Greyline Insights – Q3 2019 « Greyline Partners, LLC

Greyline Insights – Q3 2019

In this Issue

The first three quarters of 2019 have been a particularly busy time for regulators and, by extension, to compliance professionals. Enforcement and guidance updates continue to flow from the SEC, adjusting how we do compliance in the day to day. But to us, the most interesting development of 2019 is the agency’s landmark rulemaking. In addition to Regulation Best Interest/Form CRS finalized in June, the SEC has now proposed to overhaul its Advertising and Cash Solicitation Rules. While the proposal is positioned as modernizing these rules, which it certainly does, these amendments will have a substantive impact on investment advisers. As to advertising, the proposal: (1) adds specific prohibitions in presenting performance numbers, absent certain disclosures; (2) permits testimonials with a specified disclosure; and (3) includes significantly more detail to the prohibition on misleading statements. Notably, the proposal also requires additional disclosure on Form ADV regarding the adviser’s advertising practices. The most significant changes to the Cash Solicitation Rule are: (1) including non-cash compensation; and (2) expanding the requirements to soliciting investors in private funds. (We will be addressing the new rule in more detail in a separate blog post and email update.)

The NFA, always consistent and incremental in its regulation, has issued: an amendment to its Interpretive Notice on cybersecurity, a new Interpretive Notice on CPO internal controls and established proficiency requirements for swap dealers. The first two expand on NFA expectations that have been around for years. However, we recommend that all firms revisit them as they approach a new year of compliance. Two important takeaways on the cybersecurity front are: (1) adding a cybersecurity section to the Self-Examination Questionnaire; and (2) a notice requirement for breaches that must also be reported to another regulator, such as a state. CPO internal controls have long been an examination priority. However, this notice states in detail the elements of effective internal controls for the first time; it is essentially a roadmap of what the staff looks for in exams. Lastly, swap dealer regulation is an emerging area, so it is not surprising to see proficiency requirements. Unlike the series exams, the Swap Dealer proficiency requirements can be met on one’s desktop, with training modules and tests built into the system. Mark your calendars for January 31, 2020, when the system will go live, and January 2021, when all of your APs must satisfy the requirements.

On behalf of the Greyline team, we wish you all happy holidays!

Jennifer Dickinson
Partner, Greyline

Regulatory Updates

SEC Charges Former CEO of Silicon Valley Startup With Defrauding Investors

On July 1, the Securities and Exchange Commission (“SEC”) charged Massachusetts-based Fieldstone Financial Management Group LLC (“Fieldstone”) and its principal, Kristofor Behn, with defrauding clients by failing to disclose conflicts of interest in certain financial recommendations. Between 2014 and 2016, approximately 40 Fieldstone clients invested more than $7 million in securities issued by affiliates of Oregon-based Aequitas Management LLC (“Aequitas”), itself charged with defrauding investors in 2016. The SEC found that Behn and Fieldstone failed to disclose that Aequitas provided Fieldstone with both a $1.5 million loan and access to a $2 million line of credit. Under the terms of the agreements Behn and Fieldstone had an incentive to recommend Aequitas investments to reduce their debt. This conflict was not disclosed to Fieldstone’s clients and when an investor wanted more information about the relationship, Behn stated that “Aequitas is simply a private fund and Fieldstone has no relationship beyond making their notes available.” Behn was also found to have fraudulently induced a client to invest $1 million in Fieldstone, then took half of that to pay off personal taxes and make other payments to himself. Fieldstone and Behn must pay disgorgement and prejudgment interest of $1,047,971 and a $275,000 penalty, Fieldstone will be censured, and Behn has been barred from the securities industry.

Summit Brokerage Services Ordered to Pay $550,000+ to Customers Whose Accounts Were Excessively Traded

On July 2, the Financial Industry Regulatory Authority (“FINRA”) announced findings against Summit Brokerage Services (“Summit”) in connection to five years of excessively trading customer accounts, carried out by a former registered representative of the firm who was previously barred by FINRA. FINRA found that from January 2012 through March 2017, Summit had certain trade alerts in place regarding portfolio turnover and cost to equity ratios, but these alerts were not fed into the blotter review. As such, many alerts were not reviewed by compliance. One representative in particular, identified as “CJ,” excessively traded securities in 14 customers’ accounts, generating more than 150 alerts that no one at Summit reviewed. One example provided: CJ placed 533 trades for a retired customer over a three-year period, resulting in $171,000 in commissions. Summit was sanctioned a total amount exceeding $800,000 for its supervisory failures, including approximately $558,000 in restitution to customers.

FINRA, Division of Trading and Markets Issue Joint Statement on Broker-Dealer Custody of Digital Asset Securities

On July 8, FINRA (the “Staffs”) and the Division of Trading and Markets (the “Division”) released a statement to articulate various considerations relevant to questions about the potential intermediation (including custody) of digital asset securities and transactions. For instance, entities seeking to participate in digital asset securities must comply with relevant laws and rules, such as the Customer Protection Rule, which safeguards customer securities and funds held by a broker-dealer. The statement also discusses broker-dealer activities involving digital asset securities that would not involve the broker-dealer engaging in custody functions, as well as financial reporting rules, control location applications and more. Likewise, there are key factors to consider regarding custody and custodial practices for digital assets. Please read the full list of considerations at the link provided below.

CFTC Staff Issues Advisory Clarifying $50 Million Initial Margin Threshold and Documentation Requirements

On July 9, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued an advisory to clarify rules governing uncleared swap margin rules. Specifically, the commission says swap dealers subject to the CFTC Margin Rule are not required to provide documentation governing posting, collection and custody of initial margin until the initial margin threshold exceeds $50 million. DSIO Director Mark Kulkin stated that “The documentation requirements may impose a heavy burden on Phase 5 entities coming into scope in September 2020.” The advisory was issued in light of a statement by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions with respect to internationally agreed-upon margin requirements. DSIO does say, however, that while documentation is not required below $50 million, it expects that CFTC-regulated swap dealers will have appropriate risk management systems in place and act quickly to ensure compliance as their amounts near the $50 million threshold.

Read More: https://www.cftc.gov/csl/19-16/download (PDF)

SEC Charges Accountant, Friend in $6.2 Million Insider Trading Scheme

On July 10, the SEC filed insider trading charges against Martha Patricia Bustos, formerly an accountant at Illumina (ILMN), and close friend Donald Blakstad, alleging that they traded ILMN shares using tips ahead of confidential revenue information releases. The individuals utilized near-expiration options contracts in order to earn significant trading profits. According to the filing, Bustos allegedly tipped Blakstad ahead of four quarterly performance announcements between April 2016 and July 2018, in exchange for “extravagant” gifts. This included an all-expense paid trip for Bustos and her friend to New York City where they stayed in high-end hotels and ate at five-star restaurants. The SEC uncovered the alleged scheme, which generated profits of more than $6.2 million, by using “some of [its] latest advanced software to analyze trading data, as well as traditional investigative techniques, to piece together and expose the betrayal of trust alleged in [the] complaint.” The U.S. Attorney’s Office for the Southern District of New York also filed criminal charges against the pair on July 10.

