May 26, 2015

Deutsche Bank Ordered to Pay $55M for Misstating Financial Reports During the Economic Crisis

The U.S. Securities and Exchange Commission is ordering Deutsche Bank AG (DB) to pay $55M to resolve charges accusing the firm of misstating financial reports during the peak of economic crisis. The regulator believes that the financial institution did not factor the material risk for possible losses of billions of dollars.

According to the regulator, in its order instituting a resolved administrative proceeding, Deutsche Bank overvalued a derivatives portfolio the bank had used to buy protection against losses involving credit default. Due to the to the Leveraged Super Senior trades’ “leveraged” nature the collateral for the positions was minimal compared to the $98 billion in purchased protections.

This generated a “gap risk” that the protection’s market value could potentially go beyond the available collateral. Also, because the sellers that put down the collateral could choose to unwind the trade instead of putting more collateral down in such a situation, this meant that technically the bank was protected only up to its collateral level and not its credit protection’s full market value.

The SEC says that at first, Deutsche Bank factored the gap risk into financial statements by dropping down the LSS positions’ value. However, when the markets began to fail in 2008, the firm modified the way it measured the gap risk. Each change implemented lowered the value given to the risk until the bank stopped making adjustments for it at all. For purposes of financial reporting, this meant that Deutsche Bank was no improperly valuing LSS positions and treating its protection as if it were fully collateralized. Internal calculations, however, determined that the gap risk was anywhere from $1.5 billion to $3.3 billion during this time.

By settling, Deutsche Bank is not denying or agreeing to the SEC’s findings. It maintains that it didn’t update the market value of the transactions because it didn’t think there was a reliable means to measure them when there were illiquid market conditions at the time of the financial crisis. It said that it has since improved its policies, internal controls, and procedures related to illiquid asset valuation.

At the SSEK Partners Group, our institutional investor fraud lawyers are here to help high net worth individual investors and institutional clients recoup their losses. Contact us today.

Read the SEC Order (PDF)


More Blog Posts:

Massachusetts Securities Regulator Sues the SEC Over New Rules Affecting Small Company Stock Offerings, Stockbroker Fraud Blog, May 26, 2015

Deutsche Bank to Pay $2.5B for Rate Rigging, Institutional Investor Securities Blog, April 23, 2015

May 21, 2015

Gray Financial is Charged with Bilking Georgia Pension Funds

The SEC is accusing investment advisory firm Gray Financial, its co-CEO Robert C. Hubbard IV, and president/founder Laurence O. Gray with fraud. The regulator claims that the three of them of breached their duty to clients by directing certain pension funds to invest in a firm-offered alternative investment even while knowing that the investments were not in compliance with Georgia law.

The SEC’s order said that Gray Financial made the inappropriate recommendations to Atlanta's:

• Firefighters’ Pension Fund
• Police Officers’ Pension Fund
• General Employees’ Pension Fund
• MARTA/ATU Local 732 Employees Retirement Plan

The firm purportedly advised the pension funds to put their money in in the firm’s Greco Alternative Partners II. In the process, the firm collected over $1.7M in fees from these clients for these purportedly improper investments.

According to the Enforcement Division, the investments were in violation of state law because:

• The investments of Georgia public pension funds cannot be 20% greater than the capital found in the alternative fund. With the Gray fund, the investments of two of the pension funds exceeded that limit.

• When a Georgia public pension fund invests in an alterative fund there must a minimum of four investors, which was not the case when these investments were made.

• When a Georgia public pension fund invests in an alternative fund the latter has to have a minimum of $100M in asset. This was never the case with Gray’s alternative investment.

The SEC claims that Gray Financial and Gray made material misrepresentations regarding whether the investments complied with the law. Also, they purportedly did provide the correct information regarding the identity and number of previous fund investors.

The firm and Gray are accused of violating sections of the:

• Exchange Act of 1934
• The Securities Act of 1933
• Rule 10b-5, the Investment Adviser Act of 1940
• Rule 206(4)-8.

