Monday, August 13, 2018

Goldman Director Sues Firm For Whistleblower Retaliation


Christopher Rollins, a former managing director of American multinational investment bank and financial services company, Goldman Sachs (New York, New York), has filed a Complaint against the firm alleging to have been retaliated against for blowing the whistle on Goldman’s anti-money laundering compliance failures relating to an infamous wealthy financier based in Europe. (Christopher Rollins v. Goldman Sachs& Co. LLC, et al., Case No. 18-CV-7162 (S.D.N.Y. Aug. 9, 2018)

According to the Complaint, the financier met with two Goldman bankers, John Storey and Michael Daffey, on the financier’s yacht in August of 2015, to determine how Goldman could assist the financier in business dealings despite the financier’s checkered past. Apparently, from September of 2015 to August of 2016, Storey, Daffey and the firm’s former vice-chairman, Michael Sherwood, leveraged their status with the company and command of Goldman’s risk management systems to help effect transactions connected to the financier, circumventing Goldman’s anti-money laundering controls in the process.

The Compliant specified that transactions connected to the financier included: 1) the issuance of $1,200,000,000.00 in bonds structured by a broker whom the financier had been affiliated with; 2) the establishment of a customer account for an offshore fund which the financier controlled; 3) the creation of a London-based account for the offshore fund to effect a $400,000,000.00 trade; and 4) trading of securities of a foreign company introduced to the firm’s customers by the financier.

The Complaint alleged that Rollins and the financier met merely on a social level; no business relationship was consummated. The financier did, according the Complaint, call Rollins to discuss possible transactions, resulting in Rollins reporting his interactions with the financier to appropriate parties within Goldman.

The Complaint detailed that in August of 2016, a client of Goldman failed to pay for trades involving the securities of the foreign company introduced to the firm by the financier, causing Goldman to experience a brief $85,000,000.00 exposure. Goldman’s financial crimes compliance division, who was responsible for overseeing anti-money laundering controls, purportedly grew suspicious that the trading settlement mishap related to an unlawful pre-arranged trading scheme. The Complaint stated that officers of the financial crimes compliance division figured Rollins was a party to an unlawful scheme.

Apparently, in September of 2016, Rollins was interviewed by Goldman Sachs International’s securities compliance leader, Anil Karpal, as well as other financial crimes compliance division investigators. Rollins was seemingly advised at that time to refrain from engaging in any contact with the financier. The Complaint then stated that Rollins expressed to investigators that he was under the impression that the financier’s business dealings had been vetted through compliance. Rollins contended that he subsequently learned that investigators were not apprised of the financier’s involvement with Sherwood, Daffey and Storey; that information was deliberately concealed from Goldman’s records. In turn, Rollins was supposedly viewed by Goldman as the source of the financier’s business dealings with the firm.

In speaking with investigators, Rollins reportedly contended that his contact with the financier was reasonable and had been supported by instructions from Goldman’s compliance officer, Steven Hadermayer, who provided the greenlight to the financier’s introduction of the trading of the foreign company’s securities. Goldman’s compliance division had apparently not deemed it suspicious for the financier to be involved in those trades, and did nothing to stop those trades from being effected.

Rollins contended in the Complaint that he should have been cleared of any suspicion of wrongdoing following his interview with Goldman’s investigators, or at least not subject of an investigation by those who were tainted with conflicts. Instead, Rollins was reportedly suspended by Goldman. Over the ensuing weeks, Rollins’ suspension remained in place, and the basis of his suspension had apparently never been made clear. The Complaint revealed that Rollins soon became the primary target for the blame of the anti-money laundering compliance failures pertaining to the financier.

According to the Complaint, in an effort to determine why he was falsely accused for Goldman’s business dealings with the financier, Rollins further analyzed the transactions, finding that the questionable activities involving the financier should have altered the firm to conduct further due diligence or even file a suspicious activity report. The Complaint stated that Rollins was cognizant that Commodities and FuturesTrading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) laws and regulations mandated reasonable anti-money laundering procedures to be created and implemented by Goldman in reference to the establishment and surveillance of accounts – particularly those involving speculative or foreign companies.

