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   Strategies & Market TrendsAnthony @ Equity Investigations, Dear Anthony,


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From: StockDung7/31/2019 10:25:12 PM
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SEC YET AGAIN LETS OFF BOILER ROOM CROOKS OFF EASY

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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Release No. 86497 / July 26, 2019 Admin. Proc. File No. 3-18359 In the Matter of the Application of MEYERS ASSOCIATES, L.P. (n/k/a WINDSOR STREET CAPITAL, L.P.) and BRUCE MEYERS For Review of Disciplinary Action Taken by FINRA OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION—REVIEW OF DISCIPLINARY PROCEEDING

Former member firm and its former principal appeal from FINRA disciplinary action finding that they used unbalanced and misleading communications with the public and failed to establish and maintain a reasonable supervisory system for the preparation of books and records. FINRA also found that the firm failed to maintain accurate books and records, to report customer complaint information, to establish and maintain a reasonable supervisory system for the review of electronic correspondence, and to establish and maintain a reasonable system of supervisory controls. Held, FINRA’s findings of violations and imposition of sanctions are sustained. APPEARANCES: Lawrence R. Gelber for Meyers Associates, L.P. and Bruce Meyers. Alan Lawhead and Gary Dernelle for FINRA. Appeal filed: February 5, 2018 Last brief received: May 29, 2018 2 I. Introduction Meyers Associates, L.P. (n/k/a Windsor Street Capital, L.P.) (the “Firm”), a former FINRA member firm, and its former principal, Bruce Meyers (together, “Applicants”), seek review of FINRA disciplinary action.1 The Firm became a FINRA member in 1994 and engaged in a retail securities and investment banking business. Meyers founded, owned, and served as the managing partner and CEO of the Firm, and was registered through it as a general securities representative and a general securities principal. Meyers could hire and fire employees and implement changes in policies and procedures. Meyers’s association with the Firm terminated in June 2016 after he became subject to a statutory disqualification.2 FINRA expelled the Firm from membership in May 2018, and it withdrew its broker-dealer registration in June 2018.3 This case stems from a complaint FINRA’s Department of Enforcement filed against Applicants in 2014. After a six-day hearing, a FINRA Extended Hearing Panel (the “Hearing Panel”) issued a decision finding violations and imposing sanctions.4 The Hearing Panel found that Applicants violated NASD Rule 2210(d) and FINRA Rule 2010 by using unbalanced and misleading communications with the public from January 2011 through June 2011. 5 The Hearing Panel found further that the Firm violated NASD Rule 3110(a), FINRA Rules 4511(a) 1 See Meyers Assocs., L.P., Complaint No. 2010020954501, 2018 WL 306684 (FINRA NAC Jan. 4, 2018), available at finra.org. 2 See Meyers Assocs., L.P., Exchange Act Release No. 81778, 2017 WL 4335044, at *1, 4, & 9 (Sept. 29, 2017) (dismissing Applicants’ appeal from the denial of a membership continuance application seeking permission for Meyers to continue his association with the Firm notwithstanding his statutory disqualification). 3 See Windsor St. Capital, L.P., SD-2172, slip op. at 1, 20, 26 (FINRA NAC May 14, 2018) (denying Firm’s membership continuance application seeking permission to continue FINRA membership notwithstanding its statutory disqualification as a result of a July 2017 Commission settlement order finding that it had willfully violated the federal securities laws), available at finra.org, appeal withdrawn, Exchange Act Release No. 83734, 2018 WL 3618520, at *1 (July 27, 2018) (granting the Firm’s request to withdraw its application for review based on it having ceased its broker-dealer business). 4 See FINRA Rule 9231(c) (providing for the appointment of “a Hearing Panel or an Extended Hearing Panel to conduct the disciplinary proceeding and issue a decision” and that the matter “shall be designated an Extended Hearing, and . . . shall be considered by an Extended Hearing Panel,” upon “consideration of the complexity of the issues involved, the probable length of the hearing, or other factors that the Chief Hearing Officer deems material”). 5 As a result of the consolidation of the regulatory functions of NASD and NYSE Regulation into FINRA and the development of a new consolidated FINRA rulebook, see Exchange Act Release No. 56148, 2007 WL 2159604, at *2 (July 26, 2007), Applicants were subject to both FINRA and NASD rules during the period at issue. 3 and 2010, and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rules 17a-3, 17a-4, and 17a-5 thereunder by failing to maintain accurate books and records in 2011 and 2012; and NASD Rules 3070 and 2110 and FINRA Rule 2010 by failing to report customer complaint information from March 2007 through July 2010. The Hearing Panel also found three supervisory violations: (1) that Applicants failed to establish and maintain a reasonable supervisory system for the preparation of books and records; (2) that the Firm failed to establish and maintain a reasonable supervisory system for the review of electronic correspondence; and (3) that the Firm failed to establish and maintain a reasonable system of supervisory controls. The Hearing Panel dismissed three other allegations: (1) that Applicants violated FINRA Rule 2010 by engaging in an unregistered offering of securities without an exemption from the registration provisions of Section 5 of the Securities Act of 1933; (2) that Applicants violated FINRA Rule 2010 by falsifying, or causing to be falsified, federal tax forms; and (3) that Meyers was also liable for the Firm’s recordkeeping violations.6 The Hearing Panel fined the Firm $50,000 for the unbalanced and misleading communications; $50,000 for the recordkeeping violations; $200,000 for the failure to report customer complaint information; $100,000 for the recordkeeping supervisory violations; $200,000 for the electronic correspondence supervisory violations; and $100,000 for the failure to establish and maintain a reasonable supervisory control system. It fined Meyers $25,000 for the unbalanced and misleading communications and $50,000 for the recordkeeping supervisory violations and barred Meyers from acting in a principal or supervisory capacity. Applicants appealed to FINRA’s National Adjudicatory Council (“NAC”).7 The NAC affirmed the Hearing Panel’s findings of liability but modified some of the fines because it took a different approach than the Hearing Panel in applying FINRA’s Sanction Guidelines. The modifications resulted in the total fine for the Firm remaining at $700,000 but the total fine for Meyers increasing from $75,000 to $100,000. As to the unbalanced and misleading communications, the NAC increased the fine for the Firm from $50,000 to $200,000 and for Meyers from $25,000 to $50,000 by applying the higher guideline range for “intentional or reckless use of misleading communications”; the Hearing Panel had applied the range for “inadvertent use of misleading communications.” 8 The NAC found that the use of misleading communications “resulted, at a minimum, from reckless misconduct.” It stated that the “large number of misleading communications, the extended period over which they were sent, their 6 FINRA also charged a third respondent, Imtiaz A. Khan, a vice president of the Firm’s investment banking department, with liability for the Firm’s recordkeeping violations. Those charges were also dismissed. The Hearing Panel found that “Meyers and Khan did not cause Meyers Associates to maintain inaccurate books and records.” 7 FINRA’s Department of Enforcement did not cross-appeal the Hearing Panel’s decision. 8 The Sanction Guidelines recommend a fine up to $29,000 for “inadvertent use of misleading communications,” and a fine up to $146,000 for “intentional or reckless use of misleading communications.” FINRA Sanction Guidelines at 80-81 (Apr. 2017). 4 wide dissemination, and the potential for the firm to gain monetarily lead us to conclude that Meyers Associates’ misconduct was decidedly egregious and merits a significant fine.” Similarly, the NAC stated that the “numerous pieces of unbalanced and misleading sales literature used, the extended period of their use, and the potential for Meyer’s financial gain support a sanction at the high end of the Guidelines for advertising violations.” The NAC decreased the fine for the Firm’s remaining misconduct from $650,000 to $500,000 because, rather than assessing sanctions for each violation as the Hearing Panel did, it imposed a unitary sanction under the guideline for systematic supervisory failures.9 The NAC found this approach to be appropriate because the remaining misconduct “resulted fundamentally from the firm’s persistent supervisory failures.” For Meyers’s supervisory violation, the NAC imposed the same sanctions as the Hearing Panel: a $50,000 fine and a bar from acting in a principal or supervisory capacity. The NAC further assessed costs. This appeal followed. II. Analysis Under Exchange Act Section 19(e)(1), we review FINRA disciplinary action to determine whether Applicants engaged in the conduct FINRA found, whether that conduct violated the rules specified in FINRA’s determination, and whether those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act.10 We base our findings on an independent review of the record and apply a preponderance of the evidence standard.11 Under Exchange Act Section 19(e)(2), we must sustain FINRA’s sanctions unless we find, having due regard for the public interest and the protection of investors, that the sanctions are excessive or oppressive or impose an unnecessary or inappropriate burden on competition. 12 We consider any aggravating or mitigating factors, 13 and whether the sanctions imposed are 9 For systemic supervisory failures, the Sanction Guidelines recommend a fine up to $292,000 or higher where aggravating factors predominate. Guidelines at 105. If assessed by each violation, the Guidelines recommend the following fines: (i) for recordkeeping violations, up to $15,000 or $146,000 where aggravating factors predominate; (ii) for failures to report, up to $146,000; and (iii) for failures to supervise, up to $73,000. Id. at 29, 74, 104. 10 15 U.S.C. § 78s(e)(1). 11 Richard G. Cody, Exchange Act Release No. 64565, 2011 WL 2098202, at *1, 9 (May 27, 2011), aff’d, 693 F.3d 251 (1st Cir. 2012). 12 15 U.S.C. § 78s(e)(2). The record does not show, nor do Applicants claim, that FINRA’s sanctions impose an unnecessary or inappropriate burden on competition. 13 Saad v. SEC, 718 F.3d 904, 906 (D.C. Cir. 2013). 5 remedial or punitive.14 In imposing sanctions, the NAC relied on FINRA’s Sanction Guidelines.15 Although not binding on us, we have used the Guidelines as a benchmark.16 We sustain the NAC’s findings of violations and the sanctions imposed. A. Applicants’ use of unbalanced and misleading communications with the public NASD Rule 2210(d) imposes content standards for “communications with the public.” 17 Such communications “must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.”18 No member may “omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading,”19 “make any false, exaggerated, unwarranted or misleading statement or claim,”20 or “publish, circulate or distribute” a communication the member “knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.” 21 Communications “may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.” 22 NASD Rule 2210 includes “sales literature” as a subset of “communications with the public.”23 Sales literature includes “[a]ny written or electronic communication, other than an advertisement, independently prepared reprint, institutional sales material and correspondence, that is generally distributed or made generally available to customers or the public.”24 Sales 14 PAZ Sec., Inc. v. SEC, 494 F.3d 1059, 1065-66 (D.C. Cir. 2007). 15 Meyers does not challenge the NAC’s use of the 2017 Guidelines in this proceeding. We find that the NAC properly applied the 2017 Guidelines because those guidelines were in effect while this matter was pending before it. See Guidelines at 8 (“These guidelines are effective as of the date of publication, and apply to all disciplinary matters, including pending matters.”). 16 See, e.g., John Joseph Plunkett, Exchange Act Release No. 69766, 2013 WL 2898033, at *11 & n.68 (June 14, 2013) (citing cases). 17 NASD Rule 2210(d). FINRA Rule 2210 replaced NASD Rule 2210 effective February 4, 2013. 18 NASD Rule 2210(d)(1)(A). 19 Id. 20 NASD Rule 2210(d)(1)(B). 21 Id. 22 NASD Rule 2210(d)(1)(D). 23 NASD Rule 2210(a)(2). 24 Id. 6 literature “must prominently disclose the name of the member” and “reflect any relationship between the member and any non-member or individual who is also named.” 25 FINRA Rule 2010 requires members and their associated persons to “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of their business.26 FINRA Rule 2010 replaced NASD Rule 2110, which was identical. A violation of another Commission or FINRA rule violates FINRA Rule 2010 and NASD Rule 2110. 27 1. We sustain the finding that Applicants violated NASD Rule 2210(d) and FINRA Rule 2010 by using unbalanced and misleading communications. a. Applicants engaged in the conduct FINRA found. Between January 2011 and June 2011, Meyers used his Firm email address to send 1,037 emails concerning SignPath Pharma, Inc. (“SignPath”), a biotechnology company he co-founded. Meyers and the Firm collectively owned more than 60 percent of SignPath’s common stock. Meyers composed the emails and sent them to persons identified as being involved with, or having invested in, biotechnology companies. Meyers signed many of the emails as “President, Meyers Associates.” In some emails, however, he made no mention of the Firm or his association with it. Instead, in these emails Meyers referred to SignPath as “my biotech company” and himself as a “principal” of the company. Meyers testified that the emails were intended to generate interest in SignPath and its products. The emails described SignPath as a development phase company and provided information about its formulations of curcumin (a compound found in the turmeric plant) for applications in human diseases, its progress through various stages of testing and development, and its prospects for acquiring the rights to other promising drugs. Some emails claimed SignPath had “obtained confirmation of the rights” to Dutogliptin, a drug designed for individuals with type II diabetes. Other emails claimed SignPath “has a unique opportunity in obtaining” Dutogliptin, “which will catapult SignPath Pharma’s direct entry into clinical Phase III and IV within the next several months.” The emails did not disclose that Meyers had learned from SignPath by October 2010 that SignPath needed to raise at least $3 million to purchase Dutogliptin, that the U.S. Food and Drug Administration (“FDA”) had requested an additional Phase III clinical trial because of its cardiotoxicity concerns about Dutogliptin, and that the requested clinical trial was anticipated to cost $125 million. 25 NASD Rule 2210(d)(2)(C)(i), (ii). 26 FINRA Rule 2010; see also FINRA Rule 0140(a) (stating that persons associated with a member shall have the same duties and obligations as a member). 27 See Lek Sec. Corp., Exchange Act Release No. 82981, 2018 WL 1602630, at *10 (Apr. 2, 2018 (“We have held that a violation of another Commission or NASD rule or regulation also constitutes a violation of NASD Rule 2110 and thus also of identical FINRA Rule 2010.”) (internal quotation marks and citation omitted). 7 The emails did not refer to any specific offering of SignPath securities but stated that SignPath “is a public entity which anticipates trading shares in the 1st Quarter of 2011.” Many emails predicted, without further explanation, that “financial returns on investment within the immediate two years will enhance the stature of SignPath Pharma, Inc. as a young but imposing pharmaceutical company.” The emails stated that SignPath was “seeking prospective investors” and “capital” and told recipients to “take advantage of the opportunity presented” by contacting Meyers. b. Applicants’ public communications violated FINRA’s rules. We find that the emails constituted sales literature that violated FINRA’s content standards. NASD Rule 2210 defines sales literature “very broadly.” 28 We have held that a summary of an investment sent to 57 customers constituted sales literature.29 Here, Meyers sent over 1,000 emails to members of the public that stated SignPath was seeking investors and that recipients should contact Meyers to take advantage of the opportunity SignPath presented. These emails fall within the definition of sales literature as “electronic communication[s]” “generally distributed or made generally available to customers or the public.” As a result, the content standards of NASD Rule 2210 applied to the emails. We find that the emails violated these standards. Specifically, we find that the emails did not provide a sound basis for evaluating the claims made therein, contained false or misleading claims, were not fair and balanced, included baseless performance predictions and misleading forecasts, and did not disclose the name of the Firm and its relationship with SignPath. NASD Rule 2210(d)(1)(A) required that the emails provide a sound basis for evaluating the claims made therein. 30 But hundreds of emails claimed that SignPath anticipated its shares would trade publicly beginning in the first quarter of 2011 without providing any basis for that 28 Excel Fin., Inc., Exchange Act Release No. 39296, 1997 WL 685323, at *4 n.21 (Nov. 4, 1997). 29 Id. at *2, 4-5; see also, e.g., Brian Prendergast, Exchange Act Release No. 44632, 2001 WL 872693, at *8 (Aug. 1, 2001) (finding that letters sent to all investors in a hedge fund that included reports or summaries of the hedge fund’s performance fell “squarely within the definition of” sales literature in predecessor rule to Rule 2210). 30 NASD Rule 2210(d)(1)(A). 8 claim. 31 That claim also was not true; at the time Applicants sent the emails SignPath did not anticipate public trading of its shares. Indeed, SignPath’s CEO, whose approval was needed to have the shares trade, wanted to defer public trading until SignPath had clinical trial data. Applicants’ emails contained additional statements that violated Rule 2210(d)(1)(B)’s prohibition against “false” or “misleading” claims. 32 The claim that SignPath had “obtained confirmation of the rights” to Dutogliptin was untrue. So was the claim that SignPath had “a unique opportunity in obtaining” Dutogliptin. The opportunity to purchase Dutogliptin was not “unique” to SignPath—rather, Phenomix, the company that owned the drug, was looking to sell it to the highest bidder, other companies were bidding, and SignPath’s bid was ultimately never accepted.33 Rule 2210(d)(1)(A) also requires that communications be fair and balanced, 34 which we have stated means sales literature must “disclose in a balanced way the risks and rewards of the touted investments.”35 The emails did not disclose the negative aspects of purchasing Dutogliptin of which Applicants were aware, including that SignPath needed to raise at least $3 million to do so, the FDA had requested an additional Phase III clinical trial because of its cardiotoxicity concerns about Dutogliptin, and the clinical trial was anticipated to cost 31 See CapWest Sec., Inc., Exchange Act Release No. 71340, 2014 WL 198188, at *4 (Jan. 17, 2014) (finding that communications promoting an investment did not provide “a sound basis for evaluating the facts regarding” the investment in violation of Rule 2210(d)(1)(A) because the communications did not discuss how the investment worked or how a transaction could qualify as such an investment); Pac. On-Line Trading & Sec., Inc., Exchange Act Release No. 48473, 2003 WL 22110356, at *5 (Sept. 10, 2003) (finding that communication stating that online trading broker-dealer was the “fastest Access to the Market today” was misleading in violation of Rule 2210(d)(1) because “it did not provide a basis for investors to evaluate the assertion”). 32 NASD Rule 2210(d)(1)(B). 33 See CapWest Sec., 2014 WL 198188, at *5, *6 (finding statements concerning tenancyin-common (“TIC”) investments violated Rule 2210(d)(1)(B) by “exaggerate[ing] the level of protection that industry and regulatory oversight provided to TIC investors, as well as the likelihood of a successful investment” and by indicating that the investment allowed the investor to “avoid taxes altogether” when the investment “merely allow[ed] taxes to be deferred”). 34 NASD Rule 2210(d)(1)(A). 35 CapWest Sec., 2014 WL 198188, at *4 (quoting Jay Michael Fertman, Exchange Act Release No. 33479, 1994 WL 17055, at *5 (Jan. 14, 1994)). 9 $125 million. Discussing SignPath’s prospects for acquiring and developing Dutogliptin without a fair and balanced risk disclosure rendered the emails misleading. 36 Some of the emails also violated Rule 2210(d)(1)(D)’s prohibition on performance predictions and “unwarranted . . . forecasts.” 37 The emails did not explain the basis for the prediction that there would be “financial returns on investment within the immediate two years.” Even if SignPath had acquired Dutogliptin and Dutogliptin had passed its clinical trials, SignPath still might not have been profitable, let alone within two years.38 The emails further violated Rule 2210(d)(1)(A)’s requirement that they not omit “any material fact or qualification” necessary to make the statements contained in the communications not misleading. Despite the forecast that there would be “financial returns on investment within the two immediate years,” the emails did not disclose the risks associated with an investment in SignPath—such as SignPath’s history of significant losses, anticipated lack of revenue in the foreseeable future, lack of financial resources to successfully develop and market its products, lack of experience in manufacturing, selling, marketing, and distributing its products, and illiquidity of its shares. These omissions were material because they were “substantially likely to be considered important by a reasonable person reading the communication;” 39 indeed, 36 See id. at *4 (finding that communications promoted positive features of TIC investments in an unfair and unbalanced way by “not mention[ing] any of the negative attributes of such investments” in violation of Rule 2210(d)(1)(A)); William J. Murphy, Exchange Act Release No. 69923, 2013 WL 3327752, at *17-18 (July 2, 2013) (finding that communication was “unbalanced” in violation of Rule 2210(d)(1)(A) because it highlighted the upsides of “safe” option strategies but “failed to mention . . . the risk of substantial losses should the value of the underlying security change significantly”), petition denied sub nom. Birkelbach v. SEC, 751 F.3d 472 (7th Cir. 2014). 