Hubbard, who is accused of involvement in the violations committed by Gray and Gray Financial, is charged with violating:

• Other sections of the Securities Act of 1933
• Section 10B
• The Exchange Act
• Other rules. He is

The attorney for Gray & Co, Hubbard, and Gray claims that the SEC’s case lacks merit. The Commission’s Atlanta Regional Office Director, Walter Jospin, however, is adamant that Gray Financial and its top executives placed their own interests before that of clients.

Alternative Investment Funds
These types of funds offer unique benefits by diversifying exposure to different opportunities. Their strategies tend to take investors away from traditional asset classes while providing different investment strategies and kinds of investments.

Alternative investments can lead to above-average returns. However, there are risks involved. They tend to be less liquid than other investments, especially when there is stress in the market. They can also bring complex tax implications.

Because a lot of alternative investment funds are newer products, their performance history can be limited. They also may have higher operating costs and fees.

If you suspect your losses are due to alternative investment fund fraud, contact the SSEK Partners Group today.


Read the SEC Order (PDF)


More Blog Posts:
Gray Financial Group Sues the SEC for Using Administrative Law Judges, Institutional Investor Securities Blog, February 23, 2015

Texas Pension Fund Sues Tesco For Securities Fraud, Stockbroker Fraud Blog, November 5, 2014

May 19, 2015

Morgan Stanley to Pay $2M for Violations Involving Short Sales and Short Interest Reporting

The Financial Industry Regulatory Authority is fining Morgan Stanley & Co. LLC (MS) $2M for violations involving short sale and short interest reporting rules. The violations purportedly took place over six years. The financial firm is also accused of not putting into place a supervisory system designed in a reasonable enough manner that it could identify and prevent such violations.

Financial firms are supposed to report to the SRO on a regular basis their total short positions involving equity securities in proprietary firm and customer accounts. However, according to the self-regulatory organization, Morgan Stanley did not accurately and completely report such positions in certain securities that involved billions of shares. FINRA also said that the firm’s supervisory system was deficient.

Meantime, under U.S. Securities and Exchange Commission’s Regulation SHO for regulating short sales, firms are supposed to aggregate their positions in a security to determine whether they are short or long. Through an aggregation unit, Regulation SHO lets firms track positions in a security separate from other positions at the firm and via certain trading desks or operations.

An aggregation unit cannot include the security positions of customers at non-brokerage firm affiliates. FINRA said that Morgan Stanley, however, included the positions of such customers in a number of aggregation units when determining the net position of each unit.

By settling and agreeing to pay the $2 million fine, Morgan Stanley is not denying or admitting to the securities charges. It has, however, agreed to the entry of FINRA’s findings.

Short Sales
Most short sales are legal but there are those that are not when conducted under abusive practices. Short sale transactions are vulnerable to fraud and they may result in losses.

Contact SSEK Partners Group today.

FINRA's Action Against Morgan Stanley (PDF)


More Blog Posts:
Morgan Stanley, DOJ Arrive at $2.6B Mortgage Bond Settlement, Stockbroker Fraud Blog, February 25, 2015

Morgan Stanley Sued by Home Shopping Founder’s Widow for $170M, Institutional Investor Securities Blog, April 27, 2015

LPL Financial to Pay $11.7M Fine for Supervisory Failures, Institutional Investor Securities Blog, May 6, 2015

May 18, 2015

Nomura & Royal Bank of Scotland Must Pay $806M in Mortgage-Backed Securities Case

Nomura Holdings (NMR) and Royal Bank of Scotland group Plc (RBS) must pay $806 million in the mortgage-backed securities lawsuit filed against them by the Federal Housing Finance Agency. $779.4 million will go to mortgage lender Freddie Mac (FMCC) while $26.6 million will go to Fannie Mae (FNMA).

