In the Matter of the Application of MPHASE TECHNOLOGIES, INC
========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Release No. 74187 / February 2, 2015
Admin. Proc. File No. 3-15130
In the Matter of the Application of
MPHASE TECHNOLOGIES, INC.
c/o Frank C. Razzano, Esq.
Pepper Hamilton LLP
600 14th Street, N.W.
Washington, D.C. 20005-2004
For Review of Action Taken by
FINRA
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION — REVIEW OF ASSOCIATION
ACTION DENYING REQUEST TO PROCESS CORPORATE ACTION
Registered securities association declined to process documents related to an issuer's
proposed reverse stock split in the public interest because the issuer's corporate officers
were the subject of a settled regulatory action involving securities laws violations. Held,
review proceeding is dismissed.
APPEARANCES:
Frank Razzano and Min Choi, of Pepper Hamilton LLP, for mPhase Technologies, Inc.
Alan Lawhead, Gary Dernelle, and Jante C. Turner, for the Financial Industry
Regulatory Authority, Inc.
Appeal filed: December 12, 2012
Last brief received: April 24, 2013
2
mPhase Technologies, Inc., an issuer of securities formerly quoted on the OTC Bulletin
Board ("OTCBB"), appeals from FINRA's denial of mPhase's request that FINRA process and
announce mPhase's reverse stock split on the OTCBB. FINRA found that mPhase's request was
deficient and that processing the announcement was not in the public interest because mPhase's
chief executive and chief operating officers were the subject of a "settled regulatory action
related to . . . securities laws violations." mPhase does not dispute that its senior officers settled
a Commission action in 2007 but argues that FINRA exceeded its regulatory authority in denying
mPhase's request to process and announce its reverse stock split on the OTCBB. Based on an
independent review of the record, we find that FINRA properly exercised its discretion in
operating the OTCBB, relied on grounds that exist in fact, and denied mPhase's request in
accordance with FINRA Rules and the purposes of the Securities Exchange Act of 1934. We
accordingly dismiss the appeal.
I. Background
A. FINRA's operation of the OTCBB and processing of Company-Related Actions
FINRA owns and operates the OTCBB, an electronic inter-dealer quotation system that
FINRA provides to its members that actively trade securities not listed on NASDAQ or a
national securities exchange.1 The OTCBB displays quotes, last-sale prices, and volume
information for eligible equity securities. To be quoted on the OTCBB, an issuer's securities
must be sponsored by a FINRA member and meet applicable quotation standards.2 FINRA rules,
including the 6000 Rule Series and Uniform Practice Code, govern the use and operation of
FINRA's OTCBB service.3
As part of its operation of the OTCBB, FINRA processes requests to announce and
publish certain corporate actions from issuers whose securities are quoted on the OTCBB.4
These actions, generally referred to as "Company-Related Actions,"5 include any stock
1 See, e.g., Palmworks, Inc., Securities Exchange Act Release No. 43294, 54 SEC 840,
2000 WL 1335343, at *1 (Sept. 15, 2000).
2 See Order Approving Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 1 Thereto by the National Association of Securities
Dealers, Inc. to Allow Electronic Communications Networks and Alternative Trading Systems to
Participate in the [OTCBB], Exchange Act Release 45915, 2002 WL 977530, at *1 (May 10,
2002); OTCBB Frequently Asked Questions, finra.org
MarketTransparency/OTCBB/FAQ/ (all websites last visited on June 26, 2014).
3 See FINRA Rule 6000 and 11000 Series.
4 FINRA publishes these announcements on the OTCBB "daily list," available through
OTCBB.com. FINRA Regulatory Notice 10-38, 2010 WL 3393960, at *1 (Sept. 27, 2010).
5 FINRA Rule 6490; Order Approving Proposed FINRA Rule 6490 (Processing of
Company-Related Actions) to Clarify Scope of FINRA's Authority When Processing Documents
Related to Announcements for Company-Related Actions for Non-Exchange Listed Securities
(continued…)
3
dividends, stock splits, or rights offerings, as well as "the issuance or change to a trading symbol
or company name, merger, acquisition, dissolution or other company control transactions,
bankruptcy or liquidation."6 If FINRA elects to process an issuer's Company-Related Action, it
will, in turn, announce the action on OTCBB's "Daily List," which "effectively announces the
Company-Related Actions to the [OTC] market."7
In 2010, based on a "growing concern that FINRA's Company-Related Action processing
services may potentially be used by certain parties to further fraudulent activities," FINRA
proposed, and the Commission approved, FINRA Rule 6490 authorizing FINRA to deny an
issuer's request that FINRA announce a Company-Related Action on the OTCBB under certain
circumstances.8 The Commission's 2010 Approval Order observed that, although "[h]istorically,
FINRA has viewed its role in performing issuer-related functions as primarily ministerial" given
its indirect relationship with issuers, Rule 6490 makes clear "the scope of its regulatory authority
and . . . codif[ies] procedures that it will apply when reviewing requests to process Company-
Related Actions."9 The Rule authorizes FINRA's Department of Operations (the "Department")
to conduct "in-depth reviews" of issuers' requests10 and to deny a request upon finding that
(1) the request is "deficient," based on a five-factor inquiry,11 and (2) denial is "necessary for the
(…continued)
and to Implement Fees for Such Services, Exchange Act Release No. 62434, 2010 WL 2641653,
at *2 (July 1, 2010) (the "2010 Approval Order"); see also FINRA Regulatory Notice 10-38,
2010 WL 3393960, at *3 (Aug. 27, 2010).
6 FINRA Rule 6490 refers to the first category of Company-Related Actions as "SEA Rule
10b-17 Actions" and the second category as "Other Company-Related Actions." Id. See further
discussion infra note 70 and accompanying text.
7 2010 Approval Order, supra note 5, at *1 n.7; see also FINRA Regulatory Notice 10-38,
2010 WL 3393960, at *1.
8 2010 Approval Order, supra note 5, at *2.
9 Id.
10 Id.
11 FINRA Rule 6490(d)(3). Under FINRA Rule 6490(d)(3), a Company-Related Action is
"deficient" if "one or more" of the following factors exists:
(1) FINRA staff reasonably believes the forms and all supporting documentation
. . . may not be complete, accurate or with proper authority;
(2) the issuer is not current in its reporting requirements . . . to the SEC or other
regulatory authority;
(3) FINRA has actual knowledge that . . . officers [or] directors . . . connected to
the issuer or the [Company-Related Action requested] . . . are the subject of a
pending, adjudicated or settled regulatory action or investigation by a federal,
state or foreign regulatory agency, or a self-regulatory organization; or a civil
or criminal action related to fraud or securities laws violations;
(continued…)
4
protection of investors, the public interest and to maintain fair and orderly markets."12 An issuer
may appeal any denial by the Department to a subcommittee of FINRA's Uniform Practice Code
Committee ("UPCC Subcommittee") and that subcommittee's decision becomes FINRA's final
decision in the matter.13
B. mPhase
1. mPhase's application with FINRA
On July 6, 2012, mPhase, an OTCBB-quoted corporation specializing in microfluidics,
micro-electro-mechanical systems, and nanotechnology,14 filed an application with FINRA
requesting that it process a Company-Related Action—specifically, an announcement on the
OTCBB that mPhase was issuing a 1-200 reverse stock split.15 According to mPhase, the reverse
stock split sought to increase the share price of its common stock by reducing the number of
(…continued)
(4) a state, federal or foreign authority or self-regulatory organization has provided
information to FINRA, or FINRA otherwise has actual knowledge indicating
that the issuer, associated persons, officers, directors, transfer agent, legal
adviser, promoters or other persons connected with the issuer or [Company-
Related Action] may be potentially involved in fraudulent activities related to
the securities markets and/or pose a threat to public investors; and/or
(5) there is significant uncertainty in the settlement and clearance process for the
security.
12 Id.; 2010 Approval Order, supra note 5, at *6.
13 FINRA Rule 6490(e).
14 mPhase Tech., Inc., Form 10-K for the year ended June 30, 2012, at 4, available at
sec.gov ("mPhase
Form 10-K"). We take official notice of the information about mPhase provided in its
Commission EDGAR filings and on the website of the Secretary of the State of Connecticut. See
17 C.F.R. § 210.323 (permitting official notice of "any material fact which might be judicially
noticed by a [U.S.] district court" or "any matter in the public official records of the
Commission") and Fed. R. Evid. 201(b) (stating that "judicially noticed fact must be one not
subject to reasonable dispute in that it is . . . capable of accurate and ready determination by
resort to sources whose accuracy cannot be reasonably questioned").
15 mPhase is a New Jersey corporation with its principal place of business in Norwalk,
Connecticut. Its common stock is registered with the Commission under Section 12(g) of the
Securities Act, and at all times relevant to FINRA's action, was quoted on the OTCBB under the
ticker symbol "XDSL." On March 26, 2013, during the pendency of mPhase's appeal, mPhase
became ineligible for OTCBB quotation "due to quoting inactivity." OTCBB Daily List,
otcbb.com (search "XDSL"). mPhase's stock is currently quoted on the
OTC Pink, operated by OTC Markets Group, Inc. See OTC Markets Group's Company
Directory, otcmarkets.com.
