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Attorney General James and Multistate Coalition Secure $6.5 Million from Morgan Stanley for Failing to Protect Customer Data / Morgan Stanley to Pay New York $1.6 Million for Compromising the Personal Information of 1.1 Million New Yorkers (NYAG Release)
https://ag.ny.gov/press-release/2023/attorney-general-james-and-multistate-coalition-secure-65-million-morgan-stanley
New York Attorney General Letitia James and a coalition of five attorneys general today reached a $6.5 million Agreement https://ag.ny.gov/sites/default/files/settlements-agreements/morgan-stanley-aod.pdf with Morgan Stanley Smith Barney LLC ("Morgan Stanley") for compromising the personal information of millions of customers nationwide. As alleged in part in the NYAG Release;

Morgan Stanley hired a moving company with no experience in data destruction services to decommission thousands of hard drives and servers containing sensitive information of millions of its customers. Morgan Stanley failed to properly monitor the moving company’s work, and its computer equipment, some of which still contained private consumer information, was then sold at auction. Morgan Stanley was only made aware of the problem when a purchaser discovered the data and called the company.

In a second incident, Morgan Stanley discovered during a decommissioning process that 42 servers, all potentially containing unencrypted customer information, were missing. During this process, the company learned that the local devices being decommissioned may have contained unencrypted data due to a manufacturer flaw in the encryption software. The multistate investigation found that Morgan Stanley failed to maintain adequate vendor controls and hardware inventories, and that had these controls been in place, both data security events could have been prevented.

PRESS RELEASE
Binance and CEO Plead Guilty to Federal Charges in $4B Resolution
Tuesday, November 21, 2023

Binance Admits It Engaged in Anti-Money Laundering, Unlicensed Money Transmitting, and Sanctions Violations in Largest Corporate Resolution to Include Criminal Charges for an Executive

Binance Holdings Limited (Binance), the entity that operates the world’s largest cryptocurrency exchange, Binance.com, pleaded guilty today and has agreed to pay over $4 billion to resolve the Justice Department’s investigation into violations related to the Bank Secrecy Act (BSA), failure to register as a money transmitting business, and the International Emergency Economic Powers Act (IEEPA).

Binance’s founder and chief executive officer (CEO), Changpeng Zhao, a Canadian national, also pleaded guilty to failing to maintain an effective anti-money laundering (AML) program, in violation of the BSA and has resigned as CEO of Binance.

Binance’s guilty plea is part of coordinated resolutions with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) and the U.S. Commodity Futures Trading Commission (CFTC).

“Binance became the world’s largest cryptocurrency exchange in part because of the crimes it committed – now it is paying one of the largest corporate penalties in U.S. history,” said Attorney General Merrick B. Garland. “In just the past month, the Justice Department has successfully prosecuted the CEOs of two of the world’s largest cryptocurrency exchanges in two separate criminal cases.  The message here should be clear: using new technology to break the law does not make you a disruptor, it makes you a criminal.”

“Binance turned a blind eye to its legal obligations in the pursuit of profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform,” said Secretary of the Treasury Janet L. Yellen. “Today’s historic penalties and monitorship to ensure compliance with U.S. law and regulations mark a milestone for the virtual currency industry. Any institution, wherever located, that wants to reap the benefits of the U.S. financial system must also play by the rules that keep us all safe from terrorists, foreign adversaries, and crime or face the consequences.”

“A corporate strategy that puts profits over compliance isn’t a path to riches; it’s a path to federal prosecution,” said Deputy Attorney General Lisa O. Monaco. “Today’s charges and guilty pleas – combined with a more than $4 billion financial penalty – sends an unmistakable message to crypto and defi companies: if you serve U.S. customers, you must obey U.S. law.” 

“Changpeng Zhao made Binance, the company he founded and ran as CEO, into the largest cryptocurrency exchange in the world by targeting U.S. customers, but refused to comply with U.S. law,” said Acting Assistant Attorney General Nicole M. Argentieri of the Justice Department’s Criminal Division. “Binance’s and Zhao’s willful violations of anti-money laundering and sanctions laws threatened the U.S. financial system and our national security, and each of them has now pleaded guilty. Make no mistake: when you place profits over compliance with the law, you will answer for your crimes in the United States.”

“Binance’s crimes gave sanctioned customers unfettered access to American capital and financial services,” said Assistant Attorney General Matthew G. Olsen of the Justice Department’s National Security Division (NSD). “This prosecution is a warning that companies that do not build sanctions compliance into their services face serious criminal penalties, as do the executives who lead them.”

“From the beginning of its existence, Binance and founder Changpeng Zhao chose growth and personal wealth over following financial regulations aimed at stopping the laundering of criminal cash,” said Acting U.S. Attorney Tessa M. Gorman for the Western District of Washington. “Because Changpeng Zhao knowingly operated a financial platform without basic anti-money laundering safeguards, the company caused illegal transactions between U.S. users and users in sanctioned jurisdictions such as Iran, Cuba, Syria, and Russian-occupied regions of Ukraine – transactions for which Binance profited with significant fees.”

“Binance’s activities undermined the foundation of safe and sound financial markets by intentionally avoiding basic, fundamental obligations that apply to exchanges, all the while collecting approximately $1.35 billion in trading fees from U.S. customers,” said Chairman Rostin Behnam of the Commodity Futures Trading Commission (CFTC). “American investors, small and large, have demonstrated eagerness to incorporate digital asset products into their portfolios. It is our duty to ensure that when they do so, the full protections afforded by our regulatory oversight are in place, and that illegal and illicit conduct is swiftly addressed. When, as here, an entity goes even further, deliberately avoiding to employ meaningful access controls, intentionally avoiding knowing customers’ identities, and actively concealing the presence of U.S. customers on its platforms, there is no question that the CFTC will strike hard and aggressively.”

“When you put growth above compliance, you end up in hot water,” said Chief Jim Lee of the IRS Criminal Investigation (IRS-CI). “Our team of investigators uncovered that Binance disregarded anti-money laundering Know Your Customer laws, failed to register as a money transmitter, and willfully violated U.S. sanctions tied to the International Emergency Economic Powers Act. When you do so, your business becomes a playground for bad actors. Hundreds of millions of dollars in illicit proceeds from ransomware variants, darknet transactions, and various internet-related scams moved through Binance in an attempt to evade detection by law enforcement.”

According to court documents, Binance admitted to prioritizing growth and profits over compliance with U.S. law. Binance launched in 2017 and focused on attracting high-volume customers, including U.S.-based customers. Binance quickly became the largest cryptocurrency exchange in the world, with the greatest share of its customers coming from the United States. As a result of serving U.S. customers, Binance was required to register with FinCEN as a money services business and to implement an effective AML program that was reasonably designed to prevent Binance from being used to facilitate money laundering. Binance chose not to comply with U.S. law and failed to implement controls and procedures to prevent money laundering. Binance also did not implement controls that would have prevented U.S. customers from conducting transactions with customers in sanctioned jurisdictions, despite knowing that the system it used to match customers for transactions would necessarily cause transactions in violation of IEEPA.

Instead of complying with U.S. law, in 2019, Binance announced that it would block U.S. customers and launched a separate U.S. exchange, Binance.US. Despite this announcement, Binance took steps to maintain a substantial number of U.S. customers. In particular, Binance focused on retaining valuable “VIP” customers, which were responsible for a large portion of Binance’s trading volume and revenue. These VIP customers were critical to Binance’s business because they helped provide the necessary liquidity to facilitate trades of digital assets. For example, Binance executives, including Zhao, made a plan to contact VIP customers and help the VIP register a new account for an offshore entity and transfer holdings to that account. Binance employees also called U.S. VIPs to encourage them to provide information that suggested the customer was not located in the United States.

