Greyline Insights – Q4 2019 « Greyline Partners, LLC

Greyline Insights – Q4 2019

Regulatory Updates

6 Financial Institutions Ordered to Pay More Than $6 Million for Reporting Failures

On Oct. 1, the Commodity Futures Trading Commission (CFTC) issued orders to six banks over reporting failures committed over the past decade. Two of those banks also were charged with failing to supervise, and another took the agency’s first-ever charge of violating swap-dealer risk management regulations. HSBC Bank USA, N.A., a subsidiary of U.K.-based (NYSE:HSBC), was charged with failing to properly report swap data and for failing to establish appropriate risk management systems for its swap activities, and ordered to pay a $650,000 monetary penalty. Société Générale International Limited was ordered to pay $2.5 million in connection with charges that it failed to comply with swap data reporting obligations, failing to implement required policies and procedures, and related supervision failures. The Northern Trust Company (NASDAQ:NTRS) was ordered to pay $1 million over numerous violations of both Commodity Exchange Act (CEA) and CFTC regulations related to swap reporting. NatWest Markets was charged with failing to comply with obligations to submit large trader reports (LTRs) for physical commodity swap positions and ordered to pay $850,000. The Bank of New York Mellon (NYSE:BK) was ordered to pay $750,000 to settle charges of several violations relating to swap reporting. And PNC Bank, NA, a subsidiary of PNC Financial Services (NYSE:PNC), was ordered to pay a $300,000 civil monetary penalty for failing to report legal entity identifiers (LEIs), primary economic terms and other data and reports.

Trader to Pay $160,000 for Making Misrepresentations to Futures Commission Merchants

On Oct. 1, the CFTC announced it had settled charges against New York-based futures trader Aron Seidenfeld for causing several material misrepresentations to be made to futures commission merchants (FCMs) concerning his family trust. Seiedenfeld was the trustee of the Seidenfeld Irrevocable Trust, which owned three corporate entities. The CFTC found that the first entity closed a trading account with about $2.1 million in unsecured debit, then “a series of FCM accounts were opened in the name of the second and third corporate entities.” Seidenfeld concealed the identity of the trust as the owner of the corporate entities and misrepresented their controlling persons on the applications. The CFTC says he also submitted documentation that contained false information. The goal was to conceal his name’s association with the first corporate entity and its $2.1 million debit. FCMs use this information to establish risk-based limits to customer accounts, and falsified data can prevent an FCM from properly managing risk. Seidenfeld was ordered to pay a $160,000 civil monetary penalty, and was banned from trading in CFTC-regulated markets and registering with the CFTC in any capacity for 90 days.

Two Trading Firms, Bank, to Pay $3 Million for Spoofing

On Oct. 1, the CFTC settled charges against two trading firms and one bank for violating a CEA prohibition on spoofing – bidding or offering with the intent to cancel the action before it’s executed. Morgan Stanley Capital Group Inc., a subsidiary of Morgan Stanley (NYSE:MS), was charged for spoofing on multiple occasions in precious metals futures from at least November 2013 to November 2014, and ordered to pay a $1.5 million civil monetary penalty. Belvedere Trading LLC, a Chicago-based proprietary trading firm, was charged for spoofing in the Chicago Mercantile Exchange (CME) E-mini S&P 500 futures market hundreds of times, and was ordered to pay a $1.1 million penalty. And the Mitsubishi International Corporation was charged for multiple acts of spoofing, between April 2016 and January 2018, in the silver and gold futures markets. Mitsubishi was ordered to pay a $400,000 civil monetary penalty.

Energy Broker and Its Owner to Pay More Than $1.5 Million Over Numerous Violations

On Oct. 1, the CFTC announced that it settled charges with introducing broker (IB) Classic Energy LLC and owner Mathew D. Webb over misusing material, nonpublic order information in connection with block trades in natural gas futures, as well as related supervision and recordkeeping violations. The CFTC charged Webb with misusing the order information on at least 63 occasions between April 2014 and September 2015. Rather than facilitating block trades with other market participants on behalf of Classic’s customers, he took the other side of the block trades in his proprietary trading account. He also falsely created the impression he was only acting as a broker, but he was acting as a trading counterparty. This scheme netted Web more than $400,000 in profits. Webb and Classic also were part of several supervision and recordkeeping failures such as allowing Webb to control a proprietary trading account without proper controls, failing to maintain records of oral communications related to block trades, and failing to have policies and procedures in place to prevent Webb and other Classic brokers from taking the other side of customer block trades. Classic and Webb must pay a civil monetary penalty of $1.5 million, and Webb must disgorge $413,065 in fraudulent gains. Webb also is banned from trading on any CFTC-registered entity or from engaging in any activities requiring CFTC registration until Jan. 3, 2022.