5
mPhase's outstanding shares from approximately 4.48 billion to 22.4 million.16 mPhase
explained that it has long refrained "from attempting to increase its stock price through a reverse
[stock] split rather than through fundamentals flowing from its operations" but that market
conditions and its recent failure to secure financing necessitated the action.
2. mPhase officers Durando and Dotoli and their settlement with the SEC
Since mPhase's incorporation in 1996, Robert Durando has acted as its president and
chief executive officer and Gustave Dotoli has acted as its chief operating officer. Durando and
Dotoli both are on mPhase's board of directors and own 21.75% and 15.31% of the company's
stock, respectively. In addition to their association with mPhase, Durando and Dotoli are
officers of PacketPort.com, Inc., a Nevada corporation, of which Durando is the president and
Dotoli the vice president. Durando is also majority owner of Microphase Corporation, a
Connecticut corporation that is a part-owner of mPhase and provides mPhase with various
administrative services. Microphase and Packetport both operate from the same business address
as mPhase in Norwalk, Connecticut.17
On October 18, 2007, while they were officers of mPhase, Durando and Dotoli settled a
Commission administrative proceeding (the "2007 Settlement Order"), in which they consented
to findings that they violated several federal securities laws from 1999 to 2002.18 The findings
concerned violations related to their roles at Microphase and Packetport.com.19 The 2007
Settlement Order stated that in early 1999 Durando and Dotoli acquired control of Linkon Corp.,
a failing Internet company.20 In return for a cash infusion and settlement of Linkon's debt,
16 "A reverse stock split reduces the number of shares and increases the share price
proportionately." Reverse Stock Split, sec.gov. mPhase
initially requested that FINRA process and announce a 1-100 reverse stock split on the OTCBB
but later revised the split ratio to 1-200.
17 See mPhase Form 10-K, supra note 14, at 72, 116 (noting that mPhase leases office space
from Microphase and also compensates Microphase for "use of accounting personnel," "research
and development," and "specific projects on a project-by-project basis"). According to the Form
10-K, Durando is a controlling owner of Microphase through his ownership of a related holding
company. Id. at 72.
18 PacketPort.com, Inc., Order Instituting Cease-and-Desist Proceedings, Making Findings
and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the
Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Exchange Act
Release No. 56672, 2007 WL 3033480, *1-2 (Oct. 18, 2007).
19 At the time, Durando was Packetport.com's chairman, president, and chief executive
officer and Microphase's majority owner and chief operating officer. Dotoli was
Packetport.com's secretary and a director on its board of directors. Id.
20 The 2007 Settlement Order stated that by May 1999 Linkon was in default on $1.9
million in debt notes, subject to an $802,500 civil judgment, and had ceased operations. Id.
at *3.
6
Durando and Dotoli received stock in Linkon, which later became stock of PacketPort.com. The
2007 Settlement Order found that, in the course of this acquisition, (1) Durando, Dotoli,
PacketPort.com, and Microphase offered or sold shares of PacketPort.com stock without a
registration statement in effect in violation of Sections 5(a) and (c) of the Securities Act of
1933;21 (2) Durando and Dotoli violated Exchange Act Section 16(a) and Rule 16a-3 by failing
to timely file Forms 3 to reflect their beneficial ownership of more than ten percent of
PacketPort.com's stock;22 and (3) Durando violated Exchange Act Section 13(d) and Rule 13d-1
by failing to timely file a Schedule 13D after acquiring more than five percent of
PacketPort.com's stock.23
The 2007 Settlement Order required Durando, Dotoli, Microphase, and Packetport.com to
cease and desist from committing or causing future violations of the provisions they were found
to have violated and ordered that Durando, Dotoli, and Microphase disgorge $150,000,
$100,000, and $700,000, respectively, in ill-gotten gains.24 The Commission also announced
that it was withdrawing a parallel enforcement action pending in federal district court against
respondents.25 mPhase was not a party to the 2007 Settlement Order or the dismissed federal
court action.
C. FINRA's denial of mPhase's request
On October 2, 2012, the Department notified mPhase that it had denied the company's
request to process the reverse stock split pursuant to FINRA Rule 6490(d)(3) because mPhase's
CEO and COO are the subject of a "settled regulatory action . . . related to fraud or securities
laws violations" and that this misconduct "raised concerns for FINRA regarding the protection of
21 15 U.S.C. § 77e(a) (prohibiting the "sale" of any securities, in interstate commerce,
unless a registration statement is in effect as to the offer or sale of such securities or there is an
applicable exemption from the registration requirements); id. § 77e(c) (prohibiting the "offer for
sale" of any securities, unless a registration statement has been filed as to such securities or an
exemption is available).
22 15 U.S.C. § 78p(a) and 17 C.F.R. § 240.16a-3 (requiring directors and persons owning
more than 10% of a registrant's stock to file a Form 4 within two business days of the acquisition
or disposition of the security).
23 15 U.S.C. § 78m(d) and 17 C.F.R. § 240.13d-1 (requiring any beneficial owner of more
than 5% of any Exchange Act registered securities to disclose the extent of his or her ownership
stake).
24 PacketPort.com, 2007 WL 3033480, at *5-6.
25 SEC v. PacketPort.com, Inc., Litig. Release No. 20339, 2007 WL 3033485, *1-2
(Oct. 18, 2007); see also SEC v. PacketPort.com, Inc., Civil Action No. 3:05cv1747 (filed
Nov.15, 2005); Packetport.com, Inc., Litig. Release No. 19465, 2005 WL 3068110 (Nov. 16,
2005).
7
investors."26 The Department stated that, as a result of its findings, it would "cease processing
documentation related to [mPhase's] Company-Related Action and would make no
announcement on the [OTCBB's] Daily List."
mPhase appealed the Department's decision to the UPCC Subcommittee, arguing that the
2007 Settlement Order against Durando and Dotoli "should not per se constitute a 'deficiency'
under" Rule 6490. It sought to explain the circumstances surrounding Durando's and Dotoli's
prior misconduct by blaming their violations on erroneous legal advice. mPhase described the
2007 Settlement Order as involving only "technical violations" of the securities laws, not
antifraud violations, and imposing "only" financial penalties, not bars against Durando and
Dotoli. mPhase noted that the 2007 Settlement Order was entered "almost 5 years" ago and
claimed that since that time neither officer had been the subject of any regulatory action.
The UPCC Subcommittee affirmed the Department's decision, finding mPhase's request
deficient based on the 2007 Settlement Order and that processing the request "present[ed] a
threat to the investing public or the maintenance of fair and orderly markets." The
Subcommittee stated that it "consider[ed] the substantive allegations" of the 2007 Settlement
Order, to which Durando and Dotoli consented, and found that the 2007 Settlement Order
involved "several serious violations of the federal securities laws" and disgorgement of
significant amounts of ill-gotten gains.
The UPCC Subcommittee also cited concerns related to Durando and Dotoli's current
circumstances. It stated that Durando and Dotoli currently occupy "significant roles" at mPhase,
presenting them with opportunities for abuse without any meaningful supervisory oversight. It
"highlight[ed] [ongoing] connection[s] between mPhase and Microphase . . . and Packetport,"
finding that the three entities currently share the same business address in Norwalk and a
common high-ranking official, Durando.27 Given these facts, the Subcommittee rejected
26 On August 22, 2012, before the Department's denial, mPhase disclosed to Department
staff that Durando and Dotoli were subject to the 2007 Settlement Order by providing a copy of
the Commission's 2007 press release announcing the settlement. PacketPort.com, 2007
WL 3033485. The record also shows that the Department conducted its own background
investigation of the company and its officers, which is reflected in the record as a series of
undated "screen shots" of various database searches. These materials include a screen shot of
and the URL to the 2007 Settlement Order, but not the entire document. Pursuant to 17 C.F.R.
§ 210.323, we take official notice of the entire 2007 Settlement Order, a document that is
publicly available on the Commission's website.
27 A "business inquiry" search of "Microphase," "PacketPort.com," and "mPhase
Technologies" on the Connecticut Secretary's Secretary of State's website confirms this
conclusion. See Connecticut Secretary of the State Business Inquiry, concordsots.
ct.gov/CONCORD/online?sn=PublicInquiry&eid=9740 (searching each entity). FINRA
also attached this information, which mPhase does not contest, to its opposition brief for our
consideration.
8
mPhase's claim that the age of the settlement and asserted recent compliance served as any
mitigation. This appeal followed.28
II. Analysis
Exchange Act Section 19(f) governs our review of a self-regulatory organization's denial
of access to services.29 Here, FINRA denied mPhase's request for FINRA to process and
announce a reverse stock split on FINRA's OTCBB. Under Section 19(f), we must dismiss
mPhase's appeal of this denial if we find that (i) the specific grounds on which FINRA based its
denial exist in fact, (ii) the denial was in accordance with FINRA rules, and (iii) those rules are,
and were applied in a manner consistent with the purposes of the Exchange Act.30 FINRA's
denial meets these criteria.