37 NASD Rule 2210(d)(1)(D). 38 See CapWest Sec., 2014 WL 198188, at *6-7 (finding that communications that included improper performance predictions, claims, and forecasts violated Rule 2210(d)(1)(D)). 39 Id. at *6. Although the negative information was disclosed in SignPath’s public filings, “Rule 2210 focuses not on all information that is available to a potential investor, but on the content of the communication itself, requiring that the communication on its own be ‘fair and balanced’ and ‘provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.’ It is in this context that the NASD Rule introduces the concept of materiality: ‘No member may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.’ As a result, we determine materiality here by looking to whether a fact is substantially likely to be considered important by a reasonable person reading the communication.” Id. at *8 n.47 (internal citation omitted). 10 information about a company’s financial condition, solvency and profitability like that at issue here is undoubtedly material. 40 Some emails also violated Rule 2201(d)(2)(C)’s requirement that they disclose prominently the name of the broker-dealer from which they originated and Meyers’s role at the Firm as well as the relationship between SignPath and the Firm.41 In these emails, the domain name of Meyers’s email address was the only indication of his association with the Firm.42 The emails did not disclose Applicants’ ownership interest in SignPath or that the Firm had raised approximately $13 million in capital for SignPath and earned more than $1 million in compensation since SignPath’s inception in 2006. c. FINRA’s rules are, and were applied in this case in a manner, consistent with the purposes of the Exchange Act. Having found that Applicants engaged in the conduct FINRA found, and that this conduct violated NASD Rule 2210(d) and FINRA Rule 2010, we also find that those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act. We make this finding as to Rule 2210(d) because the Rule’s content standards protect investors from receiving public communications that are unbalanced and misleading, and because FINRA’s application of Rule 2210(d) was appropriate in light of the unbalanced and misleading statements in Applicants’ emails. We make this finding as to FINRA Rule 2010 because it reflects the mandate of Exchange Act Section 15A(b)(6) that FINRA’s rules “promote just and equitable principles of trade,” 43 and Applicants’ misconduct was inconsistent with those principles.44 Applicants argue that they should not be held liable because the recipients of the emails were not solicited as part of SignPath’s separate offering of its securities. According to them, 40 SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (“Surely the materiality of information relating to financial condition, solvency and profitability is not subject to serious challenge.”); SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340, 354 (S.D.N.Y. 2011) (finding that omission that company was “operating at a loss at the time” it was projecting profits over a three-year period was “so obviously important to an investor, that reasonable minds cannot differ on the question of materiality”); see also Donner Corp. Int’l, Exchange Act Release No. 55313, 2007 WL 516282, at *11 (Feb. 20, 2007) (“[N]egative financial information . . . constitute[d] material facts.”). 41 NASD Rule 2210(d)(1)(C)(i), (ii). 42 See Prendergast, 2001 WL 872693, at *10 (finding that advertisement failed to identify NASD member firm with which applicant was associated in violation of predecessor provision to NASD Rule 2210(d)(2)). 43 15 U.S.C. § 78o-3(b)(6). 44 See Rani T. Jarkas, Exchange Act Release No. 77503, 2016 WL 1272876, at *10 (Apr. 1, 2016) (finding FINRA Rule 2010 consistent with the purposes of the Exchange Act). 11 Enforcement “failed to present evidence that tied the Firm’s 1,037 emails to SignPath’s offering” of securities, and “not one person/entity who received an actual prospectus for the SignPath offering ever received an email.” But these facts are irrelevant. Application of NASD Rule 2210(d)(1) here is entirely consistent with its plain language and purpose. The Rule applies to “all member communications with the public”; 45 it does not require that a communication name a specific investment or a specific offering of a security in order to be violative. 46 We also reject Applicants’ argument that the NAC erred in finding that they violated Rule 2210 despite the Hearing Panel’s finding that they did not engage in a general solicitation to offer or sell SignPath’s securities in violation of Securities Act Section 5. There is no requirement that member communications with the public also constitute general solicitations for the offer or sale of securities for Rule 2210’s content standards to apply. Similarly, we reject Applicants’ reliance on the Commission staff’s no-action letter in Bateman Eichler, Hill Richards, Inc., 47 which concerned whether certain activities would constitute a general solicitation under Rule 502(c) of Regulation D.48 The no-action letter did not concern NASD Rule 2210. Applicants also argue that what they characterize as “sales hyperbole” in their emails “has routinely been held to be not actionable under the anti-fraud provisions of the federal securities laws.” But this case involves NASD Rule 2210(d)(1), which specifically prohibits exaggerated statements, claims, opinions, or forecasts, and requires that public communications 45 NASD Rule 2210(d); see NASD IM-2210-1 (“Every member is responsible for determining whether any communication with the public . . . complies with all applicable standards, including the requirement that the communication not be misleading.”); see also Robert L. Wallace, Exchange Act Release No. 40654, 1998 WL 778608, at *4 (Nov. 10, 1998) (stating that Rule 2210 is “not limited to advertisements for securities, but provide[s] standards applicable to all NASD member communications with the public”). 46 Sheen Fin. Res., Inc., Exchange Act Release No. 35477, 1995 WL 116484, at *3 n.22 (Mar. 13, 1995) (finding that predecessor rule to Rule 2210 did “not require that a communication name a specific security in order for it to violate the rule’s provisions” and that advertisement that “promote[d] specific types of securities” was within the scope of the rule); see also CapWest Sec., 2014 WL 198188, at *7 (“CapWest cites no authority to support its apparent position that these requirements apply only to testimonials in advertisements related to specific products or services, and there is nothing in Rule 2210 that would suggest that its scope is so limited. Rule 2210 applies equally to all member firm communications with the public.”). 47 SEC No-Action Letter, 1985 WL 55679 (Dec. 3, 1985). 48 17 C.F.R. § 230.502(c). 12 “be based on principles of fair dealing and good faith” and “be fair and balanced.” 49 In any case, we have found the omission of material facts from optimistic statements to violate the antifraud provisions of the federal securities laws.50 Applicants argue further that the email recipients were sophisticated and therefore were not misled, did not “suffer[] any economic harm,” and could not “be deemed to have been ‘defrauded.’” But we need not determine whether the recipients were sophisticated because 49 NASD Rule 2210(d)(1)(A), (B), & (D); see also Davrey Fin. Servs., Inc., Exchange Act Release No. 51780, 2005 WL 1323032, at *7 (June 2, 2005) (finding statements “were exaggerated, unwarranted, and misleading” in violation of Rule 2210, including discussion of “Stocks to Watch” list that had “unwarranted promises of future performance,” and discussion of a “million dollar plan” that “contained no risk disclosure, no description of the risky strategies on which it was based, and promised specific results without a reasonable basis”). 50 See Donner Corp. Int’l, 2007 WL 516282, at *9-10 (finding applicants violated Exchange Act Section 10(b) and Rule 10b-5 by making “optimistic” statements in research reports about companies’ financial and business prospects that rendered the reports misleading, such as that a company was “well-positioned” to grow and its stock was “undervalued,” while omitting “material negative information” about the company’s financial condition); M.V. Gray Invs., Inc., Exchange Act Release No. 9180, 1971 WL 120492, at *3 (May 20, 1971) (finding applicant violated Securities Act Section 17(a), Exchange Act Section 10(b), and Rule 10b-5 by making “optimistic representations and predictions” to customers without a reasonable basis and omitting that the issuer “had been losing money”); see also James E. Cavallo, Exchange Act Release No. 26639, 1989 WL 991979, at *3 (Mar. 17, 1989) (“A salesman’s honest belief in an issuer’s prospects does not warrant his making exaggerated and unfounded representations and predictions to others.”), petition denied, 993 F.2d 913 (D.C. Cir. 1993). 13 NASD Rule 2210(d) does not provide an exception for communications to sophisticated recipients.51 Nor does it require proof of reliance, harm, or fraud. 52 Applicants also argue that SignPath maintained a website from which interested persons could obtain additional information about the company, and that the emails should be considered in conjunction with the website. But in determining whether a communication violated NASD Rule 2210, we look to the content of the communication alone and not to other documents. 53 Applicants may not depend on scattered information available to the customer for the requisite disclosure of information omitted from their communications. 54 Sales literature must stand on its 51 See Excel Fin., 1997 WL 685323, at *5 (“The fact that some of the intended audience were accredited investors did not excuse [applicants’] failure to provide disclosure that was not misleading [in violation of predecessor provision to Rule 2210].”); cf. Basic, Inc. v. Levinson, 485 U.S. 224, 240 & n.18 (1998) (finding “no authority . . . for varying the standard of materiality depending on” the recipient of “the withheld or misrepresented information”). See generally NASD IM-2210-1(2) (recognizing that members “must consider the nature of the audience to which the communication will be directed” and that “[d]ifferent levels of explanation or detail may be necessary depending on the audience to which a communication is directed” but affirming that all communications with the public must comply “with the requirement that the communication not be misleading”). 52 NASD Rule 2210(d); cf. SEC v. Morgan Keegan & Co., Inc., 678 F.3d 1233, 1244 (11th Cir. 2012) (“[A] private plaintiff's ‘reliance’ does not bear on the determination of whether the securities laws were violated, only whether that private plaintiff may recover damages.”); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985) (“Unlike private litigants seeking damages, the Commission is not required to prove that any investor actually relied on the misrepresentations or that the misrepresentations caused any investor to lose money.”). 53 CapWest Sec., 2014 WL 198188, at *8 & n.47 (rejecting argument that communication should be viewed in conjunction with disclosures provided in private placement memoranda); cf. N.J. Carpenters Health Fund v. Royal Bank of Scotland Grp., 709 F.3d 109, 127 (2d Cir. 2013) (stating “‘[t]here are serious limitations on a corporation’s ability to charge its stockholders with knowledge of information omitted from a document such as a . . . prospectus on the basis that the information is public knowledge and otherwise available to them’”) (alteration and omission in original) (quoting Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726, 736 (2d Cir. 1987)). 54 Capwest Sec., 2014 WL 198188, at *8; cf. New Jersey Carpenters Health Fund, 709 F.3d at 127 (stating that “‘sporadic news reports . . . should not be considered part of the total mix of information that would clarify or place in proper context . . . representations’ that were contained in materials that the company provided ‘directly’”) (omissions in original) (quoting United Paperworks Int’l Union v. Int’l Paper Co., 985 F.2d 1190, 1199 (2d Cir. 1993)). 14 own when considered under the standards of Rule 2210.55 Representations in other materials do not cure the failure to adhere to Rule 2210’s standards in the communications at issue when those communications contain misleading statements or omit information necessary to make the statements made in the communications not misleading. 56 Finally, Applicants argue that it is not possible for a communication to be “false, exaggerated, misleading, or omit[] necessary information” under NASD Rule 2210(d)(1) if, as here, “every statement [in the communication is] true.” We disagree with both their argument and its premise. It is well established that literally true statements may be made misleading through the omission of material facts. 57 And Rule 2210(d)(1) obligates firms to include information necessary to make their public communications “fair and balanced” and to “provide a sound basis for evaluating the facts.” As discussed above, Applicants’ emails failed to do so and also omitted material facts. In any event, the emails also contained numerous falsehoods. 55 Capwest Sec., 2014 WL 198188, at *8 & n.50; Donner Corp. Int’l, 2007 WL 516282, at *10 (“The research reports themselves needed to convey a complete and accurate picture and could not depend on other information available to investors.”); Pac. On-Line Trading & Sec., 2003 WL 22110356, at *5 (finding that disclaimers provided at seminars and when customers opened new accounts did not cure misleading advertisements because “‘[a]dvertisements must stand on their own when judged against the standards of [Rule 2210]’”) (quoting Sheen Fin. Res., 1995 WL 116484, at *4). 56 Capwest Sec., 2014 WL 198188, at *8 (rejecting argument that “communications did not violate Rule 2210 since the PPMs would include risk and other disclosures that were not included in the communications themselves” because the PPMs “would not cure the Firm’s failure to provide a balanced presentation in the communications”). 57 See SEC v. First Am. Bank & Trust Co., 481 F.2d 673, 678 (8th Cir. 1973) (“[A] statement which is literally true, if susceptible to quite another interpretation by the reasonable investor . . . may properly . . . be considered a material misrepresentation.”); see also SEC v. Gabelli, 653 F.3d 49, 57 (2d Cir. 2011) (“The law is well settled, however, that so-called ‘halftruths’—literally true statements that create a materially misleading impression—will support claims for securities fraud.”), rev’d on other grounds, 568 U.S. 442 (2013); CapWest Sec., 2014 WL 198188, at *6 (“Even if certain of these statements (such as the statement that a 1031 Exchange may be executed ‘without a tax consequence’) may be literally true with respect to the initial transaction, the failure of the advertisement to explain the ultimate tax effect of a 1031 Exchange gave the misleading impression that taxes could be avoided altogether.”). 15 2. We sustain the Firm’s $200,000 fine and Meyers’s $50,000 fine for the unbalanced and misleading communications as not excessive or oppressive. FINRA’s Sanction Guidelines recommend a fine of $10,000 to $146,000 in cases involving “intentional or reckless use of misleading communications” with the public.58 The Guidelines’ general principles also authorize sanctions beyond the range recommended for a particular violation in cases involving egregious misconduct or recidivism.59 We find, as did the NAC, that Applicants’ use of unbalanced and misleading communications was at least reckless and was egregious, and that Applicants are recidivists based on their disciplinary histories, which the NAC described as “extensive” and “troubling.” In so finding, we have considered the Principal Considerations for imposing sanctions under the Sanction Guidelines.60 Recklessness is highly unreasonable conduct that represents an “extreme departure from the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the [actor] or is so obvious that the actor must have been aware of it.”61 Meyers not only drafted the emails about SignPath but was an owner, investment banker, and placement agent of SignPath. He must have known that it was untrue to state in the emails that SignPath anticipated its shares would be publicly traded in early 2011 and had obtained confirmation of the rights to Dutogliptin. Meyers also must have known that it was misleading to predict that SignPath would be profitable in two years without a basis for that prediction or disclosing the company’s significant financial problems, its difficulties in acquiring and developing Dutogliptin, and Meyers’s conflict of interest. Meyers’s scienter is imputed to the Firm.62 Applicants’ misconduct was also egregious. The Principal Considerations in the Sanction Guidelines recommend that adjudicators consider “[w]hether the respondent engaged in the misconduct over an extended period of time” and “[w]hether the respondent engaged in numerous acts and/or a pattern of misconduct.” 63 We have also previously considered the “wide circulation” of communications that violated NASD Rule 2210 to be an aggravating factor in 58 Guidelines at 82. The Guidelines also recommend a suspension for “up to two years” “n cases involving intentional or reckless use of misleading communications with the public,” and “expelling the firm, and/or barring the responsible individual” in cases “involving numerous acts of intentional or reckless misconduct over an extended period of time.” Id. 59 Id. at 2-3 (General Principle 2) & 4 (General Principle 3). 60 See id. at 7-8 (Principal Considerations for all violations) & 81 (Principal Considerations for use of misleading communications). 61 SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). 62 Warwick Capital Mgmt., Advisers Act Release No. 2694, 2008 WL 149127, at *9 n.33 (Jan. 16, 2008) (“A company’s scienter is imputed from that of the individuals controlling it.”). 63 Guidelines at 7-8 (Principal Considerations 8 & 9). 16 determining sanctions for a violation of that rule.64 Here, Applicants included their unbalanced and misleading statements in a large number of communications over an extended period of time. And Applicants’ undisclosed conflict of interest created the potential for financial gain.65 Furthermore, Applicants have significant disciplinary histories. 66 Their past misconduct includes misconduct similar to that at issue here and “evidences a reckless disregard for regulatory requirements, investor protection, [and] market integrity.”67 FINRA’s BrokerCheck shows that, at the time of the complaint in this action, the Firm had been the subject of 15 final regulatory and disciplinary actions—some concerning misleading omissions of material fact.68 BrokerCheck also shows that Meyers had been the subject of five final regulatory and disciplinary actions.69 The Firm was fined a total of $306,500, and Meyers a total of $47,000. Meyers also had been suspended for four months from acting in any principal or supervisory capacity. Considering Applicants’ scienter, the egregiousness of their misconduct, and their disciplinary histories, we sustain the $200,000 fine imposed on the Firm and the $50,000 fine imposed on Meyers. For the reasons discussed above, we agree with the NAC that applying the higher guideline range for “intentional or reckless use of misleading communications” was appropriate; as a result, it was reasonable for the NAC to impose higher fines than did the Hearing Panel. We also agree with the NAC that a significant fine was warranted in light of the large number of misleading communications, the extended period over which they were sent, their wide dissemination, and the potential for Meyers Associates and Meyers to gain monetarily. Although the Sanction Guidelines would have authorized suspending or expelling Meyers Associates, or suspending or barring Meyers, the NAC did not impose those sanctions. We find 64 CapWest Sec., 2014 WL 198188, at *9. 65 Guidelines at 8 (Principal Consideration 16) (“[w]hether the respondent’s misconduct resulted in the potential for the respondent’s monetary or other gain”). 66 See Guidelines at 2 (General Principle 2) (stating that adjudicators should “impos[e] progressively escalating sanctions on recidivists beyond those outlined in these guidelines, up to and including barring associated persons and expelling firms”); cf. Castle Sec. Corp., Exchange Act Release No. 52580, 2005 WL 2508169, at *5 (Oct. 11, 2005) (finding a firm’s disciplinary history to be “a significant aggravating factor and an important consideration”). 67 Guidelines at 3 (General Principle 3) (“Adjudicators also should consider imposing more severe sanctions when a respondent’s disciplinary history includes significant past misconduct that: (a) is similar to that at issue; or (b) evidences a reckless disregard for regulatory requirements, investor protection, or market integrity.”). 68 See BrokerCheck, available at brokercheck.finra.org. We take official notice of this information pursuant to Rule 323, 17 C.F.R. § 201.323. 69 See BrokerCheck, available at files.brokercheck.finra.org individual_1045447.pdf. We take official notice of this information. 