Securities Industry Commentator by Bill Singer Esq

Abraham Bielski filed a putative class action on behalf of Coinbase users alleging that Coinbase, an online currency platform, failed to replace funds fraudulently taken from the users’ accounts. Because Coinbase’s User Agreement provides for dispute resolution through binding arbitration, Coinbase filed a motion to compel arbitration. The District Court denied the motion. Coinbase then filed an interlocutory appeal to the Ninth Circuit under the Federal Arbitration Act, 9 U. S. C. §16(a), which authorizes an interlocutory appeal from the denial of a motion to compel arbitration. Coinbase also moved the District Court to stay its proceedings pending resolution of the interlocutory appeal. The District Court denied Coinbase’s stay motion, and the Ninth Circuit likewise declined to stay the District Court’s proceedings pending appeal.

Held: A district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is ongoing. Pp. 2–10.

(a) Section 16(a) does not say whether district court proceedings must be stayed pending resolution of an interlocutory appeal. But Congress enacted the provision against a clear background principle prescribed by this Court’s precedents: An appeal, including an interlocutory appeal, “divests the district court of its control over those aspects of the case involved in the appeal.” Griggs v. Provident Consumer Discount Co., 459 U. S. 56, 58. The Griggs principle resolves this case. Because the question on appeal is whether the case belongs in arbitration or instead in the district court, the entire case is essentially “involved in the appeal,” id., at 58, and Griggs dictates that the district court stay its proceedings while the interlocutory appeal on arbitrability is ongoing. Most courts of appeals to address this question, as well as leading treatises, agree with that conclusion.

The common practice of staying district court proceedings during the pendency of an interlocutory appeal taken under §16(a) reflects common sense. If the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost—even if the court of appeals later concluded that the case actually had belonged in arbitration all along. Absent a stay, parties also could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration. The Griggs rule avoids these detrimental results.

Congress’s longstanding practice reflects the Griggs rule. Given Griggs, when Congress wants to authorize an interlocutory appeal and to automatically stay the district court proceedings during that appeal, Congress ordinarily need not say anything about a stay. By contrast, when Congress wants to authorize an interlocutory appeal, but not to automatically stay district court proceedings pending that appeal, Congress typically says so. Since the creation of the modern courts of appeals system in 1891, Congress has enacted multiple statutory “nonstay” provisions. Pp. 2–7.

(b) Bielski’s arguments to overcome the Griggs principle are unpersuasive. First, the courts of appeals possess robust tools to prevent unwarranted delay and deter frivolous interlocutory appeals that an automatic stay might otherwise encourage. Second, Congress included explicit stay requirements in two other statutory provisions for reasons particular to those statutes, not because Congress thought that an interlocutory appeal did not ordinarily stay district court proceedings. Third, the result here does not create a special, arbitration-preferring procedural rule, but simply subjects arbitrability appeals to the same stay principles that courts apply in other analogous contexts where an interlocutory appeal is authorized. Fourth, experience shows that ordinary discretionary stay factors would not adequately protect parties’ rights to an interlocutory appellate determination of arbitrability. In any event, the background Griggs rule applies regardless of how often courts might otherwise grant stays under the ordinary discretionary stay factors. Fifth, while the Court has recognized that questions of arbitrability are severable from merits questions, the sole issue here is whether the district court’s authority to consider a case is “involved in the appeal” when an appellate court considers the threshold question of arbitrability, Griggs, 459 U. S., at 58. The answer is yes. Pp. 7–10.

Reversed and remanded.

KAVANAUGH, J., delivered the opinion of the Court, in which ROBERTS, C. J., and ALITO, GORSUCH, and BARRETT, JJ., joined. JACKSON, J., filed a dissenting opinion, in which SOTOMAYOR and KAGAN, JJ., joined in full, and in which THOMAS, J., joined as to Parts II, III and IV.

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6/22/2023

Federal Court Sanctions Lawyers for ChatGPT Use
Roberto Mata, Plaintiff, v. Avianca, Inc., Defendant (Opinion and Order on Sanctions, United States District Court for the Southern District of New York, 22-CV-1461)
https://brokeandbroker.com/PDF/SchwartzMataSDNYOpinion2306233.pdf
In the United States District Court for the Southern District of New York, Judge P. Kevin Castel issued an Opinion and Order on Sanctions pertaining to Respondents Peter LoDuca, Steven A. Schwartz and the law firm of Levidow, Levidow & Oberman P.C. In part, the Opinion asserts that:

In researching and drafting court submissions, good lawyers appropriately obtain assistance from junior lawyers, law students, contract lawyers, legal encyclopedias and databases such as Westlaw and LexisNexis. Technological advances are commonplace and there is nothing inherently improper about using a reliable artificial intelligence tool for assistance. But existing rules impose a gatekeeping role on attorneys to ensure the accuracy of their filings. Rule 11, Fed. R. Civ. P. Peter LoDuca, Steven A. Schwartz and the law firm of Levidow, Levidow & Oberman P.C. (the “Levidow Firm”) (collectively, “Respondents”) abandoned their responsibilities when they submitted non-existent judicial opinions with fake quotes and citations created by the artificial intelligence tool ChatGPT, then continued to stand by the fake opinions after judicial orders called their existence into question.

Many harms flow from the submission of fake opinions.¹ The opposing party wastes time and money in exposing the deception. The Court’s time is taken from other important endeavors. The client may be deprived of arguments based on authentic judicial precedents. There is potential harm to the reputation of judges and courts whose names are falsely invoked as authors of the bogus opinions and to the reputation of a party attributed with fictional conduct. It promotes cynicism about the legal profession and the American judicial system. And a future litigant may be tempted to defy a judicial ruling by disingenuously claiming doubt about its authenticity. . . .

= = =

Footnote 1: The potential mischief is demonstrated by an innocent mistake made by counsel for Mr. Schwartz and the Levidow Firm, which counsel promptly caught and corrected on its own. In the initial version of the brief in response to the Orders to Show Cause submitted to the Court, it included three of the fake cases in its Table of Authorities. (ECF 45.)

The Opinion and Order imposed the following:

a. Within 14 days of this Order, Respondents shall send via first-class mail a letter individually addressed to plaintiff Roberto Mata that identifies and attaches this Opinion and Order, a transcript of the hearing of June 8, 2023 and a copy of the April 25 Affirmation, including its exhibits.

b. Within 14 days of this Order, Respondents shall send via first-class mail a letter individually addressed to each judge falsely identified as the author of the fake“Varghese”, “Shaboon”, “Petersen”, “Martinez”, “Durden” and “Miller” opinions. The letter shall identify and attach this Opinion and Order, a transcript of the hearing of June 8, 2023 and a copy of the April 25 Affirmation, including the fake “opinion” attributed to the recipient judge.

c. Within 14 days of this Opinion and Order, respondents shall file
with this Court copies of the letters sent in compliance with (a) and (b).

d. A penalty of $5,000 is jointly and severally imposed on Respondents and shall be paid into the Registry of this Court within 14 days of this Opinion and Order.

Belle Vernon Resident Pleads Guilty to Wire Fraud (DOJ Release)
https://www.justice.gov/usao-wdpa/pr/belle-vernon-resident-pleads-guilty-wire-fraud
In the United States District Court for the Western District of Pennsylvania, Patty Lynn Mavrakis pled guilty to wire fraud. As alleged in part in the DOJ Release:

[I]n September 2016, Mavrakis was the Branch Manager for Valley 1st Community Federal Credit Union in Belle Vernon, Pa. The Court was further advised that, on September 5, 2016, the Credit Union was closed because of Labor Day, but Mavrakis entered the Credit Union, accessed the safe, and left the Credit Union with multiple boxes, at least one of which contained cash from the safe. On the following day, September 6, 2016, Mavrakis arrived at the Credit Union before any other employees and staged a fire in the safe. As the only witness to the fire, Mavrakis falsely claimed that an alarm wire “caught on fire” and consumed $340,200 in cash. On September 7, 2016, Mavrakis submitted an insurance claim to the Credit Union’s insurance company and again falsely claimed that an alarm wire caused the fire. The insurance company processed and paid the claim.