A. The grounds on which FINRA based its denial of mPhase's request exist in fact.
FINRA Rule 6490(d)(3) requires FINRA to conduct a two-step analysis in determining
whether to process a Company-Related Action request. First, FINRA must assess whether the
issuer's request is deficient. As the Rule states, FINRA's deficiency determination "shall" be
based "solely . . . [on] one or more" of the five enumerated factors, including as relevant here,
that FINRA has "actual knowledge . . . that officers [or] directors . . . connected to the issuer or
[the Company-Related Action] . . . are the subject of a . . . settled regulatory action . . . related to
fraud or securities laws violations."31 Second, in the event that FINRA deems an issuer's request
deficient, FINRA then "may determine" not to process the issuer's request if it finds that denial
"is necessary for the protection of investors, the public interest and to maintain fair and orderly
markets."32
28 As part of its appeal, mPhase filed a motion to amend its reply brief filed with the
Commission, requesting that the Commission strike two footnotes contained in that brief.
mPhase's motion, which FINRA does not oppose, is granted.
29 15 U.S.C. § 78s(f) (authorizing Commission review of SRO action that prohibits or limits
"any person with respect to access to services offered by the [SRO]"); see also Intelispan, Inc.,
Exchange Act Release No. 42738, 2000 WL 511471, at *2 (May 1, 2000), vacated, 2000 WL
1424830 (May 30, 2000).
30 Fog Cutter Capital Grp., Inc. v. SEC, 474 F.3d 822, 825 (D.C. Cir. 2007). We
previously found that FINRA Rule 6490 "is consistent with the [Exchange] Act and the rules and
regulations thereunder applicable to a national securities association." 2010 Approval Order,
supra note 5, at *5 (explaining that FINRA Rule 6490 is consistent with Exchange Act Sections
15A(b)(5) and (6)). Exchange Act Section 19(f) further requires that we set aside FINRA's
action if we find that it imposes an undue burden on competition. 15 U.S.C. § 78s(f). mPhase
does not claim, nor does the record suggest, that FINRA's action imposes such a burden.
31 FINRA Rule 6490(d)(3)(3).
32 FINRA Rule 6490(d)(3).
9
1. mPhase's Company-Related Action was deficient under FINRA Rule
6490(d)(3).
mPhase's request was deficient under FINRA Rule 6490(d)(3) because FINRA had
"actual knowledge . . . that officers [or] directors . . . connected to" mPhase "are the subject of a
. . . settled regulatory action . . . related to . . . securities laws violations."33 Durando, mPhase's
CEO, and Dotoli, its COO, are both officers and directors of mPhase. And their 2007
Settlement Order involved violations of the federal securities laws, specifically, Securities Act
Section 5 and Exchange Act Sections 13 and 16 and Rules 13d-1 and 16a-3. The record also
establishes that FINRA had actual knowledge of the 2007 Settlement Order as a result of its
background investigation of mPhase's officers and information supplied by mPhase.
2. FINRA found that denying mPhase's request was necessary for the
protection of investors, the public interest, and to maintain fair and orderly
markets under FINRA Rule 6490(d)(3).
FINRA Rule 6490(d)(3) states that "where [a Company-Related Action] is deemed
deficient," FINRA "may determine" not to process the request if doing so is "necessary for the
protection of investors, the public interest and to maintain fair and orderly markets."34 The
Rule's use of the permissive term "may" vests FINRA with discretionary authority in deciding
whether to process and announce a deficient Company-Related Action request on the OTCBB.35
In the similar context of delisting appeals, we have long stated that "[t]o the extent that discretion
enters into [FINRA's decision to deny inclusion on its systems] . . . the discretion in question is
[FINRA's], not ours,"36 and as in those cases, we will not substitute our judgment for FINRA's
unless its decision is unsupported by the record.37
33 FINRA Rule 6490(d)(3)(3).
34 Id.
35 See, e.g., United States v. Rodgers, 461 U.S. 677, 706 (1983) (stating that, absent
"indications of legislative intent to the contrary," "the word 'may,' when used in a statute, usually
implies some degree of discretion"). The 2010 Approval Order lends further support for this
reading and included, with approval, the following explanation by FINRA of the operation of
Rule 6490: "[W]hen the Department reasonably believes that an issuer . . . has triggered one of
the explicitly enumerated factors, . . . it would have the discretion not to process any such actions
that are incomplete or when it determines that not processing such an action is necessary for the
protection of investors." 2010 Approval Order, supra note 5, at *6 (emphasis added).
36 Tassaway, Inc., Exchange Act Release No. 11291, 45 SEC 706, 1975 WL 160383, at *2
(Mar. 13, 1975) (discussing oversight of the OTC markets by FINRA, then the NASD).
37 E.g., Cleantech Innovations, Inc., Exchange Act Release No. 69968, 2013 WL 3477086,
at *6 & n.43 (July 11, 2013) (stating that "we are not free to substitute our discretion for
NASDAQ's" but setting aside decision because "the record does not show that the grounds on
which NASDAQ relied in delisting CleanTech exist in fact"); Eagle Supply Grp., Inc., Exchange
(continued…)
10
Here, we find that the specific grounds on which FINRA based its findings that mPhase's
action posed a threat to investors and market integrity exist in fact. Durando's and Dotoli's
previous misconduct was serious. Durando and Dotoli consented to an order finding that they
violated the registration and disclosure provisions of the federal securities laws, which are
fundamental to the securities industry and the protection of investors. Securities Act
Sections 5(a) and (c) prohibit the offer and sale of a security without a registration statement, the
essential purpose of which is to "'protect investors by promoting full disclosure of information
thought necessary to informed investment decisions.'"38 Exchange Act Section 16(a) and rules
thereunder are designed to apprise "investors of security transactions by insiders," so that "abuses
resulting from the use of inside information may be averted."39 The disclosures required by
Exchange Act Section 13(d) and its rules "alert[] the marketplace to every large, rapid
aggregation or accumulation of securities . . . , which might represent a potential shift in
corporate control," as in a corporate takeover.40 Failure to comply with these core registration
and disclosure obligations deprives investors of information necessary to make informed
investment decisions, and thus, to protect themselves against potential fraud.41
(…continued)
Act Release No. 39800, 1998 WL 133847, at *4 (remanding to NASD for a more definitive
statement on its reasoning for denying issuer's inclusion on the NASDAQ SmallCap Market).
38 World Trade Fin. Corp., Exchange Act Release No. 66114, 2012 WL 32121, at *7
(Jan. 6, 2012) (quoting SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953)), petition denied,
739 F.3d 1243 (9th Cir. 2014).
39 Securities and Exchange Commission Release Notice, Exchange Act Release No. 2253,
1939 WL 37795, at *1 (Sept. 20, 1939); see also Interpretive Release on Rules Applicable to
Insider Reporting and Trading, Exchange Act Release No. 18114, 1981 WL 31301, at *1
(Sept. 24, 1981) ("The intent of [Exchange Act Section 16(b)] is to deprive officers, directors
and substantial stockholders of the incentive to utilize their positions to trade in the securities of
their companies on the basis of inside information.").
40 GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir. 1971); see also SEC v. First City Fin.
Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989) (explaining that a violator of Exchange Act Section
13(d) improperly benefits by purchasing stock at an artificially low price, because disclosure of a
"holding in excess of five percent of a company's stock suggests to the rest of the market a likely
takeover and therefore may increase the price of the stock").
41 The importance of these provisions undermines mPhase's attempt to characterize their
violations as merely "technical" in nature. E.g., Owen V. Kane, Exchange Act Release No.
23827, 48 SEC 617, 1986 WL 626043, at *5 (Nov. 20, 1986) (rejecting claim that respondent's
violations were mere "technical" violations because "[t]he registration provisions [of Securities
Act Section 5] are a keystone of the entire system of securities regulation, and set forth basic
requirements for the protection of investors" (internal punctuation and citation omitted)), aff'd,
842 F.2d 194 (8th Cir. 1988); see also SEC v. Drexel Burnham Lambert, Inc., 837 F. Supp. 587,
607 (S.D.N.Y. 1993) (stating that "[Exchange Act] Section 13(d) is not a mere 'technical'
reporting provision; it is, rather, the 'pivot' of a regulatory scheme that may represent 'the only
(continued…)
11
FINRA concluded that the imposition of $950,000 in disgorgement against Durando,
Dotoli, and Microphase further highlighted the gravity of their past misconduct. The conclusion
that the misconduct was grave also is supported by the 2007 Settlement Order's entry of ceaseand-
desist orders against Durando, Dotoli, Microphase, and Packetport.com. A cease-and-desist
order cannot be entered unless the "person is violating, has violated, or is about to violate any
provision of"42 the securities laws, rules, or regulations and there is "some risk of future
violations."43
FINRA also based its denial on its ongoing regulatory concerns about mPhase, Durando,
and Dotoli, which mPhase does not contest on appeal. As FINRA found, Durando's and Dotoli's
current positions as CEO and COO provide them "with substantial authority, placing them in
roles with minimal supervisory oversight and presenting opportunities for abuse."44 FINRA also
found it troubling that mPhase continued to be associated with Packetport and Microphase, both
of which are subject to the 2007 Settlement Order and continue to operate from the same
business address as mPhase, and in the case of Microphase, remains a part-owner of mPhase.
mPhase's briefs on appeal do not contest these findings and conclusions, and we find these
uncontested grounds for FINRA's denial exist in fact.45
(…continued)
way that corporations, their shareholders and others can adequately evaluate . . . the possible
effects of a change in substantial shareholdings'" (citations omitted)).