CHS, Inc. Ordered to Pay $500,000 for Reporting Violations

On Oct. 1, the CFTC announced that Minnesota-based cooperative corporation CHS, Inc., settled charges of failing to submit accurate monthly CFTC Form 204 reports regarding the composition of its fixed price cash corn and soybean transactions. CHS also violated a cease-and-desist provision of a 2016 CFTC order involving a 13-year failure to file correct Form 204 reports. Following the CFTC’s March 2016 order, CHS, Inc., continued to experience difficulty submitting correct reports. The difficulties stemmed from several steps the corporation took to replace its enterprise software, which would automate the Form 204 report process. In May 2018, CHS self-reported the Form 204 report errors it was aware of, and it continued to audit its reports, apprising the CFTC when it discovered new information. The CFTC imposed a $500,000 civil monetary penalty, which it said was “substantially reduced” because of CHS’s self-reporting, cooperation and remediation.

UBS Financial Services Inc. Fined $2 Million for Continued Failures Related to Short Positions

On Oct. 2, FINRA announced that it had censured and fined UBS Financial Services Inc., a subsidiary of UBS Group AG (NYSE:UBS) for repeated failures to address municipal short positions in a timely manner, as well as inaccurately representing the tax status of thousands of interest payments to customers. FINRA previously sanctioned UBS for similar violations in August 2015. The organization found that from August 2015 through the end of 2017, UBS continued to fail to timely identify and properly address certain short positions in municipal securities, which make tax-exempt interest payments. “As a result, UBS inaccurately represented on customer account statements and Forms 1099 that interest payments for 2,853 positions in municipal securities were tax-exempt when, in fact, they were taxable, and inaccurately represented on approximately 950 additional customer account statements and Forms 1099 that interest payments were taxable, when they were tax-exempt,” FINRA reports. UBS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA fined UBS $2 million, as well as ordered it to pay restitution to customers, to pay the IRS to relieve customers of any additional federal income tax owed, and to certify within 90 days that it has taken appropriate corrective measures.

Final Judgments Entered Against Brokerage, CEO, in Layering and Manipulation Case

On Oct. 2, the U.S. Securities and Exchange Commission (SEC) announced that a federal court judge had entered final judgments against New York-based brokerage firm Lek Securities Corp. and CEO Sam Lek. The SEC had charged Lek and its chief with facilitating manipulative U.S. trading by a Ukraine-based firm over a three-year period. The SEC’s complaint alleges that Kiev-based Avalon FA Ltd. illegally profited from layering (placing and canceling orders to trick others into buying or selling stocks at artificial prices) and cross-market manipulation (buying or selling stocks to artificially impact options prices). The complaint alleges that Lek Securities and Sam Lek helped facilitate these schemes by giving Avalon access to U.S. markets, relaxing Lek Securities’ layering controls after Avalon complained, allowing Avalon to conduct the trading activity, and improving the brokerage firm’s technology to assist Avalon’s trading. Lek Securities agreed to a three-year injunction largely prohibiting it from providing intra-day trading to foreign customers, and to retain an independent compliance monitor for a three-year period. Lek Securities was ordered to pay a $1 million penalty plus $525,892 in disgorgement and prejudgment interest, and Sam Lek was ordered to pay a $420,000 penalty. Litigation continues against Avalon and individuals associated with it.

FINRA Makes New Resources Available to Assist With SEC’s Reg BI and Form CRS Compliance

On Oct. 8, FINRA announced that it had made several new resources, including a checklist, available to help member firms comply with SEC Regulation Best Interest (Reg BI) and Form CRS by the June 30, 2020, compliance date. It also announced it would host several FINRA Reg BI events in the coming months. On June 5, 2019, the SEC adopted Reg BI, which establishes a “best interest” standard of conduct for broker-dealers and associated persons when they recommend any securities transaction or investment strategy involving securities to a retail customer. The SEC also adopted a new rule requiring broker-dealers and investment advisers to provide a brief relationship summary, Form CRS, to retail investors. The checklist will help members assess and implement necessary changes to their policies, procedures and compliance programs in light of the implementation of Reg BI and Form CRS. You can download the Reg BI and Form CRS checklist here. FINRA also hosted several events in October and December to teach attendees more about Reg BI. After the Dec. 18, 2019, event, a recording will be available on FINRA’s website.

SEC Forms Asset Management Advisory Committee

On Oct. 9, the SEC announced the formation of its Asset Management Advisory Committee. The committee was formed to provide the SEC with diverse perspectives on asset management, as well as related advice and recommendations on topics such as trends and developments affecting investors and market participants, the effects of globalization, and changes in the role of technology and service providers. The committee was formally established on Nov. 1, 2019, for a two-year term that the SEC can renew. Edward Bernard, Senior Advisor to T. Rowe Price (NASDAQ:TROW), was named initial committee Chairman. You can view a full list of members at the link below.