Pair to Pay $400,000 in Connection With Bitcoin Solicitation Fraud, Impersonation and Sending Forged Documents

On July 10, a Texas federal court ordered a pair of defendants to pay $400,000 in penalties and restitution in connection with a CFTC lawsuit. Judge Reed C. O’Connor of the U.S. District Court for the Northern District of Texas found that Morgan Hunt, of Texas, and Kim Hecroft, of Baltimore, used Facebook and email in a fraudulent scheme to solicit Bitcoin from people to invest in trading products. Hunt would tell people that trading in his investment product “guarantees a passive investment return of 40-60% after a 30-day trading cycle.” The pair misrepresented their experience and track record, falsely claimed they would use the funds to invest for the customers’ benefit, and falsely told customers they had to pay a tax to the CFTC to withdraw their profits. According to the suit, the defendants claimed that “tax was now handled by the CFTC…paid to a secure CFTC wallet.” The pair impersonated a CFTC investigator, and sent forged documents purportedly authored by the CFTC’s General Counsel that included the CFTC’s official seal. Likewise, Hunt told the customer that “contacting the CFTC personally will open a can of worms.” Hunt and Hecroft were both ordered to pay restitution, as well as $180,000 civil monetary penalties each.

CFTC Staff Provides Guidance, No-Action Relief for FCM Separate Account Practices

On July 10, the CFTC DSIO and Division of Clearing and Risk (“DCR”) issued a joint DSIO staff advisory interpretation and DCR time limited no-action relief letter related to the treatment of separate accounts by future commission merchants (“FCMs”). DSIO confirms that FCM customer agreements or other documents must not: (i) preclude the FCM from calling the beneficial owner of an account for required margin; (ii) in the event the beneficial owner fails to meet the margin call, preclude the FCM from initiating a legal proceeding to recover any shortfall; or (iii) otherwise guarantee a beneficial owner against, or limit a beneficial owner’s loss. The FCM must retain the ability to look to funds in other accounts of the beneficial owner to address any shortfall. Meanwhile, the no-action relief would permit DCOs to allow FCMs to treat separate accounts for the same beneficial owner separately for margin purposes, including the withdrawal of excess margin. No-action relief is limited to two years.

Read More: https://www.cftc.gov/csl/19-17/download (PDF)

CFTC Commissioner Announces Establishment of Climate-Related Market Risk Subcommittee

On July 10, CFTC Commissioner Rustin Behnam announced that the Commission voted to establish the Climate Related Market Risk Subcommittee, which will fall under the CFTC’s Market Risk Advisory Committee. The subcommittee will consider topics, such as identifying challenges or impediments to evaluating and managing climate-related financial and market risks, identifying policy initiatives and best practices for risk management related to climate, and identifying methods by which data and analyses can enhance and contribute to the assessment of climate-related financial and market risks, as well as their potential impacts on areas such as energy, food and real estate. The subcommittee will transmit reports and recommendations on how climate issues will, or are, having an impact on the markets.

FINRA Releases New Guidance on Credit for Extraordinary Cooperation

On July 11, FINRA announced the release of new guidance regarding credit for respondents who provide “extraordinary cooperation” in investigations. FINRA issued guidance in 2008 noting the types of extraordinary cooperation by a firm or individual that could result in credit, categorized as 1) self-reporting before regulators are aware of the issue; 2) extraordinary steps to correct deficient procedures and systems; 3) extraordinary remediation to customers; or 4) providing substantial assistance to FINRA’s investigation. The credit given may be included in various forms such as not escalating a case to enforcement or a reduction in enforcement penalties if the case does warrant enforcement action. Previous changes to FINRA’s rules may have created uncertainty around the continued impact that self-reporting may have on a potential respondent’s ability to receive credit for extraordinary cooperation. Thus, FINRA released this new notice to provide further clarity.

SEC Highlights Risks for Market Participants Amid Transition Away From LIBOR

On July 12, SEC staffers published a statement that encourages market participants to manage their transition away from LIBOR including an outline of several areas that might need additional attention. The expectation is that parties reporting information used to set LIBOR will stop doing so after 2021. Staffers note efforts made in the U.S. and worldwide to recommend alternative rates to LIBOR. That said, the SEC does not endorse the use of any reference rate and it is monitoring whether there should be a variety of reference rates used as opposed to one dominant benchmark. In this transition away from LIBOR, the guidance outlines key considerations for market participants surrounding existing contracts, new contracts, and other key business risks (e.g., portfolio valuations) in the transition and the impending LIBOR-less world. The staffers also outline division-specific guidance for the Division of Corporate Finance, the Division of Investment Management, the Division of Trading and Markets, and the Office of the Chief Accountant.

CFTC Orders Pair to Pay $500,00 to Settle Numerous Charges

On July 12, the CFTC issued an order settling charges against a pair of California residents who were charged with unauthorized options trading and failure to supervise, among other violations. The order found that between Jan. 1, 2014, and Sept. 24, 2017, Dean Katzelis and Shahin Maleki, doing business as “Essex Futures,” improperly combined proprietary and customer trades in bunched orders when they transmitted orders to FCMs for execution. Essex engaged in unauthorized trading for certain customer accounts, and failed to prepare requisite written records, as well as maintain and produce required records to the CFTC upon request. Essex also failed to diligently supervise its employees and agents to ensure they submitted bunched orders with properly segregated trades, engaged only in authorized trading for customer accounts and prepared required written records. Lastly, Essex failed to notify the National Futures Association within 30 days of an associated person terminating their association with Essex, failed to transmit checks received from customers in a timely fashion, and failed to publicly identify an Essex branch office.

Securities Lawyer, Microcap Agent Charged With Fraud

On July 12, the SEC charged William Scott Lawler, an Arizona-based attorney, and Natalie Bannister, a Missouri-based agent of microcap shell companies, with securities fraud and registration violations. The SEC alleges that between February 2015 and April 2017, Lawler fraudulently transferred control of shares of Broke Out, Inc. (BRKO) and the predecessor to Immage Biotherapeutics (IMMG), both of which were shell companies, to his client. Bannister participated by arranging the sale of BRKO. As part of the scheme, Lawler allegedly drafted false attorney-opinion letters that falsely claimed the stocks could be immediately sold once the client took control. However, after the client gained control, the security was subject to promotional campaigns with drastic increases in volume and price. Bannister allegedly submitted one of the false letters to a broker and helped ensure a market for BRKO stock. Brokerage accounts associated with Lawler’s client profited by more than $3 million before the SEC suspended trading. Lawler and Bannister were both charged with several violations of the Securities Act. Lawler also was charged with violating the market manipulation provision of Section 9(a) of the Exchange Act.