42 15 U.S.C. §§ 77h-1(a), 78u-3(a); see also S. Rep. 101-337 (1990) (explaining that "a
cease-and-desist order is an administrative remedy that directs a person to refrain from engaging
in conduct or a practice which violates the laws").
43 E.g., Guy P. Riordan, Exchange Act Release No. 61153, 2009 WL 4731397, at *19 (Dec.
11, 2009) (citing KPMG Peat Marwick LLP, Exchange Act Release No. 43862, 54 SEC 1135,
2001 WL 47245, at *24 (Jan. 19, 2001) ("We believe that there must be some likelihood of
future violations whenever we issue a cease-and-desist order."), petition denied, 289 F.3d 109
(D.C. Cir. 2002)), petition denied, 627 F.3d 1230 (D.C. Cir. 2010).
44 Cf., e.g., Stuart K. Patrick, Exchange Act Release No. 32314, 51 SEC 419, 1993 WL
172847, at *2 (May 17, 1993) ("Supervision, by its very nature, cannot be performed by the
employee himself.").
45 See Commission Rule of Practice 450(b), 17 C.F.R. § 201.450(b) (requiring that "[e]ach
exception to the findings or conclusions being reviewed shall be stated succinctly"); cf. NLRB v.
Konig, 79 F.3d 354, 356 n.1 (3d Cir. 1996) (uncontested findings on appeal accepted as true);
NLRB v. Tenn. Packers, Inc., 344 F.2d 948, 949 (6th Cir. 1965) ("Since respondent's brief failed
to challenge the Board's order on the merits, that issue is considered . . . abandoned . . . .").
Information available on the Secretary of State of Connecticut's website confirms the companies'
continued connection. See supra note 27 and accompanying text.
12
3. FINRA properly considered the findings of the 2007 Settlement Order in
reaching its decision.
We reject mPhase's contention on appeal that FINRA improperly considered the factual
findings set forth in the 2007 Settlement Order as a basis for its denial. mPhase cites to
provisions in the 2007 Settlement Order stating that Durando and Dotoli neither "admitt[ed] or
den[ied] the findings therein" and that "[t]he findings . . . [were] not binding on any other person
or entity . . . [in] any other proceeding" and points out that mPhase was not a party to the 2007
Settlement Order.46
We find that FINRA properly considered the underlying factual findings of Durando and
Dotoli's 2007 Settlement Order in assessing its interest in protecting investors and market
integrity. By including a settled securities-related action as one of the specific grounds for
deeming a Company-Related Action deficient in Rule 6490, FINRA made "a basic public
interest determination about the seriousness" of such an action.47 FINRA, as a general matter,
has considered prior settlements in weighing the public interest in other contexts, such as in the
evaluation of whether a person subject to a statutory disqualification should be permitted to
return to the securities industry48 and in assessing prior disciplinary history as part of its sanction
analysis in a disciplinary action.49 FINRA is required by Rule 6490(d)(3) to determine whether
denying the Company-Related Action requested is "necessary for the protection of investors, the
public interest, and maintenance of fair and orderly markets." FINRA must be able to consider
46 mPhase did not make this claim before the UPCC Subcommittee; rather it urged the
opposite position—that the Subcommittee review the findings of the 2007 Settlement Order and
find that the order involved only "technical" violations. It asserted that the "purpose of FINRA
Rule 6490 . . . is to enable FINRA to review the activities of parties related to the Company-
Related Action that are subject to a prior consent decree." FINRA contends that mPhase has
waived its new argument because Rule 6490(e) required it to "set forth with specificity any and
all defenses" before the UPCC Subcommittee. We nonetheless consider mPhase's argument, in
our discretion, as part of our review of FINRA's action.
47 See, e.g., Marshall E. Melton, Investment Advisers Act Release No. 2151, 56 SEC 760,
2003 WL 21729839, at *7 (July 25, 2003) (stating that, by making an injunction a specific
ground for commencing a follow-on proceeding, Congress intended that the allegations
underlying a consent injunction be considered in the subsequent proceeding); see also Michael
Batterman, Advisers Act Release No. 2334, 2004 WL 2785527, at *5 (Dec. 3, 2004) (same).
48 See, e.g., Eric J. Weiss, Exchange Act Release No. 69177, 2013 WL 1122496, at *7
(Mar. 19, 2013) (sustaining FINRA's consideration of state consent order); LaJolla Capital
Corp., Exchange Act Release No. 41755, 1999 WL 624046, at *7 n.31 (Aug. 18, 1999) (same).
mPhase attempts to distinguish Weiss because the Weiss consent order did not provide that the
order was "not binding" on any other party but as discussed, infra text accompanying note 56,
the provisions in the 2007 Settlement Order did not bar FINRA's consideration of it here.
49 See, e.g., Midas Sec., LLC, Exchange Act Release No. 66200, 2012 WL 169138, at *16
(Jan. 20, 2012); Wendell D. Beldon, Exchange Act Release No. 47859, 2003 WL 21088079,
at *5 (May 14, 2003).
13
the findings underlying the prior settlement to properly weigh the issuer's interests in having its
action processed against those of the investing public.50 We believe that consideration of the
factual predicate for the settlement, rather than the existence of the settlement alone, is a
necessary element of this analysis—both with respect to the issuer, which may seek to explain
the circumstances of the past action, as mPhase did below, and the public, which may be
adversely affected by a decision to deny or approve an announcement on the OTCBB.51
We have taken a similar approach in our follow-on administrative proceedings that are
based on the entry of a consent injunction.52 In a follow-on proceeding, we routinely consider
the facts of the injunctive action in determining whether it is in the public interest to impose a
remedial sanction against an enjoined individual. But, where the injunction is based on consent,
often there are no court-ordered findings from which to assess the public interest.53 We have
accordingly "adopted the policy in administrative proceedings based on consent injunctions that
the injunctive allegations may be given considerable weight in assessing the public interest."54
This conclusion is predicated on "our belief that Congress, having made an injunction a
[specific] ground for commencing a proceeding, [did not intend] for the parties to conduct the
proceeding as if the injunction had never been entered, disregarding the allegations underlying
the injunction."55
We find no error in FINRA's consideration of the settlement's findings in deciding that it
was necessary for the protection of investors and market integrity to deny mPhase's Company-
Related Action request. Several courts construing the "neither admit nor deny" provision and the
provision stating that the findings are "not binding" on other parties have held that such
provisions do not preclude the admissibility of the findings of the settled order in a subsequent
50 FINRA Rule 6490(d)(3) (requiring that FINRA determine after finding a deficiency
factor whether denial is "necessary for the protection of investors, the public interest, and
maintenance of fair and orderly markets").
51 As noted, mPhase's earlier position urged the Subcommittee to consider the facts of the
2007 Settlement Order. See supra note 46.
52 E.g., Advisers Act Sections 203(e)(4) and 203(f), 15 U.S.C. §§ 80b-3(e)(4) and (f), and
Exchange Act Sections 15(b)(4)(C) and 15(b)(6)(A)(iii), 15 U.S.C. §§ 780(b)(4)(C) and
(b)(6)(A)(iii).
53 Melton, 2003 WL 21729839, at *2.
54 Id.; see also Peter Siris, Exchange Act Release No. 71068, 2013 WL 6528874, at *10
(Dec. 12, 2013), petition denied, 773 F.3d 89 (D.C. Cir. 2014); Ralph LeBlanc, Exchange Act
Release No. 48254, 2003 WL 21755845, at *1 (July 30, 2003); Michael J. Markowski, Exchange
Act Release No. 44086, 55 SEC 21, 2001 WL 267660, at *2 (Mar. 20, 2001), petition denied,
2002 WL 1932001 (D.C. Cir. Apr. 25, 2002) (unpublished); Charles Phillip Elliott, Exchange
Act Release 31202, 50 SEC 1273, 1992 WL 258850, at * 3 (Sept. 17, 1992), aff'd, 36 F.3d 86
(11th Cir. 1994).
55 Melton, 2003 WL 21729839, at *8.
14
proceeding, so long as they are not adduced to establish liability against a party.56 In assessing
mPhase's request, FINRA did not invoke the findings of the prior proceeding to establish any
liability against mPhase, which was not a party to the 2007 Settlement Order, and FINRA
imposed no sanction or penalty against mPhase. Rather, FINRA's denial of mPhase's request is
but one of the several collateral consequences created by Durando's and Dotoli's settlement and
consent to sanctions.57
Nor can it be said that 2007 Settlement Order was "binding" or had "legal force" on the
outcome here, as mPhase suggests.58 FINRA gave mPhase an opportunity to dispute the
relevance of the 2007 Settlement Order to the Company-Related Action requested. Although
FINRA ultimately found the 2007 Settlement Order, together with its ongoing concerns about
mPhase, necessitated denial of its request, the 2007 Settlement Order did not require FINRA to
deny the request. Rather, FINRA considered a number of factors in addition to the settlement in
56 Cf., e.g., Option Res. Grp. v. Chambers Dev. Co., 967 F. Supp. 846, 848-49 (W.D. Pa.
1996) (allowing "findings, including the opinions and conclusions" from Commission
administrative settlement into evidence in separate civil suit against non-settling party under Fed.