Judge Denise L. Cote of the Federal District Court in Manhattan was the one who found the two banks liable for making false statements when selling the securities to the two lending giants. The banks will also take back the mortgage bonds that are the basis of this lawsuit. As of the end of March, these bonds were worth up to $479 million.

It was Nomura that sponsored $2 billion of the securities purchased by Freddie and Fannie. RBS was the underwriter on four of the deals.

FHFA has filed similar claims against other banks, including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC.N), and Deutsche Bank AG (DB). It’s obtained close to $17.9 billion in settlements from the financial institutions. RBS and Nomura opted to go to trial instead of settle.

Judge Cote said that the two banks committed falsities that were “enormous.” The FHFA accused both institutions of cheating Freddie and Fannie by selling them defective mortgage bonds. Meantime, RBS and Nomura had countered that the documents for the bond sales did a good enough job of pointing out the risks and did not mislead investors. They said the financial crisis, rather then their alleged misstatements, were responsible for the two mortgage lenders’ financial losses.

When financial firms and their representatives make mispresentations or ommissions about the securities they are selling, this can lead to huge losses for investors, which can be devastating if their portfolios aren't able to handle the risks. Unfortunately, that is what happened with investors of mortgage-backed securities leading up to the 2008 financial crisis. Even now, there are individual and institutional investors that are trying to get their money back.

At Shepherd Smith Edwards and Kantas, LTD LLP, our mortgage-backed securities lawyers are here to help investors with their claims and lawsuits. We have the experience and resources to go up against large banks, investment advisory firms, and others. Contact us today.

Nomura, RBS ordered to pay $806 million in mortgage bond case, St. Louis Post-Dispatch, May 15, 2015

Nomura, RBS must pay $806 million in mortgage bond case - U.S. judge, Reuters, May 15, 2015

Federal Housing Finance Agency


More Blog Posts:
Nomura Holdings and Royal Bank Scotland Lose FHFA's Mortgage-Backed Securities Case, Institutional Investor Securities Blog, May 11, 2015

Barclays, Citigroup, J.P. Morgan Chase & Royal Bank of Scotland to Settle FX Rigging Allegations, Institutional Investor Securities Blog, May 7, 2015

May 15, 2015

Barclays Also Likely to Be Fined For Libor Settlement Breach

Bloomberg says that according to sources familiar with the matter, in addition to the penalty that Barclays Plc (BCS) is expected to pay to resolve the U.S. Justice Department’s case for interest currency benchmark rigging, the bank will also likely have to pay a fine for violating an earlier settlement reached over interest rate rigging.

These sources say that as of a few weeks ago, the fine was at around $60 million, although negotiations are ongoing. If Barclays is fined it would be the second bank to be subject to penalization for such a violation.

The firm had arrived at a non-prosecution deal with the DOJ over allegations that it rigged the London interbank offered rate, even as it agreed in 2012 to pay $452.3 million to the DOJ, the Commodity Futures Trading Commission, and U.K.’s Financial Services Authority. As part of the non-prosecution agreement, Barclays consented not to commit criminal actions.

As our securiites law firm mentioned in an earlier blog post, Barclays is expected to enter a guilty plea related to currency rigging charges shoot with fines likely to exceed $1 billion to the DOJ, New York’s Department of Financial Services, and U.K.’s Financial Conduct Authority. Also expected to enter guilty pleas: JPMorgan Chase & Co. (JPM), Royal Bank of Scotland Plc (RBS), and Citigroup (C).

UBS Group AG (UBS) is expected to enter its own guilty plea to charges involving its settlement over Libor rigging. The Swiss-based bank has admitted to taking part in manipulating currency benchmarks, which violated an earlier agreement with the U.S. DOJ. In that deal, the firm promised to refrain from committing additional crimes.