-and-

SEC Charges Investment Fund Founder William K. Ichioka with $25 Million Offering Fraud (SEC Release)
https://www.sec.gov/news/press-release/2023-116

-and-

CFTC Charges New York Man with Misappropriating Over $21 Million in Commodity Pool Scheme / Federal Judge Issues Permanent Injunction and Orders Registration, Trading Bans (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8727-23

In the United States District Court for the Northern District of California, William Koo Ichioka pled guilty to one count of wire fraud, two counts of aiding or assisting in the preparation of a false or fraudulent tax return, one count of fraud in connection with the purchase and sale of securities, and one count of commodities fraud. As alleged in part in the DOJ Release:

[I]chioka admitted that he commingled investor money with his own funds and used investor money to make purchases of luxury items, including vehicles, watches, and jewelry, and to fund his own personal expenses, including for rent for his personal residence, restaurants, bars, grocery stores, taxi and car share rides, retail stores, gym membership fees, and online purchases. Moreover, Ichioka admitted that he and Ichioka Ventures did not actually earn 10% returns every 30 business days for his investors throughout the time that he represented that it did. Rather, he and Ichioka Ventures sustained losses from portions of funds that he invested. By the end of 2019 – unbeknownst to investors – Ichioka privately acknowledged that the “[c]ompany hasn’t made any money since we started.”

Ichioka admitted that he repaid existing investors using new investor funds to further perpetuate the scheme to defraud, according to court filings describing Ichioka’s agreement to plead guilty. According to the court filings, Ichioka has agreed that he owes non-family investors in “Ichioka Ventures” at least $21 million as a result of the scheme and additionally owes his family members over $40 million.

Ichioka also admitted that he concealed and hid the scheme by doctoring financial documents to overstate the value of assets (including bank, brokerage, and cryptocurrency exchange materials) and providing doctored documents to prospective investors, according to court filings. He also presented false statements of account to investors via the Ichioka Ventures website, failed to provide tax documentation to investors, and willfully failed to report income to the Internal Revenue Service in this scheme.

In the United States District Court for the Northern District of California, the SEC filed a Complaint charging William K. Ichioka with violating the antifraud provisions of the federal securities laws.
https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-116.pdf Ichioka agreed to the entry of a partial final judgment imposing requested permanent and conduct-based injunctions as well as an officer and director bar, and reserving issues of disgorgement, prejudgment interest, and a civil penalty for further determination by the court. As alleged in part in the SEC Release:

[F]rom at least June 2019 to October 2021, Ichioka solicited investments for his unregistered investment fund, Ichioka Ventures, by claiming he was an accomplished investor, promising oversized returns, and guaranteeing investors’ principal. In reality though, as the complaint alleges, Ichioka was unable to pay investors the promised returns and used money from new investors to repay other investors. Also, as alleged in the complaint, Ichioka falsified a bank statement and other documents to create an appearance of success. Finally, according to the complaint, Ichioka also misappropriated millions of investors' funds for personal use, such as on luxury watches, cars, gambling, and a penthouse apartment.

In the United States District Court for the Northern District of California, the CFTC filed a Complaint charging William Koo Ichioka with fraudulently soliciting and misappropriating more than $21 million from over 100 commodity pool participants’ funds.
https://www.cftc.gov/media/8796/enfichiokacomplaint062323/download Ichioka agreed to the entry of a proposed Consent Order of Judgment admitting his liability on the charges in the complaint. As alleged in part in the CFTC Release:

[I]chioka operated a fraudulent scheme from 2018 through November 2021, where he solicited tens of millions of dollars from more than a hundred individuals to trade digital asset commodities, including bitcoin and ether, and to enter into forex through a commodity interest pool he operated under the name Ichioka Ventures. Its website described the investment as having a term of “30 business days with a 10% return,” while assuring participants their funds could easily be withdrawn or reinvested. Ichioka ultimately misappropriated more than $21 million of participant funds, and used those funds to pay back other participants, and for his personal use and expenses, such as luxury automobiles, jewelry and rent payments.

SEC Imposes Cease-and-Desist, Censure, and $4 million Penalty on JPMorgan for Deletion of 47 Million Electronic Communications
In the Matter of J. P. Morgan Securities LLC, Respondent (SEC Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Sanctions; '34 Act Rel. No. 97787 ; Admin. File No. 3-21502)
https://www.sec.gov/litigation/admin/2023/34-97787.pdf
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/34-97787.pdff, Respondent J.P. Morgan Securities LLC consented to the entry of said Order and a finding that it had willfully violated Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder (broker- dealers required to preserve for at least three years originals of all communications received and copies of all communications sent relating to its business). In accordance with the terms of the SEC Order, JPMorgan was:

ordered to cease and desist from committing or causing any violations and any future violations of Exchange Act Section 17(a) and Rule 17a-4(b)(4);
Censured; and
ordered to pay a $4 million civil money penalty.

As alleged in part in the "Summary" portion of the SEC Order:

1. These proceedings arise out of the deletion by JPMorgan of approximately 47 million electronic communications in about 8,700 electronic mailboxes relating to the period January 1 through April 23, 2018, many of which were business records required to be retained pursuant Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder.

2. Beginning in 2016, JPMorgan undertook a project to delete from its system older communications and documents no longer required to be retained. The deletion tasks implemented by JPMorgan employees in connection with the project experienced glitches, with the identified documents not, in fact, being expunged. In June 2019, while troubleshooting the issue, firm employees executed deletion tasks on electronic communications from the first quarter of 2018, erroneously believing, based on written representations from JPMorgan’s archiving vendor, that all the documents were coded in a way to prevent permanent deletion of records still within the thirty-six month regulatory retention period required by Section 17(a) of the Exchange Act and Rule 17a-4(b) thereunder. In fact, however, the vendor did not apply the default retention settings in a particular email domain and those communications, including many required to be maintained pursuant to the broker-dealer recordkeeping rules, were permanently deleted. Thus, approximately 47 million electronic communications of JPMorgan employees in the Chase banking retail group, thousands of whom were registered representatives of JPMorgan, are unrecoverable.

3. In at least twelve civil securities-related regulatory investigations, eight of which were conducted by the Commission staff, JPMorgan received subpoenas and document requests for communications which could not be retrieved or produced because they had been deleted permanently.

In part the SEC Order asserts that:

[P]reviously, Respondent twice has consented to orders finding violations of the recordkeeping requirements under Section 17(a) of the Exchange Act and Rule 17a-4 thereunder. JP. Morgan Securities LLC, Exchange Act Rel. No. 93807, 2021 SEC LEXIS 3711 (Dec. 17, 2021) (settled) (finding failure to preserve text messages and other electronic communications between January 2018 and November 2020, and ordering $125 million in penalties); J.P. Morgan Securities Inc., Exchange Act Rel. No. 51200, 2005 SEC LEXIS 339 (Feb. 14, 2005) (settled) (finding failure to preserve electronic records between July 1, 1999 and June 30, 2002 and ordering $700,000 in penalties to be paid each to the Commission, FINRA and the New York Stock Exchange).

Statement Concerning Certain IAC Recommendations by SEC Commissioner Hester M. Peirce
https://www.sec.gov/news/statement/peirce-iac-recommendations-20230622

I am sorry that I will not be able to attend this week’s Investor Advisory Committee (“IAC”) meeting. I particularly would have liked to hear your discussion about the draft recommendations that you are planning to consider at the meeting. Each of these recommendations addresses an important topic, but robust discussion should precede finalization of any of these recommendations. I offer some questions for your consideration.