17 that the imposition of fines that exceeded the range recommended by the Guidelines was remedial and not excessive or oppressive under the circumstances of this case.70 B. The Firm’s recordkeeping and reporting violations 1. We sustain the finding that the Firm violated NASD Rule 3110, FINRA Rules 4511 and 2010, Exchange Act Section 17(a), and Exchange Act Rules 17a-3, 17a-4, and 17a-5 by creating and maintaining inaccurate books and records. NASD Rule 3110(a) and FINRA Rule 4511(a)71 require that members make and preserve books and records as required under Exchange Act Section 17(a) and Exchange Act Rules 17a-3, 17a-4, and 17a-5.72 Exchange Act Section 17(a)(1) requires broker-dealers to “make and keep for prescribed periods such records . . . and make and disseminate such reports as the Commission, by rule, prescribes.”73 Rule 17a-3(a)(2) requires broker-dealers to “make and keep current . . . [l]edgers (or other records) reflecting all assets and liabilities, income and expense and capital accounts.”74 Rules 17a-5(a) and (d) require broker-dealers to file monthly and quarterly “FOCUS” reports and annual audited reports with the Commission.75 And Rule 17a-4 requires broker-dealers to preserve required records for specified periods of time.76 Implicit in 70 See Lek Sec. Corp., 2018 WL 1602630, at *12 n.47 (finding that the fine would “protect investors by impressing upon [applicant] the importance of complying with FINRA rules” without “resort to a more serious sanction such as suspension or expulsion of [applicant] from FINRA membership”); cf. Wedbush Secs., Inc., Exchange Act Release No. 78568, 2016 WL 4258143, at *15 (Aug. 12, 2016) (“Under the circumstances, we find that FINRA’s decision to impose a fine that exceeded the Guidelines recommendations, while declining to impose the suspension that the Guidelines would have authorized, did not result in an excessive or oppressive sanction.”), petition denied, 719 F. App’x 724 (9th Cir. 2018). 71 FINRA Rule 4511 replaced NASD Rule 3110(a) effective December 5, 2011. 72 NASD Rule 3110(a); FINRA Rule 4511; see also Howard R. Perles, Exchange Act Release No. 45691, 2002 WL 507029, at *9 (Apr. 4, 2002) (“NASD Rule 3110 requires members to make and keep accurate records required by Section 17(a) of the Exchange Act and the rules promulgated by the Commission thereunder.”). 73 15 U.S.C. § 78q(a)(1). 74 17 C.F.R § 240.17a-3(a)(2). 75 Id. § 240.17a-5(a), (d). FOCUS Reports enable periodic monitoring of a company’s financial and operational soundness. E. Magnus Oppenheim & Co., Inc., Exchange Act Release No. 51479, 2005 WL 770880, at *1 n.3 (Apr. 6, 2005). 76 17 C.F.R. § 240.17a-4 (“not less than six years” as to Rule 17a-3(a)(2) records and “not less than three years” as to Rule 17a-5(a) and (d) records). 18 these requirements is that the records be accurate.77 Scienter is not required to violate these provisions. 78 The record establishes that with respect to its books and records the Firm engaged in the conduct FINRA found; that conduct violated NASD Rule 3110, FINRA Rule 4511, and Exchange Act Section 17(a) and the rules thereunder; and those provisions are, and were applied in a manner, consistent with the purposes of the Exchange Act. In November 2010, the Firm entered into employment agreements with Meyers and another senior officer, Imtiaz Khan,79 that required it to reimburse them “each month for all expenses and disbursements of any kind or nature incurred” “in connection with or on behalf of” the Firm in the performance of their duties. The covered expenses included “travel, entertainment, meals, car expense, airline travel and certain personal expenses,” up to $10,000 per month for Meyers and $7,500 for Khan. In 2011 and 2012, as Applicants admit, the Firm reimbursed Meyers and Khan for more than $60,000 in personal expenses that they charged to their corporate and personal credit cards. Although there is no allegation that the reimbursements were improper, the Firm inaccurately recorded them in its general ledger as business expenses rather than employee compensation. 80 This caused the Firm to underreport employee compensation in its FOCUS reports and annual audited reports for 2011 and 2012. After FINRA’s investigation, the Firm issued new Forms 1099 restating Meyers’s and Khan’s incomes for 2011 and 2012. Applicants do not argue that the reimbursements were recorded properly. As a result of this conduct, the Firm violated NASD Rule 3110(a), FINRA Rules 4511(a) and 2010, Exchange Act Section 17(a)(1), and Exchange Act Rules 17a-3, 17a-4, and 17a-5. By classifying the payments it made for personal expenses as business expenses, the Firm inaccurately reported the compensation for two senior officers in its ledger, monthly FOCUS 77 The Dratel Group, Inc., Exchange Act Release No. 77396, 2016 WL 1071560, at *13 (Mar. 17, 2016); Eric J. Brown, Exchange Act Release No. 66469, 2012 WL 625874, at *11 (Feb. 27, 2012), petition denied sub nom. Collins v. SEC, 736 F.3d 521 (D.C. Cir. 2013); see also Sinclair v. SEC, 444 F.2d 399, 401 (2d Cir. 1971) (stating that there is “an obligation” under Exchange Act Section 17(a) that “voluntarily suppl[ied]” information “be truthful”). 78 Mitchell H. Fillet, Exchange Act Release No. 75054, 2015 WL 3397780, at *12 (May 27, 2015) (finding that NASD Rule 3110 has no scienter requirement); Orlando Joseph Jett, Exchange Act Release No. 49366, 2004 WL 2809317, at *23 (Mar. 5, 2004) (“Scienter is not required to violate Exchange Act Section 17(a)(1) and the rules thereunder.”). 79 See supra note 6. 80 See 26 U.S.C. § 61(a)(1) (defining “gross income” as “all income from whatever source derived,” including “fringe benefits”); Internal Revenue Service, Executive CompensationFringe Benefits Audit Techniques Guide (02-2005), 2005 WL 1500302, at *3 (Feb. 2005) (“Personal expenses paid on behalf of executives are taxable fringe benefits that should be included in wages.”). 19 reports, and annual audited reports for 2011 and 2012. 81 We find that the provisions the Firm violated are, and were applied in a manner, consistent with the Exchange Act’s purpose of protecting investors and the public interest because those provisions “require[] that member firms conduct their business operations with regularity and that their records accurately reflect those operations” and here the Firm’s records were not accurate.82 Applicants argue that the Firm should not be held liable for the recordkeeping violations because the inaccuracies in their records were not material and did not threaten investors. But materiality and the potential for investor harm are not elements of the recordkeeping rules. 83 Applicants also argue that they did not act with scienter, that “[n]othing was concealed,” and that the “wrong jar into which the penny was placed was transparent.” Although they state that the NAC found their recordkeeping violation to be intentional, the NAC made no such finding. As noted above, scienter is not required to establish recordkeeping violations.84 Applicants argue further that the Firm’s outside auditor issued two “clean opinion letters” for fiscal years 2011 and 2012. According to Applicants, the Firm received a letter from its auditor stating that it “had reviewed the Firm’s general ledger and . . . accounting for the payment of expenses on behalf of” Meyers and Khan and that “the auditing staff . . . was familiar with the provision in each [employment] agreement [for Meyers and Khan] regarding the payment of employee-related business and personal expense allowance.” A representative from the auditor testified, however, that this letter was not in the audit files and that the audit staff had not reviewed the Firm’s accounting for reimbursements or been provided with the employment agreements. The letter also was dated several years after the audits and was not corroborated by 81 See Fillet, 2015 WL 3397780, at *12-13 (finding that applicant violated NASD Rule 3110(a) and Exchange Act Rule 17a-3 by backdating customer account records); Jett, 2004 WL 2809317, at *23 (finding that firm’s misstatement of profits in ledger and FOCUS reports violated Exchange Act Section 17(a)(1) and Rules 17a-3 and 17a-5). 82 See Blair C. Mielke, Exchange Act Release No. 75981, 2015 WL 5608531, at *16 (Sept. 24, 2015) (internal quotation and citation omitted); see also supra notes 27, 43, and 44. 83 See Palm State Equities, Inc., Exchange Act Release No. 35873, 1995 WL 380142, at *2 (June 20, 1995) (stating that Rule 17a-3 “does not permit a broker-dealer to avoid” the requirement to keep and maintain accurate books and records “merely because, in retrospect, the resulting adjustments prove to be immaterial”); James F. Novak, Exchange Act Release No. 19660, 1983 WL 821144, at *4 n.15 (Apr. 8, 1983) (“[T]he effect the false records may have had on investigators or customers is irrelevant to the question of whether there was a violation of recordkeeping requirements.”). 84 Fillet, 2015 WL 3397780, at *12. As also noted above, the NAC did not impose a separate sanction for the Firm’s recordkeeping violations. 20 other evidence. In any case, a broker-dealer cannot shift its responsibility to maintain accurate books and records to its auditors; that responsibility rests with the Firm and its officers.85 2. We sustain the finding that the Firm violated NASD Rules 3070 and 2110 and FINRA Rule 2010 by failing to report customer complaint information. NASD Rule 3070(c) requires firms to report to FINRA “statistical and summary information regarding customer complaints . . . by the 15th day of the month following the calendar quarter in which customer complaints are received by the [firm].” 86 FINRA’s investigator testified that he reviewed email correspondence between the Firm’s registered representatives and their customers that revealed the presence of customer complaints. But from March 2007 through July 2010, FINRA’s customer complaint reporting system did not receive from the Firm statistical and summary information regarding 49 written customer complaints the Firm had received. FINRA’s investigator testified that he made this determination by “check[ing] the system with the names of the customers or potential customers in the email complaints to see if the firm reported them and [the Firm] did not.” Many of the complaints alleged serious sales practice abuses, including unauthorized trading. And at least six of the complaints were received by the Firm’s supervisory personnel. Yet as of the final day of the 2015 hearing in this proceeding, the Firm still had not reported them. The Firm also reported the statistical and summary information for three written customer complaints it received in 2009 more than one year late. Accordingly, we find that the Firm engaged in the conduct FINRA found and that such conduct violated NASD Rules 3070(c) and 2110 and FINRA Rule 2010.87 We also find that those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act. NASD Rule 3070(c) is consistent with the purposes of the Exchange Act because it requires firms to “provide FINRA with important information to identify timely problem members, branch offices, and registered representatives and to detect and investigate possible sales practice violations and operational problems.” 88 The investing public, in turn, benefits when FINRA has this information.89 As a result, the failure to file 85 See Tiger Options, Exchange Act Release No. 37866, 1996 WL 616368, at *5 (Oct. 25, 1996) (“It is clear, however, that while a broker-dealer can use outside accountants, the firm cannot shift the obligation to comply with its recordkeeping and reporting responsibilities.”). 86 See NASD Rule 3070(c). FINRA Rule 4530 replaced NASD Rule 3070(c) effective July 1, 2011. 87 See Richard F. Kresge, Exchange Act Release No. 55988, 2007 WL 1892137, at *12 (June 29, 2007) (finding that applicant violated NASD Rule 3070(c) by failing to file reports concerning eleven customer complaints); see also supra notes 27, 43, and 44. 88 Wedbush Sec., 2016 WL 4258143 at *14; see also Kresge, 2007 WL 1892137, at *12 (stating that NASD Rule 3070(c) is “intended to protect public investors by helping to identify potential sales practice violations in a timely manner”). 89 Wedbush Sec., 2016 WL 4258143 at *14. 21 reports under Rule 3070(c) accurately and on time deprives FINRA of information that would help it efficiently set investigative priorities.90 Applying Rule 3070 in this case was appropriate because the Firm’s failure to report customer complaint information frustrated FINRA’s ability to monitor its members and protect the public. 91 Applicants acknowledge that “there were gaps in timing” for filing Rule 3070 reports. Nevertheless, they contend that it was unfair for FINRA to wait “over four years to bring formal charges which they claim was “designed to hobble [their] ability to fully paper their defenses” and resulted in the “eliminat[ion] [of] two key witnesses.” Yet Applicants have not explained what their defenses might have been or how evidence not in the record would have supported those defenses. Applicants have not even explained how the two witnesses might have testified. As for the delay in bringing the case, FINRA responds that the Firm “delayed FINRA’s inquiry into the violations, and thus the filing of the [c]omplaint, by repeatedly providing incomplete and non-responsive answers to FINRA’s document and information requests.” In any case, we find no unfairness because Applicants do not dispute, and the record establishes, that they failed to file the reports as Rule 3070 required. 92 C. Applicants’ supervisory violations 1. We sustain the findings that Applicants violated NASD Rules 3010 and 2110 and FINRA Rule 2010 and the Firm violated NASD Rules 3012 and 2110. a. Applicants failed to establish and maintain a reasonable supervisory system for the preparation of books and records. NASD Rule 3010(a) and (b) require firms to establish and maintain a supervisory system “reasonably designed to achieve compliance with applicable securities laws and regulations, and 90 Id. 91 As noted above, the NAC did not impose a separate sanction for this violation. 92 See Mark H. Love, Exchange Act Release No. 49248, 2004 WL 283437, at *4 (Feb. 13, 2004) (rejecting argument that delay in filing complaint rendered NASD proceeding unfair by making two witnesses unavailable because the “NASD based its decision on facts that [applicant] did not dispute”); see also Robert Marcus Lane, Exchange Act Release No. 74269, 2015 WL 627346, at *18 (Feb. 13, 2015) (rejecting defense based on the passage of time where applicant “identifie[d] no specific instances” of prejudice) (citing cases). 22 with applicable NASD Rules.”93 The supervisory system must include “written procedures to supervise the types of business in which [the firm] engages and to supervise the activities of . . . associated persons.”94 But during 2011 and 2012, the Firm did not have written procedures for ensuring that it accurately accounted in its books and records for the reimbursement of Meyers’s and Khan’s personal expenses as employee compensation. Despite the fact that their employment agreements provided that their personal expenses would be reimbursed, no procedures required Meyers and Khan to share the terms of their employment agreements with the personnel who prepared the books and records or to differentiate between personal and business expenses when seeking reimbursements. Instead, the Firm permitted Meyers and Khan to submit only the first page of their credit card statements, which stated the total monthly charges but did not itemize or differentiate business and personal expenses. As a result, the Firm’s accounting personnel did not know about the reimbursement of personal expenses pursuant to the employment contracts, and the personal expenses were misclassified in the books and records as business expenses rather than as employee compensation. Accordingly, we find that the Firm engaged in the conduct FINRA found and that the Firm violated NASD Rule 3010(a) and (b). The Firm had no procedures for ensuring that the personal expenses reimbursed under Meyers’s and Khan’s employment agreements were recorded as employee compensation and complied with the recordkeeping rules. 95 Rather, the Firm’s accounting personnel were unaware of the employment agreements and unable to maintain accurate books and records. We also find that NASD Rule 3010 is consistent with the Exchange Act’s purpose of protecting investors because we have “long emphasized that the responsibility of broker-dealers to supervise their employees is a critical component of the 93 NASD Rule 3010(a). FINRA Rule 3110 replaced NASD Rule 3010 effective December 1, 2014. 94 NASD Rule 3010(a)(1) & (b). 95 See, e.g., Wedbush Sec., 2016 WL 4258143, at *7 (finding that firm and its president failed reasonably to supervise regulatory reporting in violation of NASD Rule 3010 “where supervisors and executives across the Firm took insufficient steps to ensure that regulatory reporting was completed timely and accurately”) (internal quotations omitted); East/West Sec. Co., Exchange Act Release No. 43479, 2000 WL 1585633, at *3 (Oct. 25, 2000) (finding that firm violated NASD Rule 3010 by failing to have procedures stating “how it would monitor compliance with the Regulatory Element [Continuing Education Program] rule and what action it would take against a registered person who failed to comply with the rule[]”). 23 federal regulatory scheme.”96 Applying Rule 3010 here was consistent with that purpose given the unreasonableness of the Firm’s supervisory failures.97 Meyers also violated NASD Rule 3010 as a result of this conduct. “It is well established that the president of a member firm bears ultimate responsibility for compliance with all applicable requirements unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person’s performance is deficient.”98 Here, the Firm’s written supervisory procedures (“WSPs”) made Meyers, the Firm’s CEO, responsible for the “ultimate supervision” of the Firm’s supervisory personnel. The WSPs also stated, and Meyers testified, that from January to May 2011, Meyers supervised Victor Puzio, who was the Firm’s CFO and financial and operations principal (“FINOP”). 99 The WSPs stated that Puzio was responsible for “maintain[ing] the books and records” and “for the proper completion and filing of all focus reports and relevant financial reports with FINRA.” Yet Meyers did not disclose to Puzio that the Firm was reimbursing his and Khan’s personal expenses. Nor did he develop procedures concerning the reimbursement of personal expenses under his and Khan’s employment agreements or divulge the terms of those agreements to Puzio and the accounting personnel. Meyers therefore knew or must have known that Puzio and the accounting personnel did not have the necessary information to properly account for the reimbursement of personal expenses as employee compensation and thus maintain accurate books and records. Under the circumstances, Meyers failed to exercise reasonable supervision. 100 Applicants argue that because Puzio maintained, and an accounting firm reviewed, the books and records, holding Applicants liable would be “tantamount to imposing a requirement that brokerage firm principals have accounting degrees and double check the work of their outside accountants.” We have already rejected Applicants’ argument that they could shift their responsibility for maintaining accurate books and records to their accounting firm. Applicants do not explain how their outside accountants could be responsible for the failure to have WSPs governing the reimbursement of personal expenses. Indeed, the outside accountants could not be 96 Wedbush Sec., 2016 WL 4258143, at *10 (internal quotations and citations omitted). 97 See Thaddeus J. North, Exchange Act Release No. 17909, 2018 WL 5433114, at *7 (Oct. 29, 2018) (finding FINRA’s application of Rule 3010 “was appropriate in this case given the unreasonableness of the written supervisory procedures”); see also supra notes 27, 43, and 44. 98 Wedbush Sec., 2016 WL 4258143, at *8 (internal quotations and citations omitted). 99 In August 2011, the Firm revised its WSPs to state that, as of May 2011, the Firm’s new president, Donald Wojnowski, supervised Puzio, and Meyers supervised Wojnowski. 100 See Donner Corp. Int’l, 2007 WL 516282, at *14-15 (finding that firm’s president violated Rule 3010 because firm did not have any procedures governing the preparation or review of research reports despite president knowing that firm was disseminating such reports). 24 so responsible because they were not associated with the Firm.101 To the extent Applicants argue that they should not be liable because they did not commit an “intentional act,” we reject that argument because Applicants knew the terms of Meyers’s and Khan’s employment agreements yet Meyers did not develop procedures concerning the reimbursement of personal expenses or otherwise ensure that the Firm’s accounting personnel knew about the agreements and could properly record the reimbursements that the Firm made as employee compensation. 102 b. The Firm failed to establish and maintain a reasonable supervisory system for the review of electronic correspondence. NASD Rule 3010(d) requires firms to establish written procedures “for the review by a registered principal of . . . electronic correspondence of its registered representatives with the public relating to [its] investment banking or securities business.”103 Each member must “develop written procedures that are appropriate to its business, size, structure, and customers for the review of . . . electronic correspondence with the public relating to its investment banking or securities business . . . .”104 Firms must maintain, and make available to FINRA upon request, “[e]vidence that these supervisory procedures have been implemented and carried out.”105 Between March 2007 and September 2010, the Firm’s WSPs did not address how supervisors were to select electronic correspondence for review, how they were to review it, the frequency of such reviews, and the manner in which to document reviews. Nor did the Firm maintain records of its supervisory review of electronic correspondence. Accordingly, we find that the Firm engaged in the conduct FINRA found; that by failing to have WSPs for the review of electronic correspondence the Firm violated NASD Rule 3010; and that FINRA’s application of NASD Rule 3010 here was consistent with the purposes of the Exchange Act. 106 101 See Murphy, 2013 WL 3327752, at *21 n.120 (finding that applicant “could not delegate [supervisory] duties to individuals not associated with the member firm” such as outside auditor). 