission, “SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao” (June 5, 2023) available at https://www.sec.gov/news/press-release/2023-101.

[16] Ten state securities regulators filed actions against Coinbase as well. See Securities and Exchange Commission, “SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency” (June 6, 2023), available at https://www.sec.gov/news/press-release/2023-102.

[17] See Securities and Exchange Commission, “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange” (November 8, 2018), available at https://www.sec.gov/news/press-release/2018-258.

[18] See Securities and Exchange Commission, “SEC Charges Poloniex for Operating Unregistered Digital Asset Exchange” (Aug. 9, 2021), available at https://www.sec.gov/news/press-release/2021-147.

[19] Per Paragraph 6 of complaint. See United States District Court Southern District of New York, “Securities and Exchange Commission v. Coinbase, Inc. and Coinbase Global, Inc.” (June 6, 2023), available athttps://www.sec.gov/litigation/complaints/2023/comp-pr2023-102.pdf.

[20] See Securities and Exchange Commission, “SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency” (June 6, 2023), available at https://www.sec.gov/news/press-release/2023-102.

[21] See Financial Industry Regulatory Authority, “BrokerCheck Report – Prometheum Capital,” available at https://files.brokercheck.finra.org/firm/firm_312784.pdf.

[22] See Securities and Exchange Commission, “SEC Issues Statement and Requests Comment Regarding the Custody of Digital Asset Securities by Special Purpose Broker-Dealers” (December 23, 2020), available at https://www.sec.gov/news/press-release/2020-340.

[23] See Securities and Exchange Commission, “SEC Reopens Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and Provides Supplemental Information” (April 14, 2023),available athttps://www.sec.gov/news/press-release/2023-77.

[24] See Securities and Exchange Commission, “SEC Proposes Enhanced Safeguarding Rule for Registered Investment Advisers” (Feb. 15, 2023),available athttps://www.sec.gov/news/press-release/2023-30.

[25] See Securities and Exchange Commission, “Staff Accounting Bulletin No. 121” (March 31, 2022), available at https://www.sec.gov/oca/staff-accounting-bulletin-121.

[26] See Securities and Exchange Commission, “SEC Charges Global Crypto Lending Platform and Top Executives in $2 Billion Fraud” (Sept. 1, 2021), available at https://www.sec.gov/news/press-release/2021-172.

[27] See Securities and Exchange Commission, “BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product” (Feb. 14, 2022), available at https://www.sec.gov/news/press-release/2022-26.

[28] Earlier this week, amongst the charges against Binance, we alleged it was offering crypto-lending products, “Simple Earn” and “BNB Vault,” and a staking-as-a-service program. See also Securities and Exchange Commission, “SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program” (Jan. 12, 2023), available at https://www.sec.gov/news/press-release/2023-7. See also “Nexo Agrees to Pay $45 Million in Penalties and Cease Unregistered Offering of Crypto Asset Lending Product” (Jan. 19, 2023), available at https://www.sec.gov/news/press-release/2023-11. See also “Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges” (Feb. 9, 2023), available at https://www.sec.gov/news/press-release/2023-25.

[29] See Securities and Exchange Commission, “SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency” (June 6, 2023), available at https://www.sec.gov/news/press-release/2023-102.

[30] See Securities and Exchange Commission, “SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao” (June 5, 2023) available at https://www.sec.gov/news/press-release/2023-101.

[31] See Securities and Exchange Commission, “SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX” (Dec. 13, 2022), available at https://www.sec.gov/news/press-release/2022-219. See also “SEC Charges Caroline Ellison and Gary Wang with Defrauding Investors in Crypto Asset Trading Platform FTX” (Dec. 21, 2022), available at https://www.sec.gov/news/press-release/2022-234. See also “SEC Charges Nishad Singh with Defrauding Investors in Crypto Asset Trading Platform FTX” (Feb. 28, 2023), available at https://www.sec.gov/news/press-release/2023-40.

[32] See Securities and Exchange Commission, “SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes” (Feb. 16, 2023), available at https://www.sec.gov/news/press-release/2023-32.