CFTC Makes Progress on Data Protection Initiative

On July 12, CFTC Commissioner Dawn D. Stump announced the completion of the “Scope” part of the Data Protection Initiative which was launched in March. This initiative is meant to help the CFTC better understand its regulatory data needs and enhance its internal data protection. The “Scope” component – the first of five parts of the initiative – is complete, and the CFTC now has an updated and detailed data catalogue. This catalog includes information concerning the regulation providing the authority for the collection, type of entity serving as the data submitter, category of data reported and more. From here, a few things must be determined, such as the use-cases for the data stream, the sensitivity of the data and its regulatory value. After that, the Data Initiative’s next steps involve reviewing how the data is accessed, analyzing security safeguards, examining CFTC response and evaluating storage and data destruction. This is just one example of how regulators are making privacy and cybersecurity a key initiative. Stump mention that she hopes the initiative will “foster a CFTC-wide commitment and cultural shift to ensure that this process is performed on a recurring frequency.”

SEC, NASAA Explain Application of Securities Laws to Opportunity Zone Investments

On July 15, the SEC and the North American Securities Administrators Association (“NASAA”) issued a summary explaining the application of federal and state securities laws – including compliance implications – to investments in the “opportunity zone.” The adoption of the Tax Cuts and Jobs Act in December 2017 established this “opportunity zone” program, which uses tax incentives to spur long-term investment in designated economically distressed communities, with the hope of generating economic growth and job creation. The summary seeks to explain the key components of a Qualified Opportunity Fund and how they exist in practice. This includes their organizations and registration requirements. For specifics, please see the below link.

Nomura Securities to Pay $25 Million to Settle Charges of Misleading Bond Customers

On July 15, the SEC instituted a pair of enforcement actions against Nomura Securities for its failure to adequately supervise traders in mortgage-backed securities, specifically commercial and residential mortgage backed securities (“CMBS” and “RMBS,” respectively). The SEC found that several Nomura traders misled customers about the price at which Nomura had bought securities, how much profit Nomura would receive on customers’ potential trades, and who even owned the securities – traders who had already bought a security “often” pretended they were still negotiating with third parties. In some instances, the Nomura employees would claim that they were negotiating with non-existent buyers and sellers in order to convince another counterparty to trade with them. The SEC further found that Nomura lacked reasonably designed compliance and surveillance programs. Mainly, the SEC found that, given the nature of CBMS and RMBS trading and the need to obtain prices from a broker, Nomura materially misled its customers during these negotiations. As such, Nomura agreed to be censured and to reimburse customers the full amount of firm profits earned on any RMBS or CMBS trades in which a misrepresentation was identified, resulting in $20.7 million in RMBS customer payouts and $4.2 million in CMBS customer payouts. Nomura also will pay $1.5 million in joint penalty between the RMBS and CMBS cases.

Former REIT Manager and Executives to Pay More Than $60 Million in SEC Settlement

On July 16, the SEC charged AR Capital LLC (“AR Capital”), founder Nicholas S. Schorsch and former CFO Brian Block with wrongfully obtaining millions of dollars across a pair of mergers between real estate investment trusts (REITs) that AR Capital sponsored and externally managed. The complaint states that between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties (ARCP), a publicly-traded REIT to merge with two publicly held, non-traded REITs. The SEC alleges that AR Capital, Schorsch and Block did not receive informed consent from the relevant REIT boards and improperly inflated the incentive fee which yielded them millions of additional ARCP operating partnership units. Likewise, Schorsch and Block directed the misleading sale of assets, which included furniture, fixtures, and equipment, from ARCP to AR Capital as well as other unreimbursed expenses. In total, the two wrongfully obtained at least $7.27 million in supported charges from asset purchase and sale agreements connected to the mergers. AR Capital, Schorsch and Block face combined disgorgement and prejudgment interest of more than $39 million, as well as a $14 million civil penalty against AR Capital, a $7 million penalty against Schorsch, and a $750,000 penalty against Block.

FINRA Announces Final Results of Mutual Fund Waiver Initiative

On July 17, FINRA announced, thanks to its mutual fund fee waiver initiative, it had reached settlements with 56 member firms and obtained a total of $89 million in restitution for nearly 110,000 charitable and retirement accounts. Those firms failed to waive mutual fund sales charges for eligible accounts and failed to reasonably supervise the sale of funds offering waivers. The initiative began with settlements with 10 firms in 2015 who self-reported to FINRA. Then in May 2016, FINRA launched a sweep to review a group of firms that had not self-reported. FINRA sanctioned 11 firms as a result, and reached settlements with another 35 firms, most of which self-reported before the sweep. Of the total 56 firms sanctioned via the initiative, 43 were granted extraordinary cooperation and not fined.

Portfolio Manager Charged With Mispricing Fund Investments

On July 18, the SEC announced settled administrative proceedings against a New Jersey portfolio manager and trader for mispricing private fund investments to his advantage. The SEC stated that between June 2016 and April 2017, Swapnil Rege manipulated inputs he used to value interest rate swaps and swap options to make it appear as though investments in hedge funds he managed were profitable. This artificially inflated the fund’s reported returns. He did this by valuing similar assets by using different discount curves which cause the profitability of the investments to change. Ultimately, he did this until he achieved the asset calculation that he wanted. As a result, this caused the fund to pay excess management fees which led to a $600,000 bonus for Rege. The adviser later fired Rege and closed the fund due to his manipulative valuation practices. Rege agreed to a cease-and-desist order, an associational bar and investment company prohibition, disgorgement of $600,000 plus prejudgment interest, and a civil penalty of $100,000. On the same day, the CFTC entered a consent order against Rege over the same conduct, imposing a trading ban, disgorgement and an additional penalty of $100,000.

Man Ordered to Pay $2.9 Million-Plus for Social Media-Based Forex Fraud Scheme

On July 19, the CFTC announced that the U.S. District Court for the Southern District of Texas found Kelvin Ramirez, of Houston, had fraudulently solicited and misappropriated more than $735,000 in client funds in a forex trading scheme. Ramirez was found to have lured more than 400 clients via Instagram, WhatsApp and similar social media clients by falsely representing his lavish lifestyle, claiming that he made hundreds of thousands of dollars weekly by trading forex, had a growing multimillion-dollar personal bank balance and a managed forex trading pool with millions of dollars in assets under management. He solicited these clients to invest in commodity pools that purportedly traded in forex, to trade forex through accounts he managed, and to subscribe to his trading education and signals service. Ramirez claimed to have a client who was investing $700,000 and it would generate about $450,000 with “a very very very very safe risk ratio.” Not surprisingly, he absconded with his clients’ money. Ramirez is required to pay $735,983.48 in restitution to defrauded clients, as well as a civil monetary penalty of more than $2.2 million. He also is permanently banned from registering with the CFTC and trading in any CFTC-regulated markets.