R. Evid. 803(8)(C), even though settlement was "not binding" on any other person or entity);
SEC v. Pentagon Capital Mgmt. PLC, No. 08 Civ. 3324, 2010 WL 985205, at *3-4 (S.D.N.Y.
Mar. 17, 2010) (unreported) (holding that "factual findings" contained in Commission settled
orders were admissible in subsequent litigation so long as "offered for a purpose other than to
establish liability" (citing United States v. Gilbert, 668 F.2d 94, 97 (2d Cir. 1981))); see also SEC
v. Das, No. 8:10-CV-102, 2010 WL 4615336, at *7 n.5 (D. Neb. Nov. 4, 2010) (unreported)
(permitting use of an unrelated settlement order as precedent because "the SEC's findings in the
administrative decision are still soundly reasoned"); but see Carpenters Health & Wealth Fund v.
Coca-Cola Co., No. 1:00-CV-2838-WBH, 2008 WL 9358563, at *4-5 (Apr. 23, 2008) (holding
that settled order was inadmissible as hearsay under Fed. R. Evid. 408).
57 See DHB Capital Grp., Inc., Exchange Act Release No. 37069, 52 SEC 740, 1996 WL
164315, at *3 (Apr. 5, 1996) ("[FINRA]'s decision to deny inclusion [of DHB on NASDAQ]—
based in part on the fact that, upon finding that Brooks committed serious securities law
violations, we barred him (with his consent) from the industry—is a collateral consequence of
Brooks' misconduct . . . [and] a proper exercise of the [FINRA]'s authority under its
Qualification Requirements By-Law.").
For example, although mPhase was not a party to the 2007 Settlement Order, the entry of
the settlement had the collateral consequence of requiring mPhase to disclose the settlement for
the next ten years in its periodic filings with the Commission—a requirement mPhase asserts in
its briefs it has met since the entry of the 2007 Settlement Order. Item 401(f) of Reg. S-K, 17
C.F.R. § 229.401(f) (requiring disclosure of a director's, nominee's, or executive officer's
involvement in specific legal proceedings "that are material to an evaluation of the ability or
integrity" of such a person).
58 See P.R. Tel. Co. v. Sprintcom, Inc., 662 F.3d 74, 96 (1st Cir. 2011) (defining "the word
'binding' . . . as 'having legal force'" (quoting Black's Law Dictionary 190 (9th ed. 2009))).
15
determining that denial was necessary to protect the investing public or the maintenance of fair
and orderly markets.59
4. There is no credible evidence that FINRA considered the allegations of the
dismissed federal complaint in reaching its decision.
We also reject mPhase's claim that FINRA improperly considered the allegations of the
Commission's federal suit against Durando and Dotoli, a case mPhase asserts was dismissed with
prejudice in connection with entry of the 2007 Settlement Order.60 mPhase cites to evidence in
the record showing that the dismissed complaint was reviewed by a Department of Operations
"examiner" during the background investigation of mPhase. It contends that, because the case
was dismissed, FINRA should not be able to use the dismissed complaint as a basis for its denial.
mPhase's claim is meritless. Although the dismissed complaint is part of FINRA's record
before us and listed in the examiner's materials, it is the decision of the UPCC Subcommittee—
not the Department's examiner—that constitutes the final action of FINRA subject to our
review.61 mPhase cites to no part of the Subcommittee decision evidencing that the
Subcommittee considered the dismissed complaint in denying mPhase's Company-Related
Action request.62 Rather, as discussed, the Subcommittee based its denial on the 2007
Settlement Order and its ongoing concerns about mPhase and its continued association with
Durando and Dotoli, all of which amply support denial.
For the foregoing reasons, we find that the grounds on which FINRA based its denial to
process mPhase's Company-Related Action request existed in fact.
59 FINRA Rule 6490(d)(3); see also supra note 51 and accompanying text.
60 In its briefs, mPhase cites to the district court order dismissing the case for a failure to
prosecute, SEC v. PacketPort.Com, Inc., No. 3:05 CV 1747, 2007 WL 911900, at *7 (D. Conn.
Mar. 21, 2007), but that order was vacated by the court's later decision on reconsideration. SEC
v. PacketPort.Com, Inc., 2007 WL 1521583, at *9 (D. Conn. May 23, 2007). As discussed, the
Commission withdrew that federal action in connection with the entry of the 2007 Settlement
Order. PacketPort.com, 2007 WL 3033485, at *1 (D. Conn. Oct. 18, 2007).
61 FINRA Rule 6490(e); cf. Morton Bruce Erenstein, Exchange Act Release No. 56768,
2007 WL 3306103, at *8 (Nov. 8, 2007) ("'[I]t is the decision of the NAC, not the decision of the
Hearing Panel, that is the final action of [FINRA] which is subject to Commission review.'"
(quoting Philippe N. Keyes, Exchange Act Release No. 54723, 2006 WL 3313843, at *6 n.17
(Nov. 8, 2006))), petition denied, 316 F. App'x 865 (11th Cir. 2008).
62 Although the dismissed complaint involved some of the same registration and disclosure
charges found in the 2007 Settlement Order, it primarily involved allegations that Durando and
Dotoli ran a pump-and-dump scheme to fraudulently obtain over $9 million in illicit profits from
investors. Complaint, SEC v. PacketPort.com, Inc., Civil Action No. 3:05cv1747 (filed Nov.15,
2005), available at sec.gov. None of those
fraud charges was a basis for the Subcommittee's denial.
16
B. FINRA's denial of mPhase's request was in accordance with its rules.
FINRA, a registered national securities association, adopted Rule 6490 pursuant to
Exchange Act Section 15A(b).63 That provision authorizes FINRA to adopt rules that, among
other things, are "designed to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and coordination with persons
engaged in regulating, clearing, settling, [and] processing transactions in securities" and, in
general, "to protect investors and the public interest."64 As we stated in the 2010 Approval
Order, FINRA adopted Rule 6490 in furtherance of these statutory principles based on FINRA's
growing concern that its OTCBB services could be used for fraudulent practices.65 We
concluded that the Rule was designed to protect "the OTC marketplace and investors in OTC
Securities" by permitting FINRA to deny a Company-Related Action request when there are
"certain indicators of potential fraud."66
The plain language of FINRA Rule 6490(d)(3) makes clear FINRA's authority to deny a
Company-Related Action in the circumstances presented here. Among the five deficiency
factors that may form the basis for FINRA's denial is whether it has "actual knowledge" of a
settled regulatory action against the issuer's officers for securities laws violations. If "one or
more" of these factors is present, FINRA has the discretion to deny a request if denial is
"necessary for the protection of investors, the public interest, and maintenance of fair and orderly
markets."67 As discussed, FINRA's denial satisfied these requirements.68
mPhase contends that FINRA exceeded its authority under FINRA Rule 6490. It argues
that FINRA's ability to deny a Company-Related Action request under the Rule is proscribed by
Section 10(b) of the Exchange Act and Rule 10b-17 thereunder, which mPhase claims are "the
enabling statute and SEC Rule" for FINRA Rule 6490, and require that the company only give
timely notice of its reverse stock split to FINRA.69 Thus, according to mPhase, because it gave
63 2010 Approval Order, supra note 5, at *5.
64 15 U.S.C. § 78o-3(b)(6); see also Fog Cutter, 474 F.3d at 824 (discussing Exchange Act
Section 15A(b) and stating that, "[a]s a self-regulatory organization, [FINRA] must maintain
rules to protect investors and the public interest").
65 2010 Approval Order, supra note 5, at *2 (stating that FINRA proposed Rule 6490 "in
furtherance of its authority to adopt rules to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, and protect investors and the public
interest").
66 Id.
67 See supra note 35 and accompanying text (discussing FINRA's discretionary authority).
68 In addition to meeting these substantive requirements, we find, as mPhase does not
dispute, that FINRA properly followed the procedures set forth in Rule 6490(d) and (e) in
disposing of mPhase's request. Michael Stegawski, Exchange Act Release No. 59326, 2009 WL
223618, at *6 (Jan. 30, 2009).
69 17 C.F.R § 240.10b-17. Specifically, Exchange Act Rule 10b-17 requires issuers to give
(continued…)
17
sufficient notice of its stock split to FINRA, there is no basis for FINRA to deny processing and
announcing its Company-Related Action on the OTCBB.