SEC Halts Alleged $1.7 Billion Unregistered Digital Token Offering

On Oct. 11, the SEC announced it had filed an emergency action and obtained a temporary restraining order against two offshore entities – Telegram Group Inc. and wholly owned subsidiary TON Issuer Inc. – conducting an alleged unregistered, ongoing global digital token offering that had raised more than $1.7 billion from investors. The SEC said Telegram and TON Issuer began raising capital in January 2018 to finance the business, which included developing their own blockchain. The defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers across the world, and promised to deliver the Grams upon launch of the blockchain, no later than Oct. 31, 2019. The SEC alleged that Telegram and TON Issuer failed to register their offers and sales of Grams, in violation of registration provisions of the Securities Act of 1933. The SEC is seeking emergency relief, permanent injunctions, disgorgement with prejudgment interest and civil penalties.

Former Supervisor Charged for Role in Brokerage Firm’s Improper Handling of ADRs

On Oct. 15, the SEC announced that Domenick Migliorato, a former supervisor of the securities lending desk at Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) agreed to settle charges for his failures involving the improper handling of transactions involving American Depositary Receipts (ADRs). ADRs are U.S. securities that represent foreign shares of foreign companies. They require a corresponding number of foreign shares to be held in custody at a depositary bank, but “pre-release” allows ADRs to be issued without the deposit of foreign shares, but with certain requirements. Migliorato was responsible for ICBCFS’s compliance with these requirements between 2011 and 2014, but the SEC found that securities lending personnel under him failed to take reasonable steps to determine whether the proper number of foreign shares were owned and held by ICBCFS or its customers, opening up the potential for the ADRs to be used improperly for short selling or dividend arbitrage. Migliorato agreed to settle the charges and pay a $15,000 penalty, and will be prohibited from acting in a supervisory capacity for at least three years. Earlier in 2019, ICBCFS agreed to pay more than $42 million to settle SEC charges against it.

FINRA Publishes 2019 Report on Examination Findings and Observations

On Oct. 16, FINRA published its 2019 Report on FINRA Examination Findings and Observations. The report details key findings and observations made in recent examinations, as well as lists effective practices that can help firms improve compliance and risk management programs. FINRA made two material changes to make the report more useful to readers. First is that it makes a more meaningful delineation between findings (which describe a violation of a rule or regulation) and observations (which are suggestions about how to improve controls over weaknesses that may elevate risk, but don’t rise to the level of a rule violation or aren’t tied to a specific rule). This year’s report includes topics such as supervision, cybersecurity, best execution and segregation of client assets.

18 Traders Charged in $31 Million Stock Manipulation Scheme

On Oct. 16, the SEC filed an emergency action and obtained an asset freeze against 18 traders alleged to have participated in a scheme to manipulate thousands of U.S.-listed securities for more than $31 million in ill-gotten profits. The SEC’s allegations say these traders, primarily based in China, created the false appearance of trading interest and activity in thousands of thinly traded securities, manipulating their prices and allowing them to reap gains from artificially boosting and selling stock prices. Joseph G. Sansone, Chief of the SEC’s Market Abuse Unit, says the SEC alleges the traders “went to great lengths to evade detection, placing trades in over one hundred separate accounts at several different brokerage firms and submitting falsified documents to open new accounts in the names of others.” The SEC also sought disgorgement of ill-gotten gains plus interest, penalties and injunctive relief.

SEC Issues Statement on Market Structure Innovation for Thinly Traded Securities

On Oct. 17, the SEC issued a statement seeking exchanges and other market participants to submit innovative proposals designed to improve the secondary market structure for thinly traded exchange-listed equities. The SEC lists various downsides of low trading volumes, including higher investor transaction costs, challenges to investors trying to enter or unwind large positions, and negative impact on issuers’ cost of capital. SEC Chairman Jay Clayton says the SEC recognizes “a one-size-fits-all approach to market structure does not work for many of our public issuers, particularly small and medium sized companies.” The SEC’s full statement includes prior suggestions, such as the introduction of non-automated markets for thinly traded securities.

