Securities Industry Commentator by Bill Singer Esq

There's Something Happening Here at a FINRA Customer Arbitration; What It Is Ain't Exactly Clear. (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/7093/finra-schwab-arbitration/
Why would someone go to all the trouble of suing someone else but then ghost the trial? Mind you, there may be some fair explanations, such as the Plaintiff is dead, or the Claimant is home sick, or there was an emergency. Then again, sometimes folks just decide to stay home and the hell with going to court. In a recent FINRA Arbitration, about four years after a public customer sued her brokerage firm, her lawyer showed up at the hearing but his client, well, not so much.

SEC Affirms Denial of FINRA Arbitration Forum for Expungement
In the Matter of the Application of Alton Theodore Davis, Jr. For Review of Action Taken by FINRA (Opinion, '34 Act Rel. No. 07721; Admin. Proc. File No. 3-19588)
https://www.sec.gov/litigation/opinions/2023/34-97721.pdf
SEC dismissed appeal of associated person for review of a FINRA
determination that his expungement claim was ineligible for arbitration because, previously, arbitrator had denied the same expungement claim. As set forth in part in the SEC Opinion [Ed: footnotes omitted]:

[W]e find that Davis already accessed the service of using FINRA’s arbitration forum to seek to expunge the same customer dispute information at issue here, on the same ground that the customer allegations lacked merit. Even though Davis previously requested expungement in the customer arbitration forum, whereas now he is requesting expungement in the intra-industry arbitration forum, Davis has not identified any material difference between the two forums as to his expungement request. And, just as in Pearce, Davis’s access to FINRA’s arbitration service during the initial customer dispute was not “illusory.” In particular, during the underlying customer arbitration, Davis challenged the merits of the customers’ allegations, testified at the hearing, and requested expungement of all information regarding the arbitration from his CRD records, and then Davis received a final, adverse award on his request. We also note that Davis could have sought to vacate, modify, or correct the 1997 arbitration award in court, but he did not do so. Finally, as in Pearce, Davis failed to exhaust any claim before FINRA that he sought to use FINRA arbitration to request expungement on equitable grounds.

at Pages 4 - 5 of the SEC Opinion

SEC Charges Two Individuals in Connection with Fraudulent Scheme to IIIegally Sell Stock to the Public (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25745.htm
In the United States District Court for the District of Massachusetts, the SEC filed a Complaint alleging that that Joseph A. Padilla and Kevin C. Dills
https://www.sec.gov/litigation/complaints/2023/comp25745.pdf violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Acr and Rules 10b-5(a) and (c) thereunder; and that they violated the securities registration provisions of Sections 5(a) and (c) of the Securities Act. Further, the Complaint alleges that Dills aided and abetted Padilla's violations of the antifraud provisions. Additionally, named as Relief Defendants are Bright Star International, Inc., Life Sciences Journeys, Inc. Carlos Hernandez, Jamie Quick, Ashley Robinson, and Arlene Sandoval. Related charges were alleged in an Indictment against Padilla and Dills. As alleged in part in the SEC Release:

[F]rom at least February 2020 through August 2022, Padilla engaged in a fraudulent scheme to illegally sell stock of several small companies to the public. The complaint alleges that Dills took part in Padilla's scheme with the stock of a company that Dills secretly controlled.

According to the complaint, Padilla engaged in a fraudulent scheme for his own benefit and also on behalf of individuals who paid Padilla to arrange their illegal stock sales. The complaint alleges that those individuals hid their identities by selling stock through offshore accounts in different names that Padilla arranged. The complaint further alleges that Padilla traded in his own brokerage account and accounts of family and friends to profit alongside the scheme and to manipulate stock prices in support of the scheme. Padilla also allegedly enlisted a stock trader at a registered broker-dealer firm to facilitate stock trading as part of scheme. According to the complaint, Padilla timed the stock sales to coincide with stock promotions or news announcements intended to gain investor interest. As to Dills, the complaint alleges that Dills secretly controlled Oncology Pharma, Inc., which was one of the companies with stock that was subject to Padilla's scheme. Dills allegedly provided Padilla with Oncology Pharma stock, Padilla then arranged for that stock to be sold to the public, and Padilla then returned approximately $20 million in proceeds to Dills through a circuitous route of foreign bank accounts. The complaint alleges that Padilla and Dills sold Oncology Pharma stock while Dills arranged for Oncology Pharma to issue a series of press releases intended to make the company's stock more appealing to investors.