102 Lane, 2015 WL 627346, at *12 (finding that firm’s WSPs “were also deficient because they did not address interpositioning, even though the Firm regularly engaged in that practice”). 103 NASD Rule 3010(d)(1). 104 NASD Rule 3010(d)(2). 105 NASD Rule 3010(d)(1). 106 See North, 2018 WL 5433114, at *5 (finding violation of NASD Rule 3010 where WSPs “failed to specify even the most basic parameters for reviewing electronic communications, e.g., the frequency of review, the methodology to be used in selecting communications to be reviewed, whose electronic communications were going to be reviewed, the number of communications to be reviewed, or how to document actions taken as a result of reviews”); see also supra notes 27, 43, and 44 and text accompanying note 96. 25 Applicants argue that the NAC’s decision operated as an unfair “pile-on” because it sanctioned the Firm a second time for misconduct that was the subject of a 2008 settlement with FINRA. But the 2008 settlement concerned misconduct regarding the Firm’s review of electronic correspondence during the period of April 2005 to April 2006; here, the case concerns the Firm’s misconduct that occurred from March 2007 to September 2010. Notwithstanding the 2008 settlement agreement, applicants again failed to develop the required procedures. The NAC’s decision was not unfair because in this case “[s]ubsequent time periods are at issue.”107 c. The Firm failed to establish and maintain a reasonable supervisory control system. NASD Rule 3012 requires firms to designate one or more principals to “establish, maintain, and enforce a system of supervisory control policies and procedures that (A) test and verify that the member’s supervisory procedures are reasonably designed . . . to achieve compliance with applicable securities laws and . . . NASD rules and (B) create additional or amended supervisory procedures where the need is identified by such testing and verification.”108 The designated principal(s) must submit a report to senior management at least annually that “detail[s] [the] member’s system of supervisory controls” and “the summary of the test results.” 109 Among other things, the supervisory controls must include written “procedures that are reasonably designed” (i) “to review and supervise the customer account activity conducted by” producing managers;110 (ii) “to provide heightened supervision over the activities of each producing manager who is responsible for generating 20% or more of the revenue of the business units supervised by the producing manager’s supervisor”;111 and (iii) “to review and monitor . . . all transmittals of funds . . . or securities from customers to third party accounts,” “outside entities,” and “locations other than a customer’s primary residence.” 112 The record shows, and Applicants do not dispute, that the Firm failed to have these procedures. From 2009 to 2011, the Firm’s system of supervisory controls failed to reasonably explain how the Firm would identify producing managers, review the customer account activities of those managers, or determine if those managers were in need of heightened supervision because they generated 20% or more of the revenue of the business units supervised by the manager’s supervisor. The Firm’s system of supervisory controls also failed to reasonably discuss how the Firm would review and monitor transmittals of customer funds and securities. 107 Pac. On-Line Trading & Sec., 2003 WL 22110356, at *6. 108 NASD Rule 3012(a)(1). FINRA Rule 3120 replaced NASD Rule 3012 effective December 1, 2014. 109 Id. 110 NASD Rule 3012(a)(2)(A). 111 NASD Rule 3012(a)(2)(C). 112 NASD Rule 3012(a)(2)(B)(i). 26 Furthermore, the Firm’s 2009, 2010, and 2011 annual reports on its system of supervisory controls did not reasonably detail those controls and instead contained only conclusory statements that unspecified methods of testing showed supervisory procedures to be adequate. 113 Accordingly, we find that the Firm engaged in the conduct FINRA found; that that conduct violated NASD Rule 3012; and that NASD Rule 3012 is, and was applied in a manner, consistent with the purposes of the Exchange Act.114 We have stated that NASD Rule 3012 is consistent with the purposes of the Exchange Act because it “reduce[s] the potential for customer fraud and theft” by “requiring members to establish more extensive supervisory and supervisory control procedures to monitor customer account activities of their employees.” 115 Given the Firm’s unreasonable failure to have the required supervisory controls, FINRA’s application of NASD Rule 3012 here was also consistent with the purposes of the Exchange Act. 116 2. We sustain the sanctions for Applicants’ supervisory violations. a. The Firm’s $500,000 fine is not excessive or oppressive. FINRA applied the sanction guideline for “systemic supervisory failures” to impose a single $500,000 fine for all of the Firm’s violations other than the unbalanced and misleading communications. Although the Hearing Panel imposed separate sanctions for each of the other violations, the NAC found that those other violations all “resulted fundamentally from the [F]irm’s persistent supervisory failures.” We have recognized previously that the NAC may impose a unitary sanction where “violations result from a single systemic problem or cause.”117 And “it is the decision of the NAC, not the decision of the Hearing Panel, that is the final action 113 For example, the annual reports signed by a principal of the Firm stated, “At the present time my review and testing, as described above, reflects that our procedures are adequate.” They also stated, “Additionally, it is the responsibility of that principal to create or amend the firm’s procedures when it becomes applicable, as a result of the aforementioned testing.” However, the testing is not described or mentioned anywhere in the reports. 114 See Self-Regulatory Organizations; Order Approving Proposed Rule Change, Exchange Act Release No. 49883, 2004 WL 1574002, at *17 (June 17, 2004) (approving NASD Rule 3012 and finding it “consistent with the provisions of [Exchange Act ] Section 15A(b)(6)”). 115 Id. 116 FINRA’s finding that the failure to have supervisory controls also violated FINRA Rule 2010 was also consistent with the purposes of the Exchange Act. See supra notes 27, 43, and 44. 117 Mielke, 2015 WL 5608531, at *18 (sustaining the NAC’s determination “to impose a unitary sanction” for violations of NASD Rule 3040 and FINRA Rule 3030 where both violations derived from applicants’ “significant involvement and control of Midwest”). 27 of [FINRA] which is subject to Commission review.”118 As a result, we find that it was proper to aggregate the remaining violations in this way for purposes of determining sanctions.119 The guideline for “systematic supervisory failures” recommends fining a firm $10,000 to $292,000, or higher “[w]here aggravating factors predominate.”120 “Where aggravating factors predominate,” the guidelines for “systemic supervisory failures” also recommend suspending “the firm with respect to any or all relevant activities or functions” for up to two years, or expelling the firm.121 We find that aggravating factors predominate here. Several considerations specific to “systemic supervisory failures” under the Guidelines establish the presence of aggravating factors: (i) the Firm’s supervisory failures “allowed violative conduct to occur or to escape detection,”122 such as the misleading SignPath emails; (ii) the Firm “failed to timely correct or address deficiencies once identified,”123 such as the supervisory deficiencies concerning the review of electronic communications identified in the 2008 settlement; (iii) the Firm did not “appropriately allocate[] its resources to prevent or detect the supervisory failure[s],” 124 as it had been the subject of six prior disciplinary actions involving supervisory violations; (iv) the Firm’s supervisory failures had a meaningful effect on “market integrity, market transparency, the accuracy of regulatory reports, [and] the dissemination of . . . regulatory information” because they resulted in the misleading emails, inaccurate FOCUS reports and annual audited reports, and undisclosed customer complaints that frustrated FINRA’s ability to protect investors; 125 and (v) the Firm had an unreasonable supervisory control system 118 Kevin M. Glodek, Exchange Act Release No. 60937, 2009 WL 3652429, at *6 (Nov. 4, 2009) (stating that “the NAC reviews the Hearing Panel’s decision de novo and has broad discretion to review the Hearing Panel’s decisions and sanctions”). 119 Guidelines at 4 (stating that the “range of monetary sanctions in each case may be applied in the aggregate for similar types of violations rather than per individual violation”) & 106 (stating that adjudicators should use the guideline for systemic supervisory failures “when a supervisory failure is significant and is widespread or occurs over an extended period of time”). 120 Guidelines at 106; see also id. at 4 (“Adjudicators may determine that egregious misconduct requires the imposition of sanctions above or otherwise outside of a recommended range.”). 121 Id. at 107. 122 Id. at 106. 123 Id. 124 Id. 125 Id. at 107. 28 and unreasonable supervisory procedures.126 Under these circumstances, the $500,000 fine imposed on the Firm was remedial and not excessive or oppressive. Applicants contend that their “gaps in timing” with filing customer complaint information were due to “unfortunate circumstances” in 2009 and 2010, such as “the death of the Firm’s compliance consultant,” “two eye surgeries for the CFO,” and “a fire at the Firm’s office.” Although Applicants acknowledge that these circumstances do not “excuse” the Firm’s violations, they offer them “as an explanation.”127 Applicants do not explain how these circumstances prevented the Firm from making quarterly filings throughout 2009 and 2010 of statistical and summary information about customer complaints that they had received. In any case, the Firm’s NASD Rule 3070 violation spanned from March 2007 through July 2010. These circumstances provide no explanation for the Firm’s misconduct in 2007 and 2008. Applicants also contend that they took corrective action by “successfully uncover[ing] the 49 alleged unreported customer complaints . . . and report[ing] each one . . . as of December 24, 2015, some two years before the NAC Decision.” This is not mitigating because Applicants did this after “detection and intervention by” FINRA.128 Applicants contend that one factor to be considered under the guideline for “recordkeeping violations” is the “[n]ature and materiality of inaccurate or missing information,”129 and that the Firm’s violations “were immaterial and de minimis and resulted from Applicants’ reasonable reliance on the Firm’s internal CFO and its outside accountants.” But the NAC applied the guideline for “systemic supervisory failures,” not “recordkeeping violations.” Nor have Applicants established that the Firm relied on the advice of professionals. 126 Id. (recommending that adjudicators consider “[t]he quality of controls or procedures available to the supervisors and the degree to which the supervisors implemented them”). 127 See Strathmore Sec., Inc., Exchange Act Release No. 7864, 1966 WL 83448, at *5 (Apr. 8, 1966) (stating that violations were not “excuse[d]” by applicants’ contention that “the back office was under the supervision of the firm’s late president, who was seriously ill during the period when the violations occurred,” but that the issue was relevant to sanctions). 128 Guidelines at 7 (Principal Consideration 3) (recommending that adjudicators consider for all violations whether a “member firm respondent voluntarily employed subsequent corrective measures, prior to detection or intervention . . . by a regulator”); Wedbush Sec., 2016 WL 4258143, at *13 (“Applicants point to no corrective measures taken before regulators began notifying the Firm of their concerns, so the record does not support consideration of efforts to improve regulatory reporting as a mitigating factor.”). 129 Guidelines at 29. 29 Among other things, Applicants have not shown that the Firm fully disclosed the relevant facts concerning its reimbursement of Meyers’s and Khan’s personal expenses.130 b. Meyers’s $50,000 fine and bar from associating with a member firm in a principal or supervisory capacity are not excessive or oppressive. The NAC fined Meyers $50,000 and barred him from associating with a member firm in a principal or supervisory capacity as a result of his supervisory failures.131 The sanction guideline for a “failure to supervise” recommends a fine of $5,000 to $73,000 and, in “egregious cases,” a suspension or bar in any or all capacities. 132 We find that Meyers’s supervisory failures were egregious and that the sanctions imposed on him are remedial and not excessive or oppressive. The guideline for a failure to supervise recommends considering the “[q]uality and degree of [the] supervisor’s implementation of the firm’s supervisory procedures and controls.” 133 Despite being responsible for the “ultimate supervision” of the Firm’s supervisory personnel generally and Puzio—who was responsible for the Firm’s books and records— specifically, Meyers failed completely to develop procedures concerning the reimbursement of personal expenses under the relevant employment agreements or divulge the terms of those agreements to Puzio. As a result, Meyers’s failures were serious because he not only neglected his supervisory duties but also was largely responsible for the Firm’s recordkeeping violations. Two additional factors highlight the severity of Meyers’s supervisory failures. First, Meyers testified at the hearing that he was “not involved” with the compliance of the Firm, had “no compliance experience” or “knowledge of compliance per se,” and did not intend to acquire such knowledge. As the NAC found, despite being the Firm’s CEO, Meyers’s “testimony showed him to be largely distanced from, and indifferent to, Meyers Associates’ obligation to maintain an effective supervisory system.” We agree with the NAC that, as a result, a bar in a principal or supervisory capacity is necessary to protect the public. 130 See Lek Sec. Corp., 2018 WL 1602630, *12 (rejecting applicant’s contention that its reliance on an AML auditor was mitigating because the record did not establish that applicant made full disclosure to the auditor). 131 These are the same sanctions that the Hearing Panel imposed upon Meyers. 132 Guidelines at 105. 133 Id. 30 Second, Meyers has a significant disciplinary history—he has been sanctioned for three prior supervisory failures.134 None of those sanctions, including a four-month suspension from acting in a principal or supervisory capacity, has prevented Meyers from committing additional supervisory misconduct. Meyers has demonstrated that he is unfit to serve in a principal or supervisory capacity and that the public needs to be protected from him doing so. 135 Accordingly, we find that the $50,000 fine and the bar from acting in any principal or supervisory capacity are remedial and not excessive or oppressive.136 III. Applicants’ remaining contentions Applicants object to the NAC imposing different sanctions than the Hearing Panel and imposing fines that exceeded the amount Enforcement requested.137 According to Applicants, the NAC took a different approach than the Hearing Panel in determining the amount of the fines in order “to mask an egregious upward departure from the [G]uidelines” that was intended to retaliate against them and “close the Firm.” Applicants argue that the fact that the fines exceeded the amount Enforcement requested further shows retaliatory intent. We reject these contentions. Our independent review of the record reveals no evidence that the NAC imposed sanctions to retaliate against Applicants. Indeed, it is not improper for the NAC to impose different sanctions than a Hearing Panel imposed or that Enforcement 134 See BrokerCheck, available at files.brokercheck.finra.org individual_1045447.pdf. Prior to the filing of FINRA’s complaint in this proceeding, Meyers received the following sanctions for supervisory failures in final regulatory actions: (i) in 2011, for violating NASD Rule 3010 by failing to reasonably supervise the Firm’s responses to FINRA requests for information, FINRA imposed a four-month suspension in a principal or supervisory capacity, a $35,000 fine, and a censure; (ii) in 2000, for violating NASD Rule 3010 by failing to enforce the Firm’s written procedures regarding insider trading, the NASD imposed a $10,000 fine and a censure; and (iii) in 1990-1991, for violating the predecessor to NASD Rule 2110 by failing to supervise a statutorily disqualified person, the NASD imposed a $2,000 fine and a censure, and the Florida Division of Securities precluded Meyers from acting in a principal or supervisory capacity. Id. In affirming the sanctions imposed by the NAC, we have not considered that, after the filing of FINRA’s complaint in this proceeding, Meyers was sanctioned for supervisory failures in two additional final regulatory actions. Id. 135 Cf. Ronald Pellegrino, Exchange Act Release No. 59125, 2008 WL 5328765, at *17 (Dec. 19, 2008) (“The principal bar will protect investors from dealing with securities professionals who are not adequately supervised.”) (internal quotations and citation omitted). 136 We also sustain, and Applicants do not challenge, FINRA’s order to pay costs. See, e.g., Bernard G. McGee, Exchange Act Release No. 80314, 2017 WL 1132115, at *14 n.58 (Mar. 27, 2017) (sustaining FINRA’s imposition of costs where sanctions were tailored to the misconduct). 137 Enforcement requested a fine of $750,000 against the Firm and $55,000 against Meyers. 31 requested. 138 Moreover, the NAC imposed the same total fine on the Firm and bar on Meyers as did the Hearing Panel and only increased Meyers’s fine by $25,000. And it increased Meyers’s fine due to his role in the Firm’s “wide dissemination of violative public communications” that had the “potential for Meyers’s financial gain.” To the extent Applicants argue that the Firm cannot pay the fine, they have provided no evidence of the Firm’s financial condition.139 Applicants also contend that they received no “ill-gotten gains,” no customers “lost a dime,” “none of the charges involved or affected the investing public,” and there was no “widespread impact” on the investing public, markets, or “the Firm’s ability to comply with its obligations under the federal securities laws or FINRA Rules.” Even if true, “the lack of an aggravating factor . . . does not establish a mitigating factor.”140 Here, however, at least some of the violations threatened the investing public, and all of the violations demonstrated Applicants have a continuing inability to comply with the federal securities laws and FINRA Rules. Applicants argue further that the NAC’s decision was unfair because it had “sham, bootstrapped” findings, considered prior disciplinary histories in assessing “whether separately charged violative conduct ever occurred,” “improperly . . . discounted or ignored exculpatory evidence,” and “relie[d] on circular reasoning to reach a pre-ordained conclusion.” As discussed above, our independent review of the record finds no unfairness or impropriety in the NAC’s reasoning or its decision. We further reject as unsubstantiated Applicants’ general allegation that Enforcement staff engaged in unprofessional or improper conduct. 141 Applicants also complain of errors in the Hearing Panel’s decision, but “‘t is the decision of the NAC . . . that is the final 138 See Murphy, 2013 WL 3327752, at *28 (stating that the NAC “has broad discretion” in its de novo review of hearing panel decisions, and “may affirm, modify, reverse, increase, or reduce any sanction”) (internal quotations and citations omitted); see also, e.g., Jim Newcomb, Exchange Act Release No. 44945, 2001 WL 34371743, at *5 n.18 (Oct. 18, 2001) (sustaining sanctions imposed by the NAC, which were greater than those imposed by the hearing panel). 139 See ACAP Fin., Inc., Exchange Act Release No. 70046, 2013 WL 3864512, at *17 (July 26, 2013) (rejecting argument that sanctions against member firm should have been reduced based on inability to pay because there was “no evidence before [the Commission] of [the firm’s] current financial circumstances”), petition denied, 783 F.3d 763 (10th Cir. 2015). 140 Keith D. Geary, Exchange Act Release No. 80322, 2017 WL 1150793, at *9 (Mar. 28, 2017) (internal quotations and citation omitted), petition denied, 727 F. App’x 504 (10th Cir. 2018); see also Fillet, 2015 WL 3397780 at *15 (“The absence of monetary gain or customer harm is not mitigating, as our public interest analysis focus[es] . . . on the welfare of investors generally.”) (internal quotations and citations omitted). 141 See, e.g., First Colorado Fin. Serv. Co., Inc., Exchange Act Release No. 40436, 1998 WL 603229, at *7 (Sept. 14, 1998) (rejecting claims against NASD Enforcement staff of bias, improper conduct, and selective prosecution as vague and unsubstantiated by the record). 32 action of [FINRA] . . . subject to Commission review.’” 142 As discussed above, we sustain the NAC’s findings of violations and the sanctions imposed. An appropriate order will issue.143 By the Commission (Chairman CLAYTON and Commissioners JACKSON, PEIRCE, ROISMAN, and LEE). Vanessa A. Countryman Secretary 142 Lane, 2015 WL 627346, at *17 n.89 (quoting Morton Bruce Erenstein, Exchange Act Release No. 56768, 2007 WL 3306103, at *8 (Nov. 8, 2007), petition denied, 316 F. App’x 865 (11th Cir. 2008)). 143 We have considered all of the parties’ contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 86497 / July 26, 2019 Admin. Proc. File No. 3-18359 In the Matter of the Application of MEYERS ASSOCIATES, L.P. (n/k/a WINDSOR STREET CAPITAL, L.P.) and BRUCE MEYERS For Review of Disciplinary Action Taken by FINRA ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY FINRA On the basis of the Commission’s opinion issued this day, it is ORDERED that the disciplinary action taken by FINRA against Meyers Associates, L.P. (n/k/a Windsor Street Capital, L.P.) and Bruce Meyers is sustained. By the Commission. Vanessa A. Countryman Secretary