[33] See Securities and Exchange Commission, “SEC Charges Crypto Entrepreneur Justin Sun and His Companies for Fraud and Other Securities Law Violations” (March 22, 2023), available at https://www.sec.gov/news/press-release/2023-59.

FINRA Censures and Fines TD Ameritrade Clearing, Inc. for Non-compliant Confirmations
In the Matter of TD Ameritrade Clearing, Inc., Respondent (FINRA AWC 202107054701)
https://www.finra.org/sites/default/files/fda_documents/202107054701
%20TD%20Ameritrade%20Clearing%2C%20Inc.%20CRD%205633%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, TD Ameritrade Clearing, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that TD Ameritrade Clearing, Inc. has been a FINRA member firm since 1971 with about 550 registered persons at three branches. In accordance with the terms of the AWC, FINRA imposed upon TD Ameritrade Clearing a Censure and $500,000 fine. As alleged in part in the "Overview" portion of the AWC:

Between January 2016 and June 2021, TDAC sent its customers confirmations for approximately 9.8 million transactions that omitted required disclosures regarding its customers' purchases of exchange traded notes (ETNs) and preferred securities. In particular, the confirmations failed to disclose that the securities were callabe and, with regard to the ETNs, that early redemption could affect the securities' yield. As a result, TDAC violated Exchange Act Rule 10b-10(a)(4), promulgated under Section 10(b) of the Securities Exchange Act of 1934, and FINRA Rules 2232 and 2010.

FINRA Fines and Suspends Rep for Falsifying Customer Signatures With the Customers' Permission
In the Matter of Kale KH Young, Respondent (FINRA AWC 2020066352101)
https://www.finra.org/sites/default/files/fda_documents/2020066352101
%20Kale%20KH%20Young%20CRD%202270954%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, Kale KH Young submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Kale KH Young entered the industry in 1993 and by 2015, he was registered with LPL Financial LLC. In accordance with the terms of the AWC, FINRA imposed upon Young a $5,000 fine and a 20-business-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Although Young was aware of the firm's WSPs, in September 2017 Young re-used customer A's previously obtained genuine signature on three account transfer forms. In November 2017, Young re-used customer A's and B's previously obtained genuine signatures on fifteen mutual fund replacement forms. In December 2019, Young affixed a copy of customer C's signature to a life insurance product acknowledgement form. In each instance, customers A, B, and C did not sign the documents but authorized Young to affix or re-use their signatures.

Young also falsely stated on one annual compliance questionnaire that he had not signed or affixed any other person's signature on a document.

The firm used eighteen of the falsified documents to authorize and record the sale, transfer, or disbursement of cash or securities from the customers' accounts. By affixing customers A, B, and C's signatures to these documents and submitting them to LPL as
the original signatures of the customers, Young violated FIN RA Rule 2010. By engaging in this conduct, Young also caused the firm to maintain inaccurate books and records in violation of Exchange Act Rule 17a-3, and violated FINRA Rules 4511 and 2010.

Bill Singer's Comment: Yes, but . . . in "each instance, customers A, B, and C did not sign the documents but authorized Young to affix or re-sue their signatures." Then again, FINRA is right: You can't tolerate reps affixing signatures without getting the firm's approval; and you sure as hell can't lie about the practice on the ACQ. Given the somewhat tepid sanctions imposed by FINRA, I'm guessing that the regulator took a lot of extenuating circumstances into account. Also, compliments to Young's lawyer Kathleen Patchel, J.D. of Advisor Law, LLC https://advisorlawllc.com/executives/#kathleen

= = =
6/7/2023

SEE PHOTO OF MARTIAN LANDSCAPE NOW KNOWN AS NYC!

Federal Circuit Court Says Price Isn't Right In UBS Whistleblower Retaliation (BrokeAndBroker.com Blog)

https://www.brokeandbroker.com/7081/price-ubs-whistleblower/

A former UBS financial advisor (a top producer) was fired for allegedly violating compliance policies. The advisor tells a markedly different story. He says that he was terminated in retaliation for blowing the whistle on what appeared to be the financial exploitation of an elderly widow. All of which brings us to a 2018 federal district court opinion. Which brings us to a 2021 FINRA Arbitration Award. Which brings us to a 2022 federal district court opinion. Which brings us to a 2023 federal circuit court opinion. Which brings us to someplace, somewhere -- but I'm not exactly sure where we have arrived other than at the point of confusion.