Draft Recommendation on Registered Investment Adviser Oversight:
Informed by an IAC panel discussion from March 2nd, this recommendation brings attention to the mounting challenges the Commission faces in ensuring adequate oversight of investment advisers. The Commission’s Division of Examinations is central to our efforts to protect investors and ensure the smooth running of our capital markets. But resources for this key Division are always stretched thin. As the IAC highlights, in the last seven years the number of SEC-registered advisers (“RIAs”) has gone up by 25%. All the while, the Commission’s Examinations staff is only 4% larger than it was seven years ago, and its responsibilities extend beyond investment advisers.[1]

The IAC offers potential solutions to this perpetual problem of adviser ranks outpacing examiner ranks. The IAC’s draft recommended solutions include user fees[2] and third-party examinations.[3] I ask the Committee to address the following questions in their consideration of both potential solutions:

1. How would the user fees be set, and what role would Congress play in setting it? Untethering this piece of the SEC’s budget from direct congressional appropriation could undermine the SEC’s accountability to Congress. Political accountability for the agency is key to ensuring that the Commission uses its resources properly.
2. If instead the third-party option were chosen, would advisers and investors be justified in asking why we are outsourcing a key government function? Would this approach create a new set of quasi-governmental regulatory organizations? Given the regulatory origin of the demand for third-party examiners, would advisers have any leverage in fee negotiations with these third parties? What type of oversight over these third parties would be appropriate? With the necessity of Examinations’ oversight of these third parties, would we really succeed in shifting much of the burden away from the Commission? Would the Commission end up losing an important window into what goes on in the industry, as we have by ceding much of our oversight of broker-dealers to FINRA?
3. Would an approach that relies on user fees or third-party examiners foster bad habits at the Commission? The SEC recently has exhibited an unhealthy preoccupation with erasing the distinctions between the retail and private markets. A user fee could exacerbate this trend.
4. Given the battering the industry is taking courtesy of an unprecedented wave of costly regulations, would the imposition of a user fee or the forced hiring of third-party examiners serve as that one last straw on the back of small advisers?
5. How would a proposal for third-party examiners interact with the Commission’s recent service providers proposal?[4]

Draft Recommendation on Single Stock ETFs and Leveraged ETFs:
Exchange-traded funds (“ETFs”) are one of the great innovations of the last thirty years. We finally codified them in a rulemaking in 2019. Single stock ETFs are a recent phenomenon, one that I did not contemplate when we adopted the ETF rule. The IAC rightly points out that single stock and leveraged ETFs are quirky products that are definitely not suitable for everyone. The draft recommendation calls on the Commission to adopt naming conventions for single-stock ETFs and other exchange-traded products to convey their unique features and risks more accurately; bring more enforcement cases for unsuitable recommendations of single stock ETFs and other ETPs; and to “[r]equire broker-dealers to provide a visual point of sale disclosure to contrast the performance of a single stock/leveraged ETF with the underlying asset.”[5] In discussing these draft recommendations, please consider the following questions:

1. Is industry already taking steps to provide greater clarity about single-stock ETFs and other products?
2. Technology can be a powerful investor education tool. Does the Commission need to make changes to facilitate greater use of technology to ensure that investors understand the products they are buying?
3. Could a naming convention unduly constrain product development by forcing all products into existing molds?
4. Would a rulemaking on these topics make sense in light of our already over-packed agenda and the Commission’s ability using existing rules to punish advisers and broker-dealers who fail to operate in their customer’s best interest?
5. Whatever the Commission does in this space, how can we avoid veering into merit regulation territory? Used properly, these products could assist some investors in meeting their goals. We should not stand in the way of investors’ accessing products they want, even if we would not want them ourselves.

Recommendation of the Market Structure Subcommittee of the SEC Investor Advisory Committee on SEC Proposed Amendments to Regulation 13D-G, Proposed Rule 10B-1, and Proposed Rule 9j-1
The draft recommendation with respect to the Commission’s proposals on Rules 13D-G and 10B-1 grapple with difficult questions, as reflected in the Commission’s release earlier this week of additional analysis on Rule 10B-1. In discussing this draft, I hope the Committee will consider the following questions:

1. Would shortening the 13D reporting date to 5 business days discourage economic activists? If so, what would the cost be?
2. Given that security-based swap data repositories have been receiving security-based swap data for less than two years, does it make sense to postpone final action on proposed Rule 10B-1 until we have more experience with the data and a better understanding of what that data can tell us about this market?

[1] IAC “Discussion of a Recommendation on Registered Investment Adviser Oversight,” (June 22, 2023), pp.1-2, https://www.sec.gov/files/20230605-recommendation-ria-examination.pdf.

[2] Id. p.4 (suggesting that the Commission should seek congressional authority to “impose ‘user fees’ on SEC-registered investment advisers, the revenue from which could be retained by the SEC to fund and enhance its investment adviser examination program, including more frequent on-site examinations of SEC registered advisers”).

[3] Id. p.5 (calling on the Commission to seek comment on “adopt[ing] a rule requiring advisers to undergo a compliance exam conducted by an outside firm and that a copy of the exam results be submitted to the SEC”).

[4] See Outsourcing by Investment Advisers, Advisers Act Release No. 6176 (Oct. 26, 2022), available at https://www.sec.gov/rules/proposed/2022/ia-6176.pdf.

[5] IAC “Recommendation of the Market Structure Subcommittee of the SEC Investor Advisory Committee on Single Stock ETFs and Leveraged ETFs,” (June 22, 2023) [link unavailable at time of posting]

CFTC Charges California Resident and His Corporation with Fraud and Misappropriation in a Popular Romance Scam Involving Digital Asset Commodities and Forex (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8726-23
In the United States District Court for the Central District of California,the CFTC filed a Complaint against Cunwen Zhu and Justby International Auctions
https://www.cftc.gov/media/8791/enfzhucomplaint062223/download . The CFTC Release characterizes this matters as its "first case involving a romance scam, commonly known as “Pig Butchering,” a type of fraud that is growing in popularity." As alleged in part in the CFTC Release:

[Z]hu and Justby took part in an elaborate and well-coordinated scheme to defraud customers through digital asset commodity and forex trading. At least 29 customers transferred more than $1.3 million to Justby for the purpose of trading digital assets and forex on supposedly legitimate trading platforms. Instead of using the funds to trade on behalf of these customers, Zhu and Justby misappropriated the customers’ funds. Zhu used some of the funds for his personal use, and transferred the majority of the funds to bank accounts, digital wallets, and digital asset trading platforms under the control of other members of the fraudulent scheme. In fact, no actual trading took place on behalf of customers and the trading platforms were controlled by other members of the fraudulent scheme. In addition, the fraudulent scheme provided customers with false trade records in order to maintain the pretense that they were engaged in actual trading.

Parallel Criminal Action

On April 19, 2023, Cunwen Zhu was charged with one count of wire fraud in the Middle District of Florida, United States of America v. Cunwen Zhu, Case No. 3:23-cr-66-BDJMCR, for conduct similar to that alleged in the CFTC’s complaint.

FINRA Censures and Fines Evercore Group for Market Access Risk Management
In the Matter of Evercore Group L.L.C., Respondent (FINRA AWC 2017056128501)
https://www.finra.org/sites/default/files/fda_documents/2017056128501
%20Evercore%20Group%2C%20L.L.C.%20CRD%2042405
%20AWC%20gg.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, Evercore Group L.L.C. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Evercore Group L.L.C. has been a FINRA member firm since 1997 with about 1,150 registered individuals at 13 branches. In accordance with the terms of the AWC, FINRA imposed upon Evercore Group L.L.C. a Censure and $100,000 fine. As alleged in part in the "Overview" portion of the AWC:

During various periods between at least July 2017 and May 2023, Evercore failed to establish, document, and maintain reasonably designed market access risk management controls and supervisory procedures. In particular, the firm failed to establish certain reasonably designed credit threshold controls and certain price and size erroneous order controls and supervisory procedures. Further, the firm failed to establish a reasonable supervisory system concerning soft block reviews and modifications to existing controls. Finally, the firm failed to establish a reasonable system for annual reviews of the effectiveness of its market access risk controls and supervisory procedures. As a result, Evercore violated Section 15(c)(3) of the Securities Exchange Act of 1934, Exchange Act Rule 15c3-5, and FINRA Rules 3110(a) and 2010.

6/21/2023

Court Denies Vacatur of Over $2 Million FINRA Arbitration Award Involving Disputed Customer Transfer and Asset Purchase Agreement (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/7105/finra-arbitration-apa/
As best we can tell, one associated person sold her business to another via a 2020 Asset Purchase Agreement. After said sale, it looks like all hell broke loose between the seller and the buyer. Then the lawsuit was filed. Then the millions and millions in damages were piled on. In keeping with most FINRA arbitrations, we never quite learn exactly what went wrong and who did what to whom and why -- regardless, it's all a burning wreck on the side of the road and it's tough to drive by without looking.

