FINRA's BrokerCheck Posting Terminations More Quickly, but Firms Still have 30 days to Report

FINRA's RegulatoryNotice 15-39 is getting a little blog time, but sadly some law firms writing about it seem to misunderstand not only the Notice itself, but also the implications of the changes that have been implemented.  

FINRA Rule 8313 governs the body’s public disclosure of the professional history, business practices, and conduct of their security industry member firms, associates, and those affiliated with the Central Registration Depository (CRD). The Notice, issued December 12, 2015, advises of the approved change to this rule that effects the timeframe in which FINRA releases information to the public through its online BrokerCheck report system.

FINRA currently requires firms to report the termination of a representative’s registration/employment with them within 30 days of the termination through the CRD system[1]. In other words, once a representative leaves or is fired from his or her job with XYZ Financial Services, XYZ has 30 days to file a Form U5 regarding that termination. Once the U5 has been processed, it becomes available for FINRA to post on BrokerCheck, and the states to provide in the CRD Snapshot. 

The Notice states that the time FINRA must wait (after processing the filing) before making the U5 available for public access has decreased by 80 percent, from 15 days to three (3).  While this is a big change, and worthy of plenty of blog time, it in no way effects the 30-day window employment firms have to make the U5 filings.  

Now to the real heart of the matter:  Fairness.  

According to FINRA, “a three-business-day waiting period is more reasonable than a 15-day period because it allows investors to more quickly access disclosure information reported on Form U5 while at the same time still providing brokers with the opportunity to comment on the reported disclosure event.” FINRA claims this was necessary for it to fulfill its mandate to, “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest[2].”  

While FINRA's argument is for prompt disclosure to the public, they miss a key element in this process—the accuracy of the firm's Form U5 filing.  The problem is that firms sometimes have reasons to file improper or down-right false U5s[3]. (See a previous blog titled “How to Terminate,Discredit, and Interfere with a Financial Adviser: the U-5.”) 

Until FINRA member firms are held accountable for improper U5 termination language, the shorter window does little to ensure that fair and accurate information is being provided to the public, much less in a prompter fashion.  The initial 15-day window was selected to provide the representative with at least some amount of time to respond to the filed termination language before it became public.  Changing that window to three days eliminates that opportunity.  While FINRA seems to be trying to make strides to be more transparent and customer-friendly, they once again ignore that their own members are, at least initially, able to wantonly disparage brokers and reap the benefits that an improper, overly harsh, inaccurate, or unfair U5 can bring to them.  

David Cosgrove and Cosgrove Law Group, LLC have handled many U-5 defamation cases over the past several years. If you believe you are a victim of U5 defamation, please contact our firm and speak with one of our qualified attorneys.

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[1] The CRD is an online registration and licensing database that allows for the filing of required forms related to the securities industry that must be submitted for a multitude of reasons, such as “Form U5 – Uniform Termination Notice for Securities Industry Registration.” Regardless of the circumstances surrounding a representative leaving the firm to which they are registered, a U5 must be filed by the firm with the CRD within 30 days of the date of termination, as well as be provided to the representative. FINRA determines what portions of the CRD filings become publicly available on BrockCheck.

[2] Securities and Exchange Commission (2015 September 25). Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Change to Amend FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to Reduce the Waiting Period for the Release of Information Reported on Form U5 (Release No. 34-75988; File No. SR-FINRA-2015-032) [electronic format]. Retrieved from https://www.sec.gov/rules/sro/finra/2015/34-75988.pdf

[3] Most U-5 disclosures, however, are free of defamatory content or tortious intent. In other words, most broker-dealers satisfy their obligation to ensure a full, fair, and accurate reporting. There are, however, far too many times where this is not the case.