Binance also did not implement the core components of an effective AML program: Binance did not implement comprehensive know-your-customer (KYC) protocols or systematically monitor transactions, and Binance never filed a suspicious activity report (SAR) with FinCEN. For years, Binance allowed users to open accounts and trade without submitting any identifying information beyond an email address. Binance began requiring all users to provide KYC information in August 2021 but allowed users who had not provided KYC to continue trading on the exchange until May 2022. Between August 2017 and October 2022, U.S. users, including VIPs, conducted trillions of dollars in transactions on the platform, generating over $1.6 billion in profit for Binance.

As Binance’s internal communications showed, Binance’s compliance employees recognized that Binance did not have protocols to flag or report transactions for money laundering risks, which employees recognized would attract criminals to the exchange. As one compliance employee wrote, “we need a banner ‘is washing drug money too hard these days - come to binance we got cake for you.’” Due in part to Binance’s failure to implement an effective AML program, illicit actors used Binance’s exchange in various ways, including conducting transactions for mixing services that obfuscated the source and ownership of cryptocurrency; transferring illicit proceeds from ransomware variants; and moving proceeds of darknet market transactions, exchange hacks, and various internet-related scams.

Binance also knew that U.S. sanctions laws prohibited U.S. persons – including its U.S. customers – from trading with its customers subject to U.S. sanctions, including customers in comprehensively sanctioned jurisdictions, such as Iran. Binance knew that it had a significant number of users from comprehensively sanctioned jurisdictions and a substantial number of U.S. users and that its matching engine would necessarily cause U.S. users to transact with users in sanctioned jurisdictions in violation of U.S. law. Nonetheless, Binance did not implement controls that would prevent U.S. users from trading with users in Iran; and, because of this intentional failure, between January 2018 and May 2022, Binance willfully caused over $898 million in trades between U.S. users and users ordinarily resident in Iran.

As part of the plea agreement, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total financial penalty of $4,316,126,163. Binance has also agreed to retain an independent compliance monitor for three years and remediate and enhance their anti-money laundering and sanctions compliance programs. Binance separately has also reached agreements with the CFTC, FinCEN, and OFAC, and the Department will credit approximately $1.8 billion toward those resolutions.

The Department reached its resolution with Binance based on a number of factors, including the nature, seriousness, and pervasiveness of the offense, as a result of which Binance processed billions of dollars of cryptocurrency transactions for U.S. persons and caused U.S. customers to engage in transactions in violation of U.S. sanctions. Binance did not make a timely and voluntary disclosure of wrongdoing, but it received partial credit for its cooperation with the Department’s investigation, and it has taken steps to remediate its compliance program. Binance did not receive full credit for its cooperation because it delayed producing relevant evidence, including recorded meetings in which Binance executives discussed U.S. legal requirements. Accordingly, the total criminal penalty reflects a 20% reduction off the bottom of the applicable U.S. sentencing guidelines fine range.

In addition, according to court documents, Zhao, Binance’s founder, owner, and CEO, admitted that he understood that Binance served U.S. users and was thus required to register with FinCEN and implement an effective AML program. Zhao knew that U.S. users were essential to Binance’s growth and were a significant source of revenue and knew that an effective AML program would include KYC protocols that would mean that some customers would choose not to use Binance. Zhao told employees it was “better to ask for forgiveness than permission,” and prioritized Binance’s growth over compliance with U.S. law. Without an effective AML program, Binance caused transactions between U.S. users and users in jurisdictions subject to U.S. sanctions. These illegal transactions were a clear and foreseeable result of Zhao’s decision to prioritize Binance’s profit and growth over compliance with the BSA.

IRS-CI is investigating the case. The case is being prosecuted by Bank Integrity Unit Deputy Chief and National Cryptocurrency Enforcement Team Deputy Director Kevin Mosley and Trial Attorney Elizabeth Carr of the Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), Trial Attorneys Beau Barnes and Alex Wharton of NSD’s Counterintelligence and Export Control Section (CES), and Assistant U.S. Attorney (AUSA) Mike Dion for the Western District of Washington. Trial Attorney Julia Jarrett, formerly of MLARS and currently an AUSA for the District of Oregon, and Trial Attorney Matthew Anzaldi, formerly of CES and currently with NSD’s National Security Cyber Section, made substantial contributions to this investigation and prosecution.

MLARS’s Bank Integrity Unit investigates and prosecutes banks and other financial institutions, including their officers, managers, and employees, whose actions threaten the integrity of the individual institution or the wider financial system. The Criminal Division has surged resources to the Bank Integrity Unit, which has imposed over $12 billion in penalties on financial institutions for sanctions violations over the last decade. NSD’s Counterintelligence and Export Control Section investigates and prosecutes individuals and corporations for violations of export control and sanctions laws, in addition to other national security crimes. NSD continues to expand its corporate enforcement efforts – including growing the ranks of prosecutors dedicated to this work and establishing a Chief Counsel and Deputy Chief Counsel for Corporate Enforcement.

ALSO READ: 

Binance Former Chief Compliance Officer, Samuel Lim, Agrees to Pay $1.5 Million for Willfully Evading U.S. Law, and Aiding and Abetting the Illegal Operation of a Digital Asset Derivatives Exchange, and Other Violations  (CFTC Release)

Binance and Its CEO, Changpeng Zhao, Agree to Pay $2.85 Billion for Willfully Evading U.S. Law, Illegally Operating a Digital Asset Derivatives Exchange, and Other Violations  (CFTC Release)

Cyber Scam Organization Disrupted Through Seizure of Nearly $9M in Crypto (DOJ Release)
https://www.justice.gov/opa/pr/cyber-scam-organization-disrupted-through-seizure-nearly-9m-crypto
DOJ seized about $9 million worth of Tether cryptocurrency that had been traced to cryptocurrency addresses allegedly associated with an organization that exploited over 70 victims through romance scams and cryptocurrency confidence scams, which are widely known as “pig butchering.” As alleged in part in the DOJ Release:

[C]riminal actors worked together to target victims and convince them to make cryptocurrency deposits by fraudulently representing that the victims were making investments with trusted firms and cryptocurrency exchanges. In reality, the purported firms and cryptocurrency exchanges were non-existent trading platforms. Agents and analysts from the U.S. Secret Service (USSS) were able to trace those victim deposits and observed that the funds were quickly laundered through dozens of cryptocurrency addresses and exchanged for several different cryptocurrencies, a money laundering technique often referred to as “chain hopping.” These techniques are used to “layer” the proceeds of criminal activity into new cryptocurrency ecosystems, all to obfuscate the nature, source, control, and ownership of those proceeds. The seized funds were linked to numerous victim reports made via the FBI’s Internet Crime Complaint Center (IC3) and Federal Trade Commission’s (FTC) Consumer Sentinel Network.

Ex-Spouses Plead Guilty to Receiving and Laundering Money Stolen from Retirement and Investment Accounts (DOJ Release)
https://www.justice.gov/usao-edva/pr/ex-spouses-plead-guilty-receiving-and-laundering-money-stolen-retirement-and
In the United States District Court for the the Eastern District of Virginia, Ismaila Abdulraheem pled guilty to one count of conspiracy to commit money laundering; and Dasola Abdulraheem pled guilty to one count of receipt of stolen monies in violation. As alleged in part in the DOJ Release:

[F]rom approximately September 2017 to April 2020, Dasola Abdulraheem, 41, and Ismaila Abdulraheem, 44, both Nigerian nationals and formerly spouses, received the proceeds of various financial frauds into accounts that they controlled, and thereafter, conducted financial transactions with the proceeds to disguise the nature and source of the funds.

Unknown co-conspirators targeted the victims of this scheme by gaining access to their financial accounts, typically retirement or investment accounts. In one case, co-conspirators gained access to a victim’s severance payout from his former employer. The conspirators compromised a victim’s account, they posed as the victim and instructed the victim’s financial institution to add a new outside bank account to the victim’s account. The outside account was controlled by either the Abdulraheems or one of the money mules that they used. Once the victim’s financial institution added a conspirator’s account to the victim’s account, the conspirators directed that money from the victim’s account be siphoned from the victim’s account and deposited into the Abdulraheems’ accounts or into a co-conspirator’s account. The proceeds were used in some cases to purchase salvage cars at auction or to wire money to business entities in Nigeria. The overall money laundering conspiracy intended to cause a loss of approximately $866,195 and caused an actual loss of approximately $641,260.

