[F]or each transaction, respondent executed an agreement (Deposit Agreement) directly with LekUS pursuant to which LekUS deposited the shares in its account at the Depository Trust & Clearing Corporation (DTCC). In each Deposit Agreement, (1) respondent represented that his answers to certain questions were true and acknowledged that LekUS would rely on those representations; (2) LekUS agreed to act as the "Processing Broker" to provide the services of depositing and reselling the shares; and (3) LekUS accepted respondent's "Deposit Securities Request" on certain conditions, including that any claims by respondent or disputes arising from respondent's representations in the Deposit Agreement "shall be governed by New York law and subject to the exclusive venue and jurisdiction of the courts and arbitration forums in the City and State of New York," and that respondent would indemnify LekUS in connection with claims arising from respondent's representations in the Deposit Agreement or from "the deposit process or the subsequent sale of the securities."[FN1]When respondent sought to trade the CBIS shares deposited with LekUS, he communicated with Michael Mainwald, who was located at the office of LekUS, had a LekUS phone number and email address, and was registered with FINRA as the "principal operating [*2]officer" of LekUS.[FN2]= = = = =Footnote 1: Although these documents were headed "Deposit for Securities Request Questionnaires," they include a list of "Terms and Conditions" which imposed obligations on each party and were thus certainly agreements, and were referred to as such by LekUS.Footnote 2: Accordingly, petitioners' claim that Mainwald was exclusively an employee of LekUK is not supported by the record.
SIDE BAR: FINRA Code of Arbitration Procedure for Customer DisputesFINRA Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRAParties must arbitrate a dispute under the Code if:*Arbitration under the Code is either:(1) Required by a written agreement, or(2) Requested by the customer;*The dispute is between a customer and a member or associated person of a member; and*The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
In this case, the record demonstrates convincingly that the parties did not agree to arbitrate the claims asserted by Respondent. The only tether to FINRA arbitration is the assertion by Respondent that he is suing as a customer of Lek US, which is a member of FINRA. The record shows that is not the case. Respondent's customer relationship clearly was with Lek Securities UK Limited ("Lek UK"), not with Petitioner Lek Securities Corporation ("Lek US"). Respondent's attempt to shoehorn this into a customer dispute with Lek US is unavailing.
Abbar is directly on point. First, it held that the existence of a customer relationship under FINRA turns mainly on (i) whether an account was opened with the FINRA member; and (ii) whether the plaintiff purchased services from the FINRA member. 761 F.3d at 275. Second, the case involved a customer relationship between the plaintiff and a UK securities entity in which a related US entity took on the role of implementing transactions on behalf of the UK entity. The same is true here. Respondent's account was opened with Lek UK, not with Lek US. Further, there is no evidence that Respondent purchased any services from Lek US. Instead, the record indicates that the services performed by Lek US were on behalf of Lek UK, which paid for those services in a manner that was not based on transaction volume and thus not tied to Respondent's trading.
The record establishes that respondent was a customer of nonparty Lek Securities UK, Ltd. (LekUK), where he had his account, and was also a client of petitioner Lek Securities Corp. (LekUS), with which he had a series of direct agreements. Under those agreements, LekUS conditioned its provision of depository and execution services for certain trades on respondent's providing certain representations and an indemnity . . .
Petitioners and our dissenting colleague cite to Citigroup Global Mkts. Inc. v Abbar (761 F3d 268 [2d Cir 2014]) in asserting that respondent was not a customer of LekUS and may not, therefore engage in FINRA arbitration with LekUS. However, the facts of this case are distinguishable from the facts in Abbar. There, defendants entered into a complex investment vehicle with CitiUK. CitiUK then transferred its voting rights to an affiliate, Citi New York, whose personnel helped structure the transaction, gave investment advice, and performed other tasks related to the investment vehicle pursuant to an agreement between Citi New York and CitiUK. When the fund crashed, defendants sought FINRA arbitration against FINRA member Citi New York. Noting that defendants had investment agreements only with CitiUK, and had no agreements with Citi New York, the Second Circuit found that defendants had neither purchased goods or services from, nor had an account with, Citi New York and thus could not seek FINRA arbitration with Citi New York.In contrast, here, LekUS performed deposit and resale services for respondent pursuant to the Deposit Agreements between LekUS and respondent. To accomplish this, respondent dealt directly with the principal operating officer of LekUS.Furthermore, while respondent did not pay fees directly to LekUS, he was charged a minimum of $25,000 in fees each month by LekUK, and LekUK paid LekUS fees to provide services to respondent. Respondent's LekUK statements list securities processing fees for the CBIS transactions processed by LekUS. Moreover, contrary to petitioners' counsel's unsupported claim that fees paid by LekUK to LekUS were not commissions or volume-based, dependent on specific transactions performed by LekUS, respondent's LekUK statements list different fees charged for each CBIS transaction that appear to be volume-based [FN4]. Similarly, the dissent's apparent assumption that fees paid by respondent were merely "pass-through" fees charged by the DTCC to LekUS rather than revenue to LekUS is not supported by the record. Accordingly, respondent did pay fees indirectly to LekUS for the services it rendered to him.= = = = =Footnote 4: Indeed, petitioners' counsel admitted at oral argument before Supreme Court with regard to fees paid by LekUK to LekUS, "I don't know if it's a flat fee, honestly. . . ."
