By Jay Fishman, J.D.
The Massachusetts Securities Division issued a preliminary statement and entered into a consent order with Massachusetts Mutual Life Insurance Company’s subsidiary MML Investors Services (MMLIS) for MMLIS’s failure to have effective compliance policies in place to supervise and, hence, prevent its registered agent and retail investor educator (Gill) from manipulating and driving up the price of GameStop shares on YouTube, Twitter, Reddit, TikTok, Stockwits and Seeking Alpha social media platforms. Separately, MMLIS failed to supervise the trades for Massachusetts customers made by a number of unregistered agents MMLIS employed—without first checking their registration status. The Division ordered MMLIS to: (1) cease and desist from violating the Massachusetts Securities Act and rules; (2) be censured; (3) hire a Division-approved independent consultant to evaluate MMLIS’ compliance and supervisory policies; (4) report to the Division MMLIS’ process for enhancing those policies; (5) pay a $4 million fine for Gill’s GameStop activities; and (6) pay a 750,000 fine for its unregistered agents’ activities.
Gill’s GameStop activities. A putative class action complaint filed in federal court in Boston on February 21, 2021 claimed that retail trader Gill’s conduct on Reddit’s WallStreetBets forum and other social media platforms incited a concerted effort by unaffiliated traders to manipulate and drive up the price of GameStop shares solely to squeeze short sellers and achieve a price untethered to any fundamental value of the company. The putative class action plaintiff, a purchaser of option contracts on shares of GameStop, claimed that Gill sought to motivate amateur traders to inflate the price of GameStop shares by fashioning himself as "a kind of Robin Hood" while villainizing the hedge funds and other securities professionals that had shorted GameStop stock. And "Indeed, at the time Gill was inciting the market frenzy with his fake persona," the complaint states, "he was licensed by MML [MassMutual’s broker-dealer affiliate] as a registered representative (i.e., a securities broker), and he was employed by MassMutual as a ‘Financial Wellness Director.’" Moreover, the complaint continues, "At the time Gill was engaging in this wrongful conduct, MML and MassMutual had legal and regulatory obligations to supervise Gill to prevent this very conduct. They failed to do so even though Gill’s conduct was continuing and highly public." (lovin v. Gill, February 16, 2021).
Division’s preliminary statement. The Division’s preliminary statement pertaining to Gill’s activities proclaimed that the MMLIS supervisor responsible for Gill testified that he never once had a one-on-one interaction with Gill and, moreover, was responsible for approximately 500 other “home office” agents. The Division went on to say that MMLIS’ failure to vet Gill from the beginning spiraled into MMLIS’ ultimate failure to detect and monitor his social media activities that led to the GameStop frenzy. The Division concluded that MMLIS violated Massachusetts securities law by not implementing policies and procedures reasonably designed to supervise Gill’s securities transactions in others’ accounts.
Division’s consent order. The Division’s consent order addressed MMLIS’ failure to check the registration status of its other agents (besides Gill), many unregistered, who traded securities in Massachusetts customer accounts. The Division declared that had MMLIS reviewed those agents’ qualifications before allowing them to service Massachusetts customers, MMLIS would have discovered that they many were unregistered in Massachusetts and had at least one disclosed disciplinary event on their Form U-4. The Division, furthermore, said that the inadequacy of MMLIS’ compliance/supervisory policies and procedures resulted in certain unregistered agents supervising the securities business of other MMLIS agents in Massachusetts and receiving $428,995.15 in total compensation from Massachusetts customers.
The preliminary statement is Docket No. E-2021-0004 and the consent order is Docket No. R-2019-0096.