The Compliant then specified that Rollins reported his suspicion about the anti-money laundering compliance failures being covered up by way of the investigation. Rollins claimed to have recalled being told by Daffey that the $400,000,000.00 trade was a mistake and that Goldman could not afford to be subject of a scandal. Apparently, Daffey caught wind of Rollins’ outspoken concerns about the investigation conducted by Goldman, and attempted to convince Rollins to take the fall for the financier’s business dealings with the firm – Rollins’ job depended on it. The Compliant stated that Rollins refused to accept the blame, resulting in Goldman’s commencement of a disciplinary proceeding in which Rollins was pressured to admit to violating compliance restrictions. The firm; however, reportedly failed to detail the restrictions it claimed Rollins violated.

According to the Complaint, Rollins confronted the firm’s treatment of him through a disciplinary hearing directed by James Esposito, but it was ultimately determined by Esposito that Rollins’ sixteen year employment with Goldman would be terminated effective February 5, 2017. Esposito’s decision was apparently founded on a pretext – he claimed that Rollins breached compliance restrictions relating to the financier’s business dealings despite failing to detail exactly what those restrictions were.

Prior to Rollins’ termination, he apparently submitted a report to Goldman of what he believed to be violations of United States law in reference to Goldman’s compliance mishaps, and complained of a bogus investigation and disciplinary proceeding having been commenced into his activities to cover up Goldman’s conduct. Moreover, Form TCRs had been submitted by Rollins to SEC and CFTC as part of his formal reporting of Goldman’s activities to those regulators.

The Complaint further alleged that Goldman, in addition to terminating Rollins for reporting the firm’s misconduct: falsified information to regulators about Rollins’ activities; defamed him to other employers; and cancelled equity awards totaling millions of dollars. Despite the statements that Goldman made to regulators, the firm reportedly established with Rollins that he never committed any unethical or illegal activities, and that he was not terminated for cause. Moreover, the firm purportedly admitted that the compliance restrictions referenced by Esposito never existed.

According to the Complaint, substantial damages have been requested by Rollins from Goldman due to the firm’s unlawful retaliation of him in violation of the Dodd-Frank Reform Act, 7 U.S.C. §26(h)(1)(A) and 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii), and for the firm’s acts of defamation and fraud.

Cosgrove Law Group, LLC represents former employees in the finance industry against their employers for U5 defamation and whistleblower retaliation. If you feel that you have been retaliated against for blowing the whistle on your employer’s actual or prospective violations of securities laws, call Cosgrove Law Group and speak to our experienced counsel today.

Tuesday, August 7, 2018

FINRA Rule Helps Prevent Abuse

            FINRA Rule 2165 focuses on preventing the financial exploitation of certain “specified adults”.   The rule, put into effect on February 5, 2018, provides for a temporary hold on disbursement of funds or securities from the account of a specified adult.  Two rule changes put into effect include reasonable efforts required to get in touch with a “trusted contact person” and the ability to put a hold on the funds.

            A specified adult is defined as “a natural person age 65 and older; or a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.”

            A temporary hold may be placed on disbursement of funds or securities of a specified adult’s account under certain circumstances:

            1.         “The member reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted;” and
            2.         “The member… provides notification orally or in writing… of the temporary hold and the reason for the temporary hold…;” and
            3.         “The member immediately initiates an internal review of the facts and circumstances that has caused the member to reasonably believe that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.”

            The rule allows the member to get in touch with a “trusted contact person” about the hold on the account.  A trusted contact person is the person who may be contacted about the Specified Adult’s account in accordance with Rule 4512.  “The temporary hold authorized by this Rule will expire not later than 15 business days after the date” the hold was placed.

            These provisions “will allow firms to investigate the matter and reach out to the customer, the trusted contact and, as appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation.  It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.”

            This newly adopted FINRA Rule addresses a long-standing concern in the industry and provides an extra layer of client protection that brokers can utilize.  If you have concerns about your securities account or actions taken by your broker or financial adviser, please contact our firm to see if we may be able to help.

Monday, August 6, 2018

State Securities Regulators Jump in to the Crypto Fray

           The rules and regulations regarding cryptocurrency are still in a state of uncertainty. This is due to the meteoric rise in the market capitalization and popularity of cryptocurrencies overall. Regulation is currently lagging behind the technical innovations and practices involved in the world of cryptocurrency. Governments and regulatory agencies are still struggling to clarify how existing rules apply to cryptocurrencies and are in the ongoing process of creating and clarifying rules regarding the complex world of cryptocurrency. New rules specifically for cryptocurrencies are also likely to be implemented in the future. Therefore, issues revolving around cryptocurrencies are in a state of ongoing change.

            Of particular interest are Initial Coin Offerings (ICOs). Simply put, an ICO can be viewed in a similar manner as an IPO. Often, a newly created cryptocurrency begins with an ICO sale to gather capital. The volatile and risky nature of ICOs means that they attract more attention and scrutiny from regulatory agencies.           

            On May 21, 2018, the North American Securities Administrators Association (NASAA) announced a “coordinated series of enforcement actions by state and provincial securities regulators in the United Stated and Canada” in order to crack down on fraud in cryptocurrency related investment and fraudulent Initial Coin Offerings (ICOs). This series of actions was dubbed “Operation Cryptosweep” and the goal was to eliminate cryptocurrency investment scams. This involves stopping misinformation and fraudulent practices, with a particular focus on Initial Coin Offerings. Regulators “identified hundreds of ICOs in the final stages of preparation before being launched to the public” and “some were determined to warrant further investigation”. Even the major cryptocurrency exchanges have not been immune to investigation by state securities agencies. The Investor Protection Bureau of the Office of the New York State Attorney General has sent Information Demand Letters to Binance Limited, Bittrex, Inc., Coinbase, Inc., and Gemini Trust Company, among others. The actions taken by regional securities regulators against individual cryptocurrencies and cryptocurrency exchanges include Cease & Desist Letters, Emergency Cease & Desist Orders, Information Demand Letters, and Investor Alerts.

Additional information regarding Operation Cryptosweep can be found here.

Author: Kevin D. Chang, Cosgrove Law Group, LLC.

SEC Scrutiny of Cryptocurrencies and Classification as Securities

         The best way to navigate a new cryptocurrency ICO is to see whether or not it passes the Howey Test as stipulated by the Supreme Court in Securities and Exchange Commission v. W. J. Howey Co. 328 U.S. 293 (1946). A transaction will be considered an investment contract (and therefore subject to securities registration requirements) if it is (1) an investment of money in (2) a common enterprise with (3) an expectation of profits from the investment (4) due to the efforts of a promoter or a third party. Three relevant quotes from SEC v. Howey:

For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party…

This definition was uniformly applied by state courts to a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of some one other than themselves.

The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value.

            If a cryptocurrency is indeed classified as a security according to the Howey Test, then it can expect to garner attention from the SEC and it will be required to register as a security with the SEC in accordance with the Securities Act of 1933 and the Securities Exchange Act of 1934.

            A press release from the SEC sheds some additional light on the issue. In the press release dated July 25, 2017, the SEC “found that tokens offered and sold by a ‘virtual’ organization known as ‘The DAO’ were securities and therefore subject to the federal securities laws”. This ruling shows that cryptocurrencies are not immune to investigation and review by the SEC. Furthermore, the SEC stated that “the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology”.

            The SEC Report of Investigation provides an in-depth analysis of why DAO Tokens are securities. The Report states that under “Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a security includes ‘an investment contract’”. The analysis used by the SEC is similar to the one used in the Howey Test in that the SEC defines an investment contract as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”. In the case of The DAO, an important caveat is that in “determining whether an investment contract exists, the investment of ‘money’ need not take the form of cash”. ETH was exchanged for DAO Tokens and “[s]uch investment is the type of contribution of value that can create an investment contract under Howey”. Secondly, it was determined that purchasers of DAO Tokens “were investing in a common enterprise and reasonably expected to earn profits through that enterprise”. The SEC stated that profits include “dividends, other periodic payments, or the increased value of the investment”. Lastly, the investor’s profits “were to be derived from the managerial efforts of others”. The SEC noted that the limited voting rights of DAO Token holders spoke to how DAO Token holders lacked “significant managerial efforts or control over the enterprise”. This analysis can be applied to any new token or coin and yields similar results. Regardless of whether cash or cryptocurrencies are exchanged for a new token or coin, it will be an investment of money according to the SEC. Additionally, the term “profits” is broadly interpreted and can simply mean an increase in value of the investment. If a new token or coin is indeed a security according to the Howey Test, then the safest course of action is to register it as a security with the SEC.

         The SEC press release can be viewed in full here.

         The SEC Report of Investigation on “The DAO” can be viewed here.

Author: Kevin D. Chang, Cosgrove Law Group, LLC. 

Friday, August 3, 2018

Arbitration Panel Finds Merrill Lynch Defamed Former Employee


Merrill Lynch, Pierce, Fenner & Smith, Inc., a brokerage firm registered with Financial Industry Regulatory Authority (“FINRA”) and investment adviser firm registered with Securities Exchange Commission (“SEC”), as well as Merrill Lynch International Finance, Inc. (collectively, the “firms”), have been ordered by an Arbitration Panel to pay former employee, Miguel Andres Ballestas, $750,000.00 in compensatory damages based upon the firms having been found liable for defamation on FINRA Form U5 relating to the circumstances of Ballestas’ termination. (FINRA Office of Dispute Resolution Arbitration Award No. 14-01946, April 30, 2018).

According to the Arbitration Award, the firms brought an arbitration against Ballestas alleging unjust enrichment and breach of contract, contending that Ballestas failed to pay a promissory note executed on January 9, 2009. Ballestas counterclaimed, alleging that the firms, inter alia: breached duties of good fair and fair dealing; violated FINRA Rule 2010; wrongfully terminated Ballestas; breached fiduciary and contractual duties owed to Ballestas; and committed Central Registration Depository (“CRD”) Form U5 defamation pertaining to Ballestas’ termination from the firms.

In the “Termination Disclosure” section of the Form U5, the firms were apparently asked if Ballestas voluntarily resigned from the firms, or had been discharged or permitted to resign from the firms, after allegations were made that accused Ballestas of: (1) violating investment-related statutes, regulations, rules or industry standards of conduct; and/or (2) fraud or the wrongful taking of property. Evidently, those questions were answered by the firms in the affirmative.

The Arbitration Award revealed that the firms collectively sought: $407,451.40, which reflected the outstanding promissory note balance, as well as interest, costs and attorneys’ fees; and for Ballestas’ counterclaim to be completely dismissed. However, Ballestas sought a total of $26,000,000.00 in damages from the firms based upon the loss of Ballestas’ book of business, pension, and deferred compensation, and for having suffered from mental pain and anguish by the firms. Moreover, Ballestas sought for his promissory note to be cancelled or at least offset by service payments pertaining to his employment with those firms, and for his CRD Form U5 to be expunged. Evidently, on June 27, 2017, FINRA Office of Dispute Resolution was provided a notice of settlement regarding a portion of the claims made by the firms and Ballestas against each other.

After having considered the evidence, testimony and pleadings, the Arbitration Panel concluded that the firms were jointly and severally liable for CRD Form U5 defamation of Ballestas, and ordered the firms to pay Ballestas $750,000.00 in compensatory damages. Further, the Arbitration Panel recommended that the firms’ answers in the “Termination Disclosure” section of Form U5 be changed to “No” based on the firm’s initial responses being of a defamatory nature.

Cosgrove Law Group, LLC has represented former employees in several U5 defamation cases nationwide, helping them obtain settlements and awards ranging from $100,000.00 to $3,500,000.00. If you feel that you have been a victim to U5 defamation, call Cosgrove Law Group and speak to our experienced counsel today.

Thursday, June 7, 2018

EX-CITIGROUP BROKER VINDICATED WITH $4M FINRA ARBITRATION AWARD


A Miami broker, formerly with Citigroup, won a nearly $4 million award in a recent FINRA arbitration case regarding wrongful termination.  Christian Gherardi “worked at Smith Barney and other Citigroup units in Miami from the start of his career in 1996 until he was fired in December 2015.”[1]  Gherardi alleged that Citi fired him because it was afraid he would leave the firm and it wanted to retain his $200 million book of business.

            Moreover, Citi was allegedly worried that Gherardi would leave because of a moratorium that had been imposed on the bank which prevented brokers from pursuing new business until the bank got some things in order with its anti-money-laundering program.  “Citi managers alleged that Gherardi had physically threatened other brokers who were trying to poach his accounts.”1  Mr. Gherardi claimed the incidents were distorted by Citi in an effort to terminate him and take his book of business.  Gherardi was unable to take the majority of his substantial book of business with him to his new firm.
  
            The award included “$3.45 million in compensatory damages for wrongful termination, $150,000 for ‘lost quarter’ trail fees and almost $396,000 for deferred compensation.”1  Ironically, Cosgrove Law Group, LLC has obtained awards and settlements of about the same amount for other defamed registered representatives.

            The arbitration award can be viewed here.

-Maria T. Eggert

Wednesday, May 30, 2018

FINRA’S NEW DISCLOSURE REVIEWS MAY HELP LIFT BURDEN FOR FIRMS AND REPRESENTATIVES


Beginning July 9, 2018, FINRA will conduct an individual public records search on every applicant when a broker-dealer files a form U-4 application for registration.  FINRA currently performs this search for all registered persons—but only annually.  This additional records search—
which will satisfy the requirement to perform a search of records for judgments, bankruptcies, and liens only—will provide added benefit to member firms and registered persons, according to FINRA.  In FINRA’s May 18, 2018 Information Notice, FINRA claims this additional search is “likely to: (1) reduce the costs to firms associated with conducting these public records checks, which often involve finding and hiring a vendor; (2) result in more timely reporting of disclosure information to the benefit of regulators, investors and firms; and (3) result in a significant reduction of late disclosure fees related to judgments and liens[1].”

Numbers (1) and (2) seem like probable benefits to both the member firms and the registered persons.  Saying the same for number (3), however, appears to be a stretch.  Regardless, the burden of these public records searches is real, especially to smaller broker-dealers.  FINRA taking over this requirement is a welcome change and one that makes sense given that it is already performing the annual searches.  Firms and agents will still need to respond to and file any items that are found in these searches, but the searches themselves will no longer have to be performed in-house or by a third-party vender for each registered hire. 

Finally, firms and registered persons are still required to report unsatisfied liens and judgments within 30 calendar days of learning of the event as long as the agent is registered and to report other activity, such as certain criminal matters per FINRA Rules.

Cosgrove Law Group, LLC regularly assists registered persons with disclosure matters, regulatory inquiries, registration matters, and other matters related to industry registration compliance.  We also have experience assisting broker-dealers with regulatory inquiries related to their registration filings.


[1] Firms and registered persons are required to report unsatisfied liens and judgments within 30 calendar days of learning of the event. FINRA determines whether a filing is late based on the date the registered person learned of the judgment or lien and, if it is late, will assess the late disclosure fee based on that date. See Information Notice 8/17/12 (Late Disclosure Fee Related to Reporting of Judgment/Lien Events). Occasionally, an individual is unaware of the existence of a judgment or lien. The public records search facilitates the identification and timely reporting of these events