SEC Charges Ohio Investment Adviser with Misappropriating Over $1.3 Million from a Retail Investor (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25747.htm
In the United States District Court for the Southern District of Ohio, the SEC filed a Complaint charging Patrick Thayer
https://www.sec.gov/litigation/complaints/2023/comp25747.pdf with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the allegations, Thayer consented to a partial settlement, agreeing to be permanently enjoined from future violations of the charged provisions and to pay monetary relief in an amount to be determined by the court at a later date upon motion of the SEC. As alleged in part in the SEC Release:

[I]n November 2013, Thayer surreptitiously established an account in a client's name over which he maintained control and, without the client's permission, regularly transferred client assets to the account, which he then used to pay personal expenses, including his mortgage. The complaint alleges that Thayer engaged in this conduct for nearly a decade, in total misappropriating over $1.3 million by periodically selling the client's securities to fund transfers to the clandestine account.

SEC Charges Pennsylvania Man in $30 Million Offering Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25744.htm
In the United States District Court for the Eastern District of Pennsylvania, the SEC filed a Complaint charging Josh S. Verne
https://www.sec.gov/litigation/complaints/2023/comp25744.pdf
with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[V]erne defrauded investors, including close friends and family members, by making false claims about, among other things, his prior business successes and personal wealth, his authority to pool investor funds in order to purchase securities, and the purported use of investors' funds. According to the complaint, between at least 2018 and 2020, Verne solicited investments for his online rent-to-own business Ownable, LLC, its affiliate Ownable Capital Partners I, LLC, and three limited liability companies he created for the alleged purpose of pooling investors' funds together to invest in Ownable and two start-up companies unaffiliated with Verne. The complaint alleges that Verne wrongfully used at least $9.3 million of investors' funds for his own benefit, including to pay for private school tuition and an interior designer for a beach house, charter private jets, repay millions of dollars in personal loans, and to make Ponzi-like payments to earlier investors.

FINRA Fines and Suspends Rep for Reimbursement of Personal Expenses
In the Matter of Colin Healy, Respondent (FINRA AWC 2021071901901)
https://www.finra.org/sites/default/files/fda_documents/2021071901901
%20Colin%20Healy%20CRD%204672687%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, Colin Healy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Colin Healy entered the industry in 2003, and from November 2008 through June 2021, he was registered with Hightower Securities, LLC. In accordance with the terms of the AWC, FINRA imposed upon Healy a $10,000 fine and a one-year suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From 2018 to early 2020, part of Healy’s work involved meeting business contacts at private clubs. These clubs charged Healy’s corporate credit card for all charges incurred during this time. From 2018 to early 2020, Healy incurred personal expenses at these
clubs in the amount of $6,139.28, which were charged to his corporate credit card, in addition to business expenses. The personal expenses included charges such as $277.31 for “pool lessons” and $360 for “tennis clinics.” Healy then submitted the charges from the clubs, which included both his personal and business expenses, to Hightower for reimbursement as business expenses. The firm then reimbursed Healy for the personal
expenses.

By improperly seeking and obtaining reimbursement for personal expenses, Healy improperly used firm funds and violated FINRA Rule 2010.

6/13/2023

On this appeal, we assess the sufficiency of a cause of action pleaded against an investment bank for its negligent supervision and retention of an employee. Plaintiffs—a charitable foundation and its affiliate—allege that defendants’ negligent supervision of their employee resulted in him defrauding them of $25 million under the guise of his employment, as part of a scheme to cover up mounting personal trading losses and embezzlements.

We hold that it was error to dismiss plaintiffs’ negligence claim at the pleading stage. Contrary to the lower courts’ conclusions, the complaint adequately alleged that defendants were on notice of the employee’s propensity to commit fraud prior to his interactions with plaintiffs and their resulting losses. Nor can we agree that defendants’ duty of supervision ran only to their “customers.” We accordingly reverse the order of the Appellate Division and reinstate plaintiffs’ claim.

Clearly, this is a dramatic decision and, frankly, one that seems to upend the Court's prior jurisprudence on the issue. Consider this "Syllabus" from the Dissent:

SINGAS, J. (dissenting):

New York is the financial capital of the country, if not the world. This preeminent status, which has drawn business interests to New York for centuries, is due in large part to the predictability of our law. Commercial and financial sectors depend on our courts for clarity and guidance. Today’s majority opinion offers neither. Worse, it exposes law firms, banks, hedge funds, and countless other financial institutions to limitless liability for the criminal actions of rogue employees. Such unprecedented exposure will all but transform employers into insurers, an outcome against which we have repeatedly cautioned. I dissent.