We disagree. As discussed, the enabling statute for FINRA Rule 6490 is Exchange Act
Section 15A(b). Although we recognize that FINRA Rule 6490 cross references Exchange Act
Rule 10b-17, we reject the contention that, because of this, FINRA may refuse to process a
reverse stock split only if a company fails to timely give FINRA notice. Rule 6490 refers to
Exchange Act Rule 10b-17 because, under subsection (b) of Rule 6490, issuers requesting to
effectuate a Company-Related Action that is enumerated by Exchange Act 10b-17—e.g., a
reverse stock split—must provide FINRA with advance notice of the action consistent with the
"timelines specified" by Exchange Act Rule 10b-17.70 FINRA does not contest that such notice
was made here. But mPhase's compliance with one part of Rule 6490 (subsection (b)) does not
alter the fact that the 2007 Settlement Order triggered one of the five deficiency factors set forth
in another part of the Rule (subsection (d)(3)).
mPhase raises additional textual arguments regarding Rule 6490(d)(3) to assert that
FINRA possesses only "ministerial" power to process Company-Related Actions, despite
statements to the contrary in the 2010 Approval Order.71 Specifically, mPhase cites subsection
(d)(3)(1), which allows FINRA to deem a Company-Related Action deficient if "FINRA staff
reasonably believes the forms and all supporting documentation, in whole or in part, may not be
complete, accurate or with proper authority."72 mPhase also cites subsection (d)(3)(2), which
allows FINRA to deem a Company-Related Action deficient if "the issuer is not current in its
reporting requirements, if applicable, to the SEC or other regulatory authority."73 mPhase claims
these subsections address only instances where the issuer failed to disclose information to
(…continued)
FINRA, in a timely fashion, information relating to: (1) a dividend or other distribution in cash
or in kind; (2) a stock split or reverse split; and (3) a rights or other subscription offering. Under
Rule 10b-17, the issuer is required to provide this information to FINRA no later than 10 days
before the record date or, in case of a rights subscription or other offering if such 10 days
advance notice is not practical, on or before the record date, and in no event later than the
effective date of the registration statement to which the offer relates. Pursuant to Rule 10b-
17(b)(3), comparable notice given by the issuer of an exchange-listed security in accordance with
the procedures of the national securities exchange upon which a security of such issuer is
registered satisfies this requirement. Id.
70 FINRA Rule 6490(b)(2). As noted, supra note 6, Rule 6490 refers to Company-Related
Actions enumerated under Exchange Act Rule 10b-17 as "SEA Rule 10b-17 Actions." In
contrast, those corporate actions not enumerated by Exchange Act Rule 10b-17 (i.e., "Other
Company-Related Actions") must adhere to the timelines set by FINRA. FINRA Rule
6490(b)(3). Aside from this distinction, Rule 6490 treats all Company-Related Actions equally.
71 See supra text accompanying notes 9-14.
72 FINRA Rule 6490(d)(3)(1).
73 FINRA Rule 6490(d)(3)(2).
18
FINRA in its Company-Related Action application, and as a result, subsection (d)(3)(3) only
allows FINRA to deny a request if the issuer failed to inform FINRA of the prior settled action.74
These arguments fail. Subsection (d)(3)(2) says nothing about nondisclosure of
information to FINRA.75 The fact that subsection (d)(3)(1) addresses an incomplete or
inaccurate request has no bearing on subsection (d)(3)(3). It is a widely accepted principle of
construction that, where a statute or regulation includes particular language in one section but
omits it in another, the disparate inclusion or exclusion was intentional and purposeful.76 Here, it
would make little sense to apply the same basis for a deficiency under subsection (d)(3)(1) to the
remaining four deficiency factors provided in the Rule. This is particularly true given that each
factor constitutes a separate, independent ground for deeming a request deficient, a point made
clear by the express language of Rule 6490(d)(3) stating that a request is deficient if FINRA
finds "one or more of the [deficiency] factors" exists.
Equally unavailing is mPhase's contention that Rule 6490(d)(3)(3)'s requirement that
FINRA have "actual knowledge" of a settled regulatory action means that FINRA can deny
requests only when: (i) the issuer failed to disclose the settled action in its application and
(ii) FINRA independently becomes aware of the settled action. mPhase's contention is premised
on its argument—rejected above—that Rule 6490(d)(3) is a mere notice provision. Nor do we
find that the Rule's use of the term "actual knowledge" compels this interpretation. Although
"actual knowledge" is not defined by the Rule, the term has a common legal definition: that the
actor has "'[d]irect and clear'" awareness of a particular fact.77 And we find no expressed
74 mPhase's brief erroneously cites "subsections (d)(1) and (d)(2)" for this claim when the
factors it paraphrases are from (d)(3)(1) and (d)(3)(2) of the Rule.
75 FINRA Rule 6490(d)(3)(2) (defining this factor as when "the issuer is not current in its
reporting requirements, if applicable, to the SEC or other regulatory authority").
76 See, e.g., Keene Corp. v. United States, 508 U.S. 200, 208 (1993) ("'Where Congress
includes particular language in one section of a statute but omits it in another . . . , it is generally
presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.'"
(quoting Russello v United States, 464 U.S. 16, 23 (1983))); In the matter of the claim for award
in connection with SEC v. Advanced Tech. Grp. Ltd., Exchange Act Release No. 70772,
2013 WL 5819623, at *7 n.21 (Oct. 13, 2013) (discussing the "well-established canon of
statutory construction expression unius est exclusion alterius, or the expression of one thing
implies the exclusion of others" (collecting cases)).
77 Schaefer v. Las Cruces Pub. Sch. Dist., 716 F. Supp. 2d 1052, 1080 (D.N.M. 2010)
(quoting Black's Law Dictionary 250 (9th ed. 2009)); El Paso Indep. Sch. Dist. v. Richard R.,
567 F. Supp. 2d 918, 948 (W.D. Tex. 2008) (same); see also United States v. Spinney, 65 F.3d
231, 236 (1st Cir. 1995) (explaining that "[a]ctual knowledge . . . suggests the presence of
particular evidence which, if credited, establishes conclusively that the person in question knew
of the existence of the fact in question").
"[L]egal terms used in framing a [regulation] are ordinarily presumed to have been
intended to convey their customary legal meaning," unless a "contrary direction" is provided.
United Tech., Corp. v. Browning-Ferris Indus., Inc., 33 F.3d 96, 99 (1st Cir. 1994) (citing
(continued…)
19
intention by FINRA to construe "actual knowledge" alternatively, as mPhase asserts. Requiring
that FINRA have "actual knowledge" of a settled regulatory action—established here by the
information mPhase provided FINRA and FINRA's background investigation—serves the
important policy objective of ensuring that FINRA has an adequate, justifiable basis before
denying an issuer's Company-Related Action request.78
mPhase further asserts that FINRA may not reject its Company-Related Action request
because the 2007 Settlement Order did not involve fraud, an element that it contends is
necessary. But subsection (d)(3)(3) explicitly uses the disjunctive "or," in providing that the
previously settled action be "related to fraud or securities laws violations"—thus either basis
suffices for deeming a request deficient.79 As discussed, the 2007 Settlement Order resolving the
case against Durando and Dotoli for violations of the registration and disclosure requirements
constituted a sufficient basis for FINRA's deficiency determination here.
Accordingly, based on the foregoing reasons, we find that FINRA's denial was in
accordance with FINRA Rules.
C. FINRA applied its rules in a manner consistent with the Exchange Act.
FINRA applied its rules in a manner consistent with the purposes of the Exchange Act.
FINRA designed the OTCBB in response to the Securities Enforcement Remedies and Penny
Stock Reform Act of 1990, where Congress directed the creation of "automated quotation
systems for penny stocks . . . [t]o add visibility and regulatory and surveillance data to that
market."80 In enacting this legislation, Congress amended the federal securities laws by
(…continued)
Bradley v. United States, 410 U.S. 605, 609 (1973)); see also Morissette v. United States, 342
U.S. 246, 263 (1952) ("[W]here Congress borrows terms of art in which are accumulated the
legal tradition and meaning of centuries of practice, it presumably knows and adopts the cluster
of ideas that were attached to each borrowed word . . . ."); United States v. McGoff, 831 F.2d
1071, 1078 (D.C. Cir. 1987) (same).
78 Spinney, 65 F.3d at 236. Similar use of the term by FINRA is found in FINRA Rule
8210(d), requiring FINRA staff to follow certain procedures when they have "actual knowledge"
of an out-of-date or inaccurate mailing address in the Central Registration Depository.
79 Emphasis added. Accord Gary M. Kornman, Exchange Act Release No. 59403,
2009 WL 367635, at *4 (Feb. 13, 2009) ("The statutes use the disjunctive 'or,' meaning that any
one basis in the statute is sufficient to establish our authority to proceed."), petition denied, 592
F.3d 173 (D.C. Cir. 2010).