The Abdulraheems attempted to conceal their involvement in laundering proceeds by using shell companies to receive and launder the proceeds of the fraud scheme. 

Boston Man Sentenced for Securities Fraud (DOJ Release)
https://www.justice.gov/usao-ma/pr/boston-man-sentenced-securities-fraud
In the United States District Court for the District of Massachusetts, Christopher R. Esposito, 57, pled guilty to one count of securities fraud, and he was sentenced to five years of probation, with three months to be served at a halfway house, and ordered to pay forfeiture and restitution. As alleged in part in the DOJ Release:

Between 2012 and 2015, Esposito and co-conspirator, Anthony Jay Pignatello, worked together to conceal their control over Cannabiz Mobile, Inc. and to use backdated promissory notes to fraudulently obtain free-trading shares in the company. Among other steps taken to conceal their control, Esposito caused another individual to be installed as the company’s chairman, president and CEO. In reality, the executive reported to Esposito. Esposito and Pignatello then arranged for a promotional campaign in October 2014 to artificially inflate the value and trading volume of Cannabiz Mobile, Inc’s stock so that they could secretly sell their shares. In total, between September 2014 and February 2015, Esposito personally sold over 1.3 million shares fraudulently obtained as part of the scheme.

Esposito was ordered to pay $20,294 in forfeiture in connection with the pump-and-dump of Cannabiz Mobile. He was also ordered to pay $61,693.50 in restitution to investors who lost money in a separate purported business venture that Esposito pitched involving the company Code2Action, Inc. Between August 2019 and February 2020, Esposito represented to investors that he would take Code2Action, Inc. public via a reverse merger and he solicited investments in the company for that purpose. The reverse merger, however, never took place. 

Pignatello separately pleaded guilty in March 2021 to one count of conspiracy to commit securities fraud for his role in the Cannabiz Mobile scheme. He is scheduled to be sentenced on Dec. 12, 2023 before U.S. District Court Judge George A. O’Toole Jr

Former Needham Police Officer Sentenced for Insider Trading Conspiracy (DOJ Release)
https://www.justice.gov/usao-ma/pr/former-needham-police-officer-sentenced-insider-trading-conspiracy
In the United States District Court for the District of Massachusetts, David Forte, 60, was convicted after a jury trial of one count of conspiracy to commit securities fraud and one count of securities fraud; and he was sentenced to one year of supervised release, with the first six months to be served in home confinement, and fined $25,000. As alleged in part in the DOJ Release:

Beginning in or around June 2016, Forte obtained material non-public information from his brother, who was a senior executive at Analog Devices, Inc. (Analog), a Massachusetts-based semiconductor company, about Analog’s planned acquisition of Linear Technology Corp. (Linear), a semiconductor company based in Milpitas, Calif. Forte passed the information to Younis and Manning and proposed that the two purchase Linear securities and share their trading profits with him. To avoid detection, Forte did not trade Linear securities in his own name, and he advised Younis not to buy Analog securities because of his brother’s role at the company. 

Over the course of the week leading up to the public announcement of the acquisition on July 26, 2016, Forte exchanged numerous phone calls with Younis and Manning, and Younis and Manning amassed Linear securities – sometimes trading within minutes of phone calls with Forte. After the announcement of the deal, which caused Linear’s share price to increase by 30 percent, Younis and Manning sold their Linear securities for a profit and later paid Forte a share of the money they made from trading on Forte’s stock tip. 

In June 2022, Younis was sentenced by U.S. Senior District Court Judge Rya W. Zobel to one month of home detention and two years of probation after pleading guilty to his role in the conspiracy. Manning pleaded guilty in October 2023 and is scheduled to be sentenced on Jan. 3, 2024.  

Bergen County Investment Advisor Indicted for Stealing Millions from Clients (DOJ Release)
https://www.justice.gov/usao-nj/pr/bergen-county-investment-advisor-indicted-stealing-millions-clients
In the United States District court for the District of New Jersey, an Indictment https://www.justice.gov/d9/2023-11/welsh.indictment.pdf was filed charging Kenneth A. Welsh with four counts of wire fraud and one count of investment advisor fraud. As alleged in part in the DOJ Release:

From July 2017 through March 2021, Welsh, while serving in his capacity as an investment advisor employed by a large brokerage firm, misappropriated at least $3 million from five clients. Welsh, who had been entrusted to manage client funds responsibly, instead perpetrated a scheme to defraud the five clients by diverting money from their brokerage accounts to accounts under his control.

SEC Obtains Final Judgment Against Former Mayor in Municipal Bond Offering Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25901
Without admitting or denying the allegations in a Complainthttps://www.sec.gov/files/litigation/complaints/2023/comp25901-breland.pdf filed in the United States District Court for the Western District of Louisiana, Vern A. Breland consented to the entry of a Final Judgment https://www.sec.gov/files/litigation/litreleases/2023/judg25901-breland.pdf, which enjoined him from future violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act, enjoined him from participating in future offerings of municipal securities and ordered him to pay a $35,000 civil penalty. Previously, the Court had entered a Final Judgment against defendants Aaron B. Fletcher and Twin Spires Financial LLC for their involvement with Breland in the same fraudulent bond offerings. As alleged in part in the SEC Release:

[I]n 2017 and 2018 the town of Sterlington, Louisiana issued two revenue bonds to finance the development of a water system and improvements to its existing sewer system.  As required by state law, Sterlington applied to the Louisiana State Bond Commission (SBC) for approval of the two offerings.  The SEC alleged that Sterlington submitted false financial projections, created by Fletcher and Twin Spires, with then-Mayor Breland’s active participation and approval, substantially overstating the number of historical and projected sewer customers in order to mislead the SBC as to the town’s ability to cover the debt service for the proposed bonds.  The SEC alleged the Town and Breland did not disclose to bond investors that SBC approval of the bonds was based on the false projections or that Breland had directed the misuse of more than $3 million from earlier bond offerings intended for sewer system updates to instead pay for sports complex improvements, town legal fees, and payroll.

SEC Charges New York Businessman with Fraud and Unregistered Sales of Securities to Investors Seeking Permanent Residency in the U.S. / NY-based immigration attorney and her firm also charged for role in unregistered sales (SEC Release)
https://www.sec.gov/news/press-release/2023-238
In the United States District Court for the Southern District of New York, the SEC filed a Complaint https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-238.pdf that charges Nadim Ahmed, NYC Green Transportation Group, LLC, and NuRide Transportation Group, LLC with violating the antifraud provisions. Additionally, the Complaint charges the three aforementioned Defendants plus Mehreen Shah a/k/a "Mona Shah," Shah's law firm, and three other entities associated with Ahmed and/or Shah with violating the registration provisions of the federal securities laws. As alleged in part in the SEC Release:

Under the EB-5 Immigrant Investor Program, investors are eligible for permanent residency status in the U.S. if they make a qualifying investment in a new commercial enterprise in the U.S. that creates a certain number of permanent full-time jobs for qualified U.S. workers. According to the SEC’s complaint, from approximately June 2014 through December 2018, Ahmed, NuRide and NYC Green falsely told NYC Green investors that NYC Green would be operated in a manner consistent with the requirements of the EB-5 visa program and that NYC Green’s principals had contributed $11 million to the company. Further, Ahmed, NuRide, and NYC Green allegedly put key revenue-generating contracts in NuRide’s name despite telling investors that NYC Green would be the operating transportation business. Ahmed also allegedly used one investor’s funds to pay a portion of a prior settlement between another one of his companies and the SEC.