Denton County Financial Advisor Guilty of Federal Violations (DOJ Release)
https://www.justice.gov/usao-edtx/pr/denton-county-financial-advisor-guilty-federal-violations

-and-

SEC Charges Financial Advisor with Fraud for Stealing from Elderly Customers to Pay Personal Expenses (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25742.htm

In the United States District Court for the Northern District of Texas, Doug McElvey [sic] pled guilty to money laundering. [Ed: Defendant's name is also spelled "McKelvey" in other portions of the DOJ Release as first released. May be corrected by June 8, 2023]. As alleged in part in the DOJ Release:

[F]rom 2009 to 2022, McKelvey, a vice-president and financial advisor at Morgan Stanley, misappropriated at least $1.5 million of investor funds held in brokerage accounts. The funds were supposed to be invested on behalf of his clients. Instead, McKelvey used the funds to pay for personal trips, cruises, restaurants, salons, and other personal expenses.

In the United States District Court for the Northern District of Texas, the SEC filed a Complaint charging Douglas McKelvey with with violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.
https://www.sec.gov/litigation/complaints/2023/comp25742.pdf. As alleged in part in the SEC Release:

[F]rom June 2013 to February 2022, while employed as a registered representative and investment adviser representative in the Southlake, Texas office of a large financial institution, McKelvey initiated over 300 fraudulent and unauthorized disbursements of funds from the two customers' accounts to make payments on credit cards used by McKelvey and his wife to pay their personal expenses. McKelvey allegedly also sold securities from the customers' accounts to generate some of the funds he misappropriated and took steps attempting to conceal his misconduct.

SEC Adopts Amendments to Remove References to Credit Ratings From Regulation M (SEC Release)
https://www.sec.gov/news/press-release/2023-105
In part the SEC Release asserts:

The amendments, when effective, will remove certain existing rule exceptions in Rule 101 and Rule 102 of Regulation M that reference credit ratings for nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities and substitute in their place new exceptions that are based on alternative standards of creditworthiness. These substitutes include exceptions for nonconvertible debt securities and nonconvertible preferred securities of issuers who meet a specified probability of default threshold and exceptions for asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the Commission’s Form SF-3.

The Commission also adopted a record preservation requirement under Rule 17a-4(b)(17) for broker-dealers who rely on Rule 101’s or Rule 102’s new exception for nonconvertible debt securities and nonconvertible preferred securities.

SEC Adopts Rules to Prevent Fraud in Connection with Security-Based Swaps Transactions and Prevent Undue Influence over CCOs (SEC Release)
https://www.sec.gov/news/press-release/2023-104
In part the SEC Release asserts:

The antifraud and anti-manipulation rule adopted today is designed to prevent misconduct in connection with effecting any transaction in, or attempting to effect any transaction in, or purchasing or selling, or inducing or attempting to induce the purchase or sale of, any security-based swap. The rule takes into account the features fundamental to a security-based swap and will aid the Commission in its pursuit of actions that directly target misconduct that reaches security-based swaps.

The Commission also adopted a rule to protect the independence and objectivity of the CCO of a security-based swap dealer or major security-based swap participant.

Blah, blah, blah -- various SEC Chair/Commissioner Statements from the folks who didn't seem to know that the SEC's Enforcement Staff was accessing the SEC's Adjudication staff's memoranda; and now that they do know, we don't seem to have any published Statements criticizing that scandal! See: "Commission Statement Relating to Certain Administrative Adjudications (SEC)"

Statement Regarding In the Matter of American CryptoFed DAO LLC	Commissioner Hester M. Peirce Commissioner Mark T. Uyeda
Statement on Removing References of Credit Ratings from Regulation M	Chair Gary Gensler
Statement on Final Rule to Implement Section 939A(b) of the Dodd-Frank Act	Commissioner Hester M. Peirce
Statement on the Removal of References to Credit Ratings from Regulation M	Commissioner Caroline A. Crenshaw
Statement on the Adoption of Rule 939A Amendments to Regulation M	Commissioner Mark T. Uyeda
Ending SEC Reliance on Credit Ratings	Commissioner Jaime Lizárraga
Statement on Rule 9j-1 and Rule 15fh-4(c)	Chair Gary Gensler
Flexibility at the Expense of Clarity: Statement on Adoption of Exchange Act Rules 9j-1 and 15fh-4(c)	Commissioner Hester M. Peirce
Statement on the Adoption of Rules 9J-1 and 15fh-4(c)	Commissioner Caroline A. Crenshaw
Statement on Rules Regarding Prohibitions Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps and Against Undue Influence over Chief Compliance Officers	Commissioner Mark T. Uyeda
Preventing Fraud and Manipulation in the Swaps Market and Bolstering Gatekeepers	Commissioner Jaime Lizárraga

= = =
6/6/2023

Branch Manager and FINRA Fail to See Red Flags of Unsuitability Involving Senior Customers (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/7070/finra-awc-supervision/
In a recent FINRA regulatory settlement, a former supervisor was charged with having been aware of red flags of potentially unsuitable sales of liquid limited partnerships to senior customers. Indeed, those red flags were waving in 2015, 2016, 2017, 2018, and 2019. Given all the years during which all those red pennants were wavin', I understand why an in-house supervisor would be called to task for not supervising. On the other hand, why isn't Wall Street's self-regulatory-organization also called to task when its examination staff didn't take note of those same warning signs for some five years? You got failure to supervise. You got failure to regulate.

Agencies issue final guidance on third-party risk management (Joint Press Release: Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency)
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230606a.htm
As set forth in part in the Joint Release:

The final guidance describes principles and considerations for banking organizations' risk management of third-party relationships. The final guidance covers risk management practices for the stages in the life cycle of third-party relationships: planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination.

The final guidance includes illustrative examples to help banking organizations, particularly community banks, align their risk management practices with the nature and risk profile of their third-party relationships. The agencies plan to engage with community banks immediately and develop additional resources in the near future to assist them in managing relevant third-party risks.

The final guidance replaces each agency's existing general third-party guidance and promotes consistency in the agencies' supervisory approaches toward third-party risk management. The final guidance reflects streamlined language and improved clarity based on the agencies' consideration of public comments on the proposed guidance released in July 2021.

OneTaste sexual wellness executives charged by U.S. with forced labor (Reuters)
https://www.reuters.com/business/onetaste-sexual-wellness-executives-charged-by-us-with-forced-labor-2023-06-06/
Y'know, there are times when a headline is so provocative and so stunning and you're reading it but not quite sure that you read it right, so you read it again, and, well, yeah, that's what it says it says but, geez, like what the hell is this really about.

SEC Seeks Emergency Relief to Ensure Binance.US Customers’ Assets are Protected (SEC Release)
https://www.sec.gov/news/press-release/2023-103
In the United States District Court for the District of Columbia the SEC filed for a:

temporary restraining order freezing assets, directing defendants to repatriate assets held for the benefit of customers of the Binance.US crypto trading platform, and seeking other emergency relief against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings, Inc., and their founder, Changpeng Zhao, to ensure that Binance.US customers’ assets are protected and remain in the United States through the resolution of the SEC’s pending litigation of this matter.

As part of the SEC’s emergency motion, the SEC seeks (1) an order to show cause why a preliminary injunction should not be granted as to the defendants; (2) an order freezing the assets of BAM Management; (3) an order directing the defendants to repatriate assets held for the benefit of BAM Trading's or BAM Management’s (together “BAM”) customers; (4) an order for other relief concerning the custody and control of BAM customers’ assets; (5) an order prohibiting the destruction of records by the defendants; (6) an order requiring sworn accountings of certain assets from the defendants; (7) an order authorizing expedited discovery from the defendants; and (8) an order granting alternate means of service.

SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency / Coinbase also charged for the unregistered offer and sale of securities in connection with its staking-as-a-service program (SEC Release)
https://www.sec.gov/news/press-release/2023-102
In the United States District Court for the Southern District of New York, the SEC filed a Complaint alleging that Coinbase, Inc. and its holding company Coinbase Global Inc. ("CGI") violated certain registration provisions of the Securities Exchange Act and that Coinbase violated the securities offering registration provisions of the Securities Act of 1933
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-102.pdf. As alleged in part in the SEC Release:

Unregistered Exchange, Broker, and Clearing Agency

According to the SEC’s complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law. Through these unregistered services, Coinbase allegedly:

- Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
- Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and
- Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.

As alleged in the SEC’s complaint, Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.

The SEC’s complaint also alleges that Coinbase’s holding company, Coinbase Global Inc. (CGI), is a control person of Coinbase and is thus also liable for certain of Coinbase’s violations.

Unregistered Offer and Sale of Securities in Connection with Staking-as-a-Service Program

The SEC alleges that, since 2019, Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service program, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts. Through this staking program, Coinbase allegedly pools each type of customers’ stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool. Coinbase failed to register its offers and sales of this staking program as required by law.

FINRA Censures and Fines UnionBanc Investment Services, LLC for Discovery Abuses During Arbitration by Former Rep
In the Matter of UnionBanc Investment Services, LLC, Respondent (FINRA AWC 2022073798101)
https://www.finra.org/sites/default/files/fda_documents/2022073798101
%20UnionBanc%20Investment%20Services%2C%20LLC%20CRD
%2014455%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, UnionBanc Investment Services, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that UnionBanc Investment Services, LLC. has been a FINRA member firm since 1984 with 349 registered persons at 201 branches. In accordance with the terms of the AWC, FINRA imposed upon UnionBanc a Censure and $75,000 fine. As alleged in part in the "Overview" portion of the AWC:

From July 2020 to May 2021, UBIS failed to comply with its discovery obligations in an arbitration proceeding brought in FINRA's Dispute Resolution forum by a former registered representative. As a result, UBIS violated FINRA Rule 2010.

FINRA Fines and Suspends Rep for Executing Trades Without Obtaining Prior Authorization or Consent of Customers
In the Matter of Jeremy Jefferson Jacobson, Respondent (FINRA AWC 2021071954502)
https://www.finra.org/sites/default/files/fda_documents/2021071954502
%20Jeremy%20Jefferson%20Jacobson%20CRD%204437801%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, Jeremy Jefferson Jacobson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jeremy Jefferson Jacobson entered the industry in 2001 and by 2013, he was registered with LPL Financial LLC. In accordance with the terms of the AWC, FINRA imposed upon Jacobson a $5,000 fine, $7,887 in disgorgement plus interest, and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From February through May 2021, Jacobson executed twenty-four trades with a total principal value of approximately $1.1 million in the accounts of LPL customers A, B, and C, without first discussing with, and obtaining authorization or consent for the trades from, the customers.

In February 2021, Jacobson executed two trades in customer A's LPL account with a total principal value of approximately $85,700. In February 2021 through May 2021, Jacobson executed twenty trades in customer B's account with a total principal value of approximately $1.08 million. In April 2021, Jacobson executed two trades in customer C's LPL account with a total principal value of approximately $6,500. Jacobson received $7,887 in total commissions for the twenty-four trades. Jacobson did not have authorization or consent from the customers to place the twenty-four trades.

Therefore, Jacobson violated FINRA Rule 2010.

= = =
6/5/2023

Physically Delivering Digital Assets In Order To Satisfy CFTC's Observation (BrokeAndBroker.com Blog)

https://www.brokeandbroker.com/7069/cftc-digital-risk/

Recently, the CFTC published both a Staff Advisory and a Press Release that articulated its observations and disclosed its placement of emphasis on the potential risks involved with the physical delivery of digital assets. Okay, sure . . . and, y'know, like what's next? A CFTC Advisory and Release on how many digital angels can dance on the head of a physical pin?