Barclays said to face US fine for breaching libor settlement, Business Times, May 15, 2015

Barclays Said to Face US Fine for Breaching Libor Settlement, Bloomberg, May 14, 2015


More Blog Posts:
NY Sues Barclays Over Alleged High Speed Trading Favors in Dark Pool, Stockbroker Fraud Blog, June 26, 2014

Barclays, Citigroup, J.P. Morgan Chase & Royal Bank of Scotland to Settle FX Rigging Allegations, Institutional Investor Securities Blog, May 7, 2015

May 13, 2015

Goldman Sachs Must Pay National Australia Bank $100M in Mortgage Fraud Case

A Financial Industry Regulatory Authority (“FINRA”) arbitration panel recently ordered Goldman Sachs Inc. (“Goldman”) to pay $80 million in compensatory damages plus millions more in interest to National Australia Bank Ltd. (“NAB”), resulting in an award likely to cost Goldman (GS) more than $100 million. According to the award and NAB’s complaint, Goldman sold NAB several collateralized debt obligations (“CDOs”), including the Hudson Mezzanine Funding 2006-1 Ltd.

In particular, NAB paid $80 million for its stake in Hudson Mezzanine Funding, a Goldman-backed product, shortly before the financial crisis began. The investments failed when the market for CDOs and other asset backed securities fell apart in 2007 and 2008. In 2011, a U.S. senate report disclosed that while pitching Hudson Mezzanine Funding, Goldman did not tell investors such as NAB that it was betting against the assets supporting Hudson and other CDOs. As a result, according to NAB’s attorneys, when the economic crisis ensued, Goldman profited from the Hudson CDO while NAB and other investors lost all of their investment.

In its complaint, NAB contended that the mortgage-related deal posed a substantial conflict of interest between Goldman and its clients, and, therefore, Goldman was required under FINRA rules to disclose the conflict. Goldman argued it had no such disclosure obligation and, in fact, filed a counterclaim against NAB.

The FINRA arbitration panel, in its May 7 ruling, found in favor of NAB and specifically stated “there were knowing and material omissions and misstatements in the marketing materials … that masked a significant conflict of interest with [Goldman’s] clients.” As a result, the panel determined “National Australia Bank Limited is entitled to the return of its $80 million investment.”

This is not the first time Goldman has been forced to pay nine figures for selling institutional investors clearly conflicted products. In 2010, Goldman Sachs consented to pay $550 million to resolve U.S. Securities and Exchange Commission charges accusing the firm of misleading investors by omitting and misstating key facts about the ABACUS 2007-AC1, a synthetic collateralized debt obligation that it promoted. Goldman did not disclose the role of hedge fund Paulson & Co. in making portfolio choices or that Paulson took a short position against the collateralized debt security. It was ultimately found the Goldman marketing materials for the CDO did not have complete information and that Paulson’s economic interest, when making choices for the portfolio, were adverse to investors.

Shepherd, Smith, Edwards & Kantas is a national law firm that represents individual and institutional clients in high stakes securities litigation and arbitration claims. Our attorneys have over 100 collective years of securities industry and legal experience, resulting in our firm being uniquely qualified to help investors in complex securities cases. Please contact our office for a free, no obligation consultation if you have a significant securities loss and suspect there was wrongdoing.

Goldman Sachs Ordered to Pay $80 Million Plus Interest in Mortgage Case, The Wall Street Journal, May 11, 2015

Goldman Must Pay National Australia $80 Million, Panel Says, Bloomberg, May 11, 2015


May 12, 2015

Moody’s Investors Group Drops City of Chicago’s Credit Rating to Junk

Credit rating agency Moody’s Investor Service has downgraded the credit rating for the city of Chicago, Illinois to junk, reducing the rating of its $8.1 billion of general obligation by two to Ba1, along with a negative outlook. That’s right under investment grade.

The reduction lets banks demand that the Illinois city pay back the debt it owes them early. It also makes Chicago vulnerable to fees to terminate swap contracts.

Aside from the Michigan city of Detroit, Chicago is the lowest-rated of any large city in the U.S. Moody’s downgrade comes after the Illinois Supreme Court decision over retirement benefits last week. The court unanimously decided that a state pension law to reduce government worker benefits, which would get rid of $105 billion in retirement system debt, was unconstitutional. Now, there is skepticism over whether Chicago can keep its $20 billion pension fund short fall under control.