80 Pub. L. No. 101-429, 104 Stat. 931 (1990) (codified in the Exchange Act at 15 U.S.C.
§ 78q-2); see also Order Approving and Notice of Filing and Order Granting Accelerated
Approval of Amendment Nos. 3 and 4 to Proposed Rule Change Relating to the OTC Bulletin
Board Service, Exchange Act Release No. 38456, 1997 WL 152011, at *1, 4 (Mar. 31, 1997)
(the "1997 Approval Order") ("While the potential for trading abuses is greater [on the OTCBB
(continued…)
20
"issu[ing] legislative directives with the intention of curbing the pervasive fraud and
manipulation of the penny stock market."81 FINRA Rule 6490 furthers these objectives by
authorizing FINRA to deny processing and announcing a Company-Related Action on the
OTCBB when it finds deficiencies with respect to an issuer's Company-Related Action,
including "indicators of potential fraud," and that denial is "necessary for the protection of
investors, the public interest and to maintain fair and orderly markets."82
Here, FINRA found that Durando's and Dotoli's settlement of federal securities laws
violations and consent to sanctions, continued association with entities involved in that
settlement, and mPhase's lack of supervisory oversight of Durando and Dotoli made denial of the
company's request necessary to protect investors and the market integrity of the OTCBB. As we
have stated in the context of FINRA's delisting of securities from its automated systems,
investors in OTCBB securities are "entitled to assume that securities [on FINRA's] system meet
the system's standards, and that the risk associated with investing in [OTCBB securities] is
market risk rather than the risk that the promoter or other persons exercising substantial influence
over the issuer is acting in an illegal manner."83
mPhase contends that FINRA lacks authority to deny its Company-Related Action
request because FINRA has "no direct jurisdiction over issuers." But mPhase's argument ignores
(…continued)
than on NASDAQ], these abuses can be reduced by according more transparency. . . . [T]he
additional transparency from the OTCBB should assist the NASD in its surveillance efforts.").
81 Report to Accompany the Penny Stock Reform Act of 1990, H.R. Rep. No.101-617
(1990), reprinted in 1990 U.S.C.C.A.N. 1408, 1990 WL 256465.
82 2010 Approval Order, supra note 5, at *2 n.9 (citing, e.g., Andros Isle, Corp., Order of
Suspension of Trading, File No. 500-1 (Mar. 13, 2008), available at sec.gov
litigation/suspensions/2008/34-57486-o.pdf (suspending trading in 26 Pink Sheet securities and
finding that "[c]ertain persons appear to have usurped the identity of a defunct or inactive
publicly traded corporation, initially by incorporating a new entity using the same name, and
then by obtaining a new CUSIP number and ticker symbol based on the apparently false
representation that they were duly authorized officers, directors and/or agents of the original
publicly traded corporation")).
83 JJFN Servs., Inc., Exchange Act Release No. 39343, 53 SEC 335, 1997 WL 722029, at
*3 (Nov. 21, 1997) (internal quotation marks omitted) (declining to list issuer's securities on the
SmallCap Market because promoter and "key person" of the issuer was previously convicted of
filing a false tax return); see also Fog Cutter Capital Grp., Inc., Exchange Act Release No.
52993, 58 SEC 1049, 2005 WL 3500274, at *5 (Oct. 31, 2005) (denying issuer's listing on
NASDAQ after guilty plea by issuer's key executive and largest shareholder), petition denied,
474 F.3d 822, 825 (D.C. Cir. 2007); DHB Capital, 1996 WL 164315, at *3 (denying issuer's
listing on the SmallCap Market based on consent injunction entered against controlling
shareholder, officer, and director).
21
the critical role that FINRA occupies in regulating the OTC market.84 FINRA is the owner and
operator of the OTCBB and as a result has "direct authority for the activities related . . . to the
OTCBB."85 With this comes an obligation to oversee the OTCBB and "protect the integrity of
the market it is charged with maintaining."86
mPhase further contends that FINRA's denial is time-barred because the 2007 Settlement
Order is over five years old and "the five-year [statute of] limitations period " of 28 U.S.C.
§ 2462 "has clearly passed."87 The five-year statute of limitations set forth in 28 U.S.C. § 2462
applies only to "an action or proceeding for the enforcement of any civil fine, penalty, or
forfeiture."88 FINRA did not institute this action, it is not a disciplinary action, and FINRA does
not seek imposition of a fine, penalty, or forfeiture.89 Rather, this action arises solely from
84 As one court has observed, "[t]he joint roles taken by [FINRA] and the SEC in the
regulation of OTC securities reflects a congressional intent 'to establish a "cooperative
regulation" where securities associations would regulate themselves under the supervision of the
SEC.'" Lang v. French, 154 F.3d 217, 221 (5th Cir. 1998) (quoting Jones v. SEC, 115 F.3d
1173, 1179 (4th Cir. 1997) (quoting 115 S. Rep. No. 75-1455, at 3-4 (1938) and H.R. Rep. No.
75-2307, at 4-5 (1938) (legislation authorizing creation of SROs))).
85 Notice of Filing of Proposed Rule Change to Align the Reporting Requirements and
Dissemination Protocols for OTC Equity Transactions Involving Foreign Securities with All
Other OTC Equity Securities, Exchange Act Release No. 57986, 2008 WL 2971915, at *2 (June
18, 2008) (citing Exchange Act Release No. 52508 (Sept. 26, 2005), 70 F.R. 57,346 (Sept. 30,
2005)).
86 Air L.A., Inc., Exchange Act Release No. 34491, 1994 WL 413098, at *2 (Aug. 3, 1994)
(order denying stay of delisting from NASD's SmallCap Market); see also 1997 Approval Order,
supra note 80, at *4 (stating that "the operation of the OTCBB places a concomitant
responsibility on [FINRA] to surveil" that facility for abuse).
87 28 U.S.C. § 2462 (providing that "any proceeding for enforcement of any civil fine,
penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within
five years from the date when the claim first accrued").
88 Cf. Weiss, 2013 WL 1122496, at *10 ("FINRA merely denied [the applicant's] 'relief
from a previously existing disqualification'"; it did not impose additional penalty.); Dennis
Milewitz, Exchange Act Release No. 40254, 53 SEC 701, 1998 WL 409449, at *4 (July 23,
1998) ("NASD's consideration of the applicant's disciplinary history prior to the statutory
disqualification, including misconduct for which sanctions were imposed previously, does not
amount to a further penalty for that prior misconduct." (collecting cases)).
89 Pac. Stock Exch.'s Options Floor Post X-17, Exchange Act Release No. 31666, 51 SEC
261, 1992 WL 400646, at *4 (Dec. 29, 1992) ("We . . . have interpreted the term 'disciplinary' to
refer to action responding to an alleged violation of an Exchange rule or Commission statute or
rule or action 'in which punishment or sanction is sought or intended.'" (quoting Tague Sec.
Corp., Exchange Act Release 18510, 47 SEC 743, 1982 WL 32205, at *2 (Feb. 25, 1982))).
22
mPhase's request that FINRA provide it services on the OTCBB.90 In any event, we have long
held that FINRA, a private organization, is not subject to the requirements of 28 U.S.C. § 2462,
applicable to government agencies.91
mPhase argues that FINRA's denial was inconsistent with the Exchange Act because it
"amount[s] to a de facto and improper officer and director bar." mPhase is incorrect. As
discussed, FINRA's denial imposed no sanction. FINRA's refusal to announce mPhase's
Company-Related Action was a prophylactic measure designed to prevent potential fraud or
abuse from occurring through use of the OTCBB, and it had no further reach than announcement
on that particular FINRA facility.92 Although mPhase contends that FINRA's denial effectively
bars Durando and Dotoli from acting as officers and directors, we note that both remain officers
and directors of mPhase and mPhase's stock continues to trade in the OTC market and is
currently quoted on the OTC Pink, an alternative inter-dealer quotation system.93
90 We note that mPhase's current § 2462 claim contradicts its previous statement before
FINRA that the 2007 Settlement Order was "almost five years old," which is a more accurate
factual statement: The 2007 Settlement Order was entered on October 18, 2007, mPhase filed its
application with FINRA on July 6, 2012, and FINRA's Department denied the application on
October 2, 2012. Thus, even if we assume arguendo that the application or denial somehow
served as "commence[ment]" of an action under 28 U.S.C. § 2462, that action would have started
within the five-year limitations period. Cf. Birkelbach v. SEC, 751 F.3d 472, 479-80 (7th Cir.
May 2, 2014) (finding that, even if § 2462 applied to FINRA disciplinary actions, "sufficient
violative conduct" took place within the five-year period preceding action).
91 William D. Hirsch, Exchange Act Release No. 43691, 54 SEC 1068, 2000 WL 1800614
at *5 (Dec. 8, 2000) ("We have consistently held that no statute of limitations applies to the
disciplinary actions of . . . self-regulatory organizations."); Shamrock Partners, Ltd., Exchange
Act Release No. 40663, 53 SEC 1008, 1998 WL 786953, at *5 n.15 (Nov. 12, 1998) ("The fiveyear
statute of limitations discussed in SEC v. Johnson, 87 F.3d 484 (D.C. Cir. 1996), . . . does
not apply to NASD proceedings."); Henry James Faragalli, Exchange Act Release No. 37991,
52 SEC 1132, 1996 WL 683707, at *10 & n.36 (Nov. 26, 1996) ("[I]t is well established that no
statute of limitations applies to [SRO] actions . . . [because] SROs are not subject to the
requirements applicable to a government agency.").