Former Goldman Sachs Investment Banker Convicted At Trial Of Insider Trading Scheme And Obstruction Of Justice / Defendant Brijesh Goel Stole Non-Public Information and Tipped His Trading Friend (SEC Release)
https://www.justice.gov/usao-sdny/pr/former-goldman-sachs-investment-banker-convicted-trial-insider-trading-scheme-and
In the United States District Court for the Southern District of New York, Brijesh Goel was convicted of four counts of securities fraud, one count of obstruction of justice, and one count of conspiracy to commit securities fraud and tender offer fraud. As alleged in part in the SEC Release:

BRIJESH GOEL was an investment banker at Goldman Sachs in New York, New York. In that position, GOEL received confidential, internal emails directed to Goldman Sachs’s Firmwide Capital Committee and Credit Markets Capital Committee, which contained detailed information and analysis about potential merger-and-acquisition transactions Goldman Sachs was considering financing. In violation of the duties that he owed to Goldman Sachs, GOEL misappropriated that confidential information and tipped a friend (the “Friend”), who worked at another investment bank in New York, New York, with the names of potential target companies from those internal emails during in-person meetings (such as when the two met at New York Health and Racquet Club). The Friend then used that confidential information to trade call options, including short-dated, out-of-the-money call options, in brokerage accounts that were in the name of the Friend’s brother. GOEL and the Friend agreed to split the profits from their trading. Between approximately 2017 and 2018, GOEL tipped the Friend on at least six deals in which Goldman Sachs was involved, yielding total illegal profits of approximately $280,000.

Between approximately May and June 2022, GOEL also obstructed investigations by a Grand Jury in the Southern District of New York and the U.S. Securities and Exchange Commission. Specifically, GOEL deleted and asked the Friend to delete electronic communications regarding the insider trading scheme, including during an in-person meeting that the Friend consensually recorded.

SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies (SEC Release)
https://www.sec.gov/news/press-release/2023-114
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/34-97773.pdf that it had engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice, violated multiple audit standards across numerous engagements, and violated Rule 2-02(b)(1) of Regulation S-X, Marcum LLP agreed to pay a $10 million penalty, to be censured, and to undertake several remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures, as well as abide by certain restrictions on accepting new audit clients. As alleged in part in the SEC Release:

[O]ver a three-year period, Marcum more than tripled its number of public company clients, the majority of which were SPACs, including auditing more than 400 SPAC initial public offerings in 2020 and 2021. The strain of this growth, however, exposed substantial, widespread, and pre-existing deficiencies in the firm’s underlying quality control policies, procedures, and monitoring. These deficiencies permeated nearly all stages of the audit process and were exacerbated as Marcum took on more SPAC clients. Moreover, in hundreds of SPAC audits, Marcum failed to comply with audit standards related to audit documentation, engagement quality reviews, risk assessments, audit committee communications, engagement partner supervision and review, and due professional care. Depending on the audit standard at issue, violations were found in 25-50 percent of audits reviewed, with even more frequent, nearly wholesale violations found as to certain audit standards across Marcum’s SPAC practice.

PENNYSTOCK BARS
RELEASE NUMBER	RESPONDENTS
34-97779	Steve G. Blasko (Opinion of the Commission)
Respondent was permanently enjoined from violations of registration provisions of the federal securities laws. Held, it is in the public interest to bar respondent from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participation in an offering of penny stock.
34-97778	William Harper Minor, Jr. (Opinion of the Commission) Other Release No.: IA-6334
Respondent was convicted of mail fraud. Held, it is in the public interest to bar respondent from association with any broker, dealer, or investment adviser and from participating in an offering of penny stock.
34-97777	Alexander Charles White (Opinion of the Commission)
Respondent was permanently enjoined from violations of registration provisions of the federal securities laws. Held, it is in the public interest to bar respondent from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participation in an offering of penny stock.
34-97776	Mitchell B. Dow (Opinion of the Commission)
Respondent was permanently enjoined from violations of registration provisions of the federal securities laws and convicted of wire fraud. Held, it is in the public interest to bar respondent from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participation in an offering of penny stock.

Perpetual Personal Penny Stock Prohibitions: Statement on the Recent Orders Imposing Bars in the Public Interest by SEC Commissioner Hester M. Peirce
https://www.sec.gov/news/statement/peirce-penny-stock-prohibitions-20230621

Today, the Commission resolved four long-pending adjudication matters.[1] The Commission’s order in each of the matters imposes a penny stock bar on the respondent. Because I do not agree that the records in these matters establish that imposing a complete and permanent penny stock bar on each respondent is in the public interest, I dissented from the imposition of the bars. I write to explain why.

“It is well-settled that . . . administrative proceedings” such as the ones at issue here “are not punitive but remedial. When we suspend or bar a person, it is to protect the public from future harm at his or her hands.” Howard F. Rubin, Rel. No. 34-35179, 1994 WL 730446, *1 (Dec. 30, 1994). A bar designed to protect the public is remedial, not punitive. Whether the public is in need of protection turns in large part on the likelihood that the person will again violate the law in a manner that poses a risk to the investing public. The Commission typically uses the factors set out in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), as a guide to assess that likelihood. Using the Steadman factors, which require consideration of the particular facts of the case, also facilitates satisfying the Commission’s obligation to “devote individual attention to the unique facts and circumstances” of each case and to provide a “reasoned basis” that “link[s] the sanction imposed to those circumstances” when we determine that a bar is in the public interest. McCarthy v. SEC, 406 F.3d 179, 189-90 (2d Cir. 2005).

All four respondents in today’s adjudication matters face permanent penny stock bars. Specifically, the orders impose identical bars that prohibit the respondents from:

participating in any offering of a penny stock, including acting as a promoter, finder, consultant, agent, or other person who engages in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

This language, in particular the unqualified prohibition on “inducing or attempting to induce the purchase or sale of any penny stock,” permanently prohibits the respondents from participating in penny stock transactions. In other words, the respondents are prohibited in perpetuity from trading in penny stocks in their own accounts with their own money. This extraordinary limitation on the respondents’ right to engage in lawful economic activity requires equally extraordinary facts to justify it, but such facts are not present here. The conduct described in the opinions is bad conduct. It includes (i) acting as an unregistered broker in an unregistered offering,[2] (ii) misleading investors in an unregistered offering while also acting as an unregistered broker,[3] and (iii) misappropriation of funds from investors and clients.[4] That conduct shows that the respondents should not be trusted with other people’s money. For this reason, associational bars designed to prevent the respondents from gaining access to other people’s money by way of association with regulated entities are remedial and in the public interest.

None of the opinions, however, indicates that the respective respondent’s unlawful conduct involved penny stocks. To obtain a penny stock bar in court, the Commission must establish that the defendant was participating in a penny stock offering at the time of the misconduct.[5] Congress granted the Commission broader authority, and the Commission may impose penny stock bars in an administrative proceeding either when the person is engaged in a penny stock offering at the time of the misconduct or when the person is associated with, or seeking to associate with, a broker or dealer at the time of the misconduct.[6] But even in our administrative proceedings we must provide a “reasoned basis” for the conclusion that a penny stock bar protects the public and therefore is remedial, not punitive. When the misconduct involves penny stocks, explaining the link between the facts and the need for a penny stock bar to protect the public is usually not difficult, especially when the person engaging in the misconduct is associated with a broker or dealer. In the absence of misconduct involving penny stocks, however, the link between the facts and the need for a penny stock bar to protect the public is less clear, even when the person engaging in the misconduct is associated with a broker or dealer. The challenge of explaining why misconduct that does not involve penny stocks nonetheless supports a penny stock bar becomes even more pronounced when, as here, the penny stock bar reaches not only trading on behalf of others using their money, but also trading in one’s own account with one’s own money. The mere fact that the person engaged in misconduct while associated with a broker or dealer does not, on its own, support imposition of a bar that prohibits that person from trading in penny stocks on her own behalf, using her own money in her own account.

The opinions in the various matters fail to articulate a reasoned basis for the conclusion that the penny stock bars imposed are in the public interest because they fail to adequately explain the link between the facts and the need for the broad penny stock bars. Indeed the opinions offer no explanation as to why prohibiting the respondents from trading in penny stocks in their own accounts with their own money is necessary to protect the public from harm.

We could have imposed narrower penny stock bars that limited the respondents’ participation in the penny stock markets to trading in their own accounts with their own money. Given an appropriate factual predicate, such tailored bars could serve the public interest by preventing respondents from using other people’s money and accounts to trade in penny stocks without unnecessarily impinging on the respondents’ right to engage in lawful economic activity with their own money.