Read More: https://www.sec.gov/rules/policy/2019/34-87327.pdf (PDF download)

FINRA Bars Two People for Roles in Churning Accounts of Elderly Client With Dementia

On Oct. 21, FINRA announced it had barred Ami Forte and Charles Lawrence, both of Florida, for generating $9 million in commissions in less than a year from a 79-year-old customer suffering from severe cognitive impairment. Forte built a romantic and business relationship with the customer in the late 1990s. In 2001, Forte established the Forte Group, and Lawrence joined the firm at its inception. From September 2011 through June 2012, the Forte Group effected more than 2,800 trades in the customer’s accounts – including short-term trading in securities typically intended for customers with long-term investment horizons – to generate roughly $9 million in commissions for the company. The client, who passed away in August 2012, entered the hospital for the final time on June 20, 2012. Between June 20, 2012 and June 29, 2012, the customer’s accounts had more than $14 million in transactions. Forte and Lawrence neither admitted nor denied the charges but consented to the entry of FINRA’s findings.

Two BNP Paribas Subsidiaries Fined $15 Million for AML Program and Supervisory Failures

On Oct. 24, FINRA announced that it fined BNP Paribas Securities Corp. and BNP Paribas Prime Brokerage, Inc. – two subsidiaries of French international banking group BNP Paribas S.A. – $15 million for anti-money laundering (AML) program and supervisory failures involving penny stocks and wire transfers over a four-year period. Between February 2013 and March 2017, FINRA found that BNP did not develop and implement a written AML program that could be reasonably expected to detect and cause reporting of potentially suspicious transactions, despite the fact that it engaged in penny-stock activity. Until 2016, BNP’s AML program had no surveillance targeting potentially suspicious penny-stock transactions, despite the fact that BNP accepted the deposit of nearly 31 billion shares of penny stocks, worth hundreds of millions of dollars, from clients that included “toxic debt financiers.” It also didn’t implement supervisory systems or written procedures to determine whether resales of securities complied with registration requirements of Section 5 of the Securities Act of 1933. Also between February 2013 and March 2017, its AML program didn’t include any review of wire transfers to determine whether they involved high-risk entities or jurisdictions, despite processing more than 70,000 wire transfers with a total value of more than $230 billion. In addition to the fine, BNP is required to certify within 90 days that its procedures are reasonably designed to achieve compliance in its areas of failure.

NFA Bars Kansas Commodity Pool Operator From Membership

On Oct. 29, the National Futures Association (NFA) announced it had permanently barred Plutus Capital Management LLC, a Wichita, Kansas-based NFA Member commodity pool operator, from membership and from acting as a principal of an NFA member. The decision resulted from an NFA Business Conduct Committee (BCC) complaint and settlement alleging that Plutus and its sole associated person and principal, Mark E. Philips, took excess withdrawals and improper redemptions from a commodity pool operated by Plutus, and improperly allocated startup expenses to the commodity pool instead of Plutus. The complaint also alleged that Plutus and Philips provided misleading information, failed to promptly respond to NFA records requests and failed to main required records. In addition to stripping Plutus of its membership, the NFA ordered Philips to withdraw from NFA membership and as a principal of Plutus, and to not reapply for membership or act as a principal of an NFA member for one year. Should he reply for status after that, Philips must pay a $25,000 fine.

Federal Court Orders Defendants to Pay More Than $4.25 Million for Fraud and Misappropriation

On Nov. 1, the CFTC announced that the U.S. District Court for the Eastern District of New York found that two New York-based individuals (Blake Harrison Kantor and Nathan Mullins) and four corporate entities (U.K.-based Blue Bit Banc, Turks and Caicos-based Blue Bit Analytics, Ltd., New York-based Mercury Cove, Inc., and G. Thomas Client Services) had committed fraud and misappropriated client funds. The order resolves a CFTC enforcement case that charged the defendants with fraud in connection with a binary options scam involving a virtual currency known as ATM Coin that was deemed “worthless.” Customers were told they could trade for themselves or have a Blue Bit Banc representative execute the trading, but Blue Bit Banc’s computer software program fraudulently altered data associated with the binary options to decrease investors’ probability of making a profit while increasing Blue Bit Banc’s probability. The defendants also told most investors to send their funds to a bank account in St. Kitts and Nevis, which would make it more difficult to trace investor funds. Blue Bit Banc investments also were converted into ATM Coin, which Kantor falsely told investors was worth substantial sums of money. Kantor and the corporate entities must pay a civil monetary penalty of $2.5 million, as well as $846,405 in restitution, while Mullins must pay a $300,000 penalty. Kantor and Mullins also must disgorge ill-gotten gains of $515,759 and $89,574, respectively.

SEC Proposes Modernizing Advertising and Cash Solicitation Rules for Investment Advisers

On Nov. 4, the SEC announced it had voted to propose amendments targeted at modernizing rules under the Investment Advisers Act that address investment adviser advertisements and payments to solicitors. The proposed amendments to the advertising rule would swap out broadly drawn limitations with principles-based provisions, and even update the definition of “advertisement” to make it flexible enough to remain relevant amid advancing technology and evolving industry practices. It also would permit the use of testimonials, endorsements and third-party ratings, among other changes. The proposed amendments to the solicitation rule would expand the current rule from covering only arrangements involving cash, to covering solicitation arrangements involving all forms of compensation, among other modifications.

SEC Charges Issuer and CEO With Violating Whistleblower Protection Laws

On Nov. 4, the SEC filed an amended complaint against online auction portal Collectors Café and its CEO Mykalai Kontilai to add allegations that they unlawfully tried to prohibit investors from reporting misconduct to the SEC and other governmental agencies. The complaint says Collectors Café and Kontilai tried to resolve investor allegations of wrongdoing by conditioning the return of investor money to the signing of agreements prohibiting investors from reporting potential violations to law enforcement – a violation of SEC Whistleblower protection rules. Kurt L. Gottschall, Director of the SEC’s Denver Regional Office, equated the alleged actions to “holding investors’ money hostage.” The Commission also alleges that Collectors Café and Kontilai even tried to sue two investors they believed breached one of these agreements. Collectors Café and Kontilai previously were charged with a fraudulent $23 million securities offering based on false statements to investors, and the SEC had alleged Kontilai misappropriated more than $6 million of investor proceeds. The Commission says Collectors Café and Kontilai have continued to misrepresent material facts about the business. The SEC’s amended complaint seeks preliminary and permanent injunctions, disgorgement plus prejudgment interest, and penalties, and adds Kontilai’s wife, Veronica Kontilai, as a relief defendant.

SEC Announces Extension of Temporary Measure to Facilitate Cross-Border Implementation of the European Union’s MiFID II’s Research Provisions

On Nov. 4, the SEC’s staff issued an extension of a 2017 no-action letter provided to assist market participants regarding U.S.-regulated activities as they engage in efforts to comply with the Markets in Financial Instruments Directive II (MiFID II), a European Union legislative framework that regulates the bloc’s financial markets and improves investor protections. Under the extension, the staff would not recommend enforcement action to the SEC under the Investment Advisers Act of 1940 against broker-dealers receiving payments in hard dollars or through research payment accounts from clients subject to MiFID II. The letter has been extended until July 3, 2023.

Denari Capital, LLC, Owners Charged With $8.3 Million Forex Fraud

On Nov. 5, the CFTC announced it had filed a complaint in the U.S. District Court for the Northern District of California that charges Denari Capital, LLC, and owners Travis Capson and Arnab Sarkar with fraudulently soliciting more than $8.3 million from at least 28 participants in a foreign-exchange (forex) scheme. The complaint alleges that the defendants pooled and commingled participant funds into one or more Denari bank accounts and used those funds for forex trading, real estate investments and personal expenses, among other purposes, since at least 2012. Capson and Sarkar fraudulently solicited participants and prospective participants by willfully or recklessly misrepresenting the profitability of Denari’s forex trading and its participants. Denari and Capson didn’t register with the CFTC until May 1, 2019, and Sarkar never registered. The SEC alleges that Denari owed participants more than $5.2 million, which it didn’t have sufficient funds or assets to satisfy, by the end of July 2019. The CFTC alleges that Capson also made willfully false representations to, and concealed information from, the NFA during a July 15 examination. The CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.

SEC Proposes Amendments to Modernize Shareholder Proposal Rule

On Nov. 5, the SEC voted to propose amendments to modernize Exchange Act Rule 14a-8, which governs the process for shareholder proposals to be included in a company’s proxy statement. The rule requires companies subject to federal proxy rules to include shareholder proposals in their proxy statements, but permits a company to exclude a shareholder proposal from proxy statements if the proposal or the shareholder-proponent fails to meet certain requirements. These amendments would update the criteria that a shareholder must satisfy to have the proposal included in a proxy statement; update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether as a shareholder or a representative as a shareholder; and modernize the levels of shareholder support necessary for a proposal to be eligible for resubmission at a later shareholder meeting.

SEC Proposes Amendments to Proxy Voting Advice Rules

On Nov. 5, the SEC voted to propose amendments to its rules governing proxy solicitations that would enhance the quality of conflict-of-interest disclosures that proxy voting advice businesses provide their clients. The proposal includes amending Exchange Act Rule 14a-1(I) to specify the circumstances under which a person who furnishes proxy voting advice is considered engaging in a solicitation subject to proxy rules. The proposal also includes amending Rules 14a-2(b)(1) and 14a-2(b)(3), which govern exemptions from the information and filing requirements of proxy rules. It would set various conditions for proxy voting advice businesses relying on the exemptions, such as including disclosure of material conflicts of interest in proxy voting advice. The proposal also would modify Rule 14a-9 to include example of when failure to disclose certain info in the proxy voting advice could be considered misleading.

