Friday, September 21, 2018

A Closer Look At Regulatory Action Disclosures On Form U4

Financial advisors who become registered with a Financial Industry Regulatory Authority (“FINRA”) member firm should be knowledgeable about Form U4, as it addresses a broad spectrum of historical events that are required to be reported to FINRA. FINRA has offered some interpretative guidance, some of which is explained below, as it relates to Form U4 actions.

Question 14 of FINRA Form U4 concerns criminal disclosures, regulatory action disclosures, civil judicial disclosures, customer complaints, arbitrations, and civil litigation. To begin with, and perhaps to no surprise, an individual who has been charged or convicted of a felony is required to disclosure that information on Question 14A. Even, an individual who has even been pardoned for a crime must report the conviction, according to FINRA’s interpretive guidance.

Financial advisors should take note that misdemeanors are also required to be reported on Form U4 in certain cases. For example, an individual who has been charged or convicted of a misdemeanor involving investments, fraudulent conduct, or wrongful taking of property would be required to disclose those incident(s).

Question 14C prompts individuals to state whether they have been found to have committed certain types of misconduct by the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) including: making false statements or omissions; committing a violation of investment-related statues or regulations; and causing a business to have its authorization to do business revoked or suspended.

individuals are additionally required to report on Question 14C whether they have been found by the SEC or the CFTC to have willfully violated Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Commodity Exchange Act, or Municipal Securities Rulemaking Board (MSRB) rules. Disclosure is also mandated when the individual has been found to have aided and abetted a person’s violative activities, or failed to supervise another person responsible for committing violations in the securities industry.

Similarly, Question 14(E) requires that individuals report if they have been found by a self-regulatory organization to have made false statements or omissions, violated SEC rules; or caused an investment-related business to lose authorizations to conduct securities business. Any suspensions or expulsions from those self-regulatory organizations are required to be reported. Plus, disclosure is necessitated when there have been any findings of federal securities law violations committed by the individual, or someone who the individual supervised or aided.

FINRA confirms in Question 14G that individuals are required to disclose to FINRA when they are notified that they have become subject of a regulatory complaint or proceeding brought on by the SEC, CFTC, other federal agencies, state securities commissioners and self-regulatory organizations. Investigations, according to FINRA, are signaled by the issuance of a Wells Notice to the individual or the individual being notified from FINRA staff that formal disciplinary action has been recommended by FINRA. However, not all things mean an investigation to FINRA. For example, requests for information, regulatory inquiries and subpoenas, per se, apparently do not constitute investigations.

FINRA’s guidelines further reveal that when an individual has been subject to an order from a foreign regulatory agency that is later vacated, the individual generally has to report the order because of the advisor’s obligation to report the original findings. Exceptions exist, according to FINRA’s guidelines, where the regulatory agency not only vacates the order, but confirms an intent to make that order have retroactive effect.

Individuals who are the subject of a FINRA Acceptance, Waiver and Consent are also required to disclose this information so long as the AWC concerns findings as to the individual’s misconduct identified in Question 14(E). There are some situations; however, where violations of the rules do not have to be reported, including some “minor rule violations” where the fine is no more than $2,500.00 and the individual does not contest the fine.

Financial advisors and stockbrokers often wonder how to go about making disclosures concerning negative events. If you are in a situation that mandates disclosure, such as a pending regulatory investigation, it is best to consult with an attorney. If you need assistance, you may wish to consult with the experienced counsel at Cosgrove Law Group.

Thursday, September 20, 2018

SEC Affirms FINRA’s Findings of EKN Stockbroker’s Form U4 Violations


The Securities and Exchange Commission (“SEC”) affirmed a Financial Industry Regulatory Authority (“FINRA”) Decision in which EKN Financial Services Inc. stockbroker, Louis Ottimo, was assessed a $25,000.00 fine and two-year suspension in all capacities pursuant to findings that he willfully failed to accurately and timely update his Uniform Application for Securities Industry Registration or Transfer (“Form U4”) to reflect judgments, unsatisfied tax liens, and a bankruptcy filing. (In the Matter of the Application of Louis Ottimo, Admin. Proc. File No. 3-17930 (June 28, 2018).

Back on August 22, 2013, FINRA’s Department of Enforcement filed a Complaint against Ottimo alleging that he, inter alia, violated FINRA Rules 2010, 1122, NASD IM-1000-1, and Article V, Section 2(c) of FINRA’s By-Laws by deliberately failing to disclose facts on his Form U4. An Extended Hearing Panel found Ottimo to have committed the violations, and assessed a $25,000.00 fine and two-year suspension; however, sanctions were not imposed in light of Ottimo being barred by the Extended Hearing Panel for a more serious act: committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

On appeal, the National Adjudicatory Council affirmed the Extended Hearing Panel’s findings of Ottimo’s Form U4 violations. Ottimo subsequently appealed to the SEC, who sustained FINRA’s findings with respect to Ottimo’s Form U4 violations.

Ottimo became registered with EKN Financial Services Inc. on March 9, 2009. Because he was registering with a FINRA member firm, Ottimo was obligated to submit a Form U4. Ottimo, like any associated person, was obligated by FINRA rules to keep his Form U4 current at all times. Under FINRA By-Laws Article V, Section 2(c), this meant that Ottimo was required to update his Form U4 within thirty days of learning facts or circumstances giving rise to the need to amend the form.

Question 14.M on the Form U4 prompted Ottimo to disclose whether he had any liens or judgments that were unsatisfied, and question 14.K prompted Ottimo to disclose whether he, or any organization that he controlled, filed a bankruptcy petition within the prior ten year period. The findings stated that after Ottimo commenced employment with EKN Financial Services Inc., he continually neglected to accurately and timely report information on his Form U4 concerning a bankruptcy filing, six unsatisfied civil judgments and seven unsatisfied liens.

Specifically, the findings stated that Ottimo failed to report five of the tax liens issued from January 2010 to April 2010 on his Form U4 until September 2010. In addition, a November 2010 tax lien was not reported by Ottimo on his Form U4 until June 2011, and a June 2011 tax lien was not reported until April of 2012. Evidently, Ottimo’s reporting of the liens occurred well after FINRA’s thirty day time limit for reporting. Critically, Ottimo revealed in a FINRA hearing that he was cognizant about FINRA’s requirements – but he obviously disregarded them.

Further, from March 2008 to April 2010, a total of six civil judgments had been entered against Ottimo, where Ottimo failed to accurately and timely report those judgements. One of the judgments against Ottimo on June 4, 2009 had been vacated on September 9, 2009. Despite Ottimo having amended his Form U4 on four occasions between June 2009 and August 2009, he failed to report that unsatisfied judgment. Notwithstanding the judgement being vacated, Ottimo was still subject to the reporting requirement.

In addition, Ottimo failed to report a bankruptcy petition for a company he founded and which he served as president, Wheatley Capital Corporation. The findings stated that Wheatley filed for bankruptcy on April 27, 2010, and the bankruptcy petition had been signed and submitted by Ottimo. Ottimo evidently neglected to make the bankruptcy known on his Form U4 until April 19, 2002.

In the Opinion, the SEC confirmed FINRA’s findings that Ottimo’s failure to make timely disclosures of liens, civil judgments and a bankruptcy was violative of FINRA By-Laws Article V, Section 2(c). SEC also found that by way of Ottimo’s Form U4 being misleading and inaccurate, he violated FINRA Rules 1122 and NASD IM-1000-1. And as a consequence of violating FINRA Rules 1122 and NASD IM-1000-1, the SEC confirmed that Ottimo violated FINRA Rule 2010.

Moreover, the SEC concluded that Ottimo was subject to a statutory disqualification because of his (1) willful conduct in neglecting to update his Form U4, and (2) material omissions relating to his Form U4. The SEC turned to Securities Exchange Act Section 3(a)(39)(F), which provides a basis for statutory disqualification when a FINRA member intentionally omits a material fact in applying for association with a member.  Finally, the SEC found Ottimo’s conduct willful given Ottimo’s knowledge of his disclosure obligations and the significance of that information (six unsatisfied civil judgements that totaled more than $440,000.00 and unsatisfied tax liens that totaled more than $260,000.00) to investors, employers and regulators.

Interestingly enough, the SEC reversed a part of FINRA’s fraud findings, and in so doing, set aside the barring of Ottimo and remanded the matter to FINRA to determine what sanctions it deems appropriate. The SEC invited FINRA to reconsider its decision not to impose sanctions against Ottimo for his willful Form U4 violations.

Financial advisors and stockbrokers often question whether to make disclosures concerning negative events. If you are in one of those situations, it is best to be careful versus taking a risk that could possibly end your career in the securities industry. If you need assistance with your Form U4 matter, call (314) 563-2490 today to consult with the experienced counsel at Cosgrove Law Group.

Sunday, September 16, 2018

FINRA Sanctions Against Oppenheimer & Co.


The Financial Industry Regulatory Authority (FINRA) sanctioned Oppenheimer & Co. Inc. more than $3.4 million in November of 2016 due to Oppenheimer’s failing to report required information to FINRA, failing to produce documents in discovery to customers who filed arbitrations, and for not applying applicable sales charge waivers to customers. The $3.4 million in sanctions included $1.575 million in fines and $1.85 million paid to customers. In regards to the customers who filed arbitrations, FINRA ordered Oppenheimer to provide the claimants with the documents that they failed to produce and pay said claimants more than $700,000. The remainder of the $1.85 million was paid to eligible customers who qualified for, but did not receive, applicable mutual fund sales charge waivers.
            These violations by Oppenheimer spanned several years and included failures to report “more than 350 required filings including securities-related regulatory findings, disciplinary actions taken by Oppenheimer against its employees, and settlements of securities-related arbitration and litigation claims.” Additionally, FINRA stated that Oppenheimer, on average, made these filings “more than four years late.” This incident was not Oppenheimer’s first run in with FINRA. Despite prior FINRA investigations resulting in Oppenheimer’s revision of its supervisory procedures, FINRA alleged that Oppenheimer had in fact failed to adopt adequate procedures for reporting regulatory events involving its employees. In March of 2015, FINRA fined Oppenheimer $2.5 million and ordered the firm to pay $1.25 million in restitution for failure to supervise former Oppenheimer broker Mark Hotton. In that instance, FINRA found that Oppenheimer “failed to make more than 300 required filings to FINRA about some of its brokers in a timely manner” with the filings being, on average, “238 days late.”

The FINRA news releases can be viewed at the following links:



An example of a Motion for Sanctions in a FINRA arbitration can be found below:











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.