[1] In the Matter of Alexander Charles White, Rel. No. 34-97777, (June 21, 2023); In the Matter of Steven G. Blasko, Rel. No. 34-97779, (June 21, 2023); In the Matter of Mitchell B. Dow, Rel. No. 34-97776, (June 21, 2023); In the Matter of William Harper Minor, Jr., Rel. No. 34-97778 (June 21, 2023).

[2] Alexander Charles White; Steven G. Blasko.

[3] Mitchell B. Dow.

[4] William Harper Minor, Jr.

[5] Securities Act Section 20(g)(1), 15 U.S.C. § 77t(g)(1); Exchange Act Section 21(d)(6)(A), 15 U.S.C. § 78u(d)(6)(A).

[6] Exchange Act Section 15(b)(6)(A), 15 U.S.C. § 78o(b)(6)(A).

Federal Court Orders Florida Man to Pay Over $1 Million in Penalties for Fraudulent Solicitation and Misappropriation in a Commodity Pool Scheme (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8725-23
The United States District Court for the Southern District of Florida entered a Default Order of Final Judgment
file:///C:/Users/rrbdl/Downloads/enfricocoxorder062123.pdf against Rico Cox that found him liable for fraudulently soliciting investments in commodity futures and misappropriating at least 14 pool participants’ funds. The Order enjoins Cox from engaging in conduct that violates the Commodity Exchange Act (CEA), orders him to pay $710,667 in restitution, $339,300 in disgorgement, as well as a $1,017,900 civil monetary penalty; and, further, permanently bans Cox from registering with the CFTC and from trading on any registered entity. As alleged in part in the CFTC Release:

[C]ox falsely claimed he was a successful trader with years of experience trading futures contracts. The court also found Cox failed to tell participants that in 2016 he was found liable for fraudulently soliciting funds to trade in a managed futures account in a CFTC case against him. Those charges resulted in permanent trading and registration bans and a $941,000 judgment. [See CFTC Press Release No. 7383-16].

The court found that to perpetuate his fraud scheme, Cox issued false statements to participants showing false profits purportedly earned with their investments and he grossly exaggerated account balances. For instance, the court found Cox sent a participant a purported account statement from a futures trading commission merchant showing an ending balance of $1,389,091.26 when on that date the account had already been closed with a zero balance. Today’s court order also found Cox misappropriated participant funds.

FINRA Bars Vanguard Associate for Fabricating Copy of SIE Exam Results
In the Matter of Richard M. Funderburk, Respondent (FINRA AWC 2022075036001)
https://www.finra.org/sites/default/files/fda_documents/2022075036001
%20Richard%20M.%20Funderburk%20CRD%206129027%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, Richard M. Funderburk submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Richard M. Funderburk entered the industry as a Non-Registered Fingerprint person in October 2012 with Vanguard Marketing Corporation ("VMC"). In accordance with the terms of the AWC, FINRA imposed upon Funderburk a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On December 13, 2021, Funderburk re-joined VMC as a Client Representative Associate. The new role required Funderburk to be registered with FINRA. On February 8, 2022, VMC filed the Initial Uniform Application for Securities Industry Registration or Transfer (Form U4) on Funderburk’s behalf. As a condition of his employment, Funderburk was expected to successfully complete several licensing and qualifications exams, including the SIE exam. Between February 8, 2022 and May 2, 2022, Funderburk participated in mandatory training and also prepared for the SIE exam.

Funderburk took the SIE exam on May 3, 2022, and received a score of 57%. A score of 70% or above was required to pass. Later that day, Funderburk sent an instant message to his supervisor in which he falsely informed her that he had passed the exam and provided her with a fabricated SIE exam score report reflecting a passing score of 92%.

Based on the foregoing, Respondent violated FINRA Rule 2010.

6/20/2023

Digital Asset Platform EDX Markets Begins Trading and Completes New Funding Round (Businesswire)
https://www.businesswire.com/news/home/20230620110605/en
/Digital-Asset-Platform-EDX-Markets-Begins-Trading-and-
Completes-New-Funding-Round
EDX Markets (a non-custodial cryptocurrency exchange focused on institutional traders) opened trading in Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Bitcoin Cash (BCH). Founding investors in EDX include Charles Schwab, Citadel Securities, Fidelity Digital Assets, Paradigm, Sequoia Capital, and Virtu Financial. EDX is NOT REGISTERED with the SEC.

Four Indicted For $17 Million Bank Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-wdnc/pr/four-indicted-17-million-bank-fraud-scheme
In the United States District Court for the Western District of North Carolina, Kotto Yaphet Paul, Latoya Tamieka Ford, Bruce Howard Marko, and Love Norman were charged with one count of wire fraud and bank fraud conspiracy, 16 counts of financial institution fraud, and four counts of money laundering. Previously, four additional defendants were convicted of bank fraud conspiracy and sentenced to pay restitution ranging from $620,000 to more than $3.1 million plus the following prison terms as indicated below:

Amrish D. Patel, 45, 15 months;
Dwight A. Peebles, Jr., 47, 18 months;
Denise Woodard, 56, 36 months; and
Derrick L. Harrison, 54, a year and a day in prison.

As alleged in part in the DOJ Release:

[F]rom 2016 to May 2021, the defendants and their co-conspirators executed a fraudulent loan scheme that defrauded at least 17 federally insured financial institutions of more than $17 million. As alleged in the indictment, the defendants and their co-conspirators obtained loans from the financial institutions by submitting loan applications that contained fraudulent information, including false employment and income information, false tax returns, and misrepresentations regarding the applicants’ assets, liabilities, and the intended use the loan proceeds. The indictment further alleges that, based on the fraudulent loan applications, the defendants secured at least 42 loans from the victim financial institutions. Contrary to information provided on the loan applications about the purpose of the loans, the defendants allegedly used the loan proceeds to purchase real estate, cover unrelated business expenses, make investments, and pay for personal expenditures. The indictment also alleges that the defendants defaulted on most of the loans, causing substantial losses to the victim financial institutions that issued the loans.

Assistant Attorney General Jonathan Kanter Delivers Keynote Address at the Brookings Institution’s Center on Regulation and Markets Event “Promoting Competition in Banking”
https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-address-brookings-institution

Merger Enforcement Sixty Years After Philadelphia National Bank

Remarks as Prepared for Delivery

Thank you, Aaron, for that kind introduction. And thank you to Brookings for hosting this event. Sixty years ago this week, the Supreme Court handed down its decision in United States v. Philadelphia National Bank.[1] Today, I would like to discuss the enduring impact of this landmark case.

Philadelphia National Bank is well known in banking circles for recognizing the essential role that the antitrust laws have in protecting competition in the banking sector. But the legacy of Philadelphia National Bank is much broader: it is a foundational decision that has paved the way for antitrust merger enforcement across all industries. As we revise our general Merger Guidelines, Philadelphia National Bank looms large, and its impact on antitrust merger law is enduring and undeniable for enforcement agencies and for courts.

As we reflect on the legacy of Philadelphia National Bank, I hope we can all agree that bank competition is critically important for all Americans. Bank competition affects the interest you earn on your savings account, the monthly payment on your mortgage or car loan, the fees you pay to withdraw cash from an ATM, the variety of financial products you can choose from, and whether your business can get an affordable loan. Simply put: bank competition affects people’s pocketbooks and their daily lives.

Recognizing the importance of competition in banking, President Biden has encouraged the Department of Justice and the federal banking agencies to revitalize bank merger oversight to “ensure Americans have choices among financial institutions and to guard against excessive market power.”[2]

The time is indeed ripe for us to re-examine how we assess bank mergers under the statutory framework that Congress has enacted. The Department of Justice and the banking agencies issued the current Bank Merger Guidelines in 1995.[3] Much has changed since then, as we can all see from our own personal experiences. The world today – including the banking system – is radically different than it was in 1995. With the popularization of interstate banking, financial conglomeration, online and mobile banking, and the digital transformation of our economy, the banking system of today bears little resemblance to the banking system of three decades ago.

Against this backdrop, it is appropriate for us to reassess whether the prevailing approach to bank merger enforcement is fit for purpose given current market realities. Asking whether the factual and economic assumptions underlying the 1995 Guidelines are adequate to measure and assess the many different dimensions of competition that exist today is the responsible course of action.