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From: StockDung8/1/2019 12:24:20 PM
   of 121951
 
Patrick Byrne was a Double Naught Spy

=====================================================
An FBI informant assigned to spy on Russian national Maria Butina had a change of heart last week, telling Butina’s lawyer about the spying and that he’d told the FBI Butina wasn’t a Russian agent. However, the bureau never provided that evidence during the trial, which it was legally obliged to do.

Patrick Byrne, the CEO of Overstock.com, told lawyer Robert Driscoll, who represented the 30-year-old Russian national during her trial this past winter for failing to register with the US government as a foreign agent, that he’d been assigned by the FBI to initiate a romantic relationship with Butina. However, during the course of his spying on her, he decided she wasn’t up to anything suspicious, a judgment he relayed to his FBI handlers.

Driscoll says he never received that evidence, and wrote a letter of protestation to US Justice Department bigwigs last week alleging malpractice.

Driscoll wrote that Byrne had told him that “some of the details he provided the government regarding Maria in response was exculpatory - that is, he reported to the government that Maria’s behavior and interaction with him was inconsistent with her being a foreign agent and more likely an idealist and age-appropriate peace activist.”

Driscoll protested to Justice Department Inspector General Michael Horowitz and US Attorney John Durham that when asked, federal prosecutors had “denied the existence of any such Brady material.” According to the US Supreme Court’s ruling in Brady v. Maryland, prosecutors are legally obliged to provide the defense with evidence favorable to the defendant.

Butina was subsequently convicted after pleading guilty to conspiracy as part of a plea deal and will be sitting in prison until October, after which she’ll be deported back to Russia. The Russian government has maintained her innocence and protested both the conditions of her detention and her trial.

Colleen Rowley, a former FBI special agent who in 2002 was named Time Magazine person of the year along with two other whistleblowers, told Radio Sputnik’s Loud and Clear Wednesday that hiding exculpatory evidence was a practice as old as the FBI itself.

spreaker.com
Rowley said the FBI has “cultivated certain practices” since it was led by J. Edgar Hoover, who died in 1972, “that have led to debacles that have become public,” such as its use of mob boss Whitey Bulger as an informant against a rival crime family at the expense of the bureau largely overlooking Bulger’s own criminal operations.

“In theory, you don’t want to have an informant who is more able to coerce someone into committing a crime,” Rowley told hosts Brian Becker and John Kiriakou. “This case has a little touch of that,” she said, because Bryne was 57 and Butina in her 20s. “And using sex, of course, this guy didn’t just develop the relationship, he was told to institute a romantic sex relationship. So a lot of people would say that that’s going to overpower the will, and you can get - you know, a powerful person can kind of entrap people into saying things, etc.”

The irony is that throughout Butina’s trial, it was she who was slandered by the media and the prosecution as a honeypot who traded sex for political connections, when it was Byrne, at the behest of the FBI, who actually initiated the relationship with her in the interest of extracting useful information.

“The other practice that goes back to Hoover is that the FBI was never required to have any tape recording or video evidence - even of confessions. And this is great for a zealous prosecutors and for the investigation because, in this case, this informant who told the FBI, ‘Oh, you know what, she’s not really a spy, she’s just a graduate student seeking - you know, she’s trying to lobby for gun rights or whatever,’ whatever he told them, we don’t even know if that was transferred into written form.”

“It’s possible, if you had an agent with some integrity, they would’ve included that in their report. But it’s also possible, because nothing is tape-recorded and there’s no accountability, really, there’s no way of ever showing this, that an agent will not write things up in a way that helps the prosecution. And if something is exculpatory - for instance, in an interview - you know what? It may not get into the written transcription that the agent would do.”

Rowley said that even with “Brady material,” the FBI will often argue they “have less broad discovery than most state judicial authorities, because in the federal system, it has to be relevant. So, many times they will say that how a case got initiated is not relevant to what we later are able to prove and get evidence of.”

“They construe their responsibility to provide Brady material … in as narrow a fashion as they can, and unless the other side finds out about it, nobody is the wiser,” Rowley said.

...

10 0

Related: Maria Butina Speaks to Press for First Time Since Detention in US (VIDEO) Moscow Rules Out Exchange of US Citizen Whelan for Russia's Butina - Ryabkov Russia’s Butina Serving Sentence in Florida Prison ‘In Good Spirits’ - Priest

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Robert Driscoll, FBI, withhold, favorab

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To: StockDung who wrote (121919)8/14/2019 4:29:48 PM
From: Glenn Petersen
1 Recommendation   of 121951
 
Overstock Sell-Off Reaches 36% After CEO’s ‘Deep State’ Comment

By Jeran Wittenstein
Bloomberg
August 14, 2019, 12:41 PM CDT



Overstock.com CEO Patrick Byrne
Photographer: George Frey/Bloomberg
___________________________

Overstock.com Inc. shares fell for a third day Wednesday as investors reacted to statements by Chief Executive Officer Patrick Byrne that he was a part of federal investigations related to the 2016 election.

The e-commerce company has lost a third of its value in the two days since releasing a statement by Byrne titled “Overstock.com CEO Comments on Deep State” and referring to federal investigators as “the Men in Black.” The stock fell another 23% on Wednesday, bringing its slide to 36% since Monday, the biggest two-day slump in more than 11 years.

Byrne’s statement addressed stories published on a little-known news website and referenced investigations relating to the Clintons and Russian interference in the U.S. elections, political espionage and the rule of law.

“I will speak no more on the subject,” Byrne wrote in the statement. “Instead, having lived in places lacking Rule of Law and having witnessed the consequences of its absence, I plan on sitting back and watching the United States Department of Justice re-establish Rule of Law in our country.”

They’re not the first unusual comments from the Overstock founder. He sued brokerages over claims tied to naked short-selling in 2007 and has said the banks settled the case for tens of millions of dollars. He’s compared a company executive to a Star Trek character in announcing her promotion, and has signed communiques to holders with “your humble servant.” He likened Overstock’s cryptocurrency ambitions to Jonas Salk’s polio vaccine and joked on last week’s conference call about loaning office space to the SEC amid an investigation into the company’s tZero push, comments which briefly sent the shares tumbling.

“What you have here is a highly controversial CEO and another example of something that’s controversial,” D.A. Davidson analyst Tom Forte said in an interview. He has a buy rating on the stock. “There are times like right now where that has a negative impact on the performance of the stock.”



Overstock had been riding high after investors cheered the company’s second-quarter earnings report on Thursday that revealed a narrower-than-expected loss on an adjusted Ebitda basis. The stock closed the week at the highest levels since October. Now, the two-day slide has erased more than a month of gains.

“The frustrating part is that the legacy home e-commerce business has returned to positive cash flow,” said Forte, one of two Wall Street analysts covering the company. “The two assets -- e-commerce and blockchain -- are incredibly well positioned.”

Representatives for Overstock didn’t respond to a voicemail message or e-mail seeking comment on Wednesday.

bloomberg.com

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From: scion8/16/2019 4:43:23 AM
1 Recommendation   of 121951
 
General Electric shares tank following accusation of 'bigger fraud than Enron'

Share price plummets as Madoff whistleblower Harry Markopolos claims company is engaging in $38bn accounting fraud

Dominic Rushe in New York @dominicru Thu 15 Aug 2019 19.42 BST
theguardian.com

The whistleblower who exposed Bernard Madoff’s Ponzi scheme has accused General Electric of wide-scale fraud, sending the US conglomerate’s share price into a tailspin.

In a report titled General Electric, a Bigger Fraud Than Enron, the investigator, Harry Markopolos, claims GE is engaging in accounting fraud worth $38bn. He said GE was heading for bankruptcy and was hiding $29bn in long-term care losses.
gefraud.com

“GE’s $38bn in accounting fraud amounts to over 40% of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds,” Markopolos wrote, referencing two of the largest corporate scandals in history.


After a year-long investigation for an unidentified hedge fund, Markopolos said he had discovered “an Enronesque business approach that has left GE on the verge of insolvency”. Enron, a Texas-based energy group, filed for bankruptcy in 2001, brought down by a huge accountancy scandal.

This report is “going to make this company probably file for bankruptcy”, Markopolos told CNBC’s Squawk on the Street. “WorldCom and Enron lasted about four months … We’ll see how GE does.”

In a statement, GE said it “stands behind its financials” and operates to the “highest level of integrity” in its financial reporting. “We remain focused on running our business every day and will not be distracted by this type of meritless, misguided and self-serving speculation.”

GE’s share price sank close to 15% after the report was released.

General Electric is already under investigation by the Securities and Exchange Commission (SEC), the US’s top financial watchdog, and the justice department over accounting irregularities related to its insurance and power divisions.

Once the world’s most valuable company, GE has struggled in recent years. The former chief executive and chairman John Flannery was abruptly removed last year after only a year on the job and replaced by Lawrence Culp, once the head of the Danaher conglomerate.

On Thursday, Culp dismissed Markopolos’s report. “GE will always take any allegation of financial misconduct seriously. But this is market manipulation – pure and simple,” he said.

Markopolos is best known for his role as the whistleblower who warned the SEC about Madoff’s Ponzi scheme. Madoff was jailed for 150 years in 2009 after pleading guilty to swindling investors out of $65bn in savings.


theguardian.com

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To: StockDung who wrote (121919)8/22/2019 12:22:45 PM
From: Glenn Petersen
4 Recommendations   of 121951
 
Overstock CEO Patrick Byrne resigns following 'deep state' comments

August 22, 2019
Annie Palmer @annierpalmer
CNBC.com
-- Overstock CEO Partick Byrne has resigned from the e-commerce company after making controversial comments about his role in the "Deep State."

-- Shares of Overstock were halted on Thursday.

Overstock CEO Partick Byrne has resigned from the e-commerce company after making controversial comments about his role in the "deep state." Shares of Overstock were halted pending the news.

"In July I came forward to a small set of journalists regarding my involvement in certain government matters. Doing so was not my first choice, but I was reminded of the damage done to our nation for three years and felt my duty as a citizen precluded me from staying silent any longer," Byrne said in a statement. "...Though patriotic Americans are writing me in support, my presence may affect and complicate all manner of business relationships, from insurability to strategic discussions regarding our retail business."

"Thus, while I believe that I did what was necessary for the good of the country, for the good of the firm, I am in the sad position of having to sever ties with Overstock, both as CEO and board member, effective Thursday August 22," he added.

Last week, Byrne released a statement responding to claims in a blog post of his involvement in the federal government's investigation into the 2016 election. In it, he referred to federal agents as the "Men in Black" and said he assisted in investigations related to the Clintons and Russian interference.

In an interview with The New York Times, Byrne claimed he was romantically involved with Maria Butina, the Russian operative who used her NRA activism to infiltrate American politics. She was later sentenced to 18 months in prison.