The city’s retirement funds are in financial trouble because for years money was not put aside to take care of the promised benefits. Chicago has four pension funds with collectively over $20 billion in unfunded liabilities. The city claims it currently has only about half of the assets needed to pay for retirement benefits. In 2016, the yearly payment into worker pensions is expected to go up by $600 million.

The state law, which went into effect in 2013, stopped automatic, compounded annual cost-of-living increases for people that were retired while extending the retirement ages for state workers that are still on the job. It also restricted how much of a worker’s salary could be used to figure out pension benefits.

Workers’ unions sued, contending that according to the Illinois constitution, pension benefits are a contractual agreement, which cannot be “diminished or impaired” once they’ve been granted. A circuit court judge agreed with the plaintiffs, but the state government appealed on the grounds that economic necessity compelled its actions.

The Illinois State Supreme Court justices, however, disagreed, finding that the law violated the state constitution’s pension protection clause. The court said that state worker retirement benefits that are promised on the first day of employment could only be increased, not reduced. Meantime, lawsuits submitted by some 60,000 employees—the complaints had been on hold pending the outcome of this case—will have to be dealt with. The ruling impacts not just the state government but also taxpayers of Illinois municipalities that are trying to deal with increasing pension debts.

Standard & Poor’s, Fitch Ratings, and Kroll Bond Rating still have Chicago rated as investment-grade.

The SSEK Partners Group is a securities fraud law firm.

Chicago Faces $2.2 Billion Bank Payout After Rating Cut to Junk, Bloomberg, May 12, 2015

Moody's downgrades Chicago, IL to Ba1, affecting $8.9B of GO, sales, and motor fuel tax debt; outlook negative, Moody's, May 12, 2015


More Blog Posts:

Detroit Becomes Largest US City to File Bankruptcy Protection, Institutional Investor Securities Blog, July 18, 2013

OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status, Stockbroker Fraud Blog, February 14, 2015

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2015

May 11, 2015

Nomura Holdings and Royal Bank Scotland Lose FHFA's Mortgage-Backed Securities Case

A U.S. District Court judge said that Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings Inc. (NMR) misled Freddie Mac and Fannie Mae when it sold them faulty mortgage-backed securities in 2008. The two banks are the only financial firms who opted to go to trial rather than settle the claims against them. Over a dozen other firms, including Bank of America (BAC) and Goldman Sachs (GS), decided to resolve their cases filed by the Federal Housing Finance Agency. They collectively have paid close to $18 billion in penalties.

In her 361- page ruling, Judge Denise L. Cote of Federal District Court in Manhattan wrote that the extent of falsity committed by the two banks was “enormous.” She told the FHFA to propose how much Royal Bank of Scotland and Nomura should pay in the wake of her decision. The agency had initially sought approximately $1.1 billion.

The FHFA accused Nomura of cheating the two mortgage lenders when it sold them $2 billion of bonds that were backed by defective mortgages. It was RBS that underwrote more than half of the securitizations involved.

The two firms argued that the documents related to the bond sales did an adequate job of stating the risks involved and were not misleading. They claimed that any alleged misstatements did not take into account any decisions Freddie and Fannie might have made to purchase the securities. They also blamed the financial crisis for the mortgage lenders losses as opposed to their alleged misstatements.

The huge losses sustained by Fannie Mae and Freddie Mac played a part in the need for the government to take them both over in 2008.

While Cote acknowledged the complexity of the mortgage-backed securities lawsuit, she said the underlying issue was “simple:” Did the defendants, in fact, accurately describe the home mortgage in the securities offering documents at issue or not? She found that they did not.

Cote pointed to examples from Nomura’s files indicating that the bank willingly securitized faulty loans. Meantime, FHFA proved that up to 59% of the loans backing the mortgage-backed securities contained undewriting defects that upped their credit risk.