NFA Orders Golden Meadow Investments LLC to Withdraw From Membership

On Nov. 6, the NFA ordered Jersey City, New Jersey-based commodity pool operator and commodity trading advisor Golden Meadow Investments LLC to withdraw from NFA membership, and to never again apply for membership or principal status with any NFA member. The decision is based on a complaint issued by the NFA’s Business Conduct Committee, as well as a settlement offer made by Golden Meadow. During an NFA examination of Golden Meadow, the company allegedly failed to produce records of two of its former listed principals, including one that Golden Meadow represented to NFA was its primary owner. The NFA examination also turned up other deficiencies, such as failure to timely file Pool Quarterly Reports and CTA Program Reports.

SEC Division of Enforcement Publishes Fiscal Year 2019 Annual Report

On Nov. 6, the SEC’s Division of Enforcement issued its annual report for fiscal year 2019. The report, which can be found here, details the division’s efforts, highlights several significant actions, and presents the division’s activities from “both a qualitative and quantitative perspective.” Among the highlights: In fiscal year 2019, the SEC brought 862 enforcement actions, including 526 standalone actions. And through its actions, the SEC obtained judgments and orders totaling more than $4.3 billion in disgorgement and penalties, while returning roughly $1.2 billion to harmed investors.

FINRA Orders Four Firms to Pay More Than $12 Million in Restitution Related to 529 Plan Share Classes

On Nov. 6, FINRA announced that Bank of America (NYSE:BAC) subsidiary Merrill Lynch, Pierce, Fenner & Smith Inc. (MLPF&S), as well as Raymond James Financial (NYSE:RJF) subsidiaries Raymond James & Associates, Inc. (RJA) and Raymond James Financial Services, Inc. (RJFS) had agreed to pay more than $12 million in restitution to customers who incurred excess fees within 529 savings plans based on failures to reasonably supervise 529 plan share-class recommendations. Shares of 529 plans are sold in different share classes that offer different fee structures that may benefit investors differently depending on their investment time horizons. Merrill Lynch’s and Raymond James’ firms all failed to ensure registered representatives considered those fee structures when making 529 plan recommendations to customers, specifically those with long-term investment horizons, including failing to establish and maintain a supervisory system and written supervisory procedures. Merrill Lynch was ordered to pay restitution of at least $4 million, RJA agreed to pay more than $3.8 million and RJFS agreed to pay more than $4.2 million.

Proprietary Trading Firm Must Pay Record $67.4 Million in Spoofing Case

On Nov. 7, the CFTC settled charges against proprietary trading firm Tower Research Capital LLC arising from a manipulative and deceptive scheme spanning nearly two years. The CFTC found that Tower engaged in spoofing in equity index futures products traded on the CME and Chicago Board of Trade (CBOT) on thousands of occasions. Tower, through three former Tower traders, did so while placing orders for, and trading futures contracts through, Tower accounts that benefited Tower between at least March 2012 through December 2013, caused more than $32 million in market losses. The CFTC imposed a total of $67.4 million against Tower – the largest total monetary relief ever ordered in a spoofing case. That sum consists of more than $32.5 million in restitution, $10.5 million in disgorgement and a $24.4 million civil monetary penalty.

Wells Fargo to Pay More Than $14 Million For Violating Swap Dealer Business Conduct Standards

On Nov. 8, the CFTC announced it had settled charges against Wells Fargo (NYSE: WFC) subsidiary Wells Fargo Bank, N.A., for violating multiple swap dealer business conduct standards. Wells Fargo failed to deal with a counterparty “in a fair and balanced manner based on principles of fair dealing and good faith,” and failed to implement and monitor systems to ensure compliance with policies and procedures regarding fair and balanced communications with counterparties. Specifically, Wells Fargo entered into a foreign exchange forward contract with a counterparty involving the exchange of U.S. dollars for Canadian dollars. The contract included a requirement to provide a weighted average rate based on actual spot trades, but Wells Fargo didn’t have a system in place to accurately track those trades. Instead, it picked a rate it believed was in the range of the true weighted average, and it provided the counterparty a spreadsheet claiming to calculate the rate, but that didn’t reflect actual trades. Wells Fargo will pay a $10 million civil monetary penalty and $4.475 million in restitution.

Jury Rules in Favor of SEC on Layering, Manipulative Trading Case

On Nov. 12, jurors in a New York federal court ruled in favor of the SEC and against the trading firm Avalon FA Ltd., as well as Nathan Fayyer and Sergey Pustelnik for their roles in an illegal trading scheme that generated more than $25 million in profit. Fayyer and Pustelnik used Avalon FA Ltd., which is headquartered in Kiev, Ukraine, to illegally profit from two manipulative trading schemes, including: a layering scheme that involved placing and canceling orders to trick others into buying or selling stocks at artificial prices; and cross-market manipulation that involved buying and selling stocks to artificially impact options prices.