Read the full letter from Byrne below:

Dear Shareholders,

In July I came forward to a small set of journalists regarding my involvement in certain government matters. Doing so was not my first choice, but I was reminded of the damage done to our nation for three years and felt my duty as a citizen precluded me from staying silent any longer. So, I came forward in as carefully and well-managed fashion as I could. The news that I shared is bubbling (however haphazardly) into the public. Though patriotic Americans are writing me in support, my presence may affect and complicate all manner of business relationships, from insurability to strategic discussions regarding our retail business. Thus, while I believe that I did what was necessary for the good of the country, for the good of the firm, I am in the sad position of having to sever ties with Overstock, both as CEO and board member, effective Thursday August 22.

This possibility or even likelihood has been forefront of my mind for just over a year, since certain news became public in July 2018. On July 15 of this year, in the expectation that I might be gone before our recent (August 8) earnings call, I wrote my most detailed letter to shareholders in a long time. Here are the key points from that letter that you should know as a shareholder:

  1. I think the blockchain revolution will reshape key social institutions. We have designed and breathed life into perhaps the most significant blockchain keiretsu in the world, a network of blockchain firms seeking to revolutionize identity, land governance (= rule of law = potential = capital), central banking, capital markets, supply chains, and voting. In three of those fields (land governance, central banking, and capital markets) the word "trillions" comes up when calculating the disruptive opportunity of blockchain. In those three fields, our blockchain progeny (Medici Land Governance, Bitt, and tZERO, respectively) are arguably the leading blockchain disruptors in existence.
  2. Retail
    We face a competitor who (by the end of this year) will have lost close to $3 billion, and who announced recently it will seek to raise another $750 million, and who will be able to cover its expenses when the two lines in the graph intersect (cf. below right).
    After my ill-fated experiment last year in copying our competition's strategy, our retail business has recovered to a state of positive adjusted EBITDA (cf. graph on left).

    A Media Snippet accompanying this announcement is available by clicking on the image or link below:

    Leadership – We have the most solid Retail leadership team we have ever had. Our ab initio redesign of our executive structure starting a year ago has led to a better integration of all functions and proper management thereof than we have ever achieved in our history.

    Chief Marketing Officer JP Knab is the greatest master of Digital Marketing I have ever met. I will miss watching Commander Data find new arbitrage.

    Kamelia Aryfar is a data scientist and Machine Learning specialist of some renown: Dr. Aryfar originally cut her teeth at Etsy, and in her two years with us has led the Machine Learning overhaul of our company, (through which we are 40% complete).

    The integration of Skynet (Kamelia's name for her AI creation) continues across Marketing and Sourcing, and as it augments decisioning, we discover ways to find continuous gains.

    In recognition of the importance that Machine Learning is coming to play in our world, Kamelia has been named Executive Vice President and has also been appointed to the company's board of directors. She is an extraordinary asset to the firm and she will do big things for you shareholders in the future.

    Dave Nielsen is one of the few OG retailers I ever met who made the prop-to-jet conversion. He is as able as they come and is widely admired within the firm. He has already been serving as President and has been a big part of our radical improvement in bottom line this year. He is a true adult. He knows the mission is to continue providing the space and resources for Kamelia, JP and others to keep bringing in those multi-tens of million-dollar improvements in Retail bottom line by focusing on making our Retail site a gem technologically and leave the multi-billion losses to others.

    Over the last three years, Jonathan Johnson has done an extraordinary job of converting a mishmash of entrepreneurs, term papers, and your capital, into the most remarkable keiretsu of well-formed blockchain firms in the world. He has proven himself to be an extremely capable partner who gets the vision. I welcome that he will be serving as CEO of your entire public company. You could not have a more stable, prudent leader. The reason we have been such good partners is that Jonathan is the exact opposite of me in many respects. No doubt that may be welcome in some quarters. He has the keiretsu, he has the roadmap, he understands that the goal is to nurture the keiretsu to its full potential while permitting the Retail business to focus all its efforts on technological perfection rather than loss accumulation.

  3. Strategically:

    We have removed the pistol from our temple. I believe in the near future the cash generated by Retail going forward should be adequate for funding both Retail's ongoing innovation (we caught the Machine Learning wave just right here, and have a first-rate team that is reinventing the company from an ML perspective), and nurturing to maturity our keiretsu of blockchain firms, especially tZERO, Medici Land Governance, and Bitt (well, and Voatz, too) – particularly with the possibility of their becoming less of a cash burn, either through outside investments, or from the fact that their products (e.g., tZERO's) are reaching the market.

    Retail:

    In the course of discussions with brick-and-mortars last year, when we filled out their models with our data, we would generally discover that if we were part of a brick-and-mortar chain with a national footprint there could be ˜$200 million in annual savings (primarily but not exclusively in logistics). On the other hand, if joined to certain sites with high traffic but which have not cracked the monetization nut, models showed that, combined with us, there might be savings of ˜$150 - $200 million.

    In the absence of some such hybridization, I think that just by continuing to get supply-chain-smarter we can find ˜$40 million of those savings on our own over 12-18 months. We have introduced Advertising Technology this summer which will generate (I believe) a similarly attractive number over the same time frame. So, assuming Retail does $115 - $120 millionbetter on the bottom line this year than last (our range of estimates), expecting it next year to make multiple tens of millions of dollars in bottom line improvements again seems reasonable to me.

    As you know, I do think that the Gods of Economics believe some such hybridization of business models is to be done. That could take many forms, from cooperative partnerships with a brick-and-mortar, to an acquisition (for a fund with ambition, the ultimate form might be a stack of all three layers and a recovery of perhaps ˜$300 million in bottom line while establishing something unique).

    Collectively - The best thing to do for shareholder interest is to use cash flow to mature our blockchain keiretsu firms to fruition while we keep running our Retail business focusing on refining it as an exquisite gem of a technology platform, rather than again trying to go head-to-head with any firm in the process of dropping billions of dollars in losses. Refining that technological gem is what brings value to brick-and-mortars for whom we represent a way to leap to the front of the pack technologically. If the right strategic offer is made that reflects the value of that technological gem, I am confident the board will consider it. It is possible that my absence will advance the possibility.

    On any normal day, my presence is not conducive to strategic discussions regarding our retail business. I believe that going forward my presence will definitelynot be conducive to such strategic discussions. And if the hors d'oeuvre that was served recently caused the market such indigestion, it is not going to be in shareholder interest for me to be around if and when any main course is served.
It has been an honor to serve you through thick and thin, threats grand and arcane, for the past 20 years. You own some disruptive assets herein. One of them changed how furniture gets purchased in the United States and has run up a record of GAAP profitable years that is nearly unrivaled in B2C eCommerce, on a fraction of the capital of every competitor they ever faced (a fact missed by most). And you own blockchain assets that seem poised to revolutionize capital markets, finance, and governance for the poor. It has been 20 years of remarkable innovation from a team that is now honed for it.

Coming forward publicly about my involvement in other matters was hardly my first choice. But for three years I have watched my country pull itself apart while I knew many answers, and I set my red line at seeing civil violence breaking out. My Rabbi made me see that "coming forward" meant telling the public (not just the government) the truth. I now plan on leaving things to the esteemed Department of Justice(which I have doubtless already angered enough by going public) and disappearing for some time.

I wish all shareholders a smooth and level road… And don't forget to shop Overstock.com!

Your humble servant,
Patrick M. Byrne

cnbc.com

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To: Glenn Petersen who wrote (121922)8/22/2019 4:14:10 PM
From: StockDung
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The Exclusive Inside Story Of The Fall Of Overstock’s Mad King, Patrick Byrne



Lauren Debter Forbes Staff

Retail
I write about all things retail.

<div _ngcontent-c15="" innerhtml="Earlier today, Patrick Byrne, the founder and longtime CEO of former e-tailing giant Overstock.com, resigned, saying his involvement as a federal informant in the investigation of infamous Russian spy Maria Butina made performing his duties impossible. That’s not the whole story. This is.

It’s early May and Patrick Byrne has just gotten off the phone with hip-hop artist Akon and is roaming barefoot in the elegant three-room suite on the top floor of the Jefferson hotel, a stone’s throw from Embassy Row in Washington, D.C. He grabs a Diet Coke, a pack of gummy bears and some M&Ms from a minibar hidden in a tasteful armoire, settles on a plush cream-colored sofa and begins to boast about the circumstances around which the Senegalese-American celebrity sought him out. “I hear he’s a musician. We share ambitions for Africa,” says Byrne, popping a gummy bear into his mouth.

Byrne, who bought Overstock.com in 1999 and ran it for two decades, has always been a man of many ambitions. High on his list: transforming the African continent and its 1.3 billion people via blockchain technology. Like an informercial for the nascent decentralized, distributed ledger technology that underlies cryptocurrencies like bitcoin, he waxes poetic about a future in which corruption is wiped out, people are freed from poverty and developing nations can leapfrog ahead by putting government functions like voting, property records and central banking on the blockchain. Characteristically low on his priority list: The economic interests of the thousands of shareholders in his publicly traded, former e-tailing giant.

For the last several years, Byrne, 56, spent no fewer than 220 days a year on the road spreading his blockchain gospel, despite the fact that Overstock was hemorrhaging cash. “Over the next five years, we can change the world for 5 billion people,” says Byrne. “Well, at least a billion. Maybe 5 billion.”

Byrne is vague about why he is in the nation’s capital this week and mentions a meeting with representatives from Africa about his blockchain projects. However, he later reveals that he had been meeting with the Department of Justice. Byrne claims he’s been serving as a government informant, feeding information since 2015 to the “Men In Black,” as he puts it, on Maria Butina, a vivacious Russian grad student with whom he struck up a romantic relationship. She is currently serving an 18-month prison sentence after pleading guilty to conspiring to act as a foreign agent, in connection with her efforts to infiltrate conservative political circles before and after the 2016 presidential election.

In his resignation letter, Byrne cited his involvement in “certain government matters” as complicating “all matters of business relationships from insurability to strategic discussions regarding our retail business.” Byrne says what he has done (exactly what that was remains unclear) “was necessary for the good of the country, for the good of the firm.” Byrne concludes his letter by stating cryptically:

“Coming forward publicly about my involvement in other matters was hardly my first choice. But for three years I have watched my country pull itself apart while I knew many answers, and I set my red line at seeing civil violence breaking out. My Rabbi made me see that ‘coming forward’ meant telling the public (not just the government) the truth. I now plan on leaving things to the esteemed Department of Justice (which I have doubtless already angered enough by going public) and disappearing for some time.”

In a call from his car after delivering a farewell speech to his surprised employees, Byrne said he had his bags packed. “I will be sitting on a beach in South America shortly, and that is all I want to think about,” he says. “I want to focus on getting back into good shape, doing yoga and becoming a vegetarian.”

Welcome to Patrick Byrne’s bizarre world. The existential crisis Byrne is putting his Salt Lake City-based company through comes after an impressive career pioneering e-commerce. Nearly two decades ago, Byrne was lauded as “The Renaissance Man of E-Commerce.” The closeout store he took control of in 1999 for a mere $7 million was on its way to becoming an e-tailing phenom and eventually came to command a market capitalization of $2.2 billion. But in the hyper-competitive digital age, disruptive business models don’t last long, and today Overstock—once an innovator—is a has-been.

This isn’t any secret. By the time of his resignation, Byrne had all but given up trying to compete with the likes of Amazon and Wayfair, and he had spent the last two years unsuccessfully attempting to unload Overstock’s retail business. Just as e-commerce captivated Byrne at the turn of the millennium, blockchain was his shiny new obsession. So Byrne funneled Overstock’s dwindling resources into blockchain ventures—more than $200 million since 2014. About 30% of that sum went into 18 early-stage companies that are building a suite of blockchain technology products he wanted to sell to governments. The rest has been seemingly squandered on a personal vendetta: Overstock is creating a blockchain version of Nasdaq, which Byrne believed could right some the evils of Wall Street—particularly the naked short-selling that he claims plagued his company for much of the last 15 years. Byrne attracted an eclectic mix of allies to his corner doing what he calls “God’s work,” ranging from Akon and the World Bank to the infamous short-seller Marc Cohodes and the city of Denver.


Patrick Byrne at Overstock's headquarters

Tim Pannell for ForbesBut the walls closed in on Byrne’s quixotic adventure. Overstock’s heavily shorted stock plummeted from $87 in the beginning of 2018 to about $20 today as some $1.5 billion in market capitalization has evaporated. Once reliably profitable, Overstock lost $206 million last year and $110 million in 2017. In recent months, Byrne fired some 400 people.

Even worse were the cracks forming in Overstock’s new strategy. The company’s prized crypto offering, Tzero, is the subject of an SEC investigation, and a highly-anticipated private equity investment into the exchange has withered away. Its blockchain investment arm, Medici Ventures, has yet to generate meaningful revenues and racked up losses of $61 million in 2018. With many big companies now embracing blockchain technology—including a bold new plan from Facebook—Byrne’s strategy shift to blockchain suddenly looks as challenging as Overstock’s online retailing business.

Eventually even Byrne’s most loyal shareholders—blockchain believers among them— were in open revolt. Fumed Byrne in May, after investors bombarded him with calls and emails when he sold 900,000 shares of stock, “Frankly, I had no idea that shareholders would demand explanations of why and how I might want to use my cash derived from my labor and my property to pursue my ends in life.”

Byrne is the son of the late John “Jack” Byrne, a University of Michigan-trained mathematician and renowned insurance executive credited with turning around Geico in the mid-1970s and persuading Warren Buffett to invest in the auto insurer. Geico would eventually become one of the biggest contributors to Berkshire Hathaway’s bottom line, and Buffett once described Byrne’s father as “the Babe Ruth of insurance.” When Byrne was in middle school, he gravitated toward his father’s friends. Bethesda neighbor Gordon Macklin, the president of Nasdaq from 1975 to 1987 (and later the chairman of San Francisco investment bank Hambrecht & Quist), would drive Patrick to school regularly. Buffett was an occasional house guest, and Byrne’s parents would allow him to skip school to spend time with the investment maven.

Says Byrne, “My mom would get a case of Pepsi, and Buffett, who is a teetotaler, always carried a hip flask of cherry syrup like a drunk. We’d sit there and over an afternoon polish off 18 Pepsis.”

Byrne’s father later went on to turn around American Express’s Fireman’s Fund and eventually created his own insurance holding company, called White Mountains Insurance. His stake, worth hundreds of millions at his retirement in 2007, formed the basis of the family’s wealth.

Patrick was the youngest and most precocious of Jack’s three sons. In 1981, he headed to Dartmouth to study philosophy and Asian studies. Shortly after his graduation, he was diagnosed with testicular cancer. After treatment, he celebrated with a cross-country bicycle ride with his two older brothers. The cancer would come back two more times in quick succession and keep him in the hospital for much of his 20s. To keep his mind occupied while he was bedridden, he began pursuing a graduate degree in mathematical logic from Stanford. In 1988 he headed to Cambridge University as a Marshall Scholar and eventually received his philosophy doctorate from Stanford. Byrne speaks Mandarin and several other languages and once translated Lao Tzu’s Tao Te Ching (The Way Of Virtue) into English. “I was one of those guys who actually studied philosophy because I was trying to figure out man’s place in the universe,” says Byrne, whose dissertation explored the virtues of limited government and drew from libertarian Robert Nozick’s Anarchy, State and Utopia.

Despite his years in academia, Byrne pivoted hard to the pursuit of wealth in the late 1980s. “I had grown up in a very business-oriented household … I never anticipated staying in a university setting,” he says. In 1987 he bought a bankrupt hotel with his older brother called the Inn at Jackson Hole for about a million dollars, which they sold several years later for $4 million. In 1989, they started buying distressed consumer debt at 5 cents on the dollar during the S&L crisis. In 1991, Byrne led a $1 million investment into the development of the Red Dolly Casino in Colorado, which was sold three years later for $5 million. He also invested in distressed strip malls, office space and apartment buildings across the country. His dad often loaned his sons money and in later years put up mezzanine capital, collecting a preferred, 15% return and half as much equity.

Nothing kept Byrne’s attention very long. In 1994, he led an investment into Centricut, a New Hampshire-based industrial torch-part manufacturer, and served briefly as CEO when the current management fell ill. In 1997, he left to run Berkshire Hathaway’s Fechheimer Brothers, which made uniforms for police, firemen and military. In 1999, seeing an opportunity to sell leftover inventory online, his investment holding company, High Plains Investments LLC, acquired a majority stake in D-2 Discounts Direct for $7 million. He renamed it Overstock, and when 55 venture capitalists declined to fund the company’s growth, he turned to friends, family and his own checkbook. His timing was perfect. The company began scooping up inventory from bankrupt dot-coms, whether it was consumer electronics, jewelry or sporting goods, then selling it on the cheap. In 2002, Overstock’s revenue hit $92 million and Byrne took the company public via a Dutch auction, which allows investors (not bankers) to set prices for the stock offering themselves. (Google went public the same way.)

By 2005, the company’s stock, which had skyrocketed post-IPO, began to slide as its losses widened. Byrne became convinced it was because of naked short-selling, an illegal practice in which investors sell shares in a company without actually borrowing the shares, typically using leverage. In a now-infamous August 2005 conference call, he ranted about how hedge funds, journalists and regulators were conspiring to push down the company’s stock price under the direction of some faceless menace he called the “Sith Lord.” Overstock sued short-selling hedge fund Rocker Partners and research firm Gradient Analytics, which had been critical of the company. Then, in 2007, he filed a $3.5 billion lawsuit against 11 of the biggest banks on Wall Street (Goldman Sachs, Morgan Stanley and Credit Suisse among them), accusing them of participating in a “massive, illegal stock market manipulation scheme” that distorted the company’s stock price by facilitating naked short-selling.