Bill Singer's CommentApplying to the facts of this case the definition of "customer" as set forth in Abbar, I find that respondent was not a customer of LekUS and therefore, LekUS cannot be compelled to arbitrate. Initially, as in Abbar, there is no dispute that respondent did not have an account with LekUS. Respondent opened and maintained an account only with LekUK. Further, as in Abbar, [*5]there is no evidence that respondent purchased goods or services from LekUS, either directly or indirectly. Rather, the record indicates that the deposit and liquidation services performed by LekUS were performed on behalf, and at the behest, of LekUK and that LekUS was compensated for its services only by LekUK pursuant to the BSA. There is no evidence that respondent paid any fees directly to LekUS for the services it provided. There is also no evidence that any of the fees paid by LekUK to LekUS in exchange for providing its services were paid by respondent. Indeed, the record establishes that the fees paid to LekUS by LekUK were paid irrespective of whether the services were used, who used such services or LekUS's trading volume. Further, as the Court held in Abbar, the fact that LekUS and its personnel provided services for respondent at the request of LekUK is not evidence that respondent purchased such services from LekUS.Respondent is seeking to compel LekUS to arbitrate merely to avoid the jurisdictional requirements of his customer agreement with LekUK that he litigate his disputes in England and Wales. Respondent commenced the arbitration at issue solely to challenge the freezing of his securities account. However, it was LekUK, and not LekUS, which froze respondent's account.Respondent's assertion that the questionnaire/shareholder agreements he entered into with LekUS are evidence that he purchased services from LekUS, thereby making him a "customer" under the FINRA Code, is unavailing. Before selling unregistered shares for LekUK, LekUS had to conduct a searching inquiry to determine if the shares could be sold pursuant to a valid exemption from registration. To accomplish that goal, LekUS asked respondent to fill out and sign the questionnaire/shareholder agreements, which respondent filled out and signed and returned to LekUK, which, in turn, forwarded the signed questionnaire/shareholder agreements to LekUS. However, the questionnaire/shareholder agreements do not include any terms of purchase of any goods or services and they do not state that respondent is purchasing any goods or services. The agreements provide that "in consideration of [LekUS] accepting this Deposit Securities Request," respondent would, inter alia, indemnify LekUS from any loss or claim arising out of respondent's representations in the questionnaire, the deposit process or the subsequent sale of securities. Notably, LekUS has not asserted any indemnification claim against respondent based on the language in the questionnaire/shareholder agreements. Rather, LekUS only asserted indemnification claims against LekUK arising from the BSA between LekUS and LekUK, to which respondent is not a party.Respondent's assertion that the "pass-through" fees he was charged by LekUK for trading in CBIS securities are evidence that he purchased services from LekUS, thereby making him a "customer" under the FINRA Code, is also unavailing. The pass-through fees relied upon by respondent were charged to LekUS by the DTCC for holding the securities. LekUS then passed such fees on to LekUK, which in turn, passed them on to respondent. However, such fees do not constitute revenue for LekUS, which did not charge respondent any fees at all. Moreover, these fees are charged to respondent by LekUK in accordance with their customer agreement and they appear on respondent's LekUK account statement. . . .
We affirm the Hearing Panel's finding that LSC failed to establish and implement AML policies, procedures, and internal controls that could be reasonably expected to detect and cause the reporting of suspicious transactions and that were reasonably designed to achieve compliance with the Bank Secrecy Act, in violation of NASD Rules 3011(a) and 2110 and FINRA Rules 3310(a) and 2010. We also affirm the $100,000 fine and censure imposed by the Hearing Panel. Finally, we affirm the Hearing Panel's order that the Firm pay $14,776.34 in hearing costs and also order Firm to pay $1,678.34 in appeal costs.