In addition, from June 2014 through November 2022, Ahmed, NuRide, and NYC Green, along with Shah, her law firm, and three other entities associated with Ahmed and/or Shah, allegedly offered or sold unregistered securities, including to individuals residing in the United States, in three offerings, for which no exemption to the registration requirements was available.

According to the complaint, to date, none of the investors in the offerings has received unconditional permanent residency status or a return of their investment.

SEC Charges Kraken for Operating as an Unregistered Securities Exchange, Broker, Dealer, and Clearing Agency (SEC Release)
https://www.sec.gov/news/press-release/2023-237
In the United States District Court for the Northern District of California the SEC filed a Complaint https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-237.pdf that alleges that Payward Inc. and Payward Ventures Inc. ("Kraken") violated the registration provisions of the Securities Exchange Act of 1934. In February 2023, Kraken agreed to cease offering or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million. As alleged in part in the SEC Release:

[S]ince at least September 2018, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Kraken intertwines the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the Commission as required by law. Kraken’s alleged failure to register these functions has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.

Through its platform’s services, Kraken allegedly:

• • Provides a marketplace that brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact, and thus operates as an exchange;
  • Engages in the business of effecting securities transactions for the accounts of Kraken customers, and thus operates as a broker;
  • Engages in the business of buying and selling securities for its own account without an applicable exception, and thus operates as a dealer; and
  • Serves as an intermediary in settling transactions in crypto asset securities by Kraken customers, and acts as a securities depository, and thus operates as a clearing agency.

The SEC’s complaint also alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices present a range of risks for its customers. As alleged in the complaint, Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers.

SEC Charges Broker-Dealer and Two Registered Representatives with Violations of Regulation Best Interest for Excessive Trading in Customer Accounts (SEC Release)
https://www.sec.gov/enforce/34-98983-s
The SEC issued Orders settling charges against Laidlaw and Company (UK) Ltd. https://www.sec.gov/files/litigation/admin/2023/34-98984.pdf, a registered broker-dealer, and two of its registered representatives, Richard Michalski and Michael Murray https://www.sec.gov/files/litigation/admin/2023/34-98983.pdf, for recommending frequent in-and-out trades that placed the broker’s interest in generating commissions and fees ahead of the customers’ interest in making a profit. As alleged in part in the SEC Release:

[F]rom July 2020 through October 2021, Laidlaw, Michalski and Murray made a series of recommendations to retail customers without a reasonable basis to believe that the recommended transactions were not excessive and were in their customers’ best interests when taken together in light of the customers’ investment profiles, in violation of Regulation Best Interest. Laidlaw, Michalski and Murray failed to consider the impact of the costs generated by the frequency of the trading, and the level of costs associated with the trading meant that the customers in question needed to achieve high returns in order to break even. Laidlaw also failed to maintain and enforce policies designed to address and prevent violations of Regulation Best Interest, with procedures that did not provide sufficient guidance to supervisors and no method of ensuring that supervisors were taking actions to remedy violative conduct. 

In addition, the order against Laidlaw finds that, from December 2016 through December 2018, Laidlaw failed reasonably to supervise two additional registered representatives, who violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder with respect to customer accounts in which they recommended a strategy of in-and-out trading, which they had no reasonable basis to believe was suitable for any customers due to the high costs, in the form of commissions and fees, associated with the trading. The SEC’s order also finds that Laidlaw willfully violated Regulation Best Interest, Exchange Act Rule 15l-1(a)(1), as well as the Regulation’s Care Obligation (15l-1(a)(2)(ii)(C)) and Compliance Obligation (Rule 15l-1(a)(2)(iv)). Without admitting or denying the findings, Laidlaw agreed to cease and desist from future violations of these provisions, was censured; and agreed to pay $547,712.36 in disgorgement, $51,844.22 in prejudgment interest, and a civil monetary penalty of $223,328.

The SEC’s order against Michalski and Murray finds that they willfully violated Regulation Best Interest, Exchange Act Rule 15l-1(a)(1), as well as the Regulation’s Care Obligation (15l-1(a)(2)(ii)(C)). Without admitting or denying the findings, Michalski and Murray each agreed to cease and desist from future violations of these provisions and were censured. Michalski further agreed to pay disgorgement of $88,506, prejudgment interest of $4,260.55, and a civil monetary penalty of $44,253; and agreed to be suspended from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for a period of six months. Murray further agreed to pay disgorgement of $24,414.17, prejudgment interest of $1,143.91, and a civil monetary penalty of $20,000.

SEC Adopts Rules to Improve Clearing Agency Governance and Mitigate Conflicts of Interest (SEC Release)
https://www.sec.gov/news/press-release/2023-236
The SEC adopted new rules for clearing agencies to purportedly establish governance requirements regarding board composition, independent directors, nominating committees, and risk management committees; and, further, to require new policies and procedures regarding conflicts of interest, management of risks from relationships with service providers for core services, and a board obligation to consider stakeholder viewpoints. In part the SEC Release asserts that:

The rules improve the governance of registered clearing agencies by identifying certain responsibilities of the board, increasing transparency into board governance, and, more generally, improving the alignment of incentives among owners and participants of a registered clearing agency. In support of these objectives, the rules establish new requirements for board and committee composition, independent directors, management of conflicts of interest, and board oversight.

Statements on Clearing Agency Governance Rules
by SEC Chair and Commissioners

Bill Singer's Comment: An absolutely abysmal bit of hypocrisy spewing from Wall Street's federal regulator. Sure, implement all the rules you need to ensure that clearing agencies abide by ethical governance and avoid conflicts. I have no issue whatsoever with those laudable goals. On the other hand, when the hell will the SEC demand that Wall Street's self-regulator, the Financial Industry Regulatory Authority ("FINRA"), toe that same line? 

On September 6, 2023, FINRA declared the victories of two unopposed candidates in its Board of Governors elections; however, more than two months later, FINRA still declines to publish the tally of the votes cast for each candidate and, critically, fails to publish the tally of votes cast in "Abstention." "FINRA Announces Results of Governor Elections" (FINRA  / September 6, 2023)
https://www.finra.org/media-center/newsreleases/2023/finra-announces-results-governor-elections

FINRA's conduct seems more in the nature of a cover-up than the robust disclosure expected from a regulator: so much for high standards of corporate governance. Worse, no sitting FINRA Governor has spoken out against the organization's unacceptable failure to promptly disclose the actual votes in the 2023 election; but, in truth, such equivocation is all too characteristic of this lackluster Board.

FINRA's oft-voiced advocacy for ESG and diversity/inclusion and ethical corporate governance comes off as insincere and hollow when the self-regulatory-organization fails to timely release the actual vote tallies in its elections -- all the more so when a given election is the subject of a boycott and the two Board candidates ran unopposed. FINRA's duplicity is indefensible given this assertion in "Board Reaffirms FINRA’s Financial Guiding Principles; Receives Updates on Regulatory Operations" (Report From FINRA Board of Governors Meeting – September 2023 / September 26, 2023)
https://www.finra.org/media-center/newsreleases/2023/report-finra-board-governors-meeting-september-2023

FINRA’s Board of Governors met on September 13-14 in Philadelphia. In addition to continuing discussions around FINRA’s Regulatory Operations, the Board reaffirmed FINRA’s Financial Guiding Principles.

“Transparency around FINRA’s finances benefits everyone in our industry,” said FINRA Board Chair Eric Noll. “Through reaffirming the Financial Guiding Principles, the Board continues to provide clarity and direction on how FINRA can best fulfill its regulatory mandate.” . . .