The crusade cost him two directors, plus the confidence of his father, who threatened to step down from the board because he believed his son was distracted from Overstock’s core business. The litigation dragged on for over a decade and resulted in a handful of settlements, including a $20 million payment from Merrill Lynch in 2016. “I think he won the battle but lost the war when it came to naked short-selling,” says Tom Forte, long the lone analyst still covering the stock. In the years Byrne spent chasing short-sellers, Overstock’s stock sagged and revenue drifted slowly upward, hitting $830 million in 2008, $1.3 billion in 2013 and $1.8 billion in 2018. And while the company never racked up massive losses like Amazon or Wayfair, as Byrne likes to point out, its profitability has been modest. Overstock broke into the black in 2009, then eked out small profits for the next seven out of eight years.


Maria Butina

The Associated PressIn 2017 and 2018, as Byrne shifted his attention to expanding in crypto and blockchain, the company began bleeding red ink—a whopping $316 million over two years, which is more than twice the profits Overstock has ever delivered. Byrne chalked his market share declines up to competitors with seemingly endless piles of cash to blow through. “The thing I never anticipated … was that I would be in an industry that tolerated people losing $500 million, $1 billion or $3 billion forever. We started drawing copycats who came in and seemed to have unlimited capital,” he says, not hiding his disdain for and jealousy of Wayfair.

However, former employees say Byrne was distracted by his short-selling crusade and failed to take competitors seriously. Internally Byrne’s ADD management style—enthusiastically starting up new projects but then losing interest—has been jokingly referred to as the Overstock “ovolution.” In 2004, the company spent a couple of million to develop an online auction platform akin to eBay, but it struggled to turn a profit and was shut down in 2011. (Byrne later said he wished he hadn’t abandoned it.) In 2014, Overstock invested $400,000 to facilitate pet adoptions by working with shelters, which it still runs but describes as a “public service.” The company started selling home, auto and small business insurance in 2014, too, which Byrne described as “a long-term play” before trashing it as not doing “particularly well” three months later.

“Patrick gets very focused on something, and then when he sees the financials didn’t work out, he basically forces layoffs,” says Chad Huff, a former software developer. “Initiatives would get started, then shelved. Or they’d be half done and not in a great state but rolled out anyway.”

Acouple of months before his resignation, as sheets of rain blanket Overstock’s new headquarters at the base of Utah’s Wasatch Mountains—a building designed to resemble a peace sign when viewed from above—Byrne has finished sitting through a scheduled business luncheon and gone missing. Several minutes later, after his assistant tracks him down, he glides into his office, where posters of Bob Marley and Pulp Fiction give it a dorm-room feel. He sits down and begins ruminating on his two decades running Overstock. “It’s kind of imagination land,” says Byrne, dressed in a black long-sleeve T-shirt, jeans and tennis shoes.

Strangely, Byrne’s Overstock was long immune from activist shareholder campaigns and boardroom coups and what ultimately prompted his sudden departure is still murky. Investors like Marc Cohodes had called for Byrne to step aside as CEO and move into a chairman position. Despite recent stock sales, Byrne remains the company’s largest shareholder, with a 14% stake and says he wasn’t pushed out. “This is not about pressure from shareholders. The only pressure—or actual issue— was that the insurance companies were having conniptions,” he says.

Byrne began chasing crypto in late 2013 when he asked dozens of staffers to work over the holiday break to fast-track a bitcoin payment feature. The price of bitcoin had skyrocketed that year from about $13 to more than $1,000, and in January 2014, Overstock became the first major retailer to accept bitcoin as payment.

Before long, Byrne began tapping Overstock’s balance sheet to fund bigger and bigger blockchain initiatives. The crown jewel: a digital stock exchange called Tzero, which is seeking to allow investors to trade so-called security tokens that represent traditional securities, like stocks, bonds, real estate, private equity and art on the blockchain. Proponents say this will improve access and liquidity for certain investments, plus cut down settlement times for stocks and bonds from up to two days to mere seconds. A bonus: The system would make naked short-selling impossible because there is no longer a lag time between a buy and sell order.

On the plus side, Tzero has satisfied a set of fearsome regulatory requirements, most notably acquiring a company licensed as an alternative trading system. The problem is, with just two tokens—representing Overstock’s and Tzero’s own shares—available to trade on Tzero’s platform, almost no one uses it. The company says it is aiming for 5 to 10 tokens by the end of the year. In May, it announced partnerships with Saudi real estate giant Emaar Properties, to list $2 billion in real estate, and Securitize, a startup that packages regular assets into digital tokens that can be traded on the blockchain. While it hopes to generate revenues from listing fees, trading commissions, interest on lending assets and more, it first needs to create liquidity by attracting quality issuers and investors to its platform.

Byrne was also developing a securities lending platform as part of Tzero, which would connect asset-rich institutional investors like pension funds (who make money by lending their stock) directly with short-sellers (who borrow stock to make trades). Both parties stand to benefit from lower fees, plus will receive a blockchain-enabled digital locate receipt that proves the shares have actually changed hands. The service takes dead aim at banks like Goldman Sachs and Morgan Stanley, which currently sit in the middle of these transactions. It’s been tried before: A company called Quadriserv created a similar stock lending platform named AQS in 2006, but alleged in a recent lawsuit that banks conspired to “boycott AQS and starve it of liquidity.” In 2016, AQS was sold in a fire sale for $4 million.

“It’s the last great business on Wall Street,” says Byrne. “Pension funds are going to understand they have been deprived of tens of billions of earnings a year. That money is turning into Maybachs in the Hamptons.”

At the company’s annual shareholder meeting in May, Byrne fielded tough questions from investors. While the price of bitcoin had climbed some 60% in the last five months, Overstock’s shares continued to slide. And after months of delays, Overstock just dropped a bombshell: Tzero would receive a measly $5 million in the form of Chinese renminbi, U.S. dollars and other Hong Kong-traded securities from Asian investment firm GSR Capital, after the company originally touted a deal size of as much as $404 million.

Over time Byrne developed a dilettante’s reputation for overpromising and underdelivering. In 2016 Byrne boldly told investors that Overstock would be issuing the world’s first equity security using the blockchain. “The history of capital markets is entering a new era,” he said. Byrne personally ended up buying 50% of the $2 million preferred stock offering.

In 2017, Byrne announced a joint venture with Peruvian economist Hernando de Soto Polar that would “challenge global poverty and inequality” by creating a blockchain-based global land registry. But when the two couldn’t agree on terms, Byrne ended up contributing $7 million of his personal capital to take a 43% stake in the newly formed Medici Land Governance.

Overstock began exploring a sale of its retailing business in 2017, but to date no buyers have materialized. There was also Tzero’s troubled “initial coin offering,” which set out to raise $250 million but, ultimately as crypto prices were dropping, generated $105 million in August 2018 at an expense of $21.5 million to corporate parent Overstock. The offering is now being investigated by the SEC as part of a broader ICO crackdown.

Many investors grew tired of Byrne’s promises. “Basically, every initiative they put forward, they promised or signaled to the market that this is an incredible layup and they will get it done in three to six months,” says Kevin Mak, a lecturer at Stanford Business School who invested in the company in 2017 and sold his shares last fall. “I ultimately exited when I found that the information I was getting from management was no longer—I want to pick the right words—reliable.”

In the end, Byrne was forced to spend a considerable amount of time hunting for fresh funds to keep his dream alive. In November 2017, Overstock borrowed $40 million from his mother and brother at an interest rate of 8%. Over the next few months, during the height of crypto-mania, the company received $150 million from two investors, including George Soros, after they exercised warrants in exchange for stock (the investors have since dumped their shares). In August and September 2018, the company raised another $95 million by issuing new shares of common stock in an “at the market” offering.

The problem is, unlike most companies that buy back shares as prices decline, Overstock is selling, diluting the company’s equity. Shares outstanding have climbed to 35 million from 25 million in the last two years. In the first quarter of 2019 Overstock committed to another quick stock sale, raising $31 million to partially offset a $51 million cash burn.

Meanwhile, Overstock’s original business is running on fumes. “It was kind of a fight to run retail because it was never his priority,” says Stormy Simon, former president of the operation who left in 2016. Since then, there have been several rounds of layoffs in the retail business, leaving a raft of empty desks in Overstock’s new $100 million headquarters. And yet, to his blockchain staffers, Byrne was like Daddy Warbucks. Tzero CEO Saum Noursalehi was paid $4.8 million last year, while his brother and Tzero vice president Nariman earned $1 million. Tzero chief technology officer Amit Goyal made $1.8 million—and his brother Sumit earned an additional $765,000.

In Overstock’s recent quarterly filings, it indicates that it should be able to fund its current obligations for another 12 months, but after that, additional capital may be needed “to be able to fully pursue some or all of our strategies.” The ominous disclosure seems to have had little effect on Overstock’s languishing shares, because by now many investors have given up on the company.

Byrne never showed much respect for Wall Street or small-minded shareholders—and maybe that’s what got him in the end. “We’re like a Russian icebreaker trolling across the Arctic icefield. It’s three or four yards at a time and enormously expensive,” says Byrne. “When you’re talking about the kinds of numbers we’re talking about and freeing up trillions of capital … I think there is going to be so much money in it it’s kind of silly to try and model it.”

Photograph by Tim Pannell for Forbes

Get Forbes’ daily top headlines straight to your inbox for news on the world’s most important entrepreneurs and superstars, expert career advice, and success secrets.

" style="box-sizing: border-box; width: 700px;">Earlier today, Patrick Byrne, the founder and longtime CEO of former e-tailing giant Overstock.com, resigned, saying his involvement as a federal informant in the investigation of infamous Russian spy Maria Butina made performing his duties impossible. That’s not the whole story. This is.

It’s early May and Patrick Byrne has just gotten off the phone with hip-hop artist Akon and is roaming barefoot in the elegant three-room suite on the top floor of the Jefferson hotel, a stone’s throw from Embassy Row in Washington, D.C. He grabs a Diet Coke, a pack of gummy bears and some M&Ms from a minibar hidden in a tasteful armoire, settles on a plush cream-colored sofa and begins to boast about the circumstances around which the Senegalese-American celebrity sought him out. “I hear he’s a musician. We share ambitions for Africa,” says Byrne, popping a gummy bear into his mouth.

Byrne, who bought Overstock.com in 1999 and ran it for two decades, has always been a man of many ambitions. High on his list: transforming the African continent and its 1.3 billion people via blockchain technology. Like an informercial for the nascent decentralized, distributed ledger technology that underlies cryptocurrencies like bitcoin, he waxes poetic about a future in which corruption is wiped out, people are freed from poverty and developing nations can leapfrog ahead by putting government functions like voting, property records and central banking on the blockchain. Characteristically low on his priority list: The economic interests of the thousands of shareholders in his publicly traded, former e-tailing giant.

For the last several years, Byrne, 56, spent no fewer than 220 days a year on the road spreading his blockchain gospel, despite the fact that Overstock was hemorrhaging cash. “Over the next five years, we can change the world for 5 billion people,” says Byrne. “Well, at least a billion. Maybe 5 billion.”

Byrne is vague about why he is in the nation’s capital this week and mentions a meeting with representatives from Africa about his blockchain projects. However, he later reveals that he had been meeting with the Department of Justice. Byrne claims he’s been serving as a government informant, feeding information since 2015 to the “Men In Black,” as he puts it, on Maria Butina, a vivacious Russian grad student with whom he struck up a romantic relationship. She is currently serving an 18-month prison sentence after pleading guilty to conspiring to act as a foreign agent, in connection with her efforts to infiltrate conservative political circles before and after the 2016 presidential election.

In his resignation letter, Byrne cited his involvement in “certain government matters” as complicating “all matters of business relationships from insurability to strategic discussions regarding our retail business.” Byrne says what he has done (exactly what that was remains unclear) “was necessary for the good of the country, for the good of the firm.” Byrne concludes his letter by stating cryptically:

“Coming forward publicly about my involvement in other matters was hardly my first choice. But for three years I have watched my country pull itself apart while I knew many answers, and I set my red line at seeing civil violence breaking out. My Rabbi made me see that ‘coming forward’ meant telling the public (not just the government) the truth. I now plan on leaving things to the esteemed Department of Justice (which I have doubtless already angered enough by going public) and disappearing for some time.”

In a call from his car after delivering a farewell speech to his surprised employees, Byrne said he had his bags packed. “I will be sitting on a beach in South America shortly, and that is all I want to think about,” he says. “I want to focus on getting back into good shape, doing yoga and becoming a vegetarian.”

Welcome to Patrick Byrne’s bizarre world. The existential crisis Byrne is putting his Salt Lake City-based company through comes after an impressive career pioneering e-commerce. Nearly two decades ago, Byrne was lauded as “The Renaissance Man of E-Commerce.” The closeout store he took control of in 1999 for a mere $7 million was on its way to becoming an e-tailing phenom and eventually came to command a market capitalization of $2.2 billion. But in the hyper-competitive digital age, disruptive business models don’t last long, and today Overstock—once an innovator—is a has-been.

This isn’t any secret. By the time of his resignation, Byrne had all but given up trying to compete with the likes of Amazon and Wayfair, and he had spent the last two years unsuccessfully attempting to unload Overstock’s retail business. Just as e-commerce captivated Byrne at the turn of the millennium, blockchain was his shiny new obsession. So Byrne funneled Overstock’s dwindling resources into blockchain ventures—more than $200 million since 2014. About 30% of that sum went into 18 early-stage companies that are building a suite of blockchain technology products he wanted to sell to governments. The rest has been seemingly squandered on a personal vendetta: Overstock is creating a blockchain version of Nasdaq, which Byrne believed could right some the evils of Wall Street—particularly the naked short-selling that he claims plagued his company for much of the last 15 years. Byrne attracted an eclectic mix of allies to his corner doing what he calls “God’s work,” ranging from Akon and the World Bank to the infamous short-seller Marc Cohodes and the city of Denver.


Patrick Byrne at Overstock's headquarters

TIM PANNELL FOR FORBESBut the walls closed in on Byrne’s quixotic adventure. Overstock’s heavily shorted stock plummeted from $87 in the beginning of 2018 to about $20 today as some $1.5 billion in market capitalization has evaporated. Once reliably profitable, Overstock lost $206 million last year and $110 million in 2017. In recent months, Byrne fired some 400 people.

Even worse were the cracks forming in Overstock’s new strategy. The company’s prized crypto offering, Tzero, is the subject of an SEC investigation, and a highly-anticipated private equity investment into the exchange has withered away. Its blockchain investment arm, Medici Ventures, has yet to generate meaningful revenues and racked up losses of $61 million in 2018. With many big companies now embracing blockchain technology—including a bold new plan from Facebook—Byrne’s strategy shift to blockchain suddenly looks as challenging as Overstock’s online retailing business.

Eventually even Byrne’s most loyal shareholders—blockchain believers among them— were in open revolt. Fumed Byrne in May, after investors bombarded him with calls and emails when he sold 900,000 shares of stock, “Frankly, I had no idea that shareholders would demand explanations of why and how I might want to use my cash derived from my labor and my property to pursue my ends in life.”

Byrne is the son of the late John “Jack” Byrne, a University of Michigan-trained mathematician and renowned insurance executive credited with turning around Geico in the mid-1970s and persuading Warren Buffett to invest in the auto insurer. Geico would eventually become one of the biggest contributors to Berkshire Hathaway’s bottom line, and Buffett once described Byrne’s father as “the Babe Ruth of insurance.” When Byrne was in middle school, he gravitated toward his father’s friends. Bethesda neighbor Gordon Macklin, the president of Nasdaq from 1975 to 1987 (and later the chairman of San Francisco investment bank Hambrecht & Quist), would drive Patrick to school regularly. Buffett was an occasional house guest, and Byrne’s parents would allow him to skip school to spend time with the investment maven.

Says Byrne, “My mom would get a case of Pepsi, and Buffett, who is a teetotaler, always carried a hip flask of cherry syrup like a drunk. We’d sit there and over an afternoon polish off 18 Pepsis.”

Byrne’s father later went on to turn around American Express’s Fireman’s Fund and eventually created his own insurance holding company, called White Mountains Insurance. His stake, worth hundreds of millions at his retirement in 2007, formed the basis of the family’s wealth.

Patrick was the youngest and most precocious of Jack’s three sons. In 1981, he headed to Dartmouth to study philosophy and Asian studies. Shortly after his graduation, he was diagnosed with testicular cancer. After treatment, he celebrated with a cross-country bicycle ride with his two older brothers. The cancer would come back two more times in quick succession and keep him in the hospital for much of his 20s. To keep his mind occupied while he was bedridden, he began pursuing a graduate degree in mathematical logic from Stanford. In 1988 he headed to Cambridge University as a Marshall Scholar and eventually received his philosophy doctorate from Stanford. Byrne speaks Mandarin and several other languages and once translated Lao Tzu’s Tao Te Ching (The Way Of Virtue) into English. “I was one of those guys who actually studied philosophy because I was trying to figure out man’s place in the universe,” says Byrne, whose dissertation explored the virtues of limited government and drew from libertarian Robert Nozick’s Anarchy, State and Utopia.

Despite his years in academia, Byrne pivoted hard to the pursuit of wealth in the late 1980s. “I had grown up in a very business-oriented household … I never anticipated staying in a university setting,” he says. In 1987 he bought a bankrupt hotel with his older brother called the Inn at Jackson Hole for about a million dollars, which they sold several years later for $4 million. In 1989, they started buying distressed consumer debt at 5 cents on the dollar during the S&L crisis. In 1991, Byrne led a $1 million investment into the development of the Red Dolly Casino in Colorado, which was sold three years later for $5 million. He also invested in distressed strip malls, office space and apartment buildings across the country. His dad often loaned his sons money and in later years put up mezzanine capital, collecting a preferred, 15% return and half as much equity.