CFTC, FinCEN Clarify Customer Identification Program and Beneficial Ownership Obligations of Certain Introducing Brokers

On July 22, the CFTC DSIO, in conjunction with the Financial Crimes Enforcement Network (“FinCEN”), issued interpretive guidance to introducing brokers (“IBs”) in commodities that do not “introduce” customers to an FCM that carries their customers’ accounts. The staff letter clarifies the customer identification program (“CIP”) and beneficial ownership (“BO”) requirements applicable to such IBs under the Bank Secrecy Act. First, if an IB has neither customers nor accounts as defined under the CIP Rule, it has no obligations under the rule either, and likewise has no obligations under the BO Rule. The CIP Rule requires implementing a written CIP that includes risk-based procedures for verifying customer identity, as well as procedures for opening accounts that specify identifying information, and also sets forth minimum elements required to be contained in a CPI.

Overseas Whistleblower Awarded $500,000

On July 23, the SEC announced a half-million-dollar award to a foreign resident who voluntarily provided original information to the Commission, leading to a successful enforcement. Jane Norberg, Chief of the SEC’s Office of the Whistleblower stated, “The Commission’s whistleblower award program has reached an important milestone. With recent actions, more than $2 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received by whistleblowers.” The SEC has now awarded more than $385 million to 65 whistleblowers since the agency’s first reward in 2012.

Facebook Agrees to Pay $100 Million for Misleading Investors

On July 24, the SEC announced charges against Facebook for making misleading disclosures regarding the risk of misuse of Facebook user data. For two years, Facebook disclosures referred to user data misuse as purely hypothetical, even though Facebook knew a third-party developer – Cambridge Analytica – had already misused Facebook user data in 2014 and 2015. Cambridge Analytica, now defunct, paid an academic researcher to collect and transfer data from Facebook to create personality scores for roughly 30 million Americans. The research also transferred underlying Facebook user data to Cambridge Analytica, which used this information in its political advertising activities. The SEC alleges that while Facebook knew about this information misuse in 2015, it did not change its disclosure for more than two years. The SEC further alleges that during this two-year gap, Facebook “had no specific policies or procedures in place to assess the results of their investigation for the purposes of making accurate disclosures in Facebook’s public filings.” Thus, the SEC found that Facebook materially misled the public and reporters on its review of Cambridge Analytica’s misuse of information. Facebook did not admit or deny the SEC’s allegations but agreed to a $100 million penalty.

Two Former Precious Metals Traders Admit to Spoofing, Manipulating at NY Banks

On July 25, the CFTC issued two orders filing and settling chargers against a pair of former precious-metals traders who admitted to spoofing and manipulative conduct in the futures markets. Corey D. Flaum of Mount Kisco, New York, engaged in a pattern of spoofing in precious-metals futures between 2007 and 2016 while employed at a New York bank, then the New York office of another bank. Flaum and others at the banks placed futures orders they intended to cancel before execution to create false signals of buying or selling interest. The spoofing consisted of Flaum placing a genuine order and one spoof order on the opposite side of the transaction with the intention of canceling it. This would increase the market’s interest in the security and affect its price in the favor of Flaum’s genuine order. John Edmonds of Brooklyn, New York, engaged in a similar pattern of spoofing in precious-metals futures between 2009 and 2015 while employed at a New York bank. Both were ordered to cease and desist, and both have entered into formal cooperation agreements.

Citigroup Global Markets Fined $1.25 Million for Background Check Violations

On July 29, FINRA announced a $1.25 million fine against Citigroup Global Markets Inc. (“CGMI”) for failing to appropriately fingerprint or screen roughly 10,400 non-registered associated employees over a seven-year period. Federal securities laws require broker-dealers to fingerprint certain persons prior to or upon association with the firm, as they provide information such as criminal backgrounds. This, as well as other data, helps the firms to determine whether the person has previously engaged in misconduct. FINRA found that CGMI failed to conduct timely or adequate background checks on 10,400 non-registered associated persons from January 2010 to May 2017. At least 520 of those persons were not fingerprinted until after they began their association with CGMI, and CGMI was unable to determine whether it fingerprinted an additional 520 persons in a timely manner. FINRA found that “because of these failures, three individuals who were subject to statutory disqualification because of criminal convictions were allowed to associate, or remain associated, with the firm during the relevant period.” CGMI neither admitted nor denied the charges, but consented to the entry of the findings and a $1.25 million fine.

NFA Takes Emergency Action Against Commodity Pool Operator and Trading Advisor, Principal

On August 6, 2019, the National Futures Association (“NFA”) took an emergency enforcement action against Denari Capital LLC (“Denari”) and its principal, Travis Gregory Capson, to protect the investing public, derivatives market and other NFA members. Denari, an NFA member commodity pool operator and commodity trading advisor located in Walnut Creek, California, “commingled pool funds, improperly calculated the pool’s rates of return, provided misleading information to their investors and NFA, and failed to cooperate in an investigation of the firm.” Likewise, during the NFA’s initial investigation into Denari, it stated that its forex funds only had proprietary money which turned out to be a false statement. Additionally, Denari and Capson refused to provide the proper documentation to determine the net asset value of the pools. Denari and Capson have been suspended from NFA membership and were prohibited from soliciting, accepting, disbursing or transferring any funds for investment in Denari or any investment controlled or operated by Denari or Capson, without NFA’s prior approval. Denari and Capson must demonstrate they are in complete compliance with NFA requirements before the action is lifted.

NFA Orders Gain Capital Group LLC to Pay $50,000 Fine

On August 7, the NFA levied a $50,000 fine on a Bedminster, NJ futures commission merchant and forex dealer member Gain Capital Group LLC (“Gain”). On August 5, the NFA’s Business Conduct Committee issued a complaint against Gain alleging that it violated NFA Compliance Rule 2-43(a)(1)(i) by failing to adjust all customer orders adversely impacted by a recurring malfunction affecting Gain’s electronic trading platform between April 2016 and August 2017. In total, more than 7,400 customers were adversely impacted resulting in $167,100 in total harm. In instances where a customer actually benefited from the malfunction, they were permitted to keep such gains. While Gain ultimately applied adjustments to all negatively impacted customer accounts, it did not make appropriate adjustments to all affected customers in a timely fashion, nor did it take timely steps to assess the extent of customer harm. Gain neither admitted nor denied the complaint and settled the charges against it.

U.S. Bank Fined $2.5 Million

On August 9, the NFA ordered a San Francisco-based swap dealer to pay a $2.5 million fine based on the NFA’s Business Conduct Committee finding that the firm failed to communicate with a counterparty in a fair and balanced manner. In 2014, the dealer acted as a counterparty to a $4 billion forward contract with a client that had secured financing from a securities affiliate to buy out a Canadian company. The purpose of the contract was to hedge the risk of fluctuations between the U.S. dollar and Canadian dollar. The contract had a settlement date of December 31, coinciding with the expected closing date of the Client’s acquisition of a Canadian company. Rather than calculating and providing the Client with a settlement price based on the weighted average rate of the Canadian-dollar spot contracts it purchased on Aug. 27, 2014, as agreed, the bank devised an arbitrary rate that it thought the client would accept, without telling the client.

