Blog by Bill Singer WEEK IN REVIEW

December 31, 2016

With the onset of a new year, the Blog offers its annual recap of FINRA Rule 3280: Private Securities Transactions of an Associated Person, which sets out the all-important requirements for what we refer to as PSTs. With the Trump Administration on the horizon and the capital markets showing indications of increased public and private offerings, registered persons may be offered opportunities to participate in PSTs. Let's examine FINRA's PST Rule and make sure that we understand what's required. Note Bill Singer's Comment after each rule section. READ

BREAKING NEWS: Federal Appeals Court Says Securities And Exchange Commission ALJs Unconstitutional

As with many great legal battles, this one sort of starts innocuously when a Securities and Exchange Commission ("SEC") Administrative Law Judge ("ALJ") issued an "Initial Decision." In and of itself, not a particularly complicated procedural development; however, the process does raise some interesting questions. As the SEC system works, respondents invest considerable time and money in defending themselves before an ALJ, who, seems to be acting in the role of a judge with the ability to conduct what looks something like a trial and the power to issue what looks somewhat like a final decision -- except, hmmm, at the SEC, the ALJ issues what is called an "Initial Decision" and a vote by the federal regulators' Chair and commissioners is still required to convert that somewhat like preliminary pronouncement into something like a final opinion. As you can well imagine, when an adjudicative process is described by terms such as "somewhat like" and "something like," a clever lawyer may find holes to drive a truck through.  On December 28, 2016, one such clever lawyer drove one hell of a massive truck through the SEC's ALJ system, which may now be damaged beyond repair. READ

5 Years Later: The Politics Of Wall Street Regulation Is Unabated

As the Trump administration prepares to launch, Wall Street prepares for some form of deregulation, which has been characterized by supporters as the lessening of ineffective and burdensome regulation but by opponents as an anti-investor undertaking. There are those Wall Street reformers who favor strengthening the present regulatory regime. There are those Wall Street reformers who favor paring back the bloated regulatory bureaucracy and its burdensome rulebook. Then there are those Wall Street reformers who are less doctrinaire and prefer a blended approach. Regardless of where you stand, it seems beyond debate that Wall Streets regulators and regulations have largely failed both the financial services community and public investors. The Great Recession was a testament to that failure.

My personal views on what needs to be done remain largely unchanged after some three decades; and, as demonstrated in the five-year-old speech below, I remain a critic of the present financial regulatory system and an agitator for more creative solutions. At heart, I am a libertarian (with a small "l"). I see no benefit bestowed by our overblown, centralized government. I see no track record of compelling success emanating from the ever-ballooning pages of laws, rules, and regulations that no one understands and no individual or organization seems capable of effectively enforcing. I am unaware of any meaningful cooperation among the silos of regulators and, to the contrary, see only folks jockeying for position with the media in an unseemly race for headlines. 

Stand where you will. Proudly proclaim yourself a supporter of progressive politics and Bernie Sanders or Elizabeth Warren. In the alternative, proudly proclaim yourself a Trump voter and an unrepentant advocate for deregulation. How you label yourself is of no concern to me. As we used to say in the Sixties: Let your freak flag fly! In the end, it's all about results and improvements, regardless of the source or the gift-wrapping. There's got to be a better way than what we have. Desperately, we need to find folks outside of the thinning gene pool of the last several generations of Wall Street regulators.  Every so often, we are, indeed, compelled to toss out the baby with the bathwater. 