SEC Continues to Crack Down on EB-5 Fraud

Late last year, investors who claimed the $8.5 million frozen by the Securities and Exchange Commission (SEC) was rightfully theirs were denied access to the money by a federal judge. U.S. District Judge Joan Lenard ruled that management of the funds would continue with a court-appointed receiver, initially established following the filing of a fraud case against Liliy Zhong. The suit claims that Zhong and her company EB5 Asset Manager LLC obtained the money through fraudulent promises to Chinese investors of U.S. visa acquisition via the federal EB-5 program.[i]

 

Established in 1990, the EB-5 Immigrant Investor Program was designed to attract foreign capital and stimulate national job growth. The creation of ten U.S. jobs and an investment of $1 million ($500,000 under certain circumstances) procured for the investor a permanent resident visa.[ii]

While individual businesses may participate, the U.S. Citizenship and Immigration Services (USCIS) registers some companies as EB-5 “regional centers” that seemingly have the ability to satisfy the requirements of the program. These centers also ostensibly have the capacity to accept and direct funding from foreign investors to promote the required economic development.[iii] 

Though expansion of the program in 1993 relaxed job requirements by allowing the inclusion of indirect growth and decreased managerial oversight, it was not until the Great Recession that utilization of this visa system skyrocketed, increasing from 1,360 conditional visas issued in FY2008 to more than 10,000 in FY2014.[iv]

Such an increase in the program’s use has brought a corresponding increase in those attempting to take fraudulent advantage of it. According to the SEC, Zhong misappropriated funds investors were told would be utilized in construction projects, instead purchasing luxury cars, a yacht, and multi-million dollar home. [v] In a similar case, Bingqing Yang has been accused by the SEC of executing a $68 million Ponzi-like scheme, with $8 million raised from EB-5 Chinese investors, to provide a life of luxury.[vi]

Yang promised those seeking to obtain U.S. residency they would do so through investment in eight oil and gas drilling projects with one of her companies. In reality, the company was hopelessly in debt and the money simply lined Yang’s pockets.[vii]

It is not just Chinese nationals targeted by EB-5 profiteers. According to the SEC, Marco and Bebe Ramirez fraudulently raised $5 million from investors initially in Mexico, then Egypt and Nigeria. Utilizing promises of obtaining green cards, the couple began raising money prior to being certified as a regional center. These funds were diverted into other businesses and for personal use. Some were even used to pay a previous investor, creating a Ponzi-like scheme.[viii]

The exploitation of the EB-5 program has become so common the SEC Office of Investor Education and USCIS issued a joint warning, alerting the public to this potential misuse. The statement offered important clarification, including the lack of guarantee in obtaining permanent residency and an absence of government approval of investment opportunities, as well as advice and links to official websites for further information.[ix]  

Government lawmakers and auditors have called into question the ability of the immigration law specialists at the USCIS to oversee a program requiring financial regulation and investment knowledge.[x] If you feel you may have fallen victim to such a scam, please contact an attorney for further direction.

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[i] Wickham, A. (2015, December 1) Investors Can’t Touch Assets in $8.5M EB-5 Fraud Row [electronic format]. Retrieved from http://www.law360.com/articles/732402/investors-can-t-touch-assets-in-8-5m-eb-5-fraud-row

[ii] EB-5 Program: Success, Challenges and Opportunities for States and Localities (2015, September 17) [electronic format]. Retrieved from http://bipartisanpolicy.org/library/eb-5-visa-program/

[iii] SEC Halts Texas-Based Scheme Targeting Foreign Investors Seeking U.S. Residency Through EB-5 Visa Program (2013, October 1) [electronic format]. Retrieved from http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854731

[iv] EB-5 Program: Success, Challenges and Opportunities for States and Localities (2015, September 17) [electronic format]. Retrieved from http://bipartisanpolicy.org/library/eb-5-visa-program/

[v] Wickham, A. (2015, December 1) Investors Can’t Touch Assets in $8.5M EB-5 Fraud Row [electronic format]. Retrieved from http://www.law360.com/articles/732402/investors-can-t-touch-assets-in-8-5m-eb-5-fraud-row

[vi] SEC Charges Oil Company and CEO in Scheme Targeting Chinese-Americans and EB-5 Investors (2015, July 6) [electronic format]. Retrieved from http://www.sec.gov/news/pressrelease/2015-141.html

[vii] ibid

[viii] SEC Halts Texas-Based Scheme Targeting Foreign Investors Seeking U.S. Residency Through EB-5 Visa Program (2013, October 1) [electronic format]. Retrieved from http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854731

[ix] Investor Alert: Investment Scams Exploit Immigrant Investor Program (2013, October 9) [electronic format]. Retrieved from http://www.sec.gov/investor/alerts/ia_immigrant.htm

[x] EB-5 Program: Success, Challenges and Opportunities for States and Localities (2015, September 17) [electronic format]. Retrieved from http://bipartisanpolicy.org/library/eb-5-visa-program/

DID YOU JUST BUY OR SELL AN UNREGISTERED SECURITY?