Investment Banking Analyst Charged With Insider Trading

On August 12, the SEC charged Bill Tsai, a junior investment banker at a large international investment bank, with insider trading. Tsai allegedly learned of Siris Capital Group, LLC’s (“Siris”) plans to acquire Electronics for Imaging (“EFII”) when Siris consulted the bank about providing financing and advice. Through his role at the bank, he learned that the deal would commence and learned from a colleague that Siris was “focused on getting [the acquisition] done.” Between March 29 and April 12, Tsai allegedly purchased EFII call options via a brokerage account that he concealed from his employer shortly after learning about the deal. He then sold for a profit of approximately $98,750 shortly after the deal was announced on April 15, 2019. The U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Tsai in a parallel action.

SEC Freezes $8 Million in Alleged Fraudulent Token Offering, Manipulation Scheme

On August 13, the SEC announced charges against self-described “financial guru” Reginald “Reggie” Middleton, as well as two entities he controls, on allegations he engaged in a fraudulent scheme to sell digital securities and manipulate the market for them. The SEC alleges that Middleton, as well as Veritaseum, Inc., and Veritaseum, LLC (collectively “Veritaseum”), markets and sold “VERI” tokens online. The defendants misled investors on numerous fronts, including misleading investors about their prior business venture, touting fictitious investor demand for VERI tokens, and falsely claiming to have a product ready to generate revenue. The SEC also alleges Middleton manipulated VERI’s price on an unregistered digital asset platform, and that he transferred some investor assets into his personal account. When the SEC’s informed Middleton’s counsel that it would likely recommend the case to enforcement, he moved more than $2 million of the offering from a blockchain address to other addresses and used a portion of this to purchase precious metals. The SEC request that Middleton not do this, but he declined the request. Middleton and Veritaseum are charged with violating registration and antifraud provisions of U.S. federal securities laws, and Middleton also is charged with violating antifraud provisions on the basis of his manipulative trading.

Broker-Dealer Charged With Violations of Gatekeeping Provisions

On August 14, the SEC charged New York City-based broker-dealer Canaccord Genuity LLC (“Canaccord”) with enabling trading in dozens of thinly traded over-the-counter (“OTC”) and non-exchange-listed securities without conducting reviews required by the Exchange Act. The required reviews are done to verify that there exists a reasonable basis for believing that information provided by issuers is accurate in material aspects and obtained from a reliable source. The SEC stated that Canaccord published quotes and made markets in dozens of OTC securities, delegating Rule 15c2-11 compliance to an associate who had no trading experience and no formal training on conducting the requisite review. Canaccord has since revised and improved its policies and procedures with respect to the rule. Canaccord did not admit or deny the SEC’s findings, but consented to a cease-and-desist order, a censure and an order to pay a $250,000 penalty.

SEC Wins Insider Trading Jury Trial

On August 14, jurors in Atlanta federal court found New Jersey securities broker Raymond J. Pirrello, Jr. liable for insider trading ahead of three merger-and-acquisition deals. Pirrello received highly confidential nonpublic information about three impending acquisitions – Radiant Systems, Midas Incorporated and BrightPoint – from Thomas W. Avent, Jr., a partner at an international accounting firm who performed tax work on the three transactions. Pirrello then tipped off his friend and former colleague Lawrence J. Penna, Jr., who traded in securities of each of the three companies. The two also exchanged cash in connection with information and services to facilitate the scheme. Penna reaped at least $107,922 in illicit profits, at least $21,500 of which was shared with Pirrello. Pirrello was found liable on all counts; Avent and Penna had previously settled insider trading charges brought against them.

Cantor Fitzgerald, BMO Capital Charged for Improper Handling of ADRs

On August 16, the SEC announced that brokers Cantor Fitzgerald & Co. (“Cantor Fitzgerald”) and BMO Capital Markets Corporation (“BMO”) will pay more than $4.5 million combined to settle charges that they improperly handled “pre-released” American Depository Receipts (“ADRs”) – U.S. securities that represent foreign shares of a foreign company. ADRs can be pre-released which means they are issued without the deposit of foreign shares, should brokers receiving the ADRs have an agreement with a depositary bank. The broker or its customer then owns the number of foreign shares that corresponds to the shares the ADRs represent. However, the SEC says Cantor Fitzgerald and BMO obtained pre-released ADRs even though they should have known those transactions were not backed by foreign shares. The SEC found that both brokers improperly obtained pre-released ADRs indirectly from broker-dealers. Cantor Fitzgerald also improperly obtained pre-released ADRs directly from depository banks. Cantor Fitzgerald will pay more than $359,000 in disgorgement, more than $88,000 in prejudgment interest and a $200,000 penalty. BMO will pay more than $2.2 million in disgorgement, more than $546,000 in prejudgment interest and a $1.2 million penalty.

ICO Research and Ratings Provider Charged With Failing to Disclose Payments

On August 20, the SEC charged Russian entity ICO Rating, an issuer of research reports and ratings of blockchain-based digital assets, with failing to disclose payments from issuers for publicizing their digital securities offerings. ICO Rating billed itself as a “rating agency that issues independent analytical research,” but failed to disclose payments from certain issuers whose initial coin offerings (“ICOs”) it rated and published on its website and social media. The SEC found ICO Rating violated anti-touting provisions of the Securities Act of 1933. ICO Rating did not admit or deny the SEC’s findings, but agreed to cease and desist, and to pay disgorgement and prejudgment interest of $106,998, as well as a civil penalty of $162,000.

Broker-Dealer, CEO Charged With Supervision Failures in Hedge Fund Valuation Scheme

On August 21, the SEC charged New York-based broker-dealer AOC Securities LLC (“AOC”) and former CEO Ronaldo Gonzalez with failing to supervise an AOC broker who provided inflated price quotes to a significant customer. The SEC says broker Frank Dinucci Jr. provided inflated price quotes to New York-based investment adviser Premium Point Investments LP (“PPI”). PPI traders promised to send securities trades to AOC, and in exchange dictated to Dinucci the prices at which he should value certain mortgage-backed securities in PPI funds’ portfolios in order for the PPI employees to reach certain performance targets. Dinucci then provided quotes for whatever the traders wanted them to be. Dinucci, PPI and certain PPI personnel were previously charged in connection with this fraudulent valuation scheme. AOC and Gonzalez did not admit or deny the SEC’s findings, but agreed to pay penalties of $250,000 and $40,000, respectively. Gonzalez also faces a 12-month supervisory bar, and AOC has been censured.

SEC Provides Guidance on Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice

On August 21, the SEC issued several guidelines on how investment advisers should fulfill their proxy voting responsibilities. The releases reflect the agency’s scrutiny of, and expectations regarding, advisers’ proxy voting methodologies and reliance on proxy advisory firms. The guidance, following a question-and-answer format, discusses what steps an investment adviser can take to demonstrate its voting decisions in a client’s best interest, steps to consider if an adviser becomes aware of potential factual errors or potential incompleteness, and even whether an investment adviser is required to exercise every opportunity to vote a proxy for that client.

