June 26, 2015

BaFin Report Accuses Deutsche Bank Executives of Negligence in Libor Rigging

According to a report by German financial regulator BaFin, senior management at Deutsche Bank (DB) allegedly behaved “negligently” related to the rigging of Libor rates. The European regulator has been investigating the bank over its possible involvement in the manipulation of the inter-bank rate setting process.

BaFin contends that Deutsche Bank’s outgoing joint leader Anshu Jain may have lied to the European nation’s central bank, the Bundesbank, by purposely making inaccurate statements” about rate rigging during a 2012 interview. The regulator wants Deutsche Bank to be subject to special supervisory measures.

The Financial Times reports that, Jain, who resigned from his position and will officially step down at the end of the month, is accused of telling Bundesbank that he did not know about the rumors about possible rigging even though e-mails about a meeting on this matter were forwarded to him in 2008. Deutsche Bank, however, maintains that Jain did not lie or mislead the German central bank during the interview. The bank said that the BaFin report confirms its own findings that no current or ex-members of its Management Board or Group Executive Committee directed firm employees to rig intra-bank offered rate submissions or knew of any attempted manipulations before June 2011.

Deutsche Bank has paid over $9 billion in fines to resolve claims of Libor rigging. In April, the bank was fined $2.5 billion for manipulating interest-rate benchmarks.

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June 23, 2015

Morgan Stanley and Scottrade to Pay FINRA $950K FINRA for Inadequate Supervision of Third Party, Customer Account Transfers

The Financial Industry Regulatory Authority said that Morgan Stanley Smith Barney, LLC (MS) and Scottrade, Inc. will pay fines of $650K and $300K, respectively. The firms are settling claims accusing them of not putting into place supervisory systems that could reasonably monitor customer funds transmitted to third-party accounts. The self-regulatory organization cited both financial firms for having weak supervisory systems a few years back, but they purportedly did not take the necessary steps to remedy the deficiencies.

The SRO contends that from 10/08 to 6/13, three Morgan Stanley-registered representatives in two of the firm's branch offices converted $494,000 from thirteen customers by setting up fraudulent wire transfer orders and branch checks from the clients’ accounts to third-party accounts. One example of such an instance involves representatives transferring funds from several customer accounts into their own bank accounts.

FINRA said that Morgan Stanley should have put into place systems and procedures that would have allowed it to review and monitor such transmissions. The regulator said that instead, the supervisory failures let the conversions occur without detection.

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June 20, 2015

SEC’s Stein Wants Regulator to Take a Closer Look at Exchange-Traded Funds and Alternative Mutual Funds

Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

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June 19, 2015

Boston Investment Adviser Accused of Losing Over $12M of Investor Funds is Charged with Securities Fraud

According to the Securities and Exchange Commission, Interinvest Corp., a Massachusetts investment adviser, bilked investors of over $12 million, perhaps up to $17 million, when its founder invested their money in Canadian penny stock companies in which he had undisclosed interests. Hans Peter Black, who is a resident of Canada, calls the charges against him “outrageous.”

The SEC claims that Interinvest and Black funneled over $17 million of client funds to four penny stock companies on whose boards he sits. Another entity that he controls received about $1.7 million in Canadian dollars. Black’s relationships to all of these entities were purportedly never disclosed to clients or stated in the firm’s Form ADV. This is the form that investment advisers use to register with the SEC and state securities regulators.

In February, the regulator sent a subpoena to Interinvest requesting documentation of its bank accounts, compliance policies, and trades. The SEC said that Black did not comply with its request. Black also is accused of misrepresenting the nature of the penny stock company’s investments, disregarding client instructions, and purposely deviating from the conservative investment strategy his firm promoted.

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June 17, 2015

US Government Places Restrictions on Wells Fargo, JP Morgan Chase, and Other Banks for Not Complying with Orders Related to Foreclosure Abuses

The Office Comptroller of the Currency has placed restrictions on the mortgage-servicing operations of J.P. Morgan Chase & Co (JPM), Wells Fargo & Co. (WFC), HSBC Holdings PLC (HSBC), Everbank Financial Corp. (EVER), U.S. Bancorp (USB), and Santander Holdings USA Inc. for their failure to totally comply with enforcement orders related to home foreclosure abuses. The OCC said that the banks did not satisfy all the requirements in consent orders that were issued in 2011 over foreclosure processing errors.

Under agreements reached with regulators, most of the biggest mortgage services in the country have consented to pay billions of dollars and fix their controls and systems to resolve claims that they robo-signed, improperly handled loan papers, or fraudulently endorsed affidavits used in foreclosures following the 2008 financial crisis. The banks are accused of improperly putting into motion hundreds of thousands of home foreclosures without assessing each case individually.

The enforcement orders led to scrutiny into US banks’ foreclosure files to assess how many borrowers should be compensated. However, in 2013, the Federal Reserve and the OCC stopped the probe without concluding its investigation.

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June 15, 2015

SEC Charges Investment Advisory Firm’s Former President With Stealing Client Monies, Including $300,000 from Mike Tyson

The Securities and Exchange Commission is charging the former president of SFX Financial Advisory Management Enterprises with stealing client funds. The regulator’s Enforcement Division contends that Brian J. Ourand abused his discretionary authority over several clients’ accounts. He allegedly stole about $670,000 over five years by writing himself checks and putting through wire transfers.

The investment advisory firm is owned by Live Nation Entertainment and provides financial management and advisory services to high net worth individuals. SFX has a specialized focus in working with former and current professional athletes. Ex-boxing champion Mike Tyson was an SFX client at one time.

He and his wife sued SFX, Live Nation, and Ourand in 2013 on the grounds of unjust enrichment, fraud, and breach of fiduciary duty. The Tysons accused them of misappropriating over $300,000 and costing him millions more in possible future earnings. They sought over $5 million.

In its order instituting administrative and cease-and-desist proceedings, the SEC said that Ourand served as relationship manager to a number of clients. He was in charge of bank accounts and paid their bills. He also purportedly had unauthorized access to their credit card accounts. Ourand provided investment advice and had discretionary authority to trade in client brokerage accounts.

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June 12, 2015

New Jersey Hedge Fund Manager Faces SEC Charges for Bilking Small Businesses Out of Over $4M

The Securities and Exchange Commission is charging Nicholas Lattanzio with hedge fund fraud. The New Jersey man is accused of pretending to be a hedge fund manager and bilking small companies out of over $4 million.

According to the regulator, Lattanzio falsely promised small businesses that he would organize project financing for them and bring in healthy returns on money they invested in his Black Diamond Capital Appreciation Fund. He purportedly told them that they could take their money out of the project if the financing didn’t happen. He also allegedly claimed that the fund had up to $800 million under management and a history of generating double-digit returns.

The SEC, however, says that the fund never held anything above $5 million in assets and that Lattanzio took investors’ money for his own spending, including the purchase of an expensive home, a luxury car, merchandise from Tiffany & Co., over $760K in credit card debt, private school tuition for his children, and other expenses.

According to the SEC’s complaint two of Lattanzio’s victims were small companies seeking capital to finance their business. Lattanzio purportedly told them directly and through representatives that the companies would be able to get capital through a lending facility as long they invested a percentage of the capital that they wanted with Black Diamond first.

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June 11, 2015

Renowned Money Manager Who Was Fired from Merrill Lynch is Named in Several Investor Fraud Cases

Thomas J. Buck, the money manager who was let go from Merrill Lynch (MER) earlier this year, is the subject of several investor complaints alleging misrepresentation, unauthorized trading, and other wrongdoing. The cases could impact his new position at RBC Wealth Management.

The Financial Industry Regulatory Authority says there have been five complaints against the high-profile broker, who was fired from Merrill Lynch after more than three decades with the broker-dealer. The firm cited “loss of confidence” and a number of compliance lapses as reasons for the termination.

One investor is claiming losses caused by allegedly excessive trading and unsuitable investment recommendations. The investor is asking for $125K in damages. Four other claims are still pending.

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June 10, 2015

Canadian Trader Must Pay Over $1M For Short Selling Violations

Andrew L. Evans, a trader living in Canada, has consented to pay over $1 million to resolve charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally purchased shares in the offerings to generate substantial profits at little to no risk. The Securities and Exchange Commission said that through his firm Maritime Asset Management, Evans violated Rule 105, federal securities laws’ anti-manipulation provision, multiple times.

Under Rule 105, short selling in an equity security is not allowed during the restricted period, which is typically five days leading up to a public offering, nor is buying the security via the offering. By buying the shares at a lower price in the follow-on offerings that could cover his sort sales, Evans allegedly made over $580K in illegal profits.

The SEC said that the short selling violations happened between 12/10 and 5/12. Under the settlement, Evans must pay over $582K in disgorgement, more than $63K in prejudgment interest and a penalty of more than $364K. A court must still approve the settlement.

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June 9, 2015

SEC’s Use of In-House Judge in Insider Trading Case is Likely Unconstitutional, Rules Federal Judge

A federal judge has ruled that the decision by the Securities and Exchange Commission to have an in-house judge in an insider trading case was “likely unconstitutional.” In the wake of his decision, U.S. District Judge Leigh Martin May agreed to put a temporary stop to the regulator’s administrative case against Charles Hill unless the case is presided over by a judge who fulfills the requirement for constitutional appointment. The hearing in the insider trading case against Hill was scheduled to begin next week.

Hill, a self-employed Atlanta real estate developer, disputes the regulator’s allegations that he made illicit gains of $744K from trading on a tip a friend purportedly provided about the takeover of Radiant Systems Incorporated. The company was about to be acquired by NCR Corp. for $1.2 billion in 2011.

Hill filed his own lawsuit against the SEC, challenging its decision to have in-house administrative law judge James Grimes preside over his case. Grimes was retained through the SEC’s office of in-house judges instead of having the appointment approved by the regulator’s commissioners. Now Judge May is saying, per Hill’s argument, that the Commission may have broken constitutional protections.

Under the U.S. Constitution, an officer like the administrative law judge must be appointed by those running the SEC, the courts, or the president. Judge May said that the SEC could remedy the issue in dispute by having its commissioners appoint its judges.

The SEC argued that the judges are employees and therefore anyone in the agency is allowed to hire them. Judge May, however, rejected the Commissions’ contention that the agency is best qualified to interpret its own regulations and policies.

This is the first constitutional challenge against the SEC’s judicial system that has successfully reached this point. If other courts decide to uphold May’s initial finding, her ruling could impact the SEC and other government agencies that also use administrative law judges. Legal experts are also wondering whether, if the Commission were to make such a change, the defendants of previous rulings in which an SEC in-house judge had presided might come forward to challenge those decisions.

In the fiscal year that ended last September, the SEC brought over four out of five of its enforcement actions to its in-house forum. According to The Wall Street Journal, the regulator has won 90% of the cases argued before its administrative judges.

Securities Law Firm
Our securities fraud law firm represents investors in mediation and the courts to help them recover the losses they sustained from financial fraud. Our attorneys and staff have over a century’s combined experience in securities law and the securities industry.

Unfortunately, every year there are investors who lose money because of the negligent or inappropriate actions of brokerage firms, investment advisers, or their representatives. It is important that you have someone advocating on your behalf and protecting your legal rights.

Federal Judge Rules SEC In-House Judge’s Appointment ‘Likely Unconstitutional’, The Wall Street Journal, June 8, 2015

SEC appointment of in-house judges 'likely unconstitutional', Investment News/Bloomberg, June 9, 2015

Office of Administrative Law Judges
, SEC

SEC Announces New Hires in the Office of Administrative Law Judges
, SEC, June 30, 2014

June 6, 2015

DOJ Prepares Mortgage Fraud Cases Against More Banks

According to the Wall Street Journal, the U.S. Department of Justice and state officials are readying more mortgage fraud cases against up to nine banks, with resolutions against Morgan Stanley (MS) and Goldman Sachs Group (GS) possibly finalized as early as later this month. Most negotiations are reportedly in the earlier stages and could go on for months.

The cases are over residential mortgage-backed securities that fell in value during the economic crisis. Individual securities cases are expected rather than a collective agreement. Other banks that are expected to settle include Credit Suisse Group AG (CS), Barclays PLC (BARC), HSBC Holdings PLC, Deutsche Bank AG (DB), UBS AG (UBS), Royal Bank of Scotland Group PLC (RBS), and Wells Fargo & Co. (WFC).Settlements could range in size from a few hundred million dollars to up to $3 billion depending on the extent of misconduct allegedly involved.

Also likely to be involved least some of the RMBS cases are the attorneys general of Illinois, Massachusetts, New York, and other states that also took part in the earlier rounds of RMBS fraud cases against banks.

In other mortgage fraud news, a jury found Abacus Federal Savings Bank not guilty of charges involving allegedly fraudulent mortgages sales, including mortgage fraud, falsifying records, grand larceny, and conspiracy. Two Abacus executives were found not guilty of 80 counts that had been filed against them. However, eight people from the bank’s loan department pled guilty to the charges filed against them.

The case involved the bank’s sale of hundreds of millions of dollars worth of allegedly bad loans to Fannie Mae between ’05 and ’10. Prosecutors contend that the faulty loans misrepresented the credit employment, income, and other information of applicants.

According to Reuters, Abacus is thought to be the only bank to have gone to criminal trial in this country over mortgage fraud charges related to the 2008 economic crisis. The banks loans, however, did not have a high default rate and are still performing. Borrowers are continuing to issue monthly mortgage payments.

While Abacus claims the wrong bank was tried, a spokesperson from the Manhattan District Attorney's office pointed to the employees' guilty pleas and said that in the wake of the prosecution and enhanced supervision that has resulted, the alleged fraud has definitely concluded.

Abacus bank acquitted of all charges in N.Y. mortgage fraud trial, Reuters, June 4, 2015

SEC Settles With Ex-Freddie Mac Executives Over Allegations They Mislead Investors Over Mortgage Risks, Institutional Investor Securities Fraud, April 15, 2015

Goldman to Buy Back $3.15B in RMBS to Resolve FHFA Claims, Stockbroker Fraud Blog, August 26, 2014

June 5, 2015

Advisors Favor Exchange-Traded Funds

CNBC reports that according to a recent survey, advisors are preferencing exchange-traded funds over any other investment choice, in part because of their transparency, liquidity, and low costs. ETFs can also be traded throughout the day and are primarily passive. Their expense ratio is lower than actively managed mutual funds and they offer certain tax benefits. For example, unlike with mutual funds, capital gains are not as likely to arise with exchange-traded funds.

In the 2015 Trends in Investing Survey, conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, 81% of advisors said that they recommend or use ETFs—that’s significantly up from 2006 when the survey found that just 40 % of advisors used exchange-traded funds. Meantime, Morningstar, an investment research firm, reports that ETFs hold about $2.1 trillion of investor assets. However, the use of smart-beta ETFs is still low.

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