On October 1, 2019, a federal court judge entered final judgments against New York-based brokerage firm Lek Securities Corp. and Chief Executive Officer Sam Lek, who were charged by the Securities and Exchange Commission with facilitating manipulative U.S. trading by a Ukraine-based firm over a three-year period.The SEC's complaint, filed in March 2017, alleged that Lek Securities and Sam Lek helped facilitate manipulative trading schemes by its customer, Avalon FA Ltd., headquartered in Kiev. According to the complaint, Avalon illegally profited from layering, which involved placing and canceling orders to trick others into buying or selling stocks at artificial prices, and cross-market manipulation, which involved buying or selling stocks to artificially impact options prices. The SEC's complaint alleged that Lek Securities and Sam Lek made the schemes possible by giving Avalon access to the U.S. markets, relaxing the brokerage firm's layering controls after Avalon complained, allowing Avalon to conduct the trading activity, and improving Lek Securities' technology to assist Avalon's trading.. . .[L]ek Securities agreed to a three-year injunction requiring it to terminate business with foreign customers potentially engaged in market manipulation or manipulative trading and largely prohibiting it from providing intra-day trading to foreign customers. Lek Securities also agreed to retain an independent compliance monitor for a three-year period and, along with Sam Lek, agreed to permanent injunctions from violations of the charged anti-fraud and manipulative trading provisions. Lek Securities will pay a $1 million penalty plus $525,892 in disgorgement and prejudgment interest, and Sam Lek will pay a $420,000 penalty. In settling the SEC's charges, Lek Securities and Sam Lek admit that as alleged in the SEC's complaint, Avalon's trading activity through Lek Securities constituted violations of the federal securities laws.
3. Between October 1, 2010 and June 30, 2015 (the "relevant period"), LSCI and its CEO, Lek, aided and abetted manipulative trading ("layering") by "Avalon," a customer of the Firm whose master-sub account was known as "the Avalon account." LSCI also aided and abetted Avalon in the operation of an unregistered broker-dealer through the Avalon account. In addition, LSCI committed, and Lek caused, Market Access Rule violations; LSCI and Lek committed supervisory violations; and LSCI committed numerous ancillary violations concerning know-your-customer rules, failure to retain electronic communications, failure to retain complete and accurate Central Registration Depository ("CRD") records, improperly paying transaction-based compensation to an unregistered person, and supervisory violations related to review of electronic communications, ensuring the accuracy of CRD information and enforcing procedures regarding outside business activities. LSCI also failed to comply fully and timely with information requests, and both LSCI and Lek failed to observe high standards of commercial honor and just and equitable principles of trade. The violations occurred on numerous exchanges.4. Taken together, the various violations demonstrate that LSCI and Lek knowingly or with extreme recklessness aided and abetted the misconduct occurring in the Avalon account throughout the relevant period simply because the Avalon account brought in sufficient business to the Firm to make it profitable, notwithstanding numerous red flags and ongoing investigations into the activity by FINRA, the Securities and Exchange Commission ("SEC"), and various exchanges.
"I can confirm that I found out yesterday that the trading of Cannabis Science's shares has been halted by regulatory authorities - clearly the paperwork states 'due to the financials not being filed as a fully-reporting issuer'. While this is not a favorable situation, we are already addressing this matter directly with the authorities to protect the interests of our shareholders and stakeholders," states Raymond C. Dabney, President, C.E.O. and Co-Founder of Cannabis Science.
Cannabis Science, Inc. (CBIS), a U.S. company specializing in the development of cannabinoid-based medicines, has agreed to go private under sanctions by the U.S. Securities and Exchange Commission ("SEC"). All Cannabis Science shareholders and their shareholdings will remain intact under the same name and entity, Cannabis Science Inc., a Nevada Corporation. Cannabis Science shares will no longer be quoted or traded on any stock market exchange.
Once the private corporation status takes effect the Company's President will begin the steps to file a Dutch auction IPO targeting $25,000,000 USD or more with all current shareholders intact with completed financials, first rights IPO offerings for current shareholders, new shareholder IPO offerings, and a new company trading symbol. All Cannabis Science shareholders of record as of the last day trading whether individuals or entities will be eligible for the first rights IPO offering and shareholder loyalty gifts; all other new shareholders will be officially closed-out once the transition to private company status has occurred.