Whatever the tug of war, we must cease being a nation that ponders everything and resolves nothing. We must implement a more effective regulatory scheme to protect investors and also to promote reasonable, legitimate business interests. That being said, the price for such reform must never take the form of investors left naked and bleeding in the street. Similarly, we must always be careful when meddling with the primordial forces of Wall Street regulation. READ

Preet Bharara, the United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation ("FBI"), announced the arrest of IAT HONG and the unsealing today of a 13-count superseding indictment charging HONG, BO ZHENG, and CHIN HUNG (the "Defendants").  The Defendants are charged with devising and carrying out a scheme to enrich themselves by obtaining and trading on material, nonpublic information ("Inside Information"), exfiltrated from the networks and servers of multiple prominent U.S.-based international law firms with offices in New York, New York (the "Victim Law Firms"), which provided advisory services to companies engaged in corporate mergers and acquisitions ("M&A transactions").  The defendants targeted at least seven law firms as well as other entities in an effort to unlawfully obtain valuable confidential and proprietary information.  HONG, a resident of Macau, was arrested on these charges on December 25, 2016, in Hong Kong and is now pending extradition proceedings.  HONG was presented for an initial appearance on December 26, 2016, before a Judge in Hong Kong and is expected to have his next court appearance on January 16, 2017.

SEC Civil Complaint:

The Securities and Exchange Commission today charged three Chinese traders with fraudulently trading on hacked nonpublic market moving information stolen from two prominent New York-based law firms, racking up almost $3 million in illegal profits. The SEC is also seeking an asset freeze that prevents the traders from cashing in on their illicit gains. Today's action marks the first time the SEC has charged hacking into a law firm's computer network.

The SEC's complaint alleges that Iat Hong, Bo Zheng, and Hung Chin executed a deceptive scheme to hack into the networks of two law firms and steal confidential information pertaining to firm clients that were considering mergers or acquisitions.

According to the SEC's complaint, the alleged hacking incidents involved installing malware on the law firms' networks, compromising accounts that enabled access to all email accounts at the firms, and copying and transmitting dozens of gigabytes of emails to remote internet locations. Defendants Hong and Zheng in particular coveted the emails of attorneys involved in mergers and acquisitions, as they exchanged a list of partners who performed the work at one of the law firms prior to the hack at that firm. . .

UPDATE: Scottsdale Sues FINRA In Edgy Effort To Halt Disciplinary Case

Wall Street is regulated by the federal Securities and Exchange Commission ("SEC"), by state securities divisions, and by the self-regulatory organization ("SRO") the Financial Industry Regulatory Authority ("FINRA"). On top of that regulatory regime, we should also add the Federal Bureau of Investigation, the Department of Justice, the United States Attorneys, the states's Attorneys General, and, in some cases, local county or district attorneys. For such a prodigious tower of oversight, it's puzzling how poorly it all works -- or fails to. Feuding regulators battle over turf and precious media exposure instead of walking the beat. Competing regulators inefficiently pursue similar investigations seeking the same documents resulting in redundant charges. Adding insult to injury, public investors and industry participants frequently complain about being sent from an examiner to a supervisor to an office to a division to a department to an agency -- all of which culminates with no one able to solve a problem or willing to take responsibility. The process is endless,suffocating, and impotent.

For much of my three-plus decades on Wall Street, I have waged an often lonely but persistent battle in favor of regulatory reform. Pointedly, I have long advocated the end of SROs and a modernization of the tired policies and practices in place at the SEC. See, for example: End The Politics Of Wall Street Regulation: Decentralize FINRA And The SEC( BlogNovember 16, 2011). A recent case filed against FINRA in federal court raises many issues about the state of Wall Street regulation and underscores the need to bring about overdue reform. Based upon a recent Fourth Circuit Opinion, however, that reform does not appear on the horizon. READ

Daniel Christian Stanley Powell founded and operated Christian Stanley, Inc. When you go by four different names, I guess it's pretty easy to harvest two of those for use in your own business. The four-named Mr. Powell touted his business plan for the purchase of life insurance policies from insured folks (with ongoing premium payment) and making the beneficiary of those purchased policies Christian Stanley, Inc. Years later, when it all came crashing down, this inventive fellow would find himself in prison. That's bad enough. What's worse is that when it finally comes time for the Securities and Exchange Commission to decide what needs to be done to protect the public from this guy, well, you're not gonna believe this, but the federal regulator couldn't reach inmate Powell by telephone. A few days before Christmas, Powell was deemed to have defaulted and a Bar was imposed on his securities industry future -- or so it seems . . . maybe? READ