Orange County Lawyer Agrees to Plead Guilty to Multimillion-Dollar Fraud of Victims Who Believed They Were Funding Loan Program (DOJ Release)
https://www.justice.gov/usao-cdca/pr/orange-county-lawyer-agrees-plead-guilty-multimillion-dollar-fraud-victims-who
In the United States District Court for the Central District of California, Sara Jacqueline King pled guilty to wire fraud and money laundering. As alleged in part in the DOJ Release:

[K]ing operated King Family Lending LLC, a Newport Beach-based company that purportedly gave short-term, high-interest loans to professional athletes, celebrities and other high-net-worth individuals. The loans supposedly were secured by the borrowers’ own assets, including designer handbags, watches, luxury automobiles, yachts and earnings from guaranteed sports contracts.

From January 2022 until January 2023, King – through her company – recruited investors to purportedly fund her business’s loans. She admitted to telling investors that their investments were secured by the same collateral as the loans themselves. King promised she would retain possession of the collateral and that, in the event a borrower defaulted, she would sell the collateral to pay the investor in full.

King said she would keep a percentage of the interest earned from the loans and that she would pass along a percentage of the interest to victim-investors, along with their initial investment.

In reality, during this time period, King never initiated or funded any loan. Instead, she used victims’ funds to gamble at Las Vegas casinos and support her lavish lifestyle.

King admitted to causing five investors to lose more than $8 million. She has agreed that the applicable restitution amount in this case is at least $8,785,045.

She further admitted to withdrawing approximately $132,156 of investor money from King Family Lending’s bank account to purchase a Porsche Taycan electric sports car.

FINRA Fines and Suspends Rep for Accepting Monetary Gifts from Senior Customers
In the Matter of Sharom Hayut, Respondent (FINRA AWC 2021073217601)
https://www.finra.org/sites/default/files/fda_documents/2021073217601
%20Sharon%20Hayut%20CRD%205552070%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, Sharom Hayut submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Sharom Hayut was first registered in 2008 and by 2009, she was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Hayut a $10,000 fine and a four-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In January 2021 and May 2021, Hayut accepted two checks totaling $50,815 from Customer A, who was a senior customer and one of Hayut’s long-time clients. Both checks were issued from one of Customer A’s accounts at Morgan Stanley and were made payable to the synagogue to which Hayut belonged. The funds from the checks were applied to Hayut’s account and were used to pay for various expenses. The two checks were gifts from Customer A. Hayut’s acceptance of these gifts violated Morgan Stanley’s gift policies.

Hayut was aware of Morgan Stanley’s gift policies and did not disclose her acceptance of the two checks to the firm. In March 2021, after accepting the first check, Hayut incorrectly answered “no” to the question of whether she had received a gift from a customer valued at over $100 within the last 12 months on her annual compliance questionnaire.

By accepting gifts from a firm customer in contravention of firm policies, Hayut violated FINRA Rule 2010.

The FINRA Examination Team: The Ins and Outs of FINRA’s Annual Program (FINRA Podcast)
https://www.finra.org/media-center/finra-unscripted/finra-examinations-team-program
As set out in the summary of the FINRA Podcast:

FINRA's Examination team carries out a core function of FINRA's business by examining every member firm at least every four years and as often as annually, depending on the risk profile of each individual firm. These exams ensure firms remain in compliance with FINRA rules and federal securities laws and regulations and are at the heart of FINRA's mission of investor protection and market integrity.

On this episode, Michael Solomon, Senior Vice President of Examinations, Nicole McCafferty, Vice President of the Retail Exam Firm Group, and Joe Sheirer, Vice President of the Office of Exams, join us for a deep dive into how the program works and what firms can expect during routine firm exams.

6/12/2023

SEC Sends FINRA Expungement Back to the Future (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/7082/mummert-nyse-finra-sec-expungement/
A quarter of a century ago in 1998, two public customers sued a New York Stock Exchange member and one of its registered persons. In 2020, the registered person sought to clear his name and filed a FINRA Arbitration Statement of Claim seeking expungement. His FINRA Arbitration moved forward. Until it didn't. FINRA pulled the plug on Christmas Eve 2020. In the midst of the onslaught of the Covid pandemic. The registered person appealed to the SEC. And, now, in 2023, we're moving backwards. Or sideways. Or who knows -- perhaps we're headed back to the future.