Generally speaking, if an investment is a security it either needs to be registered or exempt from registration. And yet it is far too commonplace to read headlines about enforcement actions related to the sale of unregistered securities, or about defrauded investors lured in to the glittery promises of unvetted, unregistered, high-risk products. In some instances the issuers did know, or should have known, that the investment instruments were indeed securities. Or the issuer misunderstood the scope or technicalities of a registration exemption. And finally, I have, on some occasions, dealt with regulators that did not or could not accept the fact that a financial instrument was a non-security beyond their jurisdiction. But I digress.

In 2010, FINRA filed a Notice seeking a Temporary Cease and Desist Order against Pinnacle Partners Financial Corporation (“Pinnacle”) of San Antonio, Texas. FINRA alleged that, among other things, Pinnacle was selling private placements in unregistered security interests in oil and gas ventures. Pinnacle issued a statement denying that its sales suffered from fraudulent material omissions, but it is unclear if they denied that their oil and gas investments qualified as a security or if they were securities that met a registration exemption. Again, many in the industry, as well as consumers, fail to appreciate the distinction between a security, a security that is exempt from registration, and a security transaction that is exempt from registration. And, of course, even exempt transactions, such as those pursuant to Reg. D, Rule 506 require a filing with the SEC and state regulators.

Pinnacle and its president consented to a temporary cease and desist order at the beginning of 2011. But they were suspended a year later, and expelled a year after that. 

So what's all the fuss about? If a Broker-Dealer cannot distinguish a security from a non-security, there may be other basics for which they lack competence. Sure registration is not a panacea. Many investors get snookered on registered investments. But the fact that a security is illegally unregistered, or misidentified as a non-security, is frequently the tip of the ice berg. Indeed, Broker-Dealers such as Pinnacle take on substantial due diligence, record keeping and compliance obligations pursuant to FINRA Rule 3040 when their sales force is pushing securities sponsored by third-parties. And, of course, FINRA has issued substantial guidance regarding the heightened risks and ancillary Broker-Dealer obligations of non-conventional investments.

So: Buyer and Broker beware. If you are a buyer, and it looks, walks and quacks like a security—it probably is one. Same holds true for the Broker-Dealer and it's FA's. Once one realizes it is a security, both the customer and the salesperson should expect to receive an open and thorough PPM as well as back-up due diligence upon request. If it is not available, you cannot do your due diligence, which is a good sign that you shouldn’t be buying or selling it.  

2015: (Another) Year for Ponzi Schemes

According to the Securities and Exchange Commission (SEC), Homero Joshua Garza used his two Bitcoin mining companies to conduct a Ponzi scheme that collected $20 million from over 10,000 investors between August and December of 2014.[i]

Bitcoins, or other such cryptocurrencies, are digital methods of exchange that exist outside of our common centralized-banking system. These cryptocurrencies occur in encrypted blocks, finite in number, which can be “mined” using powerful computers to unencrypt the information. In doing so, the encryption of remaining units becomes more difficult, artificially creating scarcity and value.[ii]

Mining can also create value for those computers who achieve decryption, through the awarding of units of virtual currency. According to the SEC, Garza convinced investors that his companies had the computing ability to mine and achieve this decryption, thus earning value based on a physical piece of hardware that would operate virtually.[iii]  

Included in the complaint filed by the SEC on December 1, 2015, Garza did not own enough computing power to fulfill its promises to investors, conducted little to no mining activity, and made payments on investments with money collected from other investors.[iv]

According to Paul G. Levenson, Director of the SEC’s Boston Regional Office, “Garza and his companies cloaked their scheme in technological sophistication and jargon, but the fraud was simple to its core: they sold what they did not own, misrepresented what they were selling, and robbed one investor to pay another.”[v]