Former Co-Owner Of Minnesota Vikings Sentenced To 75 Months In Prison For Providing Shadow Banking Services To Cryptocurrency Exchanges (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-co-owner-minnesota-vikings-sentenced-75-months-prison-providing-shadow-banking
In the United States District Court for the Southern District of New York,
Reginald Fowler, 64, pled guilty to bank fraud, bank fraud conspiracy, operation of an unlicensed money transmitting business, conspiracy to operate an unlicensed money transmitting business, and wire fraud; and he was sentenced to 75 months in prison, and ordered to pay forfeiture of $740,249,140.52 and restitution in the amount of $53,189,261.80 to the Alliance of American Football ("AAF"). As alleged in part in the DOJ Release:

In or about February 2018, REGINALD FOWLER established Global Trading Solutions LLC (“GTS”) and began working with Crypto Capital and other related companies (the “Crypto Companies”), which were operated by Israeli nationals. The Crypto Companies marketed themselves as providing a seamless way for individuals to exchange standard currency for cryptocurrency. A number of cryptocurrency exchanges began using the Crypto Companies to process their fiat-to-cryptocurrency transactions.

Because banks were reluctant to handle cryptocurrency transactions, in reality, the Crypto Companies could not access legitimate financial institutions. Instead, the Crypto Companies lied to banks in order to open accounts that were used to process cryptocurrency transactions without the banks’ knowledge. FOWLER opened dozens of such accounts in the United States and around the world. He did not disclose GTS’s involvement with the Crypto Companies and the fact that it was operating as a payment processor for hundreds of millions of dollars in cryptocurrency transactions. FOWLER also directed other individuals to include false information on wire transfer instructions to further deceive banks about the nature of GTS’s business. In less than 10 months, FOWLER processed approximately $750 million in cryptocurrency transactions in various currencies. At no point were FOWLER, GTS, nor any of the Crypto Companies ever licensed as a money transmitting business in the United States, as required by federal law.

Additionally, in 2018, FOWLER defrauded the AAF in connection with his acquisition of a significant ownership stake in the league. In the course of negotiating his investment in the AAF, FOWLER falsely claimed personal ownership of GTS funds that, in fact, belonged to clients of FOWLER’s illegal money transmission service established in support of the Crypto Companies. As he did when opening bank accounts, FOWLER lied to AAF executives, telling them that the funds in the GTS bank accounts derived from real estate investments as well as government contracts and that the tens of millions of dollars in the GTS accounts were liquid assets he could use to invest in the AAF. FOWLER did not disclose his involvement with the Crypto Companies. Moreover, although FOWLER experienced account closures and government seizure of GTS funds in the month leading up to his investment in the AAF, FOWLER did not disclose those facts to the AAF. FOWLER acquired a significant investment stake in the AAF in November 2018 yet was unable to fund that investment. Based, in part, on FOWLER’s lies, the AAF declared bankruptcy in about April 2019, ending the season and dashing the hopes of FOWLER’s victims.

SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao / Charges include operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities. (SEC Release)
https://www.sec.gov/news/press-release/2023-101
In the United States District Court for the District of Columbia, the SEC filed a Complaint charging Binance Holdings Ltd. (“Binance”); its U.S.-based affiliate BAM Trading Services Inc. (“BAM Trading”); BAM Management US Holdings, and founder, Changpeng Zhao.
https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf
As alleged in part in the SEC Release:

UNREGISTERED EXCHANGE, BROKER, AND CLEARING AGENCY

The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, alleges that, since at least July 2017, Binance.com and Binance.US, while controlled by Zhao, operated as exchanges, brokers, dealers, and clearing agencies and earned at least $11.6 billion in revenue from, among other things, transaction fees from U.S. customers. The SEC’s complaint alleges that (1) with respect to Binance.com, Binance should have registered as an exchange, broker-dealer, and clearing agency; (2) with respect to Binance.US, Binance and BAM Trading should have registered as an exchange and as clearing agencies; and (3) BAM Trading should have registered as a broker-dealer. The SEC also alleges that Zhao is liable as a control person for Binance’s and BAM Trading’s respective registration violations.

UNREGISTERED OFFER AND SALE OF CRYPTO ASSETS

The SEC charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products known as “Simple Earn” and “BNB Vault.” Further, the SEC charged BAM Trading with the unregistered offer and sale of Binance.US’ staking-as-a-service program. The complaint also notes that Binance secretly has control over assets staked by U.S. customers in BAM’s staking program.