SEC Charges Pa. Investment Adviser With $100 Million Fraud, Obtains Emergency Asset Freeze

On August 27, the SEC charged Brenda Smith, as well as her fund Broad Reach Capital, LP (“Broad Reach”), with investment advisory fraud after she allegedly collected $105 million in funds across roughly 40 investors. According to the SEC’s complaint, Smith and Broad Reach allegedly raised the money by promising to invest investors’ money using strategies that she claimed would provide consistently high returns. However, most of the funds raised went toward paying other investors and funding her own investments. The complaint also says Smith and Broad Reach disseminated false statements about the fund’s returns and fabricated documents to inflate Broad Reach’s assets. A federal court in Newark, New Jersey, granted the SEC’s request for an asset freeze and temporary restraining order.

SEC Charges Private Lender and Its CEO, CFO and Executive VP With Fraudulent Mismarking Scheme

On August 29, the SEC charged Live Well Financial (“Live Well”), CEO Michael Hild, CFO Eric Rohr and Executive Vice President Darren Stumberger with violating anti-fraud provisions of federal securities laws, in connection with a multimillion-dollar bond mismarking scheme. According to the SEC, Live Well falsely inflated the value of its complex reverse-mortgage bonds portfolio to fraudulently secure tens of millions of dollars more in loans than if its portfolio was priced accurately. Through this “self-generating money machine,” as Hild called the scheme, the CEO funded lavish compensation packages for himself and others. In the first 18 months after the scheme was initiated, the value of Live Well’s bond portfolio ballooned from $71 million to $570 million. However, the scheme collapsed when Live Well’s lenders sought to sell the bonds back to the firm, which did not have the requisite funds to repurchase the securities. This was due to the fact that the bond were financed for far more than their actual value. When it became clear that Live Well would have to provide a justification for the valuations, there was panic because they had been claiming that all pricing is from a third-party vendor. During one meeting, they even pondered on finding a “slimy” broker who would confirm their valuations. Live Well’s counterparties were then exposed to losses in excess of $80 million and will have to seek their monetary claims through Live Well’s bankruptcy proceedings. The complaint seeks a financial and criminal penalties, as well as industry bans for Hild, Rohr, and Stumberger. The U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Hild, Rohr and Stumberger in a parallel action August 29.

SEC Charges Adviser Firm and Its Principals With Defrauding Retired NFL Players

On August 29, the SEC charged Cambridge Capital Group Advisors, LLC and its two former principals with defrauding investors, including retired NFL players. Cambridge President Phillip Timothy Howard is a Florida attorney who represented the retired athletes in a class-action lawsuit against the NFL for athletes who claimed they had suffered brain injuries resulting from concussions sustained during their time in the league. Howard then solicited these players to invest in his funds even though he had previously stated that their “brain function is not there, their body has been beat up from the NFL, they don’t have employment capacity, they don’t have credit, and they don’t have capital anymore.” He and Don Warner Reinhard, a former investment adviser previously barred by the SEC, obtained $4 million in funds from these retired players and promised to invest their money in a variety of instruments, but instead invested heavily in settlement advance loans to more than 70 of Howard’s class-action clients. In fact, 18 of the 20 investors in the scheme had received these settlement advances. The SEC alleges the defendants omitted Reinhard’s record, which includes jail time served for bankruptcy and tax fraud, as well as being barred from the securities business. Howard and Reinhard allegedly used investor funds to pay themselves “broker fees,” and that Howard borrowed $612,000 in undisclosed personal mortgage loans that he never repaid.

SEC Shuts Down San Diego Company’s $300 Million Fraud

On August 29, the SEC announced that it filed charges against San Diego-based ANI Development, LLC; its principal, Gina Champion-Cain; and a relief defendant for their alleged roles in a multiyear, $300 million scheme. The SEC’s complaint says that the defendants raised funds from approximately 50 retail investors via a sham investment opportunity claiming to allow offers to make short-term, high-interest loans to parties seeking to acquire California alcohol licenses. The SEC alleges that rather than using investor funds to make the loans, Champion-Cain directed significant amounts of funds to a relief defendant she controlled. The SEC obtained a consented-to freeze assets, and the defendants, without admitting violations of federal law, have agreed to preliminary injunctions against violations of these provisions of the federal securities laws. The complaint also seeks disgorgement, prejudgment interest, monetary penalties and permanent injunctions.

Treasury Department Submits Housing Reform Plan to President

On September 5, the U.S. Department of the Treasury released a plan to reform the housing finance system. The plan outlines roughly 50 legislative and administrative reforms, designed to minimize the government’s role in the housing market, increase efficiency in the market and protect taxpayers from future bailouts while also preserving the 30-year fixed-rate mortgage and helping Americans realize homeownership. Among the most significant proposals is the release of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) from government control. It also proposes reducing the role of the Federal Housing Administration (“FHA”). This report stems from a Presidential Memorandum issued by President Trump in March to review the role of government sponsored enterprises and other agencies that have been left intact since the financial crisis although their purpose currently is unclear and, at times, redundant. The full housing reform plan can be viewed at Treasury.gov.

CFTC Registrant to Pay $1.25 Million for Live Cattle Futures Violations

On September 9, the CFTC imposed a civil monetary penalty of $1.25 million on Nathan Harris, a CFTC registrant from Akron, Iowa, as part of a settlement on charges of fraud, unauthorized trading and violating speculative position limits in live cattle futures contracts. Between January 2012 and August 2014, Harris exceeded customers’ instructions concerning the size and risk of positions, failed to obtain specific authorization from customers for particular trades, and failed to obtain signed powers of attorney. Customers lost roughly $10.3 million as a result of Harris’s unauthorized trading. He also exceeded Chicago Mercantile Exchange’s (“CME”) live cattle spot-month limit in one customer’s account. Harris now faces certain permanent restrictions, including that his business-related telephone must be recorded, and his sponsoring firm must conduct quarterly on-site compliance reviews. The effort was a combination of work complete by the CFTC, NFA, and CME.

Merrill Lynch to Pay $300,000 Penalty Over Audit Trail Data

On September 10, the CFTC settled charges against Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), a registered futures commission merchant, for failing to promptly produce certain required records to the CFTC and failing to properly supervise its employees and agents. The CFTC’s order finds that Merrill Lynch failed for almost three years to produce reliable audit trail data requested by the Division of Enforcement. These failures delayed a CFTC investigation even after the scope of the investigation was reduced. Merrill Lynch was found to not have adequate procedures; for instance, it did not have a process in place to locate account numbers or order entry operator identification numbers. The CFTC imposed a $300,000 civil monetary penalty, but noted that Merrill Lynch has already taken steps toward revising its internal processes and was eventually able to produce the requisite documents.