Of course, I would be remiss if I did not address the elephant in the room. We are examining bank merger policy against the backdrop of an industry that has experienced some recent turmoil. There are many considerations relevant to bank merger policy. I will limit my comments today to the narrow but important question of how best to apply the antitrust laws to competition in the banking space, with an eye toward preserving the benefits of competition. Broader considerations regarding bank merger regulation is better left to the expert bank regulators.

Today, I will discuss why bank competition is essential, how bank competition has evolved over time, and how the Antitrust Division will fulfill its statutory obligation to protect competition in the banking sector going forward. In keeping with our celebration of Philadelphia National Bank, I will also discuss the impact of this seminal case on antitrust enforcement more broadly.

In 1961, the Department of Justice sued to block the merger of the second- and third-largest banks in Philadelphia. On June 17, 1963, the Supreme Court sided with the DOJ, holding that the merger violated section 7 of the Clayton Act. In its decision, the Supreme Court held that certain changes in market structure alone can create a presumption that a merger may substantially lessen competition.[4] In doing so, the Court underscored that a fundamental purpose of the Clayton Act was, among other things, to arrest trends toward concentration in their incipiency.[5]

Philadelphia National Bank has made an indelible mark on merger enforcement generally. In its decision, the Court acknowledged that certain mergers are so clearly likely to lessen competition that they must be prohibited in the absence of clear evidence to the contrary.[6] Courts have closely followed this presumption, simplifying the test of presumptive illegality for certain mergers and allowing decisionmakers to cut to the heart of the merger inquiry.[7] Though Philadelphia National Bank is most cited for its articulation of this presumption, the Court also set forth numerous other key principles of antitrust merger enforcement that remain lodestars today.

Philadelphia National Bank’s holdings are still binding.[8] The Supreme Court has not since revisited or criticized these holdings, and the basis for the structural presumption in merger review is even stronger today than it was in 1963 and is cited consistently and authoritatively by courts throughout the country.[9]

60 years on, Philadelphia National Bank has stood the test of time. Like its classmates from the 1963 term - Gideon v. Wainwright and Brady v. Maryland - Philadelphia National Bank is a seminal decision in its area of law.[10] That is true notwithstanding that much has changed in our understanding of economics and in the market realities we confront in our cases. When we evaluate precedent in antitrust, we distinguish the legal holdings from the analytical tools that we use to assess facts in any particular case or industry. As law enforcers, our job at the Antitrust Division is to apply those legal holdings in a manner consistent with modern tools and the realities of our markets as we find them today.

Of course, Philadelphia National Bank is uniquely relevant to banking. Although it may seem hard to believe today, for much of the 20th century it was widely assumed that banks were exempt from the antitrust laws. Philadelphia National Bank changed that assumption and firmly established that banking is within the purview of federal antitrust law.

Philadelphia National Bank emphasized the importance of competition in banking because of banking’s unique role in the economy. In reaching its decision, the Supreme Court recognized that bank competition is critically important for families who are trying to take out a mortgage or earn interest on their savings. Of course, bank competition also effects our commercial economy. As the Supreme Court wrote, if businesspeople are “denied credit because … banking alternatives have been eliminated by mergers, the whole edifice of an entrepreneurial system is threatened….”[11] The Court underscored that excessive consolidation in the banking sector could imperil the free and fair functioning of the broader economy. In the Court’s words, “[C]oncentration in banking accelerates concentration generally.”[12] It was true then and it remains true today: competition in banking and competition throughout our economy go hand in hand.

After Philadelphia National Bank, Congress codified the Department of Justice’s role in bank antitrust enforcement. Under the Bank Merger and Bank Holding Company Acts, the federal banking agencies are the primary authorities on bank merger review. The department has an important, but specific, role in the process.

As amended, the bank merger statutes prohibit the banking agencies from approving any merger that violates the antitrust laws unless the banking agency finds that the merger’s anticompetitive effects “are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.”[13] This assessment of “convenience and needs” is a distinctive feature of the bank merger statutes, which empower the bank regulators - and not the DOJ - to conduct this assessment. Indeed, the Supreme Court cautioned in Philadelphia National Bank that an otherwise illegal merger under the antitrust laws “is not saved because, on some ultimate reckoning of social or economic debits and credits, it may be deemed beneficial.”[14]

Congress directed the department to serve in an advisory capacity to the banking agencies by providing the agencies “a report on the competitive factors” involved in a bank merger.[15] At the same time, Congress authorized the DOJ to serve in its law enforcement capacity by challenging in court any anticompetitive bank merger that violates antitrust law.[16]

On this milestone anniversary of Philadelphia National Bank, it is appropriate to take stock of how the department is fulfilling its statutory role in bank merger enforcement. As I have frequently said, we need to make sure our approach to investigating and analyzing mergers reflects current market realities and how competition presents itself today. The department’s review of bank mergers should follow this path.

The department and the federal banking agencies issued Bank Merger guidelines in 1995 to “identify proposed mergers that clearly do not have significant adverse effects on competition.”[17] The 1995 Guidelines reflect that era’s approach to bank antitrust enforcement based on the industry realities of that time. These Guidelines attach great significance to market shares based on local branch deposits as a proxy for concentration and competition. For transactions that exceed a specific deposit concentration threshold, the 1995 Guidelines invite the merging banks to “resolve the problem by agreeing to make an appropriate divestiture.” It has since become standard practice for the DOJ to address such mergers by negotiating branch divestitures and entering into a Letter of Agreement - or settlement of sorts – with the parties.

Much has changed, however, since 1995. When the agencies issued the current guidelines, Congress had only months earlier removed legal barriers that prevented many banks from expanding beyond their home state.[18] Congress was still years away from authorizing banks to affiliate with investment banks and insurance companies.[19] At the time the agencies issued the 1995 Guidelines, the largest bank holding company had $250 billion in assets, less than one-seventh the size of the largest bank holding company today after adjusting for inflation.

Fast forward almost 30 years, and the number of “community banks” - or smaller banks that focus on lending in their local neighborhoods - has dropped by more than half, according to the Federal Deposit Insurance Corporation (FDIC). At the same time, the six largest bank holding companies have amassed as many assets as all other bank holding companies combined. To put it plainly: policymakers in 1995 confronted a much different banking system than the one we have today.

Against this backdrop, there are good reasons aside from the passage of time to question whether the 1995 Guidelines sufficiently reflect current market realities. A few examples. First, financial conglomerates today may compete in many more geographic areas, across many more business lines, and on many different dimensions than they did three decades ago. The 1995 Guidelines’ narrow focus on local market deposit concentration may therefore be inadequate to assess the likely competitive effects of a modern bank merger. It may also disproportionally focus enforcement on transactions involving small local banks and understate network concerns relating to large national and multi-national banks. Second, as the global economy has evolved and become more diverse, so too have customers’ financial services needs. A multinational corporation demands a much different cluster of financial services than a local business owner. Likewise, the needs of high net worth C-suite executive differ from those of a local school teacher. Finally, the emergence of fintech and other nonbank financial companies has been notable. How these companies should be factored into the competition analysis is appropriately fact-specific.

In his executive order on promoting competition, President Biden recognized the need for bank antitrust policy to better reflect today’s market realities and support a more resilient banking system that serves all types of customers and communities.[20]

Consistent with the president’s executive order, the Antitrust Division invited public comment in late 2021 on whether and how to revise the 1995 Guidelines.[21] We received numerous thoughtful responses from public interest groups, banks, think tanks, and trade associations, among other stakeholders.[22] This public consultation followed an earlier comment period in 2020, which also elicited helpful feedback from a wide range of interested parties.[23] We are carefully considering the comments that we received during these two comprehensive rounds of public input.

Let me now describe what the Antitrust Division is doing to ensure that we fulfill our statutory obligation to protect the competitive process in the banking sector.

The Antitrust Division takes seriously its statutory responsibility to advise the relevant federal banking agencies about the competitive effects of a proposed merger, including our responsibility to analyze relevant competitive factors through the lens of current market realities.

To that end, the division is modernizing its approach to investigating and reporting on the full range of competitive factors involved in a bank merger to ensure that we are taking into account today’s market realities and the many dimensions of competition in the modern banking sector.

In preparing the competitive factors reports that we are required by law to submit to the banking agencies, the DOJ will assess the relevant competition in retail banking, small business banking, and large- and mid-size business banking in any given transaction. These analyses will include consideration of concentration levels across a wide range of appropriate metrics and not just local deposits and branch overlaps. Indeed, the division and the federal banking agencies are working together to augment the data sources we use when calculating market concentration to ensure we are relying on the best data possible and using state-of-the art tools to assess all relevant dimension of competition.

