Welcome to FINRA's masquerade ball where the self-regulatory organization hides two entire countries behind a mask of secrecy in a recent regulatory settlement despite naming one American state and one British territory and one sovereign nation in the same document. All of this inconsistent and ironic subterfuge takes place on the pages of a settlement agreement involving alleged failures to disclose. After you get lost in that lonely game FINRA plays, sit back and enjoy an absolutely amazing music video with George Benson, Chaka Khan, and Ray Charles!
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Francisco G. Hervella submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Francisco G. Hervella, Respondent (AWC 2015044201103, June 13, 2016).
In 1994, Hervella was first registered and by July 1, 2011, he was associated with FINRA member firm Invex, Inc., where the AWC asserts that he worked from his home until his voluntary resignation on June 17, 2014. The AWC asserts that Hervella had no prior disciplinary history with the SEC, FINRA, or other self regulatory organization or any state securities regulator.
The Delaware Entity
The AWC concedes that in June 2011, while interviewing with Invex, Hervella provided written disclosure to Invex that he was an as-yet uncompensated 50% owner of what the AWC characterizes as the "Delaware Entity;" however, Hervellas further disclosed his expectation of future compensation. Beyond this pre-hire written disclosure, the AWC asserts that Hervella did not provide to Invex any further written disclosures referencing any other proposed outside business activity.
The British Virgin Islands Entity
After starting his association with Invex, the AWC alleges that on July 29, 2011, Hervella and his business partner incorporated a British Virgin Islands entity (the "BVI Entity"), which was a wholly-owned subsidiary of the Delaware Entity. The AWC alleges that during his association with Invex, Hervella never disclosed in writing or orally his 50% ownership of the BVI Entity, which the AWC characterizes as "outside the scope of his employment." Moreover, the AWC alleges that Invex never approved Hervella's involvement with BVI Entity. FINRA deemed Hervella's non-disclosure and the absence of his firm's approval as constituting violations of FINRA Rules 3270 and 2010.
The New Zealand Entity
In September 2013, the AWC asserts that the "BVI Entity became a director of the New Zealand Entity," which apparently did not share owners or employees with either the Delaware Entity or the BVI Entity. The AWC asserts that Hervella "acted on behalf of the BVI Entity as a director of the New Zealand Entity, Hervella's role was that of signatory."
FINRA deemed Hervella's non-disclosure of his directorship and the absence of his firm's approval as constituting violations of FINRA Rules 3270 and 2010.
Private Securities Transactions in Country A and Country B
Three PSTs (2011 - 2012)
The AWC alleges that during his association with Invex and between July 2011 and April 2012, Hervella participated in three private securities transactions ("PSTs") in South American "Country A." The AWC alleges that the purpose of the PSTs was to help a Spain-based company repatriate money from its Country A subsidiary back to Spain. Hervella purportedly structured transactions by which he converted Country A's currency to U.S Dollars through the purchase of $250 million in U. S Treasury Bills. The AWC alleges that Hervella was paid over $2 million for his advisory role in structuring and supporting the execution of the PSTs. In structuring these three PSTs, the AWC alleges that Hervella engaged in activities outside the scope of his Invex employment and that he had failed to provide the requisite prior written notice to his employer or obtain his firm's approval.
Two PSTs (2013 - 2014)
The AWC alleges that during his association with Invex and between September 2013 and March 2014, Hervella participated in two PSTs in South American "Country B." Thes two PSTs allegedly involved sales by two institutional customers located in Country B of about $4 million in invoices payable in U.S. Dollars in exchange for bonds issued by Country B's government. The AWC alleges that Hervella was paid about $125,000 for his advisory role in structuring and supporting the execution of the PSTs. In structuring these two PSTs, the AWC alleges that Hervella engaged in activities outside the scope of his Invex employment and that he had failed to provide the requisite prior written notice to his employer or obtain his firm's approval.
FINRA deemed Hervella's non-disclosure of the five PSTs discussed above and the absence of his firm's approval as constituting violations of NASD Rules 3040 and FINRA Rule 2010. NOTE: FINRA Rule 3040 was replaced on September 21, 2015, by FINRA Rule 3280.
In accordance with the terms of the AWC, FINRA imposed upon Hervella a $50,000 fine and a 2-year-suspension from association with any FINRA regulated broker-dealer in any capacity.
Bill Singer's Comment
Lemme see if I got this. The AWC names by name the state of Delaware, the British territory of the British Virgin Islands, and the country of New Zealand. For some reason, however, the AWC will not name the two South American countries where five of the cited PSTs took place. Okay, go ahead, you take your best shot as to how you reconcile the masked references by FINRA to Country A and Country B with the full disclosure by FINRA of the names of one USA state, one British territory, and another sovereign nation.
I readily admit that the disclosure of the names of the two masked South American nations makes no difference in terms of the regulatory issues at hand, but since I am an inquisitive bastard with a seemingly unquenchable desire for disclosure, this apparent silliness grabs my attention. I mean, after all, this entire settlement is largely about non-disclosure by Respondent Hervella, yet the AWC doesn't disclose the identities of the two countries where much of Hervella's non-disclosure misconduct occurred. Seriously, if it turns out that Country A was Venezuela and Country B was Argentina, are we to expect that life as we know it will come to an end?
Undoubtedly, there are those of you who would tell me to get a life because the naming of the countries is of no consequence, and, since the disclosure doesn't matter, I shouldn't even bother complaining about FINRA's masquerade. Of course, I would parry your thrust with an equally pithy retort of my own, which would assert that if the disclosures don't matter, then why didn't the regulator make them -- if for no other reason than being consistent with its other disclosures of the state, the territory, and the other nation.
To which you might resort with that overly-used line about a "foolish" consistency, and then we'll discuss hobgoblins, and then we'll get around to Ralph Waldo Emerson, and then hours will turn into days and we will waste a lot of time on what we will both agree is nonsense but, notwithstanding, it was an interesting discussion, and how about we grab a couple of beers from countries of undisclosed origin? And as soon as I see that you've had a tad too much beer, I will ask you how you feel about Brexit in which "Country A" exited from the "Continent B Union." My not knowing when to quit could get us thrown out of the bar.
Welcome to FINRA's masquerade. Now, let's enjoy some wonderful music with Ray, Chaka, and George: