Permanent Industry Bar
Series 7 Examination Fraud
Bleich, Michael was the subject of a permanent bar from the securities industry issued by FINRA (formerly NASD). The bar was imposed following findings that an imposter had taken the Series 7 qualifying examination on Bleich's behalf.
The Series 7, formally known as the General Securities Representative Examination, is a mandatory qualification for individuals seeking registration as a general securities representative. It is administered by FINRA and required for anyone who wishes to solicit, purchase, or sell securities products.
The use of an imposter to take the examination constitutes a fundamental breach of the registration process. FINRA responded with the most severe available sanction: a permanent bar from association with any FINRA member firm.
A Series 7 license is the primary credential required to trade securities in the United States. Without it, an individual cannot legally work for or be associated with a broker-dealer.
A permanent bar means the individual is prohibited — for life — from associating with any FINRA member firm in any capacity. This is the most severe disciplinary sanction FINRA can impose, short of referring a case for criminal prosecution.
However, this bar applies specifically to broker-dealer association under FINRA jurisdiction. It does not extend to Registered Investment Advisers (RIAs), which are regulated by the SEC under a separate statutory framework. This distinction is central to the questions raised by this investigation — see Open Questions.
Scout Trading LLC
Systemic Illegal ETF Trading Strategy
In 2015, Scout Trading LLC — of which Bleich, Michael was CEO — agreed to a $3,000,000 fine and a censure to settle multiple allegations brought by NASDAQ. The disciplinary action addressed a systemic, illegal trading strategy involving Exchange-Traded Funds (ETFs).
The strategy centered on persistent failures to deliver shares of leveraged ETFs, exploiting the predictable value decay inherent in these instruments to generate profit while circumventing delivery obligations.
How the Scheme Worked
Failure to Deliver
Scout Trading placed orders to redeem (return) ETF shares to the issuer, or sell them on the open market, even though the firm did not actually own enough shares to do so. In effect, they were systematically selling what they did not have.
Profiting from Economic Decay
Certain leveraged ETFs are designed to amplify daily returns of an underlying index. Due to compounding effects, these instruments often lose value over time — a phenomenon known as "economic decay" or "volatility drag." Scout's strategy was to maintain short positions for as long as possible without delivering shares, profiting from this predictable price decline without following delivery rules.
Scale of Abuse
The scheme was not isolated or marginal. In one leveraged ETF — FAZ (Direxion Daily Financial Bear 3x Shares) — Scout Trading's activity accounted for an extraordinary share of all market-wide settlement failures.
When a security is sold, the seller is legally obligated to deliver the shares to the buyer within a defined settlement period (typically two business days, known as "T+2"). A failure to deliver (FTD) occurs when the seller does not deliver the shares within this timeframe.
Occasional FTDs can result from administrative errors. However, systematic failures to deliver — particularly when a firm maintains short positions without any intention of covering — constitute a violation of securities regulations. Regulation SHO, administered by the SEC, establishes locate and close-out requirements specifically to prevent this type of abuse.
When a single firm accounts for 59% of all failures to deliver in a given instrument, this is not an administrative error — it is a dominant pattern of non-compliance.
Pattern & Significance
The enforcement record establishes two distinct but connected episodes. The FINRA permanent bar demonstrates a willingness to circumvent the foundational rules of the securities industry — the examination process that governs who is permitted to participate at all. This is not a technical violation or a misjudgment; it is a deliberate subversion of the gatekeeping mechanism.
The Scout Trading fine demonstrates the capacity to design and execute a systematic scheme that exploited regulatory gaps at significant scale. A firm accounting for 59% of market-wide failures to deliver in a single instrument is not operating at the margins of compliance — it is operating outside it, as a matter of strategy.
Taken together, these actions describe a pattern of sophisticated regulatory circumvention — first of the qualification process, then of the settlement process. The question this investigation explores is whether the current corporate structure represents a third instance of the same pattern: the circumvention of the industry bar itself through the RIA regulatory framework. See Open Questions.