However, our competitive factors reports will not be limited to measuring concentration of bank deposits and branch overlaps. Rather, a competitive factors report should evaluate the many ways in which competition manifests itself in a particular banking market—including through fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service.[24] Our competitive factors reports will increasingly address these dimensions of competition that may not be observable simply by measuring market concentration based on deposits alone.

Let me highlight two areas that will be of particular interest to the division as it prepares competitive factors reports.

First, the division will closely scrutinize mergers that increase risks associated with coordinated effects and multi-market contacts. The division will also examine the extent to which a transaction threatens to entrench power of the most dominant banks by excluding existing or potential disruptive threats or rivals. Our competitive factors reports must take into account these potential threats to competition just as we do in mergers throughout other areas of the economy. While we will scrutinize any transaction that presents substantive legal concerns, we will not limit our analysis to small and local bank acquisitions—where appropriate, we will also scrutinize the largest and most powerful actors.

Second, the division will carefully consider how a proposed merger may affect competition for different customer segments. Though far from perfect, the modern banking system features a wide variety of different types of banks that serve different customer needs. For example, some banks specialize in relationship lending and personalized service, leveraging their unique knowledge of their local communities. Other banks operate extensive regional or nationwide branch networks and offer sophisticated mobile banking capabilities. This diversity creates choices for customers who may comparison shop and choose the type of bank that best meets their needs. To protect competition, antitrust enforcers must ensure that customers retain a meaningful choice as to the type of bank with which they do business by recognizing that different segments of customers have different needs and that substitution across different types of banks may be limited.[25]

A few words on remedies. Our job at the Antitrust Division is enforcing the law, not micromanaging or regulating the private sector. We owe it to the public to maintain a high bar for the divestitures we will accept as remedies and to evaluate fully the risks associated with carve-out divestitures, in particular. Branch divestitures are not always adequate to address the broader range of competitive concerns, including interoperability and network effects, among many other potential areas that may be relevant to a particular review. Nor are we able to consider how, if at all, an otherwise anticompetitive merger might impact the convenience and needs of a community, a role the bank merger statutes specifically reserve for the bank regulators.

These judgments, in our view, are best made by banking regulators, informed by their unique supervisory experience and powers. We are in the process of reorienting the Antitrust Division’s role to focus on providing our advisory opinion as required by the statute and not remedies agreements with parties (as has become custom over the last many years). The goal is for this revised procedure to faithfully effectuate the department’s limited - but essential - statutory role in bank antitrust enforcement and facilitate the banking agencies’ analysis of competition and other factors as part of their broader bank merger review framework and statutory approval authorities. This approach preserves our authority to challenge a bank merger under the antitrust laws, consistent with the statutory framework Congress established.

Of course, our work does not end there. Our Bank Merger Guidelines need updating. Guidelines are valuable tools that we use to identify harms to competition and the types of evidence we use to investigate a merger’s likelihood of resulting in those harms. Updated Bank Merger Guidelines will provide valuable guidance to the antitrust bar and the banking community more generally. However, guidelines are not law - the law and precedents like Philadelphia National Bank are our ultimate guides, and we plan to anchor any revisions to the guidelines in binding precedent and statutory text.

We look forward to continuing to collaborate with the talented leadership and staff of the Federal Reserve, FDIC and Office of the Comptroller of the Currency on new Bank Merger Guidelines. Our staffs have been engaged in productive discussions, and I am optimistic that we will develop new guidelines that reflect our responsibility to protect competition in the banking system, consistent with the Executive Order from our president. As we update the Bank Merger Guidelines, we must ensure that our enforcement decisions are attuned to current market realities and not based on an outdated conception of banking.

I have deep nostalgia for our banking system as it existed in 1995. Like many of you, I remember the excitement of being handed a free toaster when signing up for a new account. I recall the weekly ritual when members of the local community would wait in line on Friday to deposit a check and withdraw cash for the upcoming week. A lot has changed since then, but curiously our Bank Merger Guidelines have not. As we stare down the realities of our financial system in 2023, the time is ripe for us to revisit the Bank Merger Guidelines to make sure that we are applying the legal holdings and principles of Philadelphia National Bank and its progeny in a manner that is consistent with modern market realities.

[1] 374 U.S. 321 (1963).

[2] Executive Order on Promoting Competition in the American Economy, Exec. Order No. 14036, 86 Fed. Reg. 36,987 (July 9, 2021).

[3] Department of Justice, Bank Merger Competitive Review – Introduction and Overview (Issued 1995).

[4] 374 U.S. at 363 (“[A] merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.”).

[5] Id. at 367.

[6] Id. at 362-63.

[7] See, e.g., F.T.C. v. H.J. Heinz Co., 246 F.3d 708, 715 (D.C. Cir. 2001); United States v. Anthem, Inc., 236 F. Supp. 3d 171, 191-92 (D.D.C. 2017).

[8] While General Dynamics acknowledged they are subject to a rebuttal step, in so doing it reaffirmed Philadelphia National Bank’s foundational principles. See United States v. General Dynamics, 415 U.S. 486, 497-499 (1974) (explaining that share statistics and trend toward concentration “would…have sufficed to support a finding of undue concentration in the absence of other considerations,” and that the question then becomes whether those other factors “mandate a conclusion that no substantial lessening of competition is threatened by the merger”).

[9] See United States v. Aetna Inc., 240 F. Supp. 3d 1, 42-43 (D.D.C. 2017) (holding that the government established its prima facie case based on “compelling concentration figures” showing that “the post-merger HHI would reflect a merger to monopoly”); FTC v. H.J. Heinz Co., 246 F.3d 708, 715 (D.C. Cir. 2001) (holding that the government makes it prima facie case by showing “that the merger would produce a firm controlling an undue percentage share of the relevant market, and [would] result[] in a significant increase in the concentration of firms in that market’”) (quoting Philadelphia Nat’l Bank, 374 U.S. at 363); see also Herbert Hovenkamp & Carl Shapiro, Horizontal Mergers, Market Structure, and Burdens of Proof, 127 Yale L.J. 1996, 2008 (2018) (“Not only is the structural presumption theoretically and empirically justified but it is also very well-established in the case law.”).

[10] Gideon v. Wainwright, 372 U.S. 335 (1963); Brady v. Maryland, 373 U.S. 83 (1963).

[11] 374 U.S. at 372.

[12] Id. at 370.

[13] 12 U.S.C. §§ 1828(c)(5), 1842(c)(1).

[14] 374 U.S. at 371.

[15] 12 U.S.C. § 1828(c)(4)(A)(i).

[16] 12 U.S.C. §§ 1828(c)(7), 1849(b)(1).

[17] Department of Justice, supra note 3.

[18] Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub. L. No. 103-328, 108 Stat. 2338.

[19] Gramm-Leach Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999).

[20] Executive Order on Promoting Competition in the American Economy, Exec. Order No. 14036, 86 Fed. Reg. 36,987 (July 9, 2021).

[21] Press Release, Dep’t of Justice, Antitrust Division Seeks Additional Public Comments on Bank Merger Competitive Analysis (Dec. 7, 2021), https://www.justice.gov/opa/pr/antitrust-division-seeks-additional-public-comments-bank-merger-competitive-analysis.

[22] 2022 Antitrust Div. Banking Guidelines Rev.: Public Comments (Dep’t. of Justice through Antitrust Division), https://www.justice.gov/atr/antitrust-division-banking-guidelines-review-public-comments-topics-issues-guide/2022-Bank-Guideline-Review.

[23] Press Release, Dep’t Of Justice, Antitrust Division Seeks Public Comments on Updating Bank Merger Review Analysis (Sep. 1, 2020), https://www.justice.gov/opa/pr/antitrust-division-seeks-public-comments-updating-bank-merger-review-analysis. In addition, the Federal Deposit Insurance Corporation has requested public comment on its bank merger framework. See Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions, 87 Fed. Reg. 18,740 (Mar. 31, 2022).

[24] Philadelphia National Bank, 374 U.S. 321, 368 (1963) (“Competition among banks exists at every level— price, variety of credit arrangements, convenience of location, attractiveness of physical surroundings, credit information, investment advice, service charges, personal accommodations, advertising, [and] miscellaneous special and extra services….”