FHFA has also filed a separate complaint against RBS for its $32 billion of its mortgage-backed securities that it sold to Freddie Mac and Fannie Mae. That mortgage fraud lawsuit will go to trial next year.

The financial crisis of 2008 resulted in massive losses for many investors, with many sustaining financial hits from faulty mortgage-backed securities that were misrepresented and the potential risks involved downplayed. Our securities fraud law firm is here to help investors recoup their losses caused by negligence and fraud. Contact SSEK Partners Group today.

Nomura Holdings and Royal Bank Scotland Lose FHFA's Mortgage-Backed Securities Case Involving Fannie Mae and Freddie Mac, NY Times, May 11, 2015

Nomura, RBS Defective-Bond Suit Loss Seen Spurring Deals
, Bloomberg, May 11, 2015


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

Barclays, Citigroup, J.P. Morgan Chase & Royal Bank of Scotland to Settle FX Rigging Allegations, Institutional Investor Securities Blog, May7, 2015

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2015

May 7, 2015

Barclays, Citigroup, J.P. Morgan Chase & Royal Bank of Scotland to Settle FX Rigging Allegations

The Wall Street Journal says that U.S. prosecutors are getting ready to announce settlements reached with Barclays PLC ( BCS), Citigroup Inc. (C), Royal Bank of Scotland Group (RBS), and J.P. Morgan Chase & Co. (JPM) over allegations involving foreign currency exchange rate rigging. All four banks are expected to plead guilty to charges of criminal antitrust related to their traders’ alleged collusion in foreign currency markets. The Department of Justice has been investigating whether traders manipulated exchange rates so that their positions would benefit even if this meant financially hurting customers.

Barclays is expected to settle with a number of agencies in the U.S. and Europe for over $1 billion. Also expected to settle is UBS AG (UBS), which was the first bank to cooperate with federal investigators in this probe. The Swiss bank, however, will reportedly be granted immunity from prosecution.

Guilty pleas by the other firms, however, aren’t going to resolve all of the investigations into forex rigging. Other banks are still under scrutiny and settlements from them may be pending.

Also, NY’s Department of Financial Services is conducting its own probe into whether large banks manipulated FX rates via computer program. The regulator has put in monitors at Deutsche Bank (DB) and Barclays to investigate the issue further. It’s also subpoenaed Goldman Sachs (GS) and a couple of other firms.

The SSEK Partners Group is a securities law firm. We help high net worth individual investors and institutional investor recoup their losses that they sustained from securities fraud.

Banks Expected to Settle FX Probes for Billions, The Wall Street Journal, May 6, 2015

UBS expects forex-rigging settlement with US as profits surge, The Guardian, May 5, 2015


More Blog Posts:
RBC Capital Markets Must Pay $1M Fine and $434K Restitution to Customers Over Unsuitable Reverse Convertible Sales, Stockbroker Fraud Blog, April 30, 2015

FINRA Fines J.P. Turner, LaSalle St. Securities, and H. Beck For Report Supervision Lapses, Institutional Investor Securities Blog, March 30, 2015

More than $600K Whistleblower Award to Be Issued in SEC’s First Retalitation Case
, Institutional Investor Securities Blog, April 30, 2015

May 6, 2015

LPL Financial to Pay $11.7M Fine for Supervisory Failures

The Financial Industry Regulatory Authority Inc. said that LPL Financial (LPLA) must pay $11.7M in fines and restitution for widespread supervisory failures involving complex products sales. The self-regulatory organization said that from 2007 up to last month, the firm did not properly supervise certain exchange-traded funds, nontraded real estate investment trusts, and variable annuities. It also did not properly deliver over 14 million trade confirmations to customers and failed to properly supervise communications, including advertising, as well as the consolidated reports used by brokers.

