tZERO, the digital-themed broker-dealer created by Patrick Byrne and BOX Digital Markets LLC (BOX Digital)-a subsidiary of Boston Options Exchange, announced it has formed a joint venture to launch the industry’s first regulated security token exchange.

Lisa Fall, Box Digital

On May 18, 2018, the two companies entered into a letter of intent to form an exchange to list and publicly trade security tokens for companies that issue, or convert existing stock to, security tokens. The proposed joint venture would be equally owned by tZERO and BOX Digital, with each having equal representation on the Board of Directors, together with one mutually agreed upon independent director. Lisa Fall, who currently serves as CEO of BOX Digital and as president of BOX Options Exchange LLC, would be the CEO of the joint venture.

“tZERO has proven to be a pioneer in the development and practical use of blockchain technologies for capital markets for a number of years,” said Ms. Fall. “tZERO’s track record and accomplishments in this innovative area, coupled with BOX’s expertise in operating a highly efficient and transparent equity options marketplace, made partnering together an easy decision and we look forward to building a world-class platform for listing and trading security tokens.”

tZERO plans to contribute cash and license tZERO’s blockchain technology for operation of the security token market. BOX Digital will contribute expertise and personnel toward obtaining regulatory approval and operation of the security token market. Approval of the U.S. Securities and Exchange Commission will be sought following execution of definitive documentation. Creation of the joint venture is subject to definitive documentation and customary conditions.

“Our partnership with BOX Digital Markets is a significant milestone that will create the first SEC-regulated exchange designed to efficiently trade crypto securities. Lisa Fall’s leadership, reputation and deep experience in the regulated securities exchange industry will be a major asset in achieving this objective,” said Saum Noursalehi, newly appointed CEO of tZERO. “Together, we will continue to work with the SEC as we develop a first-of-its-kind platform that will integrate blockchain capital markets into the current U.S. National Market System.”

“Now that pragmatic securities industry thought-leaders have figured out how to package crypto assets within the construct of a security so as to conform to the US regulatory regime, nobody can dispute the fact the genie is out of the bottle .  Securities Token Offerings (“STOs”) is a much more palatable approach, making way for a new mantra, “ICOs are dead, long live STOs”, until of course, another shoe drops.

For the full story from Traders Magazine, click here

Securities Token Exchanges Cranking Up in US: BOX +tZero

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The SEC’s Office of Compliance Inspections and Examinations announced Monday it will be paying particular attention to firms that hire advisers with rogue backgrounds to ensure those advisers are being properly supervised.

The SEC did not respond to a request for comment, but the enhanced oversight could have multiple effects on advisory firms, according to regulatory specialists.

“It will significantly effect a small percentage of firms, and I think firms will look more closely at individuals with disciplinary histories,” said Brian Rubin, partner at the law firm Sutherland, Asbill & Brennan.

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In this case, the issuer cancelled a proposed secondary stock offering for which the broker-dealer was planning to act as the lead underwriter.  At that point, the issuer planned another offering, and the broker-dealer was invited to participate as a co-manager.   However, according to the SEC, the broker-dealer’s participation was made contingent by the issuer upon the broker-dealer commencing research coverage – a “quid pro quo” – which the investment bank agreed to do.  In commencing research coverage, the investment bank rated the stock a “buy,” with a price target that was considerably higher than its then current market price.¹

In issuing the fine, the SEC relied on its traditional guidance as to when a broker-dealer is subject to Section 5(b)(1)’s potential limitations on issuing research.  In particular, the SEC has stated that a broker-dealer that publishes research is subject to Section 5(b)(1):

• while seeking to participate in the underwriting of the issuer’s securities offering;
• after having been invited to participate by the issuer in the underwriting of its securities offering; or
• after reaching an understanding with the issuer that it will participate as a managing underwriter in the issuer’s securities offering.

Under these circumstances, the SEC will typically view a research report about the subject company as an improper prospectus.  While SEC Rule 139 includes a safe harbor from the definition of “prospectus” for research reports that satisfy the rule, this safe harbor excludes cases such as this one, where the broker-dealer initiated coverage.  Here, the SEC deemed the research report to be a prospectus, due to its potential to condition the market.  The SEC’s fine in this matter is further indication of regulatory interest in research related supervisory and oversight lapses.

To read the full article, please click here

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SEC Floats Rule With FDIC On Failing Broker-Dealers

The U.S. Securities and Exchange Commission and Federal Deposit Insurance Corp. jointly proposed a rule Wednesday intended to provide a more efficient liquidation process for large broker-dealers in the event they fail, carrying out a mandate under the Dodd-Frank Act.

