On Wall Street, if you are found to have engaged in certain misconduct or criminal activity, you're tagged with the label of a "Bad Boy," which can impact your ability to engage in various forms of employment, pursue various business ventures, and may delay your ability to issue public offerings. Pointedly, being deemed a "Bad Boy" may invoke the Reg D "ineligible issuer" disqualification, which is a really, really big pain in the ass for many of Wall Street's large institutions. The invocation of a Bad Boy disqualification is supposed to get your attention and ensure that you feel some pain for your misconduct. In theory, that's a great idea. In practice, it's often a joke -- as demonstrated in today's featured DOJ and CFTC $67 million settlement with Tower Research Capital LLC.
Late last week, Aegis Frumento, Esq. had a call set up with two SEC Enforcement Staff attorneys who were investigating a situation described by a whistleblower client of his. They had been working on it since 2017, and Aegis and his client had spent over $100,000 in legal time fleshing out the story for them. Aegis was expecting them to ask to speak to his client again, as they had a couple times before, or perhaps to meet his client in person. Then Jane Norberg, the head of the Whistleblower Office, got on the phone. That's seldom good news.
In recent weeks, we got prosecutors and regulators taking victory laps in response to what they are touting as the "shut down" of a Ponzi scheme. Frankly, it's not much of a victory and those folks who are running around the track shouldn't be taking those strides. Every Wall Street cop was on this beat: FINRA, SEC, and DOJ. Funny, isn't it, how folks who won't actually walk the beat are always ready to run the victory lap. Although the press releases regale us with the sordid details of a decade-long scam, what gets lost amid the back-slapping and self-promotion is the horrific financial and emotional devastation brought upon the victims.
In 2016, the SEC sued Defendants Liu and Wang for their roles in an alleged EB-5 scheme whereby at least 50 Chinese investors were purportedly defrauded out of some $27 million. As the case made its way through the federal courts, the SEC prevailed via injunctive relief, civil penalties, and disgorgement. On appeal to the Supreme Court, the Defendants argued that the lower courts were not empowered to order disgorgement in the amount set. The Supreme Court granted certiorari and may subsequently determine whether court-ordered disgorgement is an impermissible "penalty" or a permitted form of "equitable relief."