According to the Letter of Acceptance, Waiver, and Consent, To grow LPL, its wholly-owned brokerage firm subsidiary, LPL Financial Holdings Inc. employed a strategy that included acquiring financial services firms, consolidating them with the broker-dealer, and bringing in more registered representatives. Unfortunately, said the SRO, the firm failed to dedicate enough resources to allow LPL to fulfill its supervisory duties.

As just one example, LPL did not have a system for either monitoring the duration of time customers held securities in accounts or enforcing concentration limits on complex products. Its system for reviewing trading activities in accounts had numerous deficiencies. Also, LPL did not submit trade confirmations in over 67,000 customer accounts.

In certain transactions involving variable annuities, LPL purportedly allowed sales to go through without disclosing surrender fees. With certain mutual fund “switch transactions,” the firm is accused of using an automated surveillance system that left these trades out of supervisory review. When supervising non-traded REITs, LPL did not identify which accounts were eligible to receive volume sales charge reductions. Also, LPL’s surveillance system did not issue alerts for certain activities that were high risk, did not keep track of trading activities that were overdue for supervisory review, failed to report certain trades to FINRA and MSRB, and neglected to give regulators full and accurate data about certain variable annuity transactions.

The penalty includes a fine of $10 million and restitution of $1.7 million to customers who bought certain ETFs. Following a review of procedures and systems, these customers may also receive more compensation. By agreeing to pay the fine, LPL is not denying or admitting to the findings.

With approximately 18,000 brokers in the U.S, LPL is one of the biggest brokerage firms in the country. This fine comes two years after the firm paid a $7 million for similar issues involving the way LPL monitored emails between customers and brokers. That was also the year that The New York Times reported that the brokerage firm had been subject to an unusual number of penalties from regulators for purportedly letting brokers sell complex products to investors who weren’t sophisticated enough for the financial instruments. Complex products tend to bring with them bigger commissions than mutual funds, which are less costly.

Read the FINRA Action (PDF)


More Blog Posts:
LPL Financial Should Pay $3.6M in Fines, Repayments for REIT Sales to Older Investors, Says NH Regulator, Stockbroker Fraud Blog, April 7, 2015

Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm, Stockbroker Fraud Blog, October 30, 2015

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2013

April 30, 2015

More than $600K Whistleblower Award to Be Issued in SEC’s First Retalitation Case

The Securities and Exchange Commission will award a whistleblower more than $600,000 for providing original information that resulted in a successful enforcement action. That’s 30% of the total monies collected related to the case,
In the Matter of Paradigm Capital Management, Inc. and Candace King Weir
. It’s also the maximum percentage of funds that a whistleblower can get in in such an action.

The Commission charged Paradigm with taking retaliatory action against the whistleblower for reporting the possible misconduct. Retaliatory actions included removing the person from their position and changing their job duties, making the individual investigate the wrongdoing that was alleged, and other acts that caused the whistleblower to feel marginalized.

SEC Office of the Whistleblower Chief Sean McKessy said that it is unacceptable to retaliate against a whistleblower. He hoped that the $600K would serve as incentive for other potential whistleblowers while serving as proof of the agency’s dedication to protecting them from retaliation.

Under the SEC whistleblower program, a person who provides high-quality original data may be eligible to receive 10-30% of money collected in a successful action if sanctions are greater than $1 million. So far, the agency has awarded 17 whistleblowers in less than 4 years with payouts totaling over $50 million.

Also this month, the SEC awarded over $1.4 million to a compliance officer who gave over information that helped the agency’s investigation into the company where the tipster worked. This is the second time a compliance person has been awarded under the SEC whistleblower program.

In other SEC whistleblower news, the regulator is looking at whether some companies are making employees sign agreements stipulating that they must forego the right to receive any type of whistleblower award in order to be eligible for severance. It was just this month that KBR Inc. settled with the Commission. The case was over restrictive language in confidentiality agreements that could potentially impede the whistleblowing process.