Broker Describes IBM Tipping Chain In SEC Insider Case

A broker testified in New York federal court on Wednesday that he relayed information about an impending $1.2 billion IBM acquisition to two former colleagues who are now on trial in a closely watched U.S. Securities and Exchange Commission insider trading case.

Madoff Trustee Shuts Down $11B Investor Suit For Now

A Manhattan federal bankruptcy judge on Wednesday blocked the latest investor suit targeting a Bernie Madoff associate for his role in Madoff’s massive Ponzi scheme, agreeing with the trustee for Madoff’s defunct securities firm that the $11 billion claims in Florida are preempted by a 2011 settlement.

Victims of Bernard Madoff’s fraud cannot pursue a Florida lawsuit to recover $11 billion from the estate of Jeffry Picower, who they say helped perpetuate the swindler’s Ponzi scheme, a Manhattan bankruptcy judge ruled on Wednesday.

U.S. Bankruptcy Judge Stuart Bernstein said the lawsuit by A&G Goldman Partnership and Pamela Goldman, their third effort to sue in Florida, violated an injunction barring Madoff victims from pursuing claims belonging to Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC.

Ex-Wells Fargo Trader Fights SEC’s Insider Trading Finding

A former Wells Fargo trader urged the U.S. Securities and Exchange Commission to overturn part of a finding by the agency’s in-house court that he made four trades on tips from an analyst, but asked it to preserve the court’s finding that cleared him in two other trades, according to a brief filed in the appeal.

SEC Hits More Traders With Newswire Hacking Allegations

The U.S. Securities and Exchange Commission on Wednesday brought more litigation over an alleged scheme to hack into newswires to secure a trading advantage, filing suit in New Jersey federal court against Russian traders who allegedly scored more than $19.5 million in illegal profits.

7th Circ. Won’t Rekindle Steak ‘N Shake Suit Over CEO Deals

The Seventh Circuit on Wednesday refused to revive a shareholder derivative suit against the heads of restaurant chain Steak ‘n Shake filed over deals which purportedly enriched holding company CEO Sardar Biglari at the expense of the company, citing a lack of a sufficient challenge to company leaders’ business judgment.

Ex-Deutsche Bank Analyst In Big Trouble Over Big Lots Rating

A former Deutsche Bank research analyst has been suspended from the securities industry for a year and ordered to pay a $100,000 fine over Securities and Exchange Commission charges that he let his relationship with Big Lots Stores Inc. executives taint his analysis of the company and its stock.

Atty Violated Securities Laws In Fracking Venture, Judge Says

A Texas federal judge on Wednesday found that an attorney violated securities laws in connection with a fracking water filtration venture, but did not immediately rule on $2.5 million in disgorgements and civil penalties sought by the U.S. Securities and Exchange Commission.

POLICY & REGULATION

IRS Locks In Rules On Broker Reporting Obligations

The Internal Revenue Service on Wednesday released final regulations on brokers’ reporting requirements for transactions involving debt instruments and options, including the reporting of original issue discounts on tax-exempt obligations.

LITIGATION

11th Circ. Won’t Revive Paulson Feeder Fund Investor’s Suit

The Eleventh Circuit on Wednesday refused to revive a Florida investor’s suit against Paulson & Co. hedge fund managers for his losses in a feeder fund, after Delaware’s high court answered a certified question from the appeals court by saying he had no direct claim.

Bankia Commits $2B To Repay Retail Investors For IPO Bust

State-backed Spanish lender Bankia SA said Wednesday it will set aside €1.84 billion ($2.1 billion) to fully refund retail investors for their losses following the company’s doomed, 2011 initial public offering and to resolve ongoing litigation after the bank lost two appeals.

Argentina To Pay $1B To End Debt Fight With EM, Montreux

Argentina has agreed to pay creditors EM Ltd. and Montreux Partners LP as much as $1.1 billion to resolve long-running litigation over the country’s 2001 default, according to documents filed Wednesday in New York federal court.

$27M Goldman CDO Deal Gets Judge’s Initial Sign-Off

A New York federal judge preliminarily approved a $27.5 million settlement Tuesday between Goldman Sachs Group Inc. and a class of investors led by hedge fund Dodona I LLC that sued over toxic collateralized debt obligations.

Ex-Rabobankers Denied Acquittal, New Trial In Libor Scam

A New York federal judge denied acquittal or a new trial Wednesday for two former Rabobank traders convicted of conspiracy and wire fraud in connection with a scheme to manipulate Libor, rejecting arguments their submissions to the global benchmark weren’t misstatements intended to cause harm.