92 Cf., e.g., United States v. O'Hagan, 521 U.S. 642, 672-73 (1997) (describing Exchange
Act Rule 14e-3(a) as "[a] prophylactic measure, because its mission is to prevent . . . [and it]
encompasses more than the core activity prohibited").
93 See supra note 15. Cf. Millenia Hope, Inc., Exchange Act Release No. 42739, 2000 WL
511439, at *1 (May 1, 2000) (denying stay of OTCBB delisting and stating that "the deletion
[from the OTCBB] means only that there will be no prices for those securities quoted on the
OTCBB," not that the securities must cease trading); Cleantech Innovations, Inc., Exchange Act
Release No. 66064, 2011 WL 6811202, at *3 (Dec. 28, 2011) (same).
For similar reasons, we reject mPhase's related arguments that are based on this
contention, including that FINRA's action improperly intrudes on New Jersey corporate law, that
the Commission is collaterally estopped from affirming an officer and director bar, and that
(continued…)
23
Finally, we reject mPhase's argument, made only in its application for review, that
FINRA "improperly applied [FINRA Rule 6490] retroactively to punish conduct that occurred
prior to the enactment of [Rule 6490]." mPhase has since abandoned this argument in
subsequent briefs; in any event, we find it meritless. The United States Supreme Court has
observed that "[a] statute 'is not made [impermissibly] retroactive merely because it draws upon
antecedent facts for its operation.'"94 Rather, a statute is impermissibly retroactive "when such
application would 'tak[e] away or impai[r] vested rights acquired under existing laws, or creat[e]
a new obligation, impos[e] a new duty, or attac[h] a new disability, in respect to transactions or
considerations already past."'95 The Court has explained that statutes imposing requirements on
previously convicted or sanctioned individuals to "address[] dangers that arise postenactment"
are not impermissibly retroactive.96 Even where application of such statutes could be construed
to "unsettle expectations and impose burdens on past conduct," those statutes are not
impermissibly retroactive because they "target a present danger."97
FINRA's action was not impermissibly retroactive for two independent reasons. First,
FINRA considered the 2007 Settlement Order, along with its ongoing concerns about mPhase, to
make a present determination of risk to investors and the public generally. Although FINRA
drew on information predating Rule 6490's adoption, FINRA did so as part of a process in which
it assessed the present risks posed by mPhase's request for public announcement on the
OTCBB.98 Under FINRA's process, while the existence of the 2007 Settlement Order caused
mPhase's request to be deficient under FINRA Rule 6490(d)(3), FINRA, consistent with its Rule,
allowed mPhase an opportunity to explain why the company's request should be processed
(…continued)
imposing a bar denies Durando and Dotoli due process. FINRA's denial of an announcement on
the OTCBB and our affirmance of that decision imposes no bar; nor does the denial prevent
mPhase from effectuating its corporate action outside of the OTCBB.
94 Landgraf v. USI Film Prod., 511 U.S. 244, 269 (1994) (quoting Cox v. Hart, 260 U.S.
427, 435 (1922)); see also Martin v. Hadix, 527 U.S. 343, 357-58 (1998) ("The inquiry into
whether a statute operates retroactively demands a commonsense, functional judgment about
'whether the new provision attaches new legal consequences to events completed before its
enactment.' This judgment should be informed and guided by 'familiar considerations of fair
notice, reasonable reliance, and settled expectations.'" (quoting Landgraf, 511 U.S. at 270)).
95 Vartelas v. Holder, 132 S. Ct. 1479, 1487 (2012) (quoting Langraf, 511 U.S. at 283)
(holding that statutes authorizing prospective remedies may consider conduct pre-dating the
statute without a genuinely retroactive effect).
96 Id. at 1489 n.7; Johnny Clifton, Exchange Act Release No. 69982, 2013 WL 3487076, at
*13 (July 12, 2013) (holding that it is proper to consider respondent's conduct predating Dodd-
Frank Act in assessing future risk to investing public).
97 Vartelas, 132 S. Ct. at 1489 (discussing various examples); see also United States v.
Shoulder, 738 F.3d 948, 958 (9th Cir. 2012).
98 Landgraf, 511 U.S. at 270 n.24.
24
nonetheless.99 Yet, after weighing the arguments and materials mPhase submitted against the
perceived interests of the public, FINRA concluded that announcement of mPhase's reverse stock
split on the OTCBB at this time posed too great a risk for the investing public and market
integrity.100 And as discussed, FINRA's assessment of that risk is supported by the record.
Second, nothing in FINRA's application of Rule 6490 impairs rights mPhase possessed
when it acted, increases its liability for past conduct, or imposes new duties with respect "to
transactions already completed."101 mPhase has not asserted, nor do we find, that it had a vested
right in having FINRA process and announce its Company-Related Actions. 102 mPhase filed its
application more than two years after the adoption of Rule 6490. When mPhase did so, it was
clear that its officers' 2007 Settlement Order could be a basis for FINRA to deny the request.
FINRA's action therefore did not affect mPhase's reliance interest or settled expectations in
having FINRA announce its corporate actions on the OTCBB.
mPhase also did not incur any new liability, duty, or disability from its own conduct
predating Rule 6490's adoption because it was neither a party to the 2007 Settlement Order nor
was it subject to any of its sanctions.103 mPhase, in effect, is claiming an impermissible
99 See supra note 51 and accompanying text; accord Boniface v. Dep't of Homeland Sec.,
613 F.3d 282, 288 (D.C. Cir. 2010). In Boniface, the Court of Appeals for the D.C. Circuit
rejected a similar retroactivity challenge, upholding the Transportation Security Administration's
("TSA") application of a new regulation to deny licensing of a hazardous materials endorsement
("HME") to a commercial trucker based on an event predating the regulation, the trucker's thirtyyear-
old conviction for transporting hazardous materials. The court reasoned that the TSA's
denial did not trigger "any of the effects deemed retroactive [by the Supreme Court] in Landgraf
because it does not bar an applicant with a disqualifying conviction from obtaining an HME but
rather creates 'an evidentiary presumption' that an applicant with a disqualifying conviction in his
past poses a security threat in the present; the applicant may rebut that presumption through the
waiver process." Id. The presence of a deficiency factor here operated analogously.
100 Boniface, 613 F.3d at 288; Adm'rs of the Tulane Educ. Fund v. Shalala, 987 F.2d 790,
798 (D.C. Cir. 1993) (finding that regulations at issue had no retroactive effect because they
"contemplate only the use of past information for subsequent decisionmaking").
101 Landgraf, 511 U.S. at 280.
102 See, e.g., Empresa Cubaexport v. Dept. of Treasury, 638 F.3d 794, 799 (D.C. Cir. 2011)
(holding that company had no vested right to perpetual renewal of its trademark; stating that "[a]
law that merely 'upsets expectations based in prior law' . . . does not trigger the presumption
against retroactivity" (quoting Landgraf, 511 U.S. at 269)); Goodyear Tire & Rubber Co. v.
Dep't. of Energy, 118 F.3d 1531, 1536-38 (Fed. Cir. 1997) (holding that DOE's application of
1992 product eligibility rule was not retroactive because applicant had no vested right to have the
pre-1992 rule applied and no vested right to have its claims approved).
103 See, e.g., Ohio Head Start Assoc. v. U.S. Dept. of Health and Human Svcs., 873 F. Supp.
2d 335, 347-48 (D.D.C. 2012) (discussing U.S. Supreme Court precedent and concluding that the
principal focus for determining whether to allow "regulations [to] use antecedent information in
(continued…)
25
retroactive effect based on an antecedent event that relates only to the conduct of its officers. We
have not found, nor has mPhase cited to, any authority suggesting that a statute or regulation is
impermissibly retroactive when it triggers an outcome based on the earlier misconduct of a
different person or entity. Accordingly, for all these reasons, we find that FINRA's denial was
not impermissibly retroactive.
Based on the foregoing, we find that FINRA properly denied mPhase's Company-Related
Action request and, accordingly, dismiss mPhase's appeal.
An appropriate order will issue.104
By the Commission (Chair WHITE and Commissioners AGUILAR and STEIN);
Commissioners GALLAGHER and PIWOWAR, dissenting.
Brent J. Fields
Secretary
(…continued)
making future decisions lies in the notion of imposing a 'liability' versus denying an individual a
future 'benefit'" (citations omitted)), aff'd, 510 F. App'x 1 (D.C. Cir. 2013) (per curiam).
104 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. 74187 / February 2, 2015
Admin. Proc. File No. 3-15130
In the Matter of the Application of
MPHASE TECHNOLOGIES, INC.
c/o Frank C. Razzano, Esq.
Pepper Hamilton LLP
600 14th Street, N.W.
Washington, D.C. 20005-2004
For Review of Action Taken by
FINRA
ORDER DISMISSING REVIEW PROCEEDINGS
On the basis of the Commission's opinion issued this day, it is
ORDERED that the application for review filed by mPhase Technologies, Inc., is hereby
dismissed.
By the Commission.
Brent J. Fields
Secretary |