Trading Firm’s Chief Compliance Officer Ordered to Pay $150,00 for Fraud, False Statements

On September 12, the CFTC settled charges with CFTC registrant Rafael Marconato of Limeira, São Paulo, Brazil, accusing him of engaging in acts that operated as a fraud on pool participants, as well as making false statements to the NFA. Marconato was a registered associated person and chief compliance officer of a registered commodity pool operator and commodity trading advisor who solicited clients to invest in commodity pools and managed accounts operated and offered by the firm. The CFTC’s order states that the firm and its CEO misappropriated client funds, and that the CEO lied to the NFA to conceal the fraud. The order found that Marconato also denied the existence of that commodity pool to the NFA, and instead represented that the firm had no customers. Marconato also told the NFA that the commodity pool he had been soliciting for was a company that invested in software, and sent a false document to the NFA repeating that claim. Marconato also sold part of his interest in the commodity pool to an existing pool participant for $125,000 without disclosing he was selling part of his own interest. Likewise, in certain instances, when investors would wire money to a fund, Marconato would wire the money from the fund to his own personal account. Marconato is required to pay $125,000 in restitution and a $25,000 civil penalty.

Registrant Ordered to Pay $1.5 Million for Violations Related to Cyber Breach

On September 12, the CFTC settled charges against Phillip Capital Inc. (“PCI”), a registered futures commission merchant, for “allowing cyber criminals to breach PCI email systems, access customer information and successfully withdraw $1 million in PCI customer funds.” PCI also failed to disclose the cyber breach to customers in a timely manner, and failed to properly supervise its employees. According to the order, PCI’s IT engineer, who was broadly responsible for data and systems issues, vendor management and other tasks, “had limited training in cybersecurity, and cybersecurity was not broadly within the IT engineer’s sphere of responsibility.” The breach occurred on February 28, 2018, when the IT engineer received a phishing email from a hacked financial security organization account, clicked on a PDF attachment and entered login information for the PCI administrator’s email account to access the document. Cyber criminals used the email account’s administrator privileges to access email accounts for PCI’s co-CEO and various PCI finance employees. Company management sought to keep the breach a secret. The one co-CEO emailed all employees, telling them that “this is all confidential and no mention should be made outside the company.” He also told the CCO to ask customers who knew about the breach to not discuss it with others because “it will only hurt our company for others to know and it to be talked about.” PCI faces a civil monetary penalty of $500,000 and $1 million in restitution, though it’s credited the restitution based on its prompt reimbursement of customer funds when the fraud was discovered.

CFTC Market Risk Advisory Committee Approves Plain English Disclosures

On September 13, the CFTC Market Risk Advisory Committee approved plain English disclosures for new derivatives referencing LIBOR and other Interbank offered rates at its September 9 public meeting. The standard set of disclosures is intended as a helpful example of plain English disclosures that market participants can use with all clients and counterparties with whom they continue to transact derivatives referencing LIBOR and other IBORs. The information provides disclosures for LIBOR and IBOR as well as disclosures for certain ISDA implementations.

Interdealer Broker to Pay $13 Million for Supervisory Failures and False Statements

On September 13, the CFTC issued two orders settling charges against Tullett Prebon Americas (“Tullet”), an interdealer broker and CFTC-registered introducing broker headquartered in New Jersey. The CFTC found that Tullett failed to implement supervisory procedures reasonably designed to prevent its brokers from making false or misleading statements to customers relating to certain trades, bids and offers in U.S. dollar medium-term interest rate swaps. In fact, an employee raised concerns about brokers providing false and misleading information to customers. Tullett ignored the employee and did not take a corrective action as a result. The first order requires Tullett to pay an $11 million civil monetary penalty. The second order, which also stipulates that at least one Tullett broker made false or misleading statements of material facts, or omitted to state material facts, to CFTC staff concerning the subject of the investigation. Prior to a broker’s interview for the investigation, a co-head of his desk pulled him into a private office and told the broker to “toe a line that protected Tullett” and not say anything that they lawyers had prepared. As a part of the second order, Tullet is required to pay a $2 million civil monetary penalty.

SEC Charges Prudential Subsidiaries for Misleading Funds They Advised

On September 16, the SEC charged two Prudential Financial (“Prudential”) subsidiaries, AST Investment Services (“AST”) and PGIM Investments LLC (“PI”), with failing to disclose conflicts of interest and making misleading disclosures to the boards for 94 insurance-dedicated mutual funds they advised. In 2006, the funds were reorganized from registered investment companies to partnerships so Prudential could receive certain tax benefits, even though this came with negative consequences to the funds. During the restructuring, an employee raised concerns about the conflict to Prudential’s tax department but nothing was done and no compliance personnel were consulted. Additionally, AST and PI cost the funds tens of millions of dollars in interest income when they temporarily recalled securities that the funds had out on loan. As a result of this, Prudential received more than $229 million in tax benefits and the funds did not receive an estimated $72 million in revenue. Neither AST or PI disclosed conflicts of interest between Prudential and the funds connected with the recalls. Also, while AST and PI assured that Prudential would reimburse the funds for losses resulting from the reorganization of the funds, which subjected them to less favorable tax treatment in certain jurisdictions, Prudential did not. AST and PI did self-report the conduct after initially failing to disclose it during an examination, cooperated with staff and voluntarily reimbursed the funds more than $155 million. ASTI and PI were censured and must disgorge an additional $27.6 million, pay a civil monetary penalty of $5 million, and cease and desist.

Two Broker-Dealers to Pay $4.65 Million in Penalties for Providing Deficient Blue Sheet Data

On September 16, the SEC announced settlements with Stifel, Nicolaus & Co. (“Stifel”) and BMO Capital Markets Corp. (“BMO”) on charges of providing incomplete and inaccurate securities trading information to the SEC. Stifel and BMO made numerous deficient submissions of “blue sheets” – information that the SEC uses to carry out enforcement and regulatory obligations – over a period of several years. Stifel failed to report data for approximately 9.8 million transactions and provided inaccurate information for approximately 1.4 million transactions. BMO submitted missing or incorrect data for approximately 5.4 million transactions. Both firms lacked adequate processes to validate submission accuracy, and each “willfully violated the broker-dealer books and records and reporting provisions of the federal securities laws.” Both firms also took remedial efforts in light of the SEC’s findings. Specifically, BMO retained an expert regulatory and technology consultant to complete a review and assessment as to how to best create and implement new policies and procedures. Stifel will pay $2.7 million in penalties, while BMO will pay $1.95 million.

Raymond James to Pay $15 Million for Improperly Charging Retail Investors

On September 17, the SEC found that three Raymond James entities improperly charged advisory fees on inactive retail client accounts and charged excess commissions for brokerage customer investments in certain unit investment trusts (“UITs”). The order found that Raymond James & Associates, Inc., and Raymond James Financial Services Advisors, Inc., failed to consistently perform promised ongoing reviews of inactive advisory accounts, and in turn failed to determine whether the fee-based advisory account was suitable. In total, over 7,708 accounts were not reviewed after they did not have any trades for at least 12 months. These accounts paid about $4.9 million in advisory fees. They also misapplied incorrect pricing data to certain UIT positions, causing advisory clients to overpay fees. The order also found that Raymond James & Associates, Inc., and Raymond James Financial Services, Inc., “recommended that their brokerage customers sell UITs before their maturity and buy new UITs without adequately determining whether these recommendations were suitable,” which resulted in greater sales commissions than they would have been charged from simply holding the UITs to maturity before buying new UITs. These sales generated approximately $5.5 million in excess sales charges and affected 2,044 accounts. Raymond James also failed to identify the conflict involved through recommending the UITs and did not apply applicable discounts of $660,000 to 5,468 accounts. The three Raymond James entities will disgorge approximately $12 million, with prejudgment interest, and pay a $3 million civil penalty.