Garza was not original in his tactics. In 1919, Charles Ponzi, for whom the scheme would eventually be named, saw an opportunity to make money utilizing the unequal exchange rate between the United States and Spain, the latter’s currency one-sixth the value of the former. At this time, there existed an International Postal Reply Coupon (IPRC) which was used in small, international transactions. Ponzi realized he could convert American dollars into Spanish pesetas, purchase IPRCs in Spain, redeem them for US postage, and sell that postage for a profit. Thus was born The Security and Exchange Company, the seemingly legitimate front for his get-rich-quick scheme.[vi]

Ponzi initially offered a 40 percent return in 90 days for investments, though later increased that to 50 percent, and added a 100 percent return for 90-day notes. He deposited so much of others’ money in a mutual savings bank, he became the major share-holder and elected himself president and lived a life of lavish luxury. [vii]

Newspaper articles and a government audit eventually brought the scheme to an end, having lost $97.53 of every $100. After serving three-and-a-half years in prison for grand larceny and use of the mail to defraud, Ponzi was rearrested and skipped bail, going to Florida under an assumed name. He was sent to jail there for real estate fraud, promising a 200 percent return on investment in 60 days. After again skipping bail, he was recaptured and served another seven years on his original sentence.[viii]

Garza has shown Ponzi’s tactics are alive and well in the financial industry. If you believe you may have fallen victim to such a scheme, contact an attorney for further investigation. Food for thought…

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[i] SEC Charges Bitcoin Mining Companies [electronic format] (2015 December 1). Retrieved from http://www.sec.gov/news/pressrelease/2015-271.html

[ii] Pulliam-Moore, C. (2014 August 12) Consumer Protection Agency Urges Americans to Beware of Bitcoin, Other Cryptocurrencies [electronic format]. Retrieved from http://www.pbs.org/newshour/rundown/consumer-protection-agency-urges-americans-beware-bitcoin-cryptocurrencies/

[iii] SEC Charges Bitcoin Mining Companies [electronic format] (2015 December 1). Retrieved from http://www.sec.gov/news/pressrelease/2015-271.html

[iv] Ibid.

[v] Ibid.

[vi] San Jose̒ State University Department of Economics (n.d.) The Nature and History of Ponzi Schemes [electronic format]. Retrieved from http://www.sjsu.edu/faculty/watkins/ponzi.htm

[vii] Ibid.

[viii] Ibid.

Ex-Broker Sentenced to Prison for Venezuelan Bribery Scheme

Ex-broker Jose Alejandro Hurtado was sentenced to three years in prison for his role in a $60 million bribery scheme after pleading guilty in 2013 to a variety of criminal charges, including violation of the Foreign Corrupt Practices Act, money laundering, and obstruction of justice.[i]

According to prosecutors, Hurtado and fellow employees of New York broker-dealer Direct Access Partners LLC (DAP) channeled millions of dollars in bribe monies to senior officials at Banco de Desarrollo Economico y Social de Venezuela. In exchange, DAP received bond-trading business from the state-owned Venezuelan bank. Prosecutors determined DAP received $60 million in commissions from the illegal activity, and Hurtado personally gained $11.9 million in profits.[ii]   

Securities and Exchange Commission (SEC) examiners uncovered evidence of suspicious payments in 2010, though DAP employees attempted to obfuscate the scheme by deleting emails. This proved fruitless, as the correspondence had been saved on the company’s backup system.[iii]

All DAP employees charged in connection with the bribery activity have pled guilty, with all but one sentenced to prison terms ranging from two to four years. The final individual is scheduled for sentencing in January of 2016. Hurtado’s then girlfriend and now wife is named in a civil suit brought by the SEC.[iv]

While presiding Judge Denise Cote of the U.S. District Manhattan Court praised Hurtado’s cooperation with the federal investigation, she stated, “These were very, very significant crimes that deserve an appropriate sentence to reflect their seriousness.”[v] Although Cosgrove Law Group LLC focuses its practice in financial industry matters, it also represents clients in the federal courts. In addition to those civil matters which are not captured by an arbitration agreement, industry malfeasance cases migrate to the federal criminal courts from time to time, as well.

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[i] Stendahl, M. (2015, December 15) Ex-Broker Dealer Employee Gets 3 Years For $60M Bribe Plot [electronic format]. Retrieved from http://www.law360.com/articles/737953/print?section=securities

[ii]  Ibid.

[iii] Ibid.

[iv] Ibid.

[v]  Ibid.