Genworth Says Witness Recantations Ruin Investors’ IPO Suit

Genworth Financial on Wednesday blasted investors opposing the insurance giant’s bid to dismiss multidistrict litigation over an initial public offering delayed by a swell of mortgage insurance claims, telling a New York federal judge that they’ve relied on “irrelevant distractions” in an effort to rescue recanted testimony from the cutting-room floor.

ADT Wants Lookalike $450M Stock Buyback Suit Tossed

ADT Corp. urged the Delaware Chancery Court to toss a shareholder suit over $450 million in stock the company repurchased from a hedge fund, saying Wednesday the case nearly mirrors a challenge the court threw out 10 months ago.

AIG Unit Policy Must Pay Prejudgment Interest, 9th Circ. Told

Nutritional supplement maker Cell Tech International shareholders on Wednesday urged the Ninth Circuit to find that an American International Group unit owes them them millions of dollars in prejudgment interest on a $4.1 million judgment against the insurer, saying a lower court erred in ruling that a $5 million policy limit precludes the interest.

Investor Green Cards Imperiled In EB-5 Fraud Case, Court Told

A group of investors in a real estate project targeted by a $136 million EB-5 fraud suit brought by the U.S. Securities and Exchange Commission urged a Washington federal judge on Tuesday not to let a receiver in the case sell the project without considering their immigration interests.

Lehman Tells 2nd Circ. Treaty Entitles It To Tax Credits

Defunct investment bank Lehman Brothers Holding Inc. told the Second Circuit on Tuesday that its bankruptcy administrators are entitled to $67 million in foreign tax credits under the terms of a 1975 U.S-U.K. income tax treaty favoring newly enacted legislation.

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The total number of Financial Industry Regulatory Authority (FINRA) member retail brokerages has been on the decline for the last five years, but one sliver of the universe is showing new signs of life: A new crop of broker/dealers and online funding portals are joining FINRA to capitalize on new opportunities made possible by the JOBS Act of 2012. The legislation prompted the SEC to make it easier to market and solicit investments, and opened the door for small businesses to engage in so-called “equity crowdfunding.”

About 15 to 20 of these new firms have signed on since 2013, according to Fishbowl Strategies, with another three to six launching soon, in anticipation of a wave of issuers and investors entering the market. Whether there is a crowd for equity crowdfunding remains to be seen.

But Paul Boyd, managing partner at ClearPath Capital Partners, a wealth management firm for tech entrepreneurs, says there
is plenty of pent-up demand and a backlog of Reg D deals that are moving forward.

Boyd also expects the next phase of the JOBS Act, Title III, will bring a lot more attention to capital raises online. Set to go into effect in May, those rules let any investor, accredited or not, invest in unregistered securities online (with limits on the amounts that can both be invested, and raised, in a year). The tech-fueled vision of bypassing stuffy financial intermediaries in favor of a new-class of SEC-registered and FINRA member “crowdfunding portals” has inspired a flotilla of startups to enter the space.

Many of the new entrants have affiliated agreements with brokerdealers. Some have launched their own b/ds.

WealthForge launched its own b/d to provide all the services needed to complete a private securities transaction, including investor accreditation, regulatory filings and escrow. Co-founder and CEO Mat Dellorso says the new rules—and bringing the process online—have spurred their growth.

“When you bring the internet and you’re allowed to advertise a private security through 506(c), more investors do take part,” he says. WealthForge has completed 150 private financing transactions, bringing in 2,500 investors. “A traditional investment bank might complete three or five a year,” he says. “It’s a lot more volume because it’s more transparent and online now.

“Normally these transactions take weeks and months, but an investor can literally invest in a private placement on our platform in a matter of minutes,” he says.

Dellorso doubts they will do much work with firms looking to raise capital through the exemptions for non-accredted investors.

CircleUp is another new broker-dealer with a focus on consumer products and retail companies. Bhakti Chai, which makes Fair Trade Certified tea, raised nearly $865,000 on the platform.

Folio Institutional, a self-clearing broker/dealer, saw the interest around equity crowdfunding and decided to launch an online equity and debt-funding platform in September. Since the firm can custody the securities, it can enage in secondary-market transactions and, potentially, public offerings.

For the entire article from WealthManagement.com please click here

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Cuban, an entrepreneur and owner of the Dallas Mavericks who beat insider trading allegations brought against him by the SEC in 2013 after a jury trial, argued in an amicus brief filed with the court Thursday that the SEC’s aggressive use of a “defective” in-house tribunal creates unpredictability that harms the public’s best interests.