Major U.S. Bank Traders Charged With Manipulating Precious Metals Future Markets

On September 16, the CFTC charged Michael Nowak and Gregg Smith with spoofing, engaging in a manipulative and deceptive scheme, and attempting to manipulate prices in the precious metals futures markets, in a civil enforcement action filed with the U.S. District Court for the Northern District of Illinois. The CFTC alleges that, from at least 2008 through at least 2015, Nowak and Smith, while working for a major U.S. bank, repeatedly engaged in manipulative or deceptive acts and practices by spoofing while placing orders and trading precious metals future contracts on CME Group’s exchanges. The defendants allegedly placed thousands of orders with the intention to cancel them later to send false signals to market participants. These fake trades would then affect the price in favor of the genuine trades that Novak and Smith would place. The complaint also states that the defendants were aware other traders at the bank were spoofing, and that Smith taught other traders how to spoof. Earlier on September 16, the district court unsealed a criminal indictment brought by the Department of Justice against traders including Nowak and Smith.

CFTC Unanimously Approves Two Measures in Open Meeting

On September 16, the CFTC announced it had voted unanimously to approve two measures:

Final Rule on Position Limits and Position Accountability for Security Futures Products:Among other things, this increases the default maximum level of equity securities futures products (“SFP”) position limits that designated contract markets (DCMs) may set; modifies the criteria for setting a higher position limit and position accountability level by relying primarily on estimated deliverable supply; and adjusts the time during which position limits or position accountability must be in effect.
Proposed Rule on Public Rulemaking Procedures (Part 13 Amendments): This proposal would amend Part 13 of the CFTC’s regulations to eliminate the provisions that set for the procedure for the formulation, amendment or repeal of rules or regulations. The CFTC believes it is unnecessary to codify the rulemaking process in a Commission regulation because the Administrative Procedure Act (“APA”) already governs the Commission’s rulemaking process.

FINRA Fines J.P. Morgan Securities LLC $1.1 Million Over Untimely Disclosure of Misconduct Allegations

On September 16, FINRA announced it censured and fined J.P. Morgan Securities LLC (“JPMS”) $1.1. million for failing to disclose 89 internal reviews or allegations of misconduct by its registered representatives and associated persons in a timely manner. FINRA found that, from January 2012 to April 2018, JPMS failed to either disclose in a timely manner or disclose at all, allegations of misconduct including, but not limited to, borrowing from customers, forgery, falsification or alteration of documents and unauthorized trading. On average, JPMS filed the required information with FINRA more than two years late, preventing or delaying FINRA, other regulators, member firms and the public from learning about the allegations. It also prevented FINRA from pursuing potential disciplinary action against more than 30 former JPMS representatives because it was outside of the timeline in which FINRA could take action. Additionally, 36 of the registered representatives went on to at other FINRA registered firms before JPMS disclosed the information. Only when the inquiries began and FINRA asked the firm to conduct a review, did JPMS file 66 disclosures. JPMS must also certify within 60 days that it has taken appropriate corrective measures.

NFA Bars Chicago Commodity Trading Advisor, Principal, From Membership

On September 17, the NFA permanently barred Chicago-based NFA Member commodity trading advisor Systra LLC (“Systra”), as well as its sole principal and associated person, Robert Kopp, from membership and from acting as a principal of an NFA member. On June 28, the NFA’s Business Conduct Committee issued a complaint against Systra and Kopp alleging that they provided false information to NFA concerning Kopp’s trading activities on behalf of a pool managed by Systra, and also failed to cooperate with an NFA examination by failing to produce requested documents and failing to make Kopp available for questioning. Systra and Kopp have failed to answer or respond to the complaint or a subsequent NFA reminder letter. In fact, Kopp had canceled a call with the NFA and they refused to answer any of their attempts to reschedule the call. Systra had previous been the subject of three NFA examinations and had a litany of deficiencies. The most recent examination began when an investor sent a complaint to the NFA that Sysstra would not allow him to redeem his interests in one of the pools. Kopp also is rendered permanently ineligible to serve on a disciplinary committee, arbitration panel, oversight panel or governing board of any self-regulatory organization.

SEC Charges ICO Incubator and Founder for Unregistered Offering, Unregistered Broker Activity

On September 18, the SEC sued ICOBox and founder, CEO, and “vision director” Nikolay Evdokimov for conducting an illegal $14 million-plus securities offering of ICOBox’s digital tokens and for acting as unregistered brokers for other digital asset offerings. The SEC says ICOBox sold roughly $14.6 million worth of “ICOS” digital tokens to more than 2,000 investors via an unregistered offering in an effort to develop an ICO platform. The defendants allegedly claimed the ICOS tokens would increase in value upon trading, but the tokens are “virtually worthless” until they could be used to purchase other assets. They also offered a referral program with a 5% bonus for every investor who promoted the offering. The scheme was marketed as a way for investors “to minimize both the cost of buying the tokens and the risk associated with it.” In turn, these tokens could be used to purchase other digital currencies. ICOBox told investors that its goal “is to do 800 ICOs in the next year” and, based on their estimations “800 annual ICOs is quite realistic.” The SEC also alleges that ICOBox failed to register as a broker but acted as one by facilitating offerings that raised more than $650 million for clients. The complaint seeks injunctive relief, disgorgement with prejudgment interest and civil money penalties.

Former New Silk Route Advisors’ CCO/CFO Files Whistleblower Retaliation Complaint

On October 7, former CCO and CFO, Rishi K. Gupta (“Gupta”) brought an action against New Silk Route Advisors, LP (“NSR”) for protection under the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. NSR was controlled by its executive officer Parag Saxena, an additional defendant in the action, who co-founded the venture capital firm with former McKinsey chief Rajat Gupta and Galleon head Raj Rajaratnam – both of whom were jailed in connection with the largest hedge fund insider trading case in U.S. history. The complaint alleges that in the months and years prior to January 2017, Gupta reported what he reasonably believed to be violations of federal securities laws by NSR to Saxena and his two close confidants, who refused to take corrective action. Gupta then reported the information to the SEC’s Whistleblower Office beginning in March 2016, which ultimately led to two administrative sanctions actions against NSR. According the complaint, Gupta was publicly harassed and denigrated within the NSR offices and eventually had his employment terminated in January 2017.

Greyline Insights Q1 2022

The Next Chapter The first quarter of 2022 was eventful, to say the least. With the uptick in COVID-19 cases early in the quarter, we were sent back to our

SEC Proposes Rules on Special Purpose Acquisition Companies, Shell Companies and Projections

On March 30, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed rules under the Securities Act of 1933 and Securities Exchange Act of 1934 to codify enhancements of disclosure