Transparency? Transparency, Chair Noll -- seriously?? Where is the transparency, where is the clarity, what is the direction in your failure to fully disclose the vote tallies in your 2023 Board elections? And, like I asked atop this comment, where the hell is the SEC in terms of demanding that FINRA accept the same standards that is now being imposed on clearing agencies? See: Quantum Physics And FINRA's Inability To Tally The Votes Of Its Board Elections (BrokeAndBroker.com Blog / November 2, 2023)
https://www.brokeandbroker.com/7189/finra-election-quantum-physics/

SEC Settles Case Against Investment Adviser and its Principal Alleged to Have Engaged in a Fraudulent “Cherry-Picking” Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25894
Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the Eastern District of Pennsylvannia, Marguerite Cassandra Toroian and Bell Rock Capital, LLC agreed to the entry of a final judgment:

Toroian: (i) that permanently restrains and enjoins her from violating Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act, and from aiding and abetting an investment adviser’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder; (ii) ordering her to pay disgorgement of $883,597, plus prejudgment interest of $185,451; and (iii) ordering her to pay a penalty of $220,000.

Bell Rock: (i) that permanently restrains and enjoins it from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder; and (ii) ordering it to pay a penalty of $220,000.  The settlements are subject to court approval. 

As alleged in part in the SEC Release:

[F]rom at least January 1, 2011, through December 31, 2015, Toroian defrauded Bell Rock clients through a cherry-picking scheme.  Specifically, the SEC’s complaint alleged that Toroian placed trades through a master trading account and disproportionately allocated profitable trades to accounts belonging to herself and her family members, and disproportionately allocated unprofitable trades to many of Bell Rock’s clients. The complaint further alleged that Toroian made material misrepresentations to clients in Bell Rock’s Form ADV and other communications, including, for instance, that Bell Rock and its associated persons would always act in their clients’ best interest and not put their interests before the interests of clients. The complaint also alleged that Bell Rock failed to adopt and implement written policies and procedures reasonably designed to prevent cherry picking in violation of Section 206(4) the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-7 thereunder, and that Toroian aided and abetted Bell Rock’s failure.  

SEC Charges Algorithmic Trader Matthew Melton with Defrauding Investors Out of More Than $1.5 Million (SEC Release)
https://www.sec.gov/litigation/litreleases/lr-25893
In the United States District Court for the Southern District of New York, the SEC filed a Complaint https://www.sec.gov/files/litigation/complaints/2023/comp25893.pdf that charges The SEC’s complaint charges Matthew Melton with violations of the federal securities laws. A parallel criminal action was filed against Melton. In part the SEC Release alleges that:

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Melton.

[B]etween April 1, 2018, and October 31, 2020, Melton raised more than $3.4 million from at least 23 investors in Puerto Rico and elsewhere who shared an affinity for outdoor activities. Melton allegedly asserted that he would profitably trade stock index futures through the use of his Price Physics trading algorithm, which, he claimed, had generated consistent returns of 12 percent per month. Contrary to these claims, the complaint alleges, Melton’s trading was consistently unprofitable. According to the complaint, to invest with Melton, investors signed a loan agreement or promissory note and sent funds directly to Melton’s personal bank accounts, where the funds were commingled with other investor funds. As alleged in the complaint, rather than use the investors’ money as promised, Melton misappropriated more than $1.5 million of investor funds to make Ponzi-like payments to other investors and to pay for his personal expenses, such as travel, sailing, and mortgage payments.

Charter Communications to Pay $25 Million Penalty for Stock Buyback Controls Violations (SEC Release)
https://www.sec.gov/news/press-release/2023-235
Without admitting or denying the findings in an SEC Order https://www.sec.gov/files/litigation/admin/2023/34-98923.pdf that it had violated Section 13(b)(2)(B) of the Exchange Act,  Charter Communications Inc. agreed to cease-and-desist from further violations of the section and pay a civil penalty of $25 million. As alleged in part in the SEC Release:

[C]harter’s board authorized company personnel to conduct certain buybacks using trading plans that conform to SEC Rule 10b5-1. Rule 10b5-1 offers protection to companies and individuals from insider trading liability as long as they meet the conditions of the rule, including a requirement that they not retain the ability to change the planned purchases or sales after they adopt the trading plan. However, the SEC’s order finds that, from 2017 to 2021, Charter used plans that included “accordion” provisions, which company personnel described as giving Charter flexibility, that allowed Charter to change the total dollar amounts available to buy back stock and to change the timing of buybacks after the plans took effect. According to the SEC’s order, because Charter’s trading plans did not meet the conditions of Rule 10b5-1, the company’s buybacks did not comport with the board’s authorizations. The SEC’s order finds that Charter included accordion provisions in nine separate trading plans over the four-year period.

The SEC’s order finds that Charter’s repeated use of trading plans that did not conform to Rule 10b5-1 was the result of the company’s insufficient internal accounting controls, in particular, its absence of reasonably designed controls to analyze whether the discretion the accordion provisions gave executives to alter the company’s trading was consistent with the board’s authorizations.

The SEC’s Swiss Army Statute: Statement on Charter Communications, Inc. by SEC Commissioner Hester M. Peirce and SEC Commissioner Mark T. Uyeda
https://www.sec.gov/news/statement/peirce-uyeda-statement-charter-communications-111423

The classic Swiss Army Knife began its life as an ingenious multi-use tool designed by Karl Elsener, a Swiss cutler.[1] The early versions started with basic tools useful to soldiers—a blade, a can opener, a screwdriver, and a reamer—and soon expanded to include a second blade and a corkscrew. Over time, the knife has evolved to incorporate myriad attachments and has expanded beyond its martial beginnings to offer versions for different users.[2] The Commission in recent years has taken to using Securities Exchange Act Section 13(b)(2)(B) [3] as its own Swiss Army statute—a multi-use tool handy for compelling companies to adopt and adhere to policies and procedures that the Commission deems good corporate practice. We do not have the authority to tell companies how to run themselves, but we now routinely use Section 13(b)(2)(B) to do just that. The settlement with Charter Communications, Inc. is the latest example of the Commission’s unmooring of Section 13(b)(2)(B) from its statutory text and context to extend the reach of its jurisdiction.

According to the Commission’s Order Instituting Proceedings, Charter, since 2016, has bought back more than $70 billion of its stock from shareholders.[4] The Order acknowledges that “Charter had controls designed to obtain share repurchase authorization from the Board, to stay within the Board’s financial parameters and guidelines, and to confirm that the buyback transactions were accurately reflected in its accounts and ledgers.” Indeed, the Order further acknowledges that “Charter personnel requested authorization from the board of Directors to engage in buybacks within certain financial parameters and guidelines.” Notwithstanding its functioning accounting controls, Charter ran afoul of the law because “the Board’s authorizations [to engage in buybacks] were predicated on the company’s use of trading plans that conform to Commission Rule 10b5-1” and “Charter failed to implement a reasonable process to ensure that its trading plans were adequately reviewed for conformity with the requirements of Rule 10b5-1 prior to adoption.”[5]

The fundamental flaw in the Order is its failure to distinguish between internal accounting controls and other types of internal controls. Section 13(b)(2)(B)(i) requires Charter to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization.” (emphasis added). The Order recites no facts suggesting that Charter’s management used more funds than the board authorized for share buybacks, that management purchased shares at a quantity or time inconsistent with the board’s authorization, or that management failed to properly record the expenditure of corporate funds and consequent purchase of shares on Charter’s books. Instead, the Order faults Charter because it lacked “reasonably designed controls to analyze” its trading plans for compliance with Rule 10b5-1. Controls designed to answer a legal question—compliance with the regulatory conditions necessary to qualify for an affirmative defense—are simply not internal accounting controls within Section 13(b)(2)(B)’s scope.

At bottom, this case is simply the latest application of the unsupportable and ill-considered interpretation of Section 13(b)(2)(B) that the Commission advanced more than three years ago in Andeavor, LLC.[6] The Commission’s attempts to convert an internal accounting controls provision into an ever-unfolding utility tool that magically converts every corporate activity into something the Commission regulates are inappropriate extensions of the agency’s authority. We respectfully dissent.

[1] Swiss Army knife, https://www.britannica.com/technology/Swiss-Army-knife (last visited Nov. 12, 2023); see also https://www.victorinox.com/us/en/History/cms/history (last visited Nov. 12, 2023).