The Texas-based global technology and engineering company was accused of violating whistleblower protections by making witnesses in certain internal investigations sign confidentiality statements. The wording of these statements included warnings of disciplinary action, even termination, if the witnesses talked about the probe with external parties without getting KBR’s consent first. The investigations were over possible violations of securities law.

To settle KBR consented to pay a $130,000 penalty. It also modified its confidentiality statement to include language clarifying that employees may report potential violations to federal agencies without company approval or fear of reprisal.

SSEK Partners Group is a securities law firm.

The SEC Order in its first retaliation case (PDF)

The SEC Order in the Case Against KBR (PDF)


More Blog Posts:
SEC News: Regulator Grants $30M Whistleblower Award and Charges Washington Investment Advisory Firm $600K for Undisclosed Principal Transaction, False Advertising, Stockbroker Fraud Blog, September 23, 2014

SEC Files First Enforcement Action Protecting Whistleblower Confidentiality Agreements, Institutional Investor Securities Blog, April 8, 2015

SEC Examines The Way Companies Deal with Whistleblowers, Institutional Investor Securities Blog, February 28, 2015

April 28, 2015

SEC Investigates Bank of America Merrill Lynch

According to The Wall Street Journal, the U.S. Securities and Exchange Commission is investigating Bank of America Corp. (BAC) and its Merrill Lynch unit to find out if the lender broke rules established to protect customers accounts. According to sources in the know, over a three-year period, Merrill Lynch used different kinds of big, complex trades and loans to save on funding expenses and free up billions of dollars in money and securities for trading that it otherwise would have needed to keep off-limits.

Bank of America put a halt to the trades in 2012 in the wake of internal dialogue over possible risks involved. The trades involved strategies that existed when the bank purchased Merrill Lynch in 2009.

Now, the SEC wants to know if the strategies violated the protection rules and if regulators were misled about the bank’s actions. It also is trying to determine if retail brokerage funds were placed at risk for the purpose of making more money.

The SEC probe involves looking at whether Bank of America complied with a rule. Established in 1972, the Securities Exchange Act of 1934’s Rule 15c3-3 is intended to make sure that trading firms and investment banks put aside enough funds and securities that are easy to sell so that if a failure were to arise the financial institution would be able to easily pay back whatever customers are owed.

Financial firms that deal with customer trades must calculate their net liability to clients at least once a week. This figure is how much more banks owe clients, through funds such as deposits. The greater the total net that the bank owes, the more funds a firm would have to put aside in reserve in “lockup” accounts for emergency purposes when paying customers would be warranted. These funds must be kept separate from other accounts.

Sources say that Merrill Lynch executives came up with trades and loans to lower how much money needed to be in lockup. In one strategy, called leveraged conversion, the equities desk would recruit clients to place token amounts in their own funds in return for loans that were close to 100 times greater. Bank of America would then organize big trades, with the same customers taking the other side, doing so in a manner to fulfill some of its other financing needs. This would dramatically up how much these customers owed the bank, which would lower the net amount owed to clients and how much had to be kept in lockup.

SSEK Partners Group is an institutional investor fraud law firm. We also work with high net worth individual investors who sustained losses from securities fraud to help them get back their money.

SEC Investigating Whether Bank of America Broke Customer-Protection Rules, The Wall Street Journal, April 28, 2015

Bank of America Merrill Lynch being investigated by SEC, Investment News, April 28, 2015


More Blog Posts:
Bank of America’s Merrill Lynch to Pay $2.5M to Massachusetts Over Compliance Rule Relapse, Institutional Investor Securities Blog, March 23, 2015
FINRA Orders Merrill Lynch to Pay $2.4M in Fine, Restitution for Hundreds of Securities Transactions That Violated Fair Price Guidelines, Stockbroker Fraud Blog, December 16, 2014

Bank of America Used Subsidiary to Finance Trades, Helped Hedge Funds, Others, Avoid Taxes, Institutional Investor Securities Blog, February 11, 2015

Contact Us

(800) 259-9010

Our Other Blog

Recent Entries