FAILURE TO RESTRICT U.S. INVESTORS FROM ACCESSING BINANCE.COM

The SEC’s complaint alleges that Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of an elaborate scheme to evade U.S. federal securities laws by claiming that BAM Trading operated the Binance.US platform independently and that U.S. customers were not able to use the Binance.com platform. The complaint alleges that, in reality, Zhao and Binance maintained substantial involvement and control of the U.S. entity and that, behind the scenes, Zhao directed Binance to allow and conceal many high-value U.S. customers’ continued access to Binance.com. In one instance, the Binance chief compliance officer messaged a colleague that, “[w]e are operating as a fking unlicensed securities exchange in the USA bro.”

MISLEADING INVESTORS

According to the SEC’s complaint, BAM Trading and BAM Management misled Binance.US customers and equity investors concerning the existence and adequacy of market surveillance and controls to detect and prevent manipulative trading on the Binance.US platform’s crypto asset trading volumes. The complaint further alleges that the strategic and targeted wash trading largely perpetrated by the Binance.US platform’s primary undisclosed “market making” trading firm Sigma Chain, also owned by Zhao, demonstrates the falsity of statements BAM Trading made about its market surveillance and controls.

Federal Court Orders Washington Rancher to Pay $1 Million Penalty for Phantom Cattle Scheme, Position Limit Violations (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8711-23
The United States District Court for the Eastern District of Washington issued an Order granting a permanent injunction against Cody Easterday https://www.cftc.gov/media/8681/enfcodyeasterday060523/download
and requiring him to pay a $1 million civil monetary penalty and permanently enjoining him from further violating cited regulations; and also permanently prohibits Easterday from trading on or subject to the rules of any CFTC-registered entity and from engaging in any activities requiring CFTC registration. Previously, in a parallel criminal action, Easterday was sentenced to 11 years in prison and ordered to pay $244 million in restitution. As alleged in part in the CFTC Release:

[F]rom approximately October 2016 to November 2020, Easterday caused Easterday Ranches to submit false invoices and reimbursement requests relating to more than 200,000 head of cattle that it never purchased or raised on the processor’s behalf. Through the use of fraudulent invoices and reimbursement requests, Easterday Ranches received more than $233 million to which it was not entitled.

In addition, the order finds that Easterday caused Easterday Ranches to report false or misleading information concerning its cattle inventory, purchases, and sales to the Chicago Mercantile Exchange in at least two hedge exemption applications seeking permission to exceed the exchange’s position limits. These false statements to the exchange were made in 2017 and 2018 to avoid disciplinary actions and scrutiny when Easterday Ranches exceeded exchange-based position limits in the live cattle and feeder cattle futures markets. Because they were based on false or misleading information, the hedge exemptions were invalid. As a result, Easterday Ranches violated exchange-set position limit violations on at least two occasions.

FINRA Fines and Suspends Rep for Willful Failure to Timely Disclose Felony Charge
In the Matter of Adam C. Ellison, Respondent (FINRA AWC 2022074931701)
https://www.finra.org/sites/default/files/fda_documents/2022074931701
%20Adam%20C.%20Ellison%20CRD%206073346%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, Adam C. Ellison submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Adam C. Ellison was first registered in 2012 with Ameriprise Financial Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Ellison a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. The AWC includes this statement:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA’s By-Laws, this omission makes him subject to a statutory disqualification with respect to association with amember.

As alleged in part in the AWC:

On October 20, 2021, while Ellison was associated with Ameriprise, the District Attorney of the County of Nevada (California) filed with the California Superior Court a felony complaint against Ellison. Ellison became aware of the felony charge by November 2021, and was required to amend his Form U4 within 30 days to disclose the charge. However, Ellison did not disclose the felony charge on his Form U4 until March 15, 2022.

Therefore, Ellison willfully failed to timely disclose a felony charge in violation of Article V, Section 2(c) of FINRA’s By-Laws, and FINRA Rules 1122 and 2010.

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Securities Industry Commentator by Bill Singer Esq

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