[In]Securities Guest Blog: Lawyers, Guns and Money by Aegis Frumento Esq

December 12, 2019

[In]Securities
a Guest Blog by
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell

Lawyers, Guns and Money

I feel I should say something about the House's impeachment resolutions, but I don't want to. I just don't find it interesting enough. Nixon's impeachment had burglars, break-ins, tape recordings, the stuff of a Damon Runyon novel. Clinton's impeachment had salacious sexual exposes, a stained dress, and the epistemologically wondrous question of what exactly "is" is. Nothing Trump does is near as interesting. It's not that I don't think he should be impeached-I actually think impeachment is too good for him-but I get enough naked self-interest in my day job.

That's because my day job involves a lot of securities fraud, which leads me away from the impeachee to the impeachers, and to Chris Collins in particular. Last week, Collins settled insider-trading charges brought against him by the SEC. A few weeks before that he pled guilty to criminal charges arising out of the same conduct.

https://www.nytimes.com/2019/10/01/nyregion/chris-collins-guilty-congress.html. It seems Collins was a director and the major shareholder of an Australian pharmaceutical company, Innate Immunotherapies, in which he had invested some $2.4 million. Collins was so hot on Innate stock that he touted it to his son, who in turn touted it to his girlfriend and her family. They all bought.

And then, one day, apparently while standing on the White House lawn, Collins learned that Innate's wonder drug had failed a key clinical trial. So he alerted his son, who in turn alerted his girlfriend and her family. They all dumped the stock and saved three quarters of a million when it tanked a few days later. "Tanking" is a relative term, by the way: Innate was only selling at 45 cents before plummeting to 3 1/2 cents. Yes, I know that is the equivalent of a $45 stock plummeting to $3, as I remember happening to some Citibank stock that I owned in 2008. But let's not draw false comparisons. Innate was a penny stock in the old-fashioned sense, and there's something quaint about that.

Now all of this is remarkable only for the stupidity of it. One can't read the SEC complaint against Collins without laughing out loud.
https://www.sec.gov/litigation/complaints/2018/comp-pr2018-151.pdf. Each phone call tipping the next Innate shareholder is timed to the minute, to the point where the SEC could allege that sales took place within three, four or five minutes of the phone call. Didn't these folks realize that all their cell phone calls were traceable and timed, as were all their stock sales? It's difficult to say whether they were arrogant or naive in thinking they could get away with this. Stupidity is the best common denominator that I come up with to describe it.

To me the most amazing paragraph in the SEC complaint is paragraph 18:

In 2012, Christopher Collins was elected to serve the 27th Congressional District of the State of New York in the U.S. Congress and is currently in his third term. At the time of the relevant conduct Christopher Collins was a member of Innate's Board of Directors and the company's largest shareholder.

Let's remember that, impeachment aside, President Trump has been excoriated for not completely divesting himself of his interests in the Trump Organization, for not putting it into a blind trust as other presidents have done with their assets. And yet here is a member of Congress concurrently acting as a director and the major shareholder of a penny stock pharmaceutical company. Is there not something wrong with this picture?

It was only a few years ago that Congress passed the STOCK Act to prevent a Congressman from profiting by trading the shares of companies that would be affected by upcoming legislation. Before that, it was perfectly lawful for a Congressman to trade shares of corporations that they knew in advance would be affected, positively or negatively, by bills pending in Congress or being drafted. That wasn't insider-trading, because the information didn't come from inside any of the companies that were being traded.

But passage of the STOCK Act only solved the most egregious conflict of interest plaguing Congress. https://www.theatlantic.com/politics/archive/2012/10/lucky-congress-blatant-conflict-interest-still-perfectly-legal/322790/.Congressmen are still permitted to serve on corporate boards and own major stock positions in public companies, as Collins did. Nor is there a clear prohibition against Congressman voting on matters that directly impact their own investments.
https://hbr.org/2017/02/the-growing-conflict-of-interest-problem-in-the-u-s-congress Soon after joining Congress, for example, Collins was named chairman of the subcommittee on Healthcare and Technology of the House Small Business Committee. You know, the subcommittee most directly relevant to a small pharmaceutical like Innate.

Of course, Collins's committee assignments had nothing to do with his insider-trading. But I have the nagging sense that anyone ensconced in a general environment that tolerates conflicts of interest as blatant as Congress does would perhaps overlook the obvious impropriety of breaking the law to help one's son (and that son's girlfriend's family) save a few bucks. That Collins was a Congressman, and is now a convicted criminal insider-trader, are not the same thing. But the distance between them is not as far as you might think.

Before this, Collins was famous for two things. He was the first Congressman to endorse Donald Trump for President, long before anyone else. And after the tragic shooting that seriously injured representative Steve Scalise, representative Collins was the first Congressman to publicly announce that he would thenceforth go armed, and since then he packed heat. The gun was the first to go. After he was indicted, he was forced to surrender all his weapons.
https://buffalonews.com/2018/08/16/chris-collins-must-surrender-guns-as-criminal-case-plays-out/. His early support of Donald Trump doesn't look like it's going to work out so well either.

But those now are the least of his worries. Collins had plenty of lawyers representing him in the past year. They helped him plead guilty to a felony and to accept an SEC sanction. Collins still has lawyers, but no guns and a bit less money. His reputed $43 million net worth will now serve mainly to raise the average income level of the prison population. That's a legacy, sort of.

ABOUT THE AUTHOR

Aegis J. Frumento

Stern Tannenbaum & Bell

Co-Head, Financial Markets Practice

afrumento@sterntannenbaum.com

380 Lexington Avenue

New York, NY 10168

212-792-8979

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.

Securities Industry Commentator:
A legal, regulatory, and compliance feed

curated by veteran Wall Street lawyer Bill Singer http://www.rrbdlaw.com/4951/securities-industry-commentator/

[In]Securities Guest Blog: Lawyers, Guns and Money by Aegis Frumento Esq (BrokeAndBroker.com Blog)

Hackers allegedly emptied brokerage accounts with a simple email scam - here's how to protect yourself (CNBC.com by Kate Fazzini)

SEC Charges Florida Resident and His Corporate Entity for Fraudulent Securities Offerings (SEC Release)

SEC Obtains Final Judgment Against Former Online Marketing Company Executive (SEC Release)

SEC Charges Founder, Digital-Asset Issuer With Fraudulent ICO (SEC Release)

Pennsylvania Man Indicted In "SIM Swapping" Scheme To Steal Cryptocurrency (DOJ Release)

FINRA NAC Piles on Fines on Out of Business Spencer Edwards, Inc. In the Matter of Department of Enforcement, Complainant, vs. Spencer Edwards, Inc., Respondent (FINRA National Adjudicatory Council Decision)

FINRA Fines Aeon Capital and Its CCO over Taping Rule. In the Matter of Aeon Capital Inc. and Vincent Michael Bruno, Respondents (FINRA AWC)

FINRA Fines and Suspends Rep For Not Properly Confirming Hacker's Identity and Unauthorized Trades. In the Matter of William Darby, Respondent (FINRA AWC)