Federal Court Denies Alpine's Emergency Motion for a Preliminary Injunction or Temporary Restraining Order against FINRA
Scottsdale Capital Advisors Corporation And Alpine Securities Corporation, Plaintiffs, v. Financial Industry Regulatory Authority, Inc., Defendant - and - United States Of America, Intervenor Defendants (Opinion, United States District Court for the District of Columbia, 23-CV-1506)
https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2023cv1506-88
As set forth in the "Syllabus":

Plaintiffs Scottsdale Capital Advisors Corporation (“SCA”) and Alpine Securities Corporation (“Alpine”) originally filed suit in the Middle District of Florida asserting several constitutional challenges to the operation and structure of the Financial Industry Regulatory Authority, Inc. (“FINRA”), a private corporation responsible for regulating broker-dealers in the securities industry. As litigation proceeded in that case, FINRA expedited an enforcement action against Alpine, alleging that this company committed thousands of violations of a permanent FINRA order to cease-and-desist certain conduct, which conduct required Alpine’s immediate expulsion from FINRA’s membership and thus the securities industry. Alpine coins tha punishment “the corporate death penalty” given that such expulsion would necessitate a complete closure of Alpine’s business and operations. Pls.’ Second Am. Compl. (“SAC”) ¶¶ 10, 129, ECF No. 43.

Weeks before the expedited enforcement action’s scheduled hearing before FINRA, Alpine sought an emergency preliminary injunction from the district court in the Middle District of Florida, seeking to halt the expedited enforcement proceeding pending resolution of Alpine’s constitutional challenges. After briefing and oral argument on the motion, however, the case was transferred to this Court for resolution—only two business days before the FINRA hearing. The day before the scheduled hearing, Alpine then renewed its emergency motion seeking a preliminary injunction or temporary restraining order (“TRO”). Alpine also seeks reconsideration of an earlier order of this Court denying its original emergency motion as filed in the Middle District of Florida.

Upon consideration of Alpine’s two pending motions, extensive briefing, oral argument, and the entire record herein, Alpine’s motion for reconsideration is granted and its emergency motion for a preliminary injunction or TRO is denied.

Among the more notable portions of the Court's Opinion:

On that point, Alpine invokes Axon to argue that its assertion of constitutional claims against FINRA and its adjudicatory process subjects the company to a “here-and-now injury” and automatically triggers a finding of irreparable harm. See Pl.’s TRO Mot. at 22–23 (quoting Axon, 143 S. Ct. at 903). Indeed, the Supreme Court expressed the view that being subjected to an adjudicatory process that a plaintiff claims is constitutionally flawed is “impossible to remedy once the proceeding is over” and a “grievance [for which] the court of appeals can do nothing: [a] proceeding that has already happened cannot be undone.” Axon, 143 S. Ct. at 903–4. Alpine is right that this strong language in Axon must be viewed as a consideration relevant to irreparable harm, see Hr’g Tr. at 63:7–13 (Alpine agreeing that the “here-and-now injury” language in Axon is the Supreme Court “putting its thumb on the scale among the preliminary injunctive factors for irreparable harm”), and neither FINRA nor the government, as intervenor-defendant, present much argument against this view, see, e.g., Hr’g Tr. at 78:13–80:11 (FINRA arguing only that Axon does not alter the preliminary injunction analysis); id. at 89:4–90:6 (referencing the government’s choice not to take a position on certain preliminary injunction factors before stating that nothing in Axon displaces the preliminary injunction factors). Consequently, under the Supreme Court’s explicit language, the nature of the constitutional claims asserted here, no matter their unlikelihood of success, suffice to show irreparable harm to Alpine, even though any such harm may stem directly from Alpine’s noncompliant actions.

at Pages 27 - 28 of the DCDC Opinion [Ed: Footnote omitted]

[T]he risk of harm to the public from an alleged bad actor openly and repeatedly flouting a remedial cease-and-desist order issued by a FINRA panel, allegedly thousands of times, at the expense of customers, is significant and concrete compared to Alpine’s interest in asserting constitutional claims against FINRA that have an unlikelihood of success for the reasons already summarized. As such, the balance of equities and public interest disfavor any injunctive relief.

at Page 29 of the DCDC Opinion

St. Petersburg Man Who Orchestrated Multimillion Dollar Fraud Scheme While On Supervised Release Sent Back To Prison For Theft Of Government Property And Money Laundering (DOJ Release)
https://www.justice.gov/usao-mdfl/pr/st-petersburg-man-who-orchestrated-multimillion-dollar-fraud-scheme-while-supervised
In the United States District Court for the Middle District of Florida, Matthew Walker Meredith, 40, pled guilty to theft of government money and money laundering; and he was sentenced to six years in prison and he was ordered to forfeit real property, six Mercedes Benz vehicles, and $6,374,576.92.
Bill Singer's Comment: Naaah, that brief summary above doesn't even begin to tell this jaw-droppin' tale; and, frankly, what a shame, what a waste of talent! I mean, geez, Defendant Meredith sure as hell seems to have had the smarts to make an honest buck. Then again, if it weren't for folks who had the smarts but went over to the darkside, a lot of lawyers wouldn't be making any money. As such, let me step back and allow a portion of the DOJ Press Release to razzle and dazzle you far beyond my raconteur skills could come close to accomplishing:

According to court documents, in 2016, Meredith was sentenced in federal court to three years’ imprisonment for conspiracy and possession with intent to distribute Ethylone, also known as “Molly.” Those charges stemmed from Meredith’s importation of kilogram quantities of Ethylone from China. The Bureau of Prisons released Meredith in October 2017, and he began serving a three-year term of federal supervised release. While under federal supervision, Meredith began to submit claims for tax refunds to the Internal Revenue Service (IRS) in the names of entities under his control. Specifically, in just six months, Meredith submitted five claims to the IRS seeking in excess of $170 million. Each claim was false and fraudulent, in that Meredith falsified both his income and withholdings.

On November 23, 2019, the IRS issued Meredith a refund check in the amount of $6,374,576.92, which Meredith quickly deposited into his bank account. In the weeks that followed, Meredith laundered the illicit proceeds by purchasing luxury vehicles and a waterfront home. Specifically, and as described below, in one week he purchased six new Mercedes Benz totaling $843,269.32.

Date of Purchase	Type of Vehicle	Cost
11.30.19	2020 Mercedes Benz S63AMG3	$187,327.68
11.30.19	2019 Mercedes Benz SL63	$156,404.27
11.30.19	2020 Mercedes Benz C63WS	$103,547.17
12.6.19	2020 Mercedes Benz GLE350W	$72,707.55
12.6.19	2020 Mercedes Benz AMG GTR	$232,368.12
12.7.19	2019 Mercedes Benz C63WS	$90,914.53

And on December 5, 2019, Meredith purchased, in cash, a 6,500 square foot waterfront mansion (pictured below) in St. Petersburg, for $2,625,000.

SEC Charges Investment Adviser and Principal in Abusive Naked Short Selling Scheme (SEC Release)
https://www.sec.gov/news/press-release/2023-107
In the United States District Court for the District of New Jersey, the SEC filed a Complaint charging Sabby Management LLC and its managing partner Hal D. Mintz
https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-107.pdf with violations of Section 10(b) of the Securities Exchange Act and Rules 10b-5 and 10b-21 thereunder; and, further charges Sabby with violations of Sections 204 and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2 and 206(4)-7 thereunder and charges Mintz with aiding and abetting those violations. As alleged in part in the SEC Release:

[F]rom at least March 2017 through May 2019, Sabby and Mintz repeatedly circumvented trading rules to conduct unlawful trades in the stock of at least 10 public companies. Short selling is a legal practice where, generally, a trader borrows a security from a securityholder and sells the security at one price, speculating that the trader can buy the security at a lower price in the future before it must be returned to its owner. As alleged in the complaint, for example, Sabby and Mintz engaged in illegal “naked short selling” by intentionally and improperly placing short sales when they knew or were reckless in not knowing that they had not borrowed or located the shares, and then failed to make timely delivery of the shares. According to the SEC’s complaint, the purpose of Sabby and Mintz’s fraudulent scheme was to earn profits they could not have gained through legal trading.

Additionally, as the complaint alleges, on occasion Sabby and Mintz used their naked short selling to artificially deflate the price of securities, allowing them to obtain more shares at a cheaper price.

The SEC’s complaint further alleges that Sabby and Mintz tried to conceal their fraudulent trading, including by using securities acquired after the trades to make it appear to brokers executing the trades that they had complied with the requirement to have borrowed or located the shares prior to their trades. As the complaint alleges, when questioned by at least one broker regarding their trading, Sabby and Mintz repeatedly lied about the trading.

SEC Unveils New Public Service Campaign Encouraging Older Investors to Never Stop Learning (SEC Release)
https://www.sec.gov/news/press-release/2023-106
Of for godsakes -- seriously? The SEC is spending tax dollars in order to encourage older investors to never stop learning? What's the follow-on PSA -- encouraging older investors to never stop breathing? By way of disclosures, I am an OLDER investor and find the SEC's campaign condescending and moronic. This is yet another infuriating example of a regulator that is wasting time, money, and staff on the "marketing" of the "appearance" of regulation when such resources should be put to far better use doing the actual work of regulating. Even more absurd is that at a time when the regulatory community is complaining about the "gamification" of Wall Street, the SEC's Press Release asserts in part that:

More than 60 million users have accessed Investor.gov since it launched in October 2009, and thousands of investors test their investing knowledge by taking a new quiz published each month. This month’s quiz, available at Investor.gov/quiz, highlights messaging from the new campaign focused on older investors.

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