[2] See https://www.victorinox.com/global/en/Products/Swiss-Army-Knives/Medium-Pocket-Knives/c/SAK_MediumPocketKnives?ScrollPosition=0&maxResults=30 (last visited Nov. 12, 2023).

[3] 15 U.S.C. § 78m(b)(2)(B).

[4] Charter Communications, Inc., Rel. No. 34-98923 (Nov. 14, 2023).

[5] The Order also states that Charter’s “trading plans did not satisfy the requirements of Rule 10b5-1.” Charter’s failure “to implement a reasonable process to ensure” that its trading plans met Rule 10b5-1’s requirements is independent from the question of whether Charter’s trading plans did or did not meet the conditions for Rule 10b5-1’s affirmative defense to liability under Section 10(b) and Rule 10b-5 for illegal insider trading. The Order does not charge violations of Section 10(b) or Rule 10b-5.

[6] Statement of Commissioners Hester M. Peirce and Elad L. Roisman—Andeavor, LLC, available at https://www.sec.gov/news/public-statement/peirce-roisman-andeavor-2020-11-13 (last visited Nov. 12, 2023); see also Andeavor, LLC, Rel. No. 34-90208, 2020 WL 6112215 (Oct. 20, 2020) (3-2 decision).

CFTC

Binance Former Chief Compliance Officer, Samuel Lim, Agrees to Pay $1.5 Million for Willfully Evading U.S. Law, and Aiding and Abetting the Illegal Operation of a Digital Asset Derivatives Exchange, and Other Violations  (CFTC Release)

Binance and Its CEO, Changpeng Zhao, Agree to Pay $2.85 Billion for Willfully Evading U.S. Law, Illegally Operating a Digital Asset Derivatives Exchange, and Other Violations  (CFTC Release)

Federal Court Orders Illinois Man and His Entities to Pay Over $20 Million in Restitution and Penalties for Commodity Pool Ponzi Scheme https://www.cftc.gov/PressRoom/PressReleases/8823-23
The United States District Court for the Northern District of Illinois entered an Order of Final Judgment https://www.cftc.gov/media/9746/enftycheassetmanagementorder110823/download against Phillip Galles, Tyche Asset Management LLC, Tyche Master Fund Ltd, Tyche Asset Trade LLC, Tyche Offshore Fund Ltd., Tyche Onshore Fund LP, Tyche PML Master Fund Ltd., Tyche PML Onshore Fund LP, Tyche Onshore Fund GP LLC, and Tyche Asset Trade LLC. The Order requires Galles and the Tyche entities to pay $5,327,173 in restitution and imposes a $15,981,519 penalty. The order also imposes a permanent injunction against Galles and the Tyche entities, barring them from, among other actions, trading on CFTC-regulated markets and from engaging in conduct in violation of the CEA as alleged in the complaint. As alleged in part in the CFTC Release:

The order finds Galles falsely claimed to be a managed futures hedge-fund magnate with billions of dollars under management at Tyche Asset Management LLC and its affiliated entities. Galles claimed Tyche achieved extraordinary rates of return of more than 200% annually in recent years using sophisticated technology and strategies to trade commodity futures and options on CFTC-regulated markets.

However, Galles misappropriated participant funds and operated a Ponzi scheme. Galles and Tyche used very little participant funds to place trades, and instead Galles used the money to fund his lavish lifestyle and to promote his fabricated image as a hedge fund tycoon. The order finds Galles and the Tyche entities defrauded 65 people who suffered $5,327,173 in losses.

The order also finds Galles and Tyche lied to the NFA in filings certifying Tyche was not actively soliciting or accepting funds from customers. In April 2023, Galles repeated the same lies to NFA examiners when they asked him about Tyche’s operations.

FINRA

FINRA Fines and Suspends Rep for Willful Violations of Reg BI
In the Matter of Troy Allen Orlando, Respondent (FINRA AWC 2019060753505)
https://www.finra.org/sites/default/files/fda_documents/2019060753505
%20Troy%20Allen%20Orlando%20CRD%206055474%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, Troy Allen Orlando submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Troy Allen Orlando was first registered in 2012 and from November 2015 through July 2019, he was registered with Spartan Capital Securities, LLC, and, thereafter, from July 2019 to December 2020 with Worden Capital Management LLC. In accordance with the terms of the AWC, FINRA imposed upon Orlando a 20-month suspension from associating with any FINRA member in all capacities and $58,082.50 in restitution. No fine was imposed by FINRA based upon Orlando's "limited ability to pay.".  The AWC includes this admonition:

Respondent understands that this settlement includes a finding that he willfully violated Rule 15/-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA 's By-Laws, this makes him subject to a statutory disqualification with respect to
association with a member. 

As alleged in part in the "Overview" of the AWC:

From January 2018 through November 2020, while registered with FINRA through Spartan and Worden, Respondent recommended a series of trades in five customers' accounts that were excessive, unsuitable, and not in the customers· best interest. By this conduct, Respondent willfully violated the Best Interest Obligation under Rule 15I-1 of the Securities Exchange Act of 1934 (Regulation BI) (for the period June 30, 2020, through November 2020) and violated FINRA Rule 2111 (for the period January 2018 through June 29, 2020) and FINRA Rule 2010. 

FINRA Fines and Suspends Rep for Customers' Signatures
In the Matter of Frenise L. Mann, Respondent (FINRA AWC  2021072888301)
https://www.finra.org/sites/default/files/fda_documents/2021072888301
%20Frenise%20L.%20Mann%20CRD%206972542%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, Frenise L. Mann submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Frenise L. Mann was first registered in 2019 with Thrivent Investment Management Inc. In accordance with the terms of the AWC, FINRA imposed upon Mann a $7,500 fine and a six-month suspension from associating with any FINRA member  in all capacities. As alleged in part in the "Overview" of the AWC:

At various points between April 2019 and August 2021, Mann electronically signed the names of eight customers, without the customers' prior permissions, on twelve forms; electronically signed the names of approximately 70 customers, with the customers' prior permission, on approximately 110 forms; inaccurately recorded her own address as that of a customer on an account application form; and copied and reused ink signatures of three customers on four forms with the customers' prior permission. Therefore, Mann violated FINRA Rule 2010. Her actions also caused firm records to be inaccurate. Therefore, Mann also violated FINRA Rules 4511 and 2010.

Separately, in December 2019, Mann impersonated a customer in a phone call to Thrivent in violation of FINRA Rule 2010. 

FINRA Fines and Suspends Rep for Private Securities Transactions
In the Matter of Sara Qazi, Respondent (FINRA AWC 2021070719701)
https://www.finra.org/sites/default/files/fda_documents/2021070719701
%20Sara%20Qazi%20CRD%20%204118177%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, Sara Qazi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Sara Qazi was first registered in 2000 and in September 2009, she became registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Qazi a $15,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the "Overview" of the AWC:

From March through June 2020, Qazi participated in a private securities transaction in which a firm customer purchased $250,000 of preferred stock in a healthcare company (Company A). Qazi did not provide written notice to Morgan Stanley prior to participating in the private securities transaction, and Morgan Stanley did not approve Qazi's participation in the transaction. Therefore, Qazi violated FINRA Rules 3280 and 2010. 

In addition, from June through July 2020, Qazi distributed a written presentation prepared by Company A to five individuals, including one Morgan Stanley customer, which included information regarding a private offering by Company A. The presentation did not disclose any of the risks associated with an investment in Company A's private offering. In June 2020, Qazi also distributed a financial model prepared by Company A to a Morgan Stanley customer, which contained financial forecasts but did not disclose any risks, limitations, or conditions that could impede the achievement of such forecasts. Therefore, Qazi violated FINRA Rules 2210(d)(1)(A), 2210(d)(1)(F), and 2010.