Nothing kept Byrne’s attention very long. In 1994, he led an investment into Centricut, a New Hampshire-based industrial torch-part manufacturer, and served briefly as CEO when the current management fell ill. In 1997, he left to run Berkshire Hathaway’s Fechheimer Brothers, which made uniforms for police, firemen and military. In 1999, seeing an opportunity to sell leftover inventory online, his investment holding company, High Plains Investments LLC, acquired a majority stake in D-2 Discounts Direct for $7 million. He renamed it Overstock, and when 55 venture capitalists declined to fund the company’s growth, he turned to friends, family and his own checkbook. His timing was perfect. The company began scooping up inventory from bankrupt dot-coms, whether it was consumer electronics, jewelry or sporting goods, then selling it on the cheap. In 2002, Overstock’s revenue hit $92 million and Byrne took the company public via a Dutch auction, which allows investors (not bankers) to set prices for the stock offering themselves. (Google went public the same way.)

By 2005, the company’s stock, which had skyrocketed post-IPO, began to slide as its losses widened. Byrne became convinced it was because of naked short-selling, an illegal practice in which investors sell shares in a company without actually borrowing the shares, typically using leverage. In a now-infamous August 2005 conference call, he ranted about how hedge funds, journalists and regulators were conspiring to push down the company’s stock price under the direction of some faceless menace he called the “Sith Lord.” Overstock sued short-selling hedge fund Rocker Partners and research firm Gradient Analytics, which had been critical of the company. Then, in 2007, he filed a $3.5 billion lawsuit against 11 of the biggest banks on Wall Street (Goldman Sachs, Morgan Stanley and Credit Suisse among them), accusing them of participating in a “massive, illegal stock market manipulation scheme” that distorted the company’s stock price by facilitating naked short-selling.

The crusade cost him two directors, plus the confidence of his father, who threatened to step down from the board because he believed his son was distracted from Overstock’s core business. The litigation dragged on for over a decade and resulted in a handful of settlements, including a $20 million payment from Merrill Lynch in 2016. “I think he won the battle but lost the war when it came to naked short-selling,” says Tom Forte, long the lone analyst still covering the stock. In the years Byrne spent chasing short-sellers, Overstock’s stock sagged and revenue drifted slowly upward, hitting $830 million in 2008, $1.3 billion in 2013 and $1.8 billion in 2018. And while the company never racked up massive losses like Amazon or Wayfair, as Byrne likes to point out, its profitability has been modest. Overstock broke into the black in 2009, then eked out small profits for the next seven out of eight years.


Maria Butina

THE ASSOCIATED PRESSIn 2017 and 2018, as Byrne shifted his attention to expanding in crypto and blockchain, the company began bleeding red ink—a whopping $316 million over two years, which is more than twice the profits Overstock has ever delivered. Byrne chalked his market share declines up to competitors with seemingly endless piles of cash to blow through. “The thing I never anticipated … was that I would be in an industry that tolerated people losing $500 million, $1 billion or $3 billion forever. We started drawing copycats who came in and seemed to have unlimited capital,” he says, not hiding his disdain for and jealousy of Wayfair.

However, former employees say Byrne was distracted by his short-selling crusade and failed to take competitors seriously. Internally Byrne’s ADD management style—enthusiastically starting up new projects but then losing interest—has been jokingly referred to as the Overstock “ovolution.” In 2004, the company spent a couple of million to develop an online auction platform akin to eBay, but it struggled to turn a profit and was shut down in 2011. (Byrne later said he wished he hadn’t abandoned it.) In 2014, Overstock invested $400,000 to facilitate pet adoptions by working with shelters, which it still runs but describes as a “public service.” The company started selling home, auto and small business insurance in 2014, too, which Byrne described as “a long-term play” before trashing it as not doing “particularly well” three months later.

“Patrick gets very focused on something, and then when he sees the financials didn’t work out, he basically forces layoffs,” says Chad Huff, a former software developer. “Initiatives would get started, then shelved. Or they’d be half done and not in a great state but rolled out anyway.”

Acouple of months before his resignation, as sheets of rain blanket Overstock’s new headquarters at the base of Utah’s Wasatch Mountains—a building designed to resemble a peace sign when viewed from above—Byrne has finished sitting through a scheduled business luncheon and gone missing. Several minutes later, after his assistant tracks him down, he glides into his office, where posters of Bob Marley and Pulp Fiction give it a dorm-room feel. He sits down and begins ruminating on his two decades running Overstock. “It’s kind of imagination land,” says Byrne, dressed in a black long-sleeve T-shirt, jeans and tennis shoes.

Strangely, Byrne’s Overstock was long immune from activist shareholder campaigns and boardroom coups and what ultimately prompted his sudden departure is still murky. Investors like Marc Cohodes had called for Byrne to step aside as CEO and move into a chairman position. Despite recent stock sales, Byrne remains the company’s largest shareholder, with a 14% stake and says he wasn’t pushed out. “This is not about pressure from shareholders. The only pressure—or actual issue— was that the insurance companies were having conniptions,” he says.

Byrne began chasing crypto in late 2013 when he asked dozens of staffers to work over the holiday break to fast-track a bitcoin payment feature. The price of bitcoin had skyrocketed that year from about $13 to more than $1,000, and in January 2014, Overstock became the first major retailer to accept bitcoin as payment.

Before long, Byrne began tapping Overstock’s balance sheet to fund bigger and bigger blockchain initiatives. The crown jewel: a digital stock exchange called Tzero, which is seeking to allow investors to trade so-called security tokens that represent traditional securities, like stocks, bonds, real estate, private equity and art on the blockchain. Proponents say this will improve access and liquidity for certain investments, plus cut down settlement times for stocks and bonds from up to two days to mere seconds. A bonus: The system would make naked short-selling impossible because there is no longer a lag time between a buy and sell order.

On the plus side, Tzero has satisfied a set of fearsome regulatory requirements, most notably acquiring a company licensed as an alternative trading system. The problem is, with just two tokens—representing Overstock’s and Tzero’s own shares—available to trade on Tzero’s platform, almost no one uses it. The company says it is aiming for 5 to 10 tokens by the end of the year. In May, it announced partnerships with Saudi real estate giant Emaar Properties, to list $2 billion in real estate, and Securitize, a startup that packages regular assets into digital tokens that can be traded on the blockchain. While it hopes to generate revenues from listing fees, trading commissions, interest on lending assets and more, it first needs to create liquidity by attracting quality issuers and investors to its platform.

Byrne was also developing a securities lending platform as part of Tzero, which would connect asset-rich institutional investors like pension funds (who make money by lending their stock) directly with short-sellers (who borrow stock to make trades). Both parties stand to benefit from lower fees, plus will receive a blockchain-enabled digital locate receipt that proves the shares have actually changed hands. The service takes dead aim at banks like Goldman Sachs and Morgan Stanley, which currently sit in the middle of these transactions. It’s been tried before: A company called Quadriserv created a similar stock lending platform named AQS in 2006, but alleged in a recent lawsuit that banks conspired to “boycott AQS and starve it of liquidity.” In 2016, AQS was sold in a fire sale for $4 million.

“It’s the last great business on Wall Street,” says Byrne. “Pension funds are going to understand they have been deprived of tens of billions of earnings a year. That money is turning into Maybachs in the Hamptons.”

At the company’s annual shareholder meeting in May, Byrne fielded tough questions from investors. While the price of bitcoin had climbed some 60% in the last five months, Overstock’s shares continued to slide. And after months of delays, Overstock just dropped a bombshell: Tzero would receive a measly $5 million in the form of Chinese renminbi, U.S. dollars and other Hong Kong-traded securities from Asian investment firm GSR Capital, after the company originally touted a deal size of as much as $404 million.

Over time Byrne developed a dilettante’s reputation for overpromising and underdelivering. In 2016 Byrne boldly told investors that Overstock would be issuing the world’s first equity security using the blockchain. “The history of capital markets is entering a new era,” he said. Byrne personally ended up buying 50% of the $2 million preferred stock offering.

In 2017, Byrne announced a joint venture with Peruvian economist Hernando de Soto Polar that would “challenge global poverty and inequality” by creating a blockchain-based global land registry. But when the two couldn’t agree on terms, Byrne ended up contributing $7 million of his personal capital to take a 43% stake in the newly formed Medici Land Governance.

Overstock began exploring a sale of its retailing business in 2017, but to date no buyers have materialized. There was also Tzero’s troubled “initial coin offering,” which set out to raise $250 million but, ultimately as crypto prices were dropping, generated $105 million in August 2018 at an expense of $21.5 million to corporate parent Overstock. The offering is now being investigated by the SEC as part of a broader ICO crackdown.

Many investors grew tired of Byrne’s promises. “Basically, every initiative they put forward, they promised or signaled to the market that this is an incredible layup and they will get it done in three to six months,” says Kevin Mak, a lecturer at Stanford Business School who invested in the company in 2017 and sold his shares last fall. “I ultimately exited when I found that the information I was getting from management was no longer—I want to pick the right words—reliable.”

In the end, Byrne was forced to spend a considerable amount of time hunting for fresh funds to keep his dream alive. In November 2017, Overstock borrowed $40 million from his mother and brother at an interest rate of 8%. Over the next few months, during the height of crypto-mania, the company received $150 million from two investors, including George Soros, after they exercised warrants in exchange for stock (the investors have since dumped their shares). In August and September 2018, the company raised another $95 million by issuing new shares of common stock in an “at the market” offering.

The problem is, unlike most companies that buy back shares as prices decline, Overstock is selling, diluting the company’s equity. Shares outstanding have climbed to 35 million from 25 million in the last two years. In the first quarter of 2019 Overstock committed to another quick stock sale, raising $31 million to partially offset a $51 million cash burn.

Meanwhile, Overstock’s original business is running on fumes. “It was kind of a fight to run retail because it was never his priority,” says Stormy Simon, former president of the operation who left in 2016. Since then, there have been several rounds of layoffs in the retail business, leaving a raft of empty desks in Overstock’s new $100 million headquarters. And yet, to his blockchain staffers, Byrne was like Daddy Warbucks. Tzero CEO Saum Noursalehi was paid $4.8 million last year, while his brother and Tzero vice president Nariman earned $1 million. Tzero chief technology officer Amit Goyal made $1.8 million—and his brother Sumit earned an additional $765,000.

In Overstock’s recent quarterly filings, it indicates that it should be able to fund its current obligations for another 12 months, but after that, additional capital may be needed “to be able to fully pursue some or all of our strategies.” The ominous disclosure seems to have had little effect on Overstock’s languishing shares, because by now many investors have given up on the company.

Byrne never showed much respect for Wall Street or small-minded shareholders—and maybe that’s what got him in the end. “We’re like a Russian icebreaker trolling across the Arctic icefield. It’s three or four yards at a time and enormously expensive,” says Byrne. “When you’re talking about the kinds of numbers we’re talking about and freeing up trillions of capital … I think there is going to be so much money in it it’s kind of silly to try and model it.”

Photograph by Tim Pannell for Forbes

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Lauren Debter

I am a staff writer at Forbes covering retail. I’m particularly interested in entrepreneurs who are finding success in a tough and changing landscape. I have been at Fo

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To: Glenn Petersen who wrote (121922)8/23/2019 5:01:36 PM
From: StockDung
   of 121951
 
Former Overstock CEO Alleges Deep State Blackmail Conspiracy Following ResignationPatrick Byrne resigned from Overstock and went on a strange media blitz on Thursday.


Published 6 hours ago on Aug 23, 2019 By Shane Trejo


A disheveled and erratic Patrick Byrne appeared for interviews on several media outlets Thursday shortly after he resigned as CEO of Overstock.com, the online retailer he founded over two decades ago.

Byrne alleges that he was embroiled in a deep state conspiracy, becoming romantically involved with Russian gun rights activist Maria Butina, and was set up as a federal informant to fuel the collusion conspiracy meant to harm President Donald Trump.

“I was given some fishy orders and I carried them out in 2015-2016, thinking I was conducting law enforcement,” Byrne said while appearing on Fox News’ “The Story.”

He alleges that the FBI was involved in a conspiracy to set up Trump, Hillary Clinton, Sen. Marco Rubio and Sen. Ted Cruz likely for the purposes of political blackmail.

“I’m highly confident that Bill Barr, the Department of Justice, will be providing those names on an indictment someday in the not too distant,”Byrne said.

He claims that the infamous Peter Strzok gave the orders for him to be embroiled in this dark conspiracy.

“I didn’t know who sent the orders, but I did them. Last summer, watching television and some congressional hearings, I figured out where these orders came from. They came from a guy named Peter Strzok.” Byrne said.

Strzok is the former FBI official who was fired after his texts were revealed with FBI lawyer Lisa Page, who was also his lover, showing his disdain and contempt for Trump and willingness to use his power to subvert his presidency.

“It was so strange that I was thinking, it’s almost like they’re letting this can-o-scandal develop and someday they’re going to shake it up and crack it and spray it all over the Republican Party,” Byrne said during another interview on CNN.

Byrne also claims former FBI Director James Comey was involved in this conspiracy.

“I was specifically told, this request is coming from Jim Comey at the request of somebody, who I’m not going to name. Do not assume it is the president. Do not assume it was President Obama. Do not assume that,” he said.

Now that he has spilled the beans about his involvement with the deep state, Byrne plans to retreat back into the shadows. He has worked with federal investigators to make sure they are aware of his explosive allegations.

“I now plan on leaving things to the esteemed Department of Justice (which I have doubtless already angered enough by going public) and disappearing for some time,” he said.

Byrne has created more questions than answers with his peculiar media blitz yesterday, but if he is telling the truth, it appears the rabbit hole goes deeper than anyone could have imagined regarding the extent of corruption coming from the deep state.

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To: Glenn Petersen who wrote (121922)8/24/2019 9:01:53 AM
From: StockDung
   of 121951
 
""I see three options here. One, he is telling the truth," Gutfeld said on " The Five." "Two, he's telling the truth but... he's nuts. Three, he's lying to create some kind of cloud of conspiracy to deflect from the S.E.C. [Securities and Exchange Commission] investigation.""
=====================================================

Greg Gutfeld reacts to Patrick Byrne's claims: 'I see three options here'

By Victor Garcia | Fox News

Video

Overstock CEO resigns over Russia probe claimsPatrick Byrne claims he was an intelligence assets and made explosive allegations that he was ordered to have an affair with a Russian spy.

Fox News' Greg Gutfeld reacted Friday to former Overstock CEO Patrick Byrne's bombshell claims that he received "fishy orders" from now-fired FBI official Peter Strzok and took part in "political espionage" in the months before the 2016 presidential election.

"I see three options here. One, he is telling the truth," Gutfeld said on " The Five." "Two, he's telling the truth but... he's nuts. Three, he's lying to create some kind of cloud of conspiracy to deflect from the S.E.C. [Securities and Exchange Commission] investigation."

OVERSTOCK CEO PATRICK BYRNE RESIGNS AMID RUSSIAN SPY LINK, 'DEEP STATE' COMMENTS

Byrne, who resigned from Overstock Thursday, said on "The Story with Martha MacCallum" that had he helped the federal government with investigations twice in the past before FBI officials reached out to him again in 2016.

"I was given some fishy orders and I carried them out in 2015-2016, thinking I was conducting law enforcement," he told McCallum.

Video

Byrne said he later "figured out" the orders came from former FBI official Peter Strzrok.

Gutfeld hoped that those close to Byrne would help confirm in the coming days whether or not his claims are true.,

"I think the only way to know is if other people who know him say something in the next couple of days, like, 'he has issues' or 'no, this is totally legitimate. He's talked to me about it,'" Gutfeld said.

CLICK HERE TO GET THE FOX NEWS APP

"But if they say 'look, he has been known to spin tales' or all these people that he's mentioned, especially like Warren Buffett ... Warren Buffett should say 'hey look, he talked to me about this. What he's saying is it is totally legit.' Then I'd be more, I'd be on firmer ground."

Fox News' Charles Creitz contributed to this report.

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To: StockDung who wrote (121925)8/24/2019 12:39:38 PM
From: StockDung
   of 121951
 
Amazing how the media treats Patrick Byrne like a sane person.

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From: Glenn Petersen8/27/2019 10:07:04 AM
   of 121951
 
Short Selling Reduces Crashes

by Alex Tabarrok
Marginal Revolution
August 27, 2019 at 7:25 am



Short sellers are often scapegoated for market crashes but a rational market requires rational buyers and sellers. When the markets are dominated by irrational exuberance only the short sellers are speaking sanity. Short-sellers, therefore, should make prices more informative and reduce the Wile E. Coyote moment when it suddenly dawns on the irrational that gravity exists.

Deng, Gao and Kim test the theory and find it holds up; lifting restrictions on short sales reduces prices crashes.
We examine the relation between short-sale constraints and stock price crash risk. To establish causality, we take advantage of a regulatory change from the Securities and Exchange Commission (SEC)’s Regulation SHO pilot program, which temporarily lifted short-sale constraints for randomly designated stocks. Using Regulation SHO as a natural experiment setting in which to apply a difference-in-differences research design, we find that the lifting of short-sale constraints leads to a significant decrease in stock price crash risk. We further investigate the possible underlying mechanisms through which short-sale constraints affect stock price crash risk. We provide evidence suggesting that lifting of short-sale constraints reduces crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency. The results of our study shed new light on the cause of stock price crash risk as well as the roles that short sellers play in monitoring managerial disclosure strategies and real investment decisions.
Hat tip: Paul Kedrosky.

marginalrevolution.com

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