[25] See, e.g., Robert M. Adams, Kenneth P. Brevoort & Elizabeth K. Kiser, Who Competes With Whom? The Case of Depository Institutions, 55 J. Indus. Econ. 141 (2007) (finding limited customer substitution between multi-market and single-market banks).

SEC Charges Private Equity Fund Adviser for Overcharging Fees and Failing To Disclose Fee Calculation Conflict (SEC Release)
https://www.sec.gov/news/press-release/2023-112
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/ia-6332.pdfthat the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder, Insight Venture management LLC agreed to a cease-and-desist order and Censure and to pay a $1.5 million penalty and $864,958 in disgorgement and prejudgment interest. The SEC’s order deems the disgorgement and prejudgment interest satisfied by Insight’s payment back to the impacted funds last month. As alleged in part in the SEC Release:

[I]nsight’s limited partnership agreements for certain funds it advised allowed it to charge management fees based on the funds’ invested capital in individual portfolio investments and required Insight to reduce the basis for these fees if Insight determined that one of these portfolio investments had suffered a permanent impairment. The order finds that, from August 2017 through April 2021, Insight charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level, as required by the applicable limited partnership agreements. Further, the SEC’s order finds that Insight failed to disclose to investors a conflict of interest in connection with its permanent impairment criteria. Because Insight did not disclose its permanent impairment criteria, investors were unaware that the criteria Insight used were narrow and subjective, making them difficult to satisfy. Therefore, the order finds that Insight’s investors were unaware that Insight’s permanent impairment criteria granted Insight significant latitude to determine whether an asset would be considered permanently impaired so as to reduce the basis used to calculate Insight’s management fees.

SEC Charges Stanley Black & Decker and Former Executive for Failures in Executive Perks Disclosure (SEC Release)
https://www.sec.gov/news/press-release/2023-111
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/34-97761.pdf, Stanley Black & Decker Inc. consented to an order requiring it to cease and desist from violations of reporting and proxy solicitation provisions of the Securities Exchange Act. Without admitting or denying the the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/34-97760.pdf, former Stanley Black & Decker executive Jeffery D. Ansell consented to an order requiring him to cease and desist from violations of proxy solicitation and books and records provisions of the Exchange Act and to pay a $75,000 civil penalty. As alleged in part in the SEC Release:

According to the SEC’s order against Stanley Black & Decker, the company failed to disclose at least $1.3 million worth of perquisites and personal benefits paid to, or on behalf of, four of its executive officers and one of its directors from 2017 through 2020. The perquisites predominantly consisted of expenses associated with the executives’ use of corporate aircraft.

The order finds that Stanley Black & Decker failed to appropriately apply the SEC’s compensation disclosure rules to its system for identifying, tracking and calculating perquisites. The order does not impose a civil penalty against Stanley Black & Decker, which self-reported the perquisite disclosure failures and other conduct potentially implicating the federal securities laws, cooperated with the SEC’s investigation, and implemented remedial measures.

According to the SEC’s separate order against Ansell, while he was a senior executive at Stanley Black & Decker, Ansell received undisclosed compensation that consisted, in part, of $280,000 in personal expenses he charged to the company. After consideration of Stanley Black & Decker’s self-reporting, cooperation, and remediation, the SEC declined to bring charges against the company related to Ansell’s conduct.

FINRA Fines and Suspends Rep for Recommending Oil and Gas Limited Partnerships
In the Matter of Abbe Jan Wollins, Respondent (FINRA AWC 2019063686205)
https://www.finra.org/sites/default/files/fda_documents/2019063686205
%20Abbe%20Jan%20Wollins%20CRD%205237027%20AWC%20gg.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, Abbe Jan Wollins submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Abbe Jan Wollins was first registered in 2007 with David Lerner Associates, Inc. ("DLA") In accordance with the terms of the AWC, FINRA imposed upon Wollins a $5,000 fine, $2,448.60 in disgorgement with interest, and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Between August 2015 and April 2018, Wollins recommended that Customers A and B, a married couple, and Customer C invest in one of two illiquid limited partnerships sold to customers of DLA. Each limited partnership was formed to acquire and develop oil and gas properties. Each partnership’s primary objectives included making distributions to investors and, five-to-seven years after the termination of each offering, engaging in a liquidity event. Each limited partnership’s ability to make distributions to its partners and to engage in a liquidity event was substantially dependent on the performance of the oil and gas properties in which the partnerships invested. According to the products’ prospectuses, investments in the partnerships involve a “high degree of risk,” and these limited partnership interests were appropriate only for investors willing and able to assume the risk of a “speculative, illiquid, and long-term investment.”

Wollins made unsuitable recommendations to Customers A, B, and C.

Customers A and B were a retired married couple who held an investment account with DLA. In August 2015, when Wollins recommended that they invest in an illiquid limited partnership, Customers A and B were approximately 82, retired, and receiving pension and social security benefits and savings. Between August 2015 and December 2016, at Wollins’ recommendation, Customers A and B invested a total of $128,907 in one of the limited partnerships. Wollins also recommended that senior Customer C invest $25,000 in one of the limited partnerships. At the time of his investment, Customer C was 93 and received social security benefits and took required withdrawals from an IRA. Customer C understood that his investment in the limited partnership would supplement his monthly income with these returns.

Wollins’ recommendations that Customers A, B, and C invest in the energy partnerships were not suitable given their investment profiles. Wollins received $2,448.30 in commissions from these investments.

Therefore, Wollins violated FINRA Rules 2111 and 2010.

FINRA Fines and Suspends Rep for Outside Business Activity of Subscription-Based Investment Content Provider
In the Matter of Jason K. Adams, Respondent (FINRA AWC 2023078823301)
https://www.finra.org/sites/default/files/fda_documents/2023078823301
%20Jason%20K.%20Adams%20CRD%202217759%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, Jason K. Adams submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jason K. Adams entered the industry in 1992; and from 2009 to June 2021, he was registered with J.P. Morgan Securities, LLC. In accordance with the terms of the AWC, FINRA imposed upon Adams a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From December 2020 to June 2021, J.P. Morgan Securities’ written supervisory procedures (WSPs) required registered representatives to obtain the firm’s written approval prior to engaging in any outside business activity. In June and July 2021, Morgan Stanley’s WSPs also required registered representatives to obtain the firm’s written approval prior to engaging in any outside business activity.

On December 29, 2020, Adams formed a Wyoming-based limited liability company that provides subscription-based, investment content. Adams was the sole owner of the company and responsible for its day-to-day operations. Adams obtained a federal employer identification number and business bank account for the company, managed the company’s payments to and relationships with vendors, and recruited two individuals to prepare content for dissemination to the company’s subscribers. From April 2021 to July 2021, Adams earned $77,500 in compensation from the company.

Adams did not provide J.P. Morgan Securities written notice before engaging in his outside activities during the period of December 2020 to June 2021. Adams also did not provide Morgan Stanley prior written notice of his outside activities during the period of June 2021 to July 2021. Adams also conducted his outside activities under a pseudonym.

Therefore, Adams violated FINRA Rules 3270 and 2010.

FINRA Fines and Suspends Rep for Recommendations of Private Placements
In the Matter of Blake Adam Levy, Respondent (FINRA AWC 2018057457401)
https://www.finra.org/sites/default/files/fda_documents/2018057457401
%20Blake%20Adam%20Levy%20CRD%204593636%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, Blake Adam Levy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Blake Adam Levy was first registered in 2003, and from 2016 through September 2019, he was registered with Westpark Capital, Inc. In accordance with the terms of the AWC, FINRA imposed upon Levy a $5,000 fine and a four-month suspension from associating with any FINRA member in all capacities. As alleged in part in the "Overview" section of the AWC:

Between August 2016 and July 2017, Levy recommended that 20 customers purchase membership interests in two funds (the Funds) for $2,260,299 through two private placement offerings, without having a reasonable basis to make those recommendations, in violation of FINRA Rules 2111 and 2010. In addition, Levy made negligent omissions in connection with the sale of membership interests in the Funds, in violation of FINRA Rule 2010, both independently and in contravention of Section 17(a)(2) of the Securities Act of 1933.

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Securities Industry Commentator by Bill Singer Esq

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