The SEC is virtually undefeated in in-house administrative proceedings, Cuban said, but is far less successful when it litigates in federal court.

“When the SEC has the ability to significantly influence the outcome of a complex, credibility-based matter such as its insider trading case against Mr. Cuban — or its insider trading case against Mr. Hill — merely by placing it into an administrative proceeding rather than a federal court, investors’ ability to predict the types of conduct that will, or will not, result in sanction is diminished, and the free flow of capital is impeded,” the 39-page brief states.

Cuban said that the SEC’s designation of administrative law judges as employees and not officers creates an “inherently biased proceeding” in which the judges are pressured to favor the SEC’s division of enforcement in administrative proceedings, according to the brief.

“The SEC seeks to force Mr. Hill to litigate similar [insider trading] issues before an ALJ that the SEC states has the status of a low-level functionary, a mere employee, with neither the stature (nor political accountability) of an officer nor the independence of a federal judge,” he said.

For the full story from Law360, please click here

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Will New Regs Create A Boon For BDs?  Brother, Can You Raise $1mil?

(RaiseMoney.com)–If only coincident to the Halloween Trick or Treat Holiday, it’s now official, on Friday Oct 30 the US Securities & Exchange Commission (SEC) passed new equity crowdfund regs, opening the path to what some believe will be a multi-billion dollar tidal wave of startup funding, and also, what more cautious experts believe could be an entirely new cycle of speculative investing by unsophisticated investors. The new rules approved will make it easier for start-ups to sell shares directly to the masses. Brother, can you spare $1million?

They could also be big business for a broad universe of broker-dealers, as well as handful of Los Angeles firms (among many others) that want to act as the stock exchanges where these deals will take place.

The rules, which will take effect in about six months, allow private companies to raise up to $1 million a year from small-time investors without most of the reporting and auditing required of larger firms or companies raising more money.

For the entire story from RaiseMoney.com, please click here

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Under the rule, a brokerage will have to include a “readily apparent reference and hyperlink” to BrokerCheck on a homepage that is initially viewed by retail investors. It also would have to include links to the database on profile pages of individual brokers.

The rule will go into effect no later than 180 days after the SEC approval order is published in the Federal Register. It’s not clear when the order will appear there.

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To read the entire story, published by InvestmentNews.com , please click here

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(Bloomberg) — Criminals always slip up. They leave behind fingerprints. Hair. A cigarette butt.

A telltale acronym.

TYOP (tell you on phone), TOL (talk offline) and LDL (let’s discuss live) are red flags for prosecutors combing through the e-mail transcripts of Wall Street traders suspected of illegal activity. No need for a crime lab. A simple search — Control-F on the computer keyboard — has become one of investigators’ favorite weapons to uncover possible lawbreaking, according to defense attorneys and current and former prosecutors who agreed to speak on condition of anonymity.

“Taking a conversation offline provides evidence of intent because if you’re trying to cover your tracks, you probably know what you’re doing is wrong,” said Eugene Ingoglia, a partner at Morvillo LLP and former assistant U.S. attorney for the Southern District of New York.

Phrases such as “call my cell” and “let’s go off e- mail” remain popular among the people who plot insider trades or the rigging of some of the world’s biggest markets. New expressions and acronyms pop up all the time, and authorities say they build lists of favored terms.

Evasion techniques can get creative. Raj Rajaratnam, the fund manager convicted in 2011 of insider trading, would write “fon” instead of “phone.” Prosecutors said they suspected the intentional misspelling was meant to distract the all-seeing electronic Javert of Control-F.

Suggestive Phrases

To continue reading the Bloomberg story re-distributed by TradersMagazine, please click here

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SEC Issues Risk Alert on Broker-Dealer Controls Regarding Retail Sales of Structured Securities Products

On August 24, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations’ National Examination Program staff (Staff) released a Risk Alert summarizing findings from an examination of 10 broker-dealers (Firms). The Staff evaluated whether the Firms effectively supervised and monitored the risks and activities associated with sales of structured securities products (SSPs) to retail investors.

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The examinations revealed significant deficiencies in all of the Firms, including that they failed to maintain and enforce adequate controls to determine suitability of SSP recommendations. The Staff noted that the Firms’ written supervisory procedures related to reviews of representatives’ determinations of customer suitability were also deficient and the Staff cited all of the examined Firms for such deficiencies.

Click here to read the Risk Alert.

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