Fayyer was Avalon’s named owner, and Pustelnik kept his controlling interest in Avalon undisclosed while he was working as a registered representative at Lek Securities Corp., a New-York based brokerage firm, in order to facilitate Avalon’s trading. Lek Securities and its CEO, Sam Lek, who settled with the SEC prior to trial, conceded that the trading occurred and was manipulative.

Unregistered Commodity Pool Operator, Two California Men Charged With $2.3 Million Fraud

On Nov. 13, the CFTC filed civil enforcement action against Main & Prospect Capital, LLC and the firm’s president, Daniel Adam Hewko, as well as his father, Daniel Hewko, for fraud. Since at least August 2014, the defendants have allegedly received more than $2.3 million from at least 19 investors to invest in a pooled investment vehicle operated by Main & Prospect Capital and marketed as the Global Opportunity Fund. The Hewkos told investors that the fund would trade various financial instruments, including stocks, commodities, and foreign currency, but allegedly dissipated and misappropriated fund assets for their benefit. Adam Hewko also had false account statements created that claimed the fund was profitable, and Daniel Hewko emailed the statements to fund investors. When investors tried to withdraw their funds, Daniel Hewko covered up any wrongdoing by telling investors they could not withdraw money because fund assets were in a “trade,” or because of the CFTC’s investigation into the defendants’ conduct. Daniel Hewko also continued to falsely tell investors that their investments had been profitable.

SEC Stops Ponzi Scheme Targeting Seniors and Small Business Owners

On Nov. 19, the SEC filed an emergency action and a temporary restraining order and asset freeze against two Florida men and their companies for an alleged $6 million Ponzi scheme. Neil Burkholz of Boca Raton, Florida, and Frank Bianco, of Pembroke Pines, Florida, through their companies Palm Financial Management LLC and Shore Management Systems LLC, solicited at least 55 investors, many of whom are senior and small business owners, by falsely stating that their proprietary options trading strategies were highly profitable. The defendants invested less than half of investor funds and those investments resulted in almost total losses. The defendants also misappropriated the remaining funds by using them to repay other investors and by transferring approximately $880,000 of investor funds to themselves and their spouses. Burkholz and Bianco sent false reports to investors to conceal their fraudulent conduct and give the investors the impression they were generating positive returns.

BGC Financial, L.P. Ordered to Pay $3 Million for Supervision, Reporting and Recordkeeping Violations

On Nov. 22, the CFTC issued an order filing and settled charges against BGC Financial, L.P., a futures industry voice broker and registered futures commission merchant (FCM), for several supervision, reporting and recordkeeping violations. From at least 2014 to March 2019, BGC failed to establish an adequate supervisory system and to diligently perform its supervisory duties with respect to its traditional and block trading futures brokerage businesses. BGC lacked adequate procedures or processes in such areas as the creation, maintenance and retention of audit trail data, and failed to follow its policies and procedures regarding brokers’ use of personal cell phones to conduct firm business. BGC must pay a $3 million civil monetary penalty and to comply with specified undertakings, including remediation and retention of an outside consultant to assess compliance, recommend improvements, and generate reports on its findings and remediation efforts. The order also requires BGC to submit these reports to the CFTC and to cease and desist from further violations.

CFTC Division of Enforcement Releases Annual Report

On Nov. 25, the U.S. Commodity Futures Trading Commission’s Division of Enforcement (DOE) released its Fiscal Year (FY) 2019 Annual Report. The report includes the division’s success in prosecuting various forms of misconduct in the market, as well as key metrics, including cases filed, relief obtained and trends among enforcement actions. Some highlights include:

The CFTC filed 69 actions during FY 2019 – an increase over the average of the five prior FYs (67.5 actions).
The total monetary relief awarded was more than $1.3 billion, which was a 39 percent increase over FY 2018, and the fourth highest total in CFTC history.
In FY 2019, the CFTC filed more cases involving manipulative conduct and spoofing than any prior year but one (FY 2018).
Approximately 65 percent of all cases filed during FY 2019 involved charges of commodities fraud, manipulative conduct or spoofing.
In FY 2019, the CFTC filed more actions in parallel with criminal authorities than in any prior year.