FINRA Fines and Suspends Rep for Sharing Commissions
In the Matter of David R. Stuart, Respondent (FINRA AWC 2023078996901)
https://www.finra.org/sites/default/files/fda_documents/2023078996901
%20David%20R.%20Stuart%20CRD%20%20857819%20AWCgg.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, David R. Stuart submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that David R. Stuart was first registered in 1978, and from 1998 to June 2023, he was registered with Lincoln Financial Advisors Corporation. In accordance with the terms of the AWC, FINRA imposed upon Stuart a $7,500 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From January 2018 to April 2023, Stuart shared commissions with an unregistered person who referred at least 31 customers to Stuart for the purpose of opening brokerage accounts and effecting securities transactions. Additionally, Stuart and the unregistered person jointly met with at least one customer to discuss investments. In connection with transactions he effectuated in the accounts of the customers the unregistered person had referred, Stuart paid approximately $148,265 in commissions from those transactions to the unregistered person between January 2018 and April 2023. In 2007, FINRA barred the unregistered person from associating with any FINRA member in any capacity, and Stuart was aware that the individual was not registered. From 2018 to 2022, Stuart also attested on annual compliance questionnaires that he understood that he was prohibited from directly paying securities or investment advisory compensation to unregistered individuals and falsely attested that he was not engaged in paying referral fees to anyone outside of Lincoln Financial.

Therefore, Stuart violated FINRA Rules 2040 and 2010. 

FINRA Censures and Fines Wedbush Securities Inc. for Supervision
In the Matter of Wedbush Securities Inc., Respondent (FINRA AWC 2021070332301)
https://www.finra.org/sites/default/files/fda_documents/2021070332301
%20Wedbush%20Securities%20Inc.%20CRD%20877
%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, Wedbush Securities Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Wedbush Securities Inc. has been a FINRA member firm since 1955 with about 530 registered representatives at 70 branches. In accordance with the terms of the AWC, FINRA imposed upon Wedbush Securities Inc. a Censure, $350,000 fine, and an undertaking to certify compliance with the supervisory issues cited. As alleged in part in the "Overview" portion of the AWC:

Between January 27, 2021, and February 4, 2021, Wedbush received and approved four fraudulent wire transfer requests from a hacker without taking reasonable steps to confirm whether the requests were genuine. The hacker, who had gained access to an email account belonging to a registered representative at one of Wedbush's correspondent firms, requested that Wedbush send four wires totalling more than $6.6 million dollars from a joint brokerage account held by two customers to two third parties. In approving the requests, Wedbush failed to reasonably investigate red flags that the wire requests were fraudulent, including that the wires were for large and increasing amounts in a short period of time and the wires were being sent to third-party recipients (both of whom were located in foreign countries) who lacked any connection to the customers. Wedbush did not take reasonable steps to confirm that the wire requests were genuine, such as contacting an authorized representative of the correspondent firm by telephone. Instead, the firm approved the four wires after only sending questions to the hacker who was using the compromised email account.

After Wedbush's correspondent firm notified it of the fraud, Wedbush and the correspondent firm reimbursed the customers for their losses. In February 2021, Wedbush revised its WSPs concerning processing letters of authorization, including requiring firm personnel to call a "recognized person" at a correspondent firm using a known telephone number prior to approving wires over a certain amount.

Due to the firm's failure to reasonably surveil the transmittals of customer funds to third parties, the firm violated FINRA Rules 3110 and 2010. 

FINRA Fines and Suspends Rep for Outside Brokerage Account
In the Matter of Robert Joseph DeHayes, Respondent (FINRA AWC 2021073486701)
https://www.finra.org/sites/default/files/fda_documents/2021073486701
%20Robert%20Joseph%20DeHayes%20CRD%202638059
%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, Robert Joseph DeHayes submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Robert Joseph DeHayes was first registered in 1995, and by 2008, he was registered with Wells Fargo Clearing Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon DeHayes a $10,000 fine and a six-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On January 26, 2012, Wells Fargo reduced the level of options trading permitted in the accounts that DeHayes maintained for himself and his wife at the firm. On the same day, DeHayes opened an outside brokerage account at another member firm in his wife’s maiden name. Over the course of the next nine years, DeHayes traded securities in the outside account. His activity included the types of options trading that Wells Fargo no longer permitted in his accounts at the firm and additional options investing that Wells Fargo prohibited. DeHayes did not notify Wells Fargo of his interest in the outside account and failed to obtain Wells Fargo’s prior written consent before opening the outside account. DeHayes also failed to notify the executing firm of his association with Wells Fargo.

Therefore, DeHayes violated NASD Rule 3050 (for conduct prior to April 3, 2017), FINRA Rule 3210 (for conduct on and after April 3, 2017) and FINRA Rule 2010. 

FINRA Fines and Suspends Rep for Adding Information to Documents
In the Matter of John Ginsburg, Respondent (FINRA AWC 2020068747501)
https://www.finra.org/sites/default/files/fda_documents/2020068747501
%20John%20Ginsburg%20CRD%203022789%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, John Ginsburg submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that John Ginsburg was first registered in 1998, and by 2014, he was registered with Principal Securities, Inc. In accordance with the terms of the AWC, FINRA imposed upon Ginsburg a $5,000 fine and a one-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From January 2019 through October 2020, Ginsburg falsified 19 firm documents for 18 customers by obtaining the customers’ signatures on blank or incomplete forms. After the customers executed the blank or incomplete forms, Ginsburg added missing information without having the customers re-execute the forms and submitted the forms to Principal for processing. The documents, which were maintained in the firm’s files, included mutual fund switch forms, account rollover analysis forms, and transfer of assets forms relating to the customers’ brokerage accounts. The missing information included material information regarding proposed investments and the costs and fees associated with those investments.

By adding information to the signed customer forms, Respondent violated FINRA Rule 2010. By causing Principal to maintain inaccurate books and records, Respondent violated FINRA Rules 4511 and 2010.  

FINRA Censures and Fines H.C. Wainwright & Co for Net Capital Calculations
In the Matter of H.C. Wainwright & Co., LLC, Respondent (FINRA AWC 2022075458801)
https://www.finra.org/sites/default/files/fda_documents/2022075458801
%20H.C.%20Wainwright%20%26%20Co.%2C%20LLC%20CRD%20375%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, H.C. Wainwright & Co., LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that H.C. Wainwright & Co., LLC has been a FINRA member firm since 1936 with about 86 registered representatives at one branch. In accordance with the terms of the AWC, FINRA imposed upon H.C. Wainwright & Co., LLC a Censure and $200,000 fine. As alleged in part in the "Overview" portion of the AWC:

From December 2020 through March 2022, H.C. Wainwright served as a guarantor on loans ranging from $50 million to $175 million taken by its parent company in connection with an employee stock ownership transaction. The firm failed to take an appropriate net capital charge for these loans, resulting in a net capital deficiency for 14 out of 16 months with the largest deficiency being $164,922,628 and an average deficiency of $95,931,666. During the relevant period, the firm also made capital withdrawals of $250,039,448. By conducting a securities business and making capital withdrawals while in net capital deficiency, the firm violated Section 15(c) of the Exchange Act of 1934, Exchange Act Rule 15c3-1, and FINRA Rule 2010.

As a result of the firm’s failure to include the amounts of the loans in its net capital calculations, H.C. Wainwright also filed 16 inaccurate Finance and Operational Combined Uniform Single (FOCUS) Reports in violation of Section 15(c) of the Exchange Act, Exchange Act Rule 17a-5, and FINRA Rule 2010. Accordingly, it also failed to create and preserve accurate books and records in violation of Section 17(a) of the Exchange Act and Exchange Act Rule 17a-3, as well as FINRA Rules 4511 and 2010. Finally, the firm failed to provide written notice to FINRA prior to agreeing to serve as guarantor to the loans in violation of FINRA Rules 4150(a) and 2010. 