Former Top Executives of Healthcare Ad Company Charged With $487 Million in Fraud

On Nov. 25, the SEC amended a complaint to charge four former executives of Outcome Health, a healthcare ad company, with fraud in raising $487 million by lying to investors, clients and auditors about the company’s success. Outcome Health charges pharmaceutical company clients to display ads in doctors’ offices. Its former executives, CEO Rishi Shah, President Shradha Agarwal, CFO Brad Purdy and Executive VP Ashik Desai, were all involved in the scheme in which they billed clients and recognized revenue for ads that never ran. The amended complaint also alleges that Outcome Health manipulated third-party studies to conceal problems delivering ads, and overstated its revenue in its audited financial statements for 2015 and 2016 by at least $14.3 million and $30 million.

SEC Proposed Modernizing Regulation of Use of Derivatives by Registered Funds and Business Development Companies

On Nov. 25, the SEC voted to propose a new rule to enhance the regulation of the use of derivatives by registered investment companies, including mutual funds, exchange-traded funds and closed-end funds, and business development companies. The rule would offer a more comprehensive approach to the regulation of funds’ derivatives use. The Investment Company Act limits the ability of registered funds and business development companies to obtain leverage, including by engaging in transactions that involve potential future payment obligations. Leverage is commonly thought of in terms of purchasing securities with borrowed funds. However, derivatives, such as forwards, futures, swaps and written options, can also create future payment obligations. The proposed rule would permit these funds to use derivatives that create such obligations, provided that they comply with certain conditions designed to protect investors. These conditions include adopting a derivatives risk management program and complying with a limit on the amount of leverage-related risk that the fund may obtain, based on value-at-risk. The proposal will be published on SEC.gov and in the Federal Register. The comment period for the proposal will be 60 days after publication in the Federal Register.

Goldman Sachs Ordered to Pay $1 Million for Recordkeeping Violations

On Nov. 26, the CFTC issued and order and simultaneously settled charges against Goldman Sachs & Co., LLC for failing to make audio recordings that are required under CFTC regulations for swap dealers. Goldman began using recording hardware to record the phone lines of trading and sales desks in March 2013. In January 2014, after the installation of a software security patch in one of Goldman’s offices, the recording hardware in that office restarted prematurely and, as a result, failed to record audio. Goldman was unaware of the error for approximately three weeks, until it conducted an unrelated spot-check of the affected office’s recording system, at which point Goldman identified the failure and re-engaged the recording system. The CFTC opened an unrelated investigation that concerned the affected office and requested that Goldman produce certain audio recordings for dates within the period of the recording failure. Because of the recording failure, Goldman was unable to produce all of the requested recordings. The CFTC only learned of Goldman’s failure to keep and maintain the recordings when Goldman informed the CFTC it was unable to produce them in the context of the CFTC’s unrelated investigation. Goldman will pay a $1 million fine and cease and desist from further violations of commission regulations.

SEC Revokes Registration of Adviser After $60 Million Fraud

On Nov. 26, the SEC revoked the registration of International Investment Group LLC (IIG), a New York-based investment adviser, after it committed securities fraud by hiding losses in its flagship hedge fund and selling at least $60 million in fake loan assets to clients. In an effort to continue its deception, IIG allegedly doctored the firm’s records to show that the defaulted loans had been repaid and that the proceeds had been used to make new loans. But there had been no repayment and the purported new loans were fake. IIG consented to a bifurcated settlement under which it is enjoined from future violations of the antifraud provisions of the federal securities laws. The judgment also imposes a preliminary asset freeze, but reserves the issue of any monetary relief, including disgorgement, prejudgment interest and civil penalties, for further determination by the court upon motion of the SEC.

SEC Stops Penny Stock Scheme Targeting Seniors

On Nov. 27, the SEC announced that it filed an emergency action and obtained an asset freeze against NIT Enterprises, Inc. for a South Florida-based investment scheme that defrauded more than 100 retail investors, including numerous seniors. NIT’s CEO Gary R. Smith, Jason M. Ganton and James E. Cleary, Jr., raised $4.9 million from investors while making misrepresentations. They allegedly claimed that NIT was raising money to fund the company’s efforts to develop its radiation protection products for medical and military applications, which would generate significant returns. The SEC alleges that Smith misappropriated $1.25 million or 25% of total investor proceeds to pay for personal expenses, while NIT and Smith have paid 25% of proceeds as undisclosed commissions. The defendants also made baseless promises of NIT’s future profitability, imminent initial public offering, and expectations to “double or triple” their investment. Ganton and Cleary, with Smith’s knowledge, allegedly concealed that they were previously barred by the SEC from acting as brokers and offering penny stocks to investors. Ganton used an alias when soliciting investors. The SEC charged all defendants with violating the anti-fraud and registration provisions of the federal securities laws and charged the individual defendants for, either directly or indirectly, acting as unregistered broker-dealers and violating past SEC orders.

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