FINRA Fines and Suspends Rep for Unauthorized Transactions and Discretion
In the Matter of Jilena Yuen-Han Mok, Respondent (FINRA AWC 2022075150801)
https://www.finra.org/sites/default/files/fda_documents/2022075150801
%20Jilena%20Yuen-Mok%20CRD%206115674%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, Jilena Yuen-Han Mok submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jilena Yuen-Han Mok was first registered in 2012 with Edward D. Jones & Co., L.P.. In accordance with the terms of the AWC, FINRA imposed upon Mok a $10,000 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the "Overview" of the AWC:

On April 25, 2022, while associated with Edward Jones, Mok effected eleven unauthorized transactions in a customer account in violation of FINRA Rule 2010. Also, between November 2020 and October 2022, Mok exercised discretionary authority with respect to 108 trades in nine other customers' accounts without obtaining prior written authorization from the customers and without having the accounts accepted as discretionary by Edward Jones, in violation of FINRA Rules 3260(b) and 2010. 

FINRA Fines and Suspends Rep for Acting as Fiduciary
In the Matter of Royal Gregory Fisher, Respondent (FINRA AWC 2021071152401)
https://www.finra.org/sites/default/files/fda_documents/2021071152401
%20Royal%20Gregory%20Fisher%20CRD%203230753%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, Royal Gregory Fisher submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Royal Gregory Fisher entered the industry in 1999, and from 2008 to April 2021, he was registered with SagePoint Financial, Inc. In accordance with the terms of the AWC, FINRA imposed upon Fisher a $5,000 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Fisher circumvented these policies when he acted in fiduciary capacities on behalf of, and accepted being named a beneficiary by a SagePoint customer to whom he was not related. In October 2015, the firm customer granted Fisher power of attorney and named him the first successor trustee of the customer’s revocable living trust. The customer also named Fisher as a ten percent beneficiary of the trust, such that Fisher stood to inherit over $100,000. After the customer’s death in November 2020, Fisher became the primary trustee of the trust and the executor of the customer’s estate.

Fisher did not disclose any of these designations to the firm.

Therefore, Fisher violated FINRA Rule 2010.

FINRA Censures and Fines Haywood Securities (USA) Inc. for Reg BI
In the Matter of Haywood Securities (USA) Inc., Respondent (FINRA AWC 2019061852801)
https://www.finra.org/sites/default/files/fda_documents/2019061852801
%20Haywood%20Securities%20%28USA%29%20Inc
.%20CRD%2042072%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, Haywood Securities (USA) Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Haywood Securities (USA) Inc. has been a FINRA member firm since 1997 with about 106 registered representatives at three branches in Canada. In accordance with the terms of the AWC, FINRA imposed upon Haywood Securities (USA) Inc.a Censure, $175,000 fine, and an undertaking to certify compliance with the Regulation BI issues cited. As alleged in part in the "Overview" portion of the AWC:

From September 2014 through the present, Haywood USA recommended 134 sales totaling almost $11 million of 53 different private placements to U.S. customers without conducting reasonable due diligence of the issuers and the offerings. Therefore, from September 2014 until June 30, 2020, the firm failed to establish, maintain, and enforce a supervisory system, reasonably designed to achieve compliance with FINRA Rule 2111, in violation of FINRA Rules 3110 and 2010 and NASO Rule 3010.2 From June 30, 2020, to the present, the firm failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with Regulation Best Interest (Reg BI), in violation of FINRA Rules 3110 and 2010.

In addition, from September 2014 to February 2023, Haywood USA failed to file offering documents with FINRA in connection with 236 Canadian private placement offerings in violation of FIN RA Rules 5123 and 2010. 

FINRA Censures and Fines Puma Capital LLC for Reg NMS Trade-Throughs
In the Matter of Puma Capital LLC, Respondent (FINRA AWC 2018060369501)
https://www.finra.org/sites/default/files/fda_documents/2018060369501
%20Puma%20Capital%2C%20LLC%20CRD%20146744%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, Puma Capital LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Puma Capital LLC has been a FINRA member firm since 2008 with about 20 registered representatives at three branches in Canada. In accordance with the terms of the AWC, FINRA imposed upon Puma Capital LLC.a Censure and $100,000 fine. As alleged in part in the "Overview" portion of the AWC:

Between April 2018 and November 2021, the firm failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs of protected quotations in NMS securities that do not fall within an exception set forth in Rule 611(b), and , if relying on such an exception, reasonably designed to assure compliance with the terms of the exception. In addition, the firm failed to conduct regular surveillance to ascertain the effectiveness of its Rule 611 compliance program and to take prompt action to remedy any deficiencies. the firm's Rule 611 policies and procedures did not include a process to determine whether intermarket sweep[ orders (ISOs) that the firm was directing to specific i exchanges were received by and executed on those exchanges. The firm failed to include such a process despite being on notice that its order management system had experienced coding problems in the past that prevent the firm's ISOs from reaching their intended destination. As a result, the firm failed to detect and remediate timely approximately 920 trade-throughs.

Through this conduct, Respondent violated Rule 611(a) of Regulation NMS and FINRA Rules 3110 and 2010.

FINRA Suspends Rep for Willful Failure to Disclose Felony Charge
In the Matter of Fedelyne Cemoin, Respondent (FINRA AWC 2023077891101)
https://www.finra.org/sites/default/files/fda_documents/2023077891101
%20Fedelyne%20Cemoin%20CRD%206430066%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, Fedelyne Cemoin submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Fedelyne Cemoin was first registered in 2015 with PFS Investments Inc. In accordance with the terms of the AWC, FINRA imposed upon Cemoin a four month suspension. No fine was imposed in consideration of Cemoin's financial condition. The AWC includes this acknowledgement:

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

As alleged in part in the AWC:

In October 2018, while associated with PFS Investments, Cemoin was charged with felony public assistance fraud. Cemoin received a notice of arraignment on November 9, 2018. Cemoin knew that she had been charged with a felony, but she did not amend her Form U4 to disclose the felony charge within 30 days of learning of it. In fact, Cemoin did not amend her Form U4 to disclose the felony charge at any point prior to resigning from PFS Investments in December 2022.

In addition, while associated with PFS Investments, Cemoin submitted to the firm five compliance questionnaires that falsely stated that she had not been charged with any felony.

By willfully failing to disclose the felony charge on her Form U4, Cemoin violated Article V, Section 2(c) of FINRA’s By-Laws and FINRA Rules 1122 and 2010. 

FINRA Fines and Suspends Rep for Mismarking Order Tickets as Unsolicited
In the Matter of Robert W. Clayton, Jr., Respondent (FINRA AWC 2023079976201)
https://www.finra.org/sites/default/files/fda_documents/2023079976201
%20Robert%20W.%20Clayton%2C%20Jr.%20CRD%
202598586%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, Robert W. Clayton, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Robert W. Clayton, Jr. was first registered in 1996, and by 2018, he was registered with The Investment Center. In accordance with the terms of the AWC, FINRA imposed upon Clayton 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:

Between September 2020 and August 2021, Clayton mismarked 625 order tickets as unsolicited when he had solicited the trades. Clayton's mismarking of these order tickets caused The Investment Center to make and preserve inaccurate books and records with respect to these trades in violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.

Therefore, Clayton violated FINRA Rules 4511 and 2010.

FINRA Fines and Suspends Rep for Outside Securities Account
In the Matter of John Roddy Hughes, Respondent (FINRA AWC 2021073087601)
https://www.finra.org/sites/default/files/fda_documents/2021073087601
%20John%20Roddy%20Hughes%20CRD%201895797%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, John Roddy Hughes submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that John Roddy Hughes was first registered in 1992 with MD Global Partners, LLC. In accordance with the terms of the AWC, FINRA imposed upon Hughes a $2,500 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On March 17, 2021, while he was associated with MD Global Partners, Hughes opened a securities account in his own name at another FINRA member firm. Hughes did not disclose his association with MD Global Partners to the member firm where he held the outside securities account, nor did Hughes seek written consent from MD Global Partners before opening this account, or at any other time, including on his 2021 annual compliance attestation.

Therefore, Hughes violated FINRA Rules 3210 and 2010.