Institutional Investor Securities Blog

The Securities and Exchange Commission's Division of Risk, Strategy and Financial Innovation’s director Craig Lewis wants members of the public to be more proactive about offering information regarding investor-protection related benefits and costs during the rulemaking process. At the Pennsylvania Association of Public Employee Retirement Systems’s spring forum, Lewis said that it would help the regulator if it was given if not quantitative data, then qualitative, descriptive, and thorough information so it could better comprehend the possible effect a rule might have on investor protection.

According to the Commission’s recently published guidance on how it performs economic analysis to support rulemaking, there are four basic elements, including:

1) Identifying the justification for why there should be a rulemaking.
2) Defining the baseline to use to measure the economic impact of the regulatory action (meaning, what is the world like now sans the regulation?)
3) Determining what (if any) reasonable regulatory approaches there might be.
4) Evaluating the economic impact of the proposed rule, as well as that of the principal regulatory options.

Lewis, who was clear that his views and opinions were his own and not necessarily that of the Commission said that Risk Fin’s economic analysis is key to the agency’s mission to protect investors. One example he pointed to was the SEC’s recent request for information on a uniform fiduciary duty for broker-dealers and investment advisers that give personalized retail investment advice. He said that data submitted was able to identify the need for a regulatory action for investor protection, which makes the latter reason for there to be a rulemaking.

Commenting on this story, Shepherd Smith Edwards and Kantas, LTD, LLP Founder William Shepherd said: “After the stock market crash of 1929, Congress passed laws to regulate securities offerings, to regulate securities markets and to create the SEC. The US securities markets soon became the gold standard for the world. Investors worldwide relied on the transparency and protection of our markets which gave them greater confidence to invest here than elsewhere in the world. The “costs” of regulation to the securities industry were far outweighed by the “benefits” to everyone, including Wall Street. Now, everyone, including financial types, doesn’t like rules and regulations that constrain us. Yet, the dawn of the 21st century hatched a new era of deregulation, including the U.S. financial industry. The foxes of Wall Street were unleashed upon the henhouse and the results are history. Hens (investors) were eaten worldwide, and a financial collapse ensued, which may or may not have been averted. Meanwhile, new efforts to “re-regulate” the U.S. financial markets have been met with expected resistance from those adverse to return of the rules. The sad part is that, instead of welcoming their new clout (or bite) some of the “fox hounds” at the SEC are more concerned about the welfare of the foxes than the hens.”

If you worry that you may have been the victim of securities fraud, do not hesitate to contact SSEK right away to ask for your free case evaluation.

Investor Protection Through Economic Analysis, by Craig Lewis, SEC, May 23, 2013

Division of Economic and Risk Analysis, SEC

More Blog Posts:
Synthetic CDOs Once Are Once Again In Demand Among Investors, Institutional Investor Securities Blog, June 4, 2013

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

Muni Bonds Draw Investors But Come With Serious Risks, Stockbroker Fraud Blog, June 11, 2013

The Chicago Board Options Exchange, which is the largest options exchange in the United States, has consented to pay $6 million penalty to settle Securities and Exchange Commission charges accusing it of not fulfilling its obligation to enforce trading rules and failing to stop one firm member from engaging in abusive-short selling. The exchange is settling and taking corrective action but is not admitting to/denying wrongdoing.

While CBOE is an SRO (self-regulating organization), the SEC has wide oversight over trading. This is the first penalty that an exchange is paying for purported regulatory oversight failures. The Commission is also censuring the exchange, which means a tougher sanction could result if the alleged violation occurs again.

According to the regulator, in 2008, CBOE transferred the monitoring of member firms’ compliance via a rule for curbing abusive short-selling practices to a different department. This, contends the SEC, hurt the exchange’s ability to enforce the rule. (Short-selling involves a trader betting that a stock will drop in value. Short-sellers borrow the shares of a company, sell them, and then purchase them when the stock fails, giving them back to the lender while keeping the price difference. Unfortunately, too much short-selling focusing on weak companies can cause them to fail, inciting market volatility.)

The SEC’S securities settlement with CBOE was announced approximately a couple of weeks after the agency imposed a $10 million against Nasdaq, for the latter’s alleged computer failure and decisions that are being blamed for the botches that occurred when Facebook issued its public offering in 2012. That fine is the biggest one ever imposed against an exchange for “poor systems and decision makings,” which are said to have occurred prior to and during the Facebook IPO.

Confusion arose on May 18, 2012 because of errors in the computer programming of Nasdaq, which were compounded with the 496,000 orders that came in when trading began that day. Brokers contacted Nasdaq after Facebook began trading to say that they did not know how many shares they had bought. Within a little over a couple of hours, executives at Nasdaq determined that they did not execute tens of thousands of orders that were placed. (According to The New York Times, Knight Capital’s CEO even sent an email asking that there be a pause in trading so those involved could regroup and fully comprehend their exposure. Executives, at Nasdaq, however, disregarded the request and continued with trading, which only caused the confusion to grow.)

Last month, Nasdaq’s chief executive Robert Greirfield put out an open letter stating that the exchange had implemented new safeguards so that such problems would not happen again. Additionally, Nasdaq consented to pay $62 million to the brokers that suffered financial losses because of what happened during the Facebook IPO. UBS (UBS), however, claims it lost $356 million because of Nasdaq’s mistakes. The financial firm plans to pursue more money via arbitration.

CBOE Paying $6M To Settle SEC Charges On Oversight, NPR/AP, June 11, 2013

NASDAQ to pay $10 million fine over Facebook IPO, New York Times, May 29, 2013

Chicago Board Options Exchange

More Blog Posts:
Muni Bonds Draw Investors But Come With Serious Risks, Stockbroker Fraud Blog, June 11, 2013

As Their Prices Hit a 2-Year Low, Gold ETFs Liquidate En Masse, Institutional Investor Securities Blog, June 10, 2013

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement, Institutional Investor Securities Blog, June 5, 2013

Gold, once a hot commodity in the markets, is, at least for now, considered incredibly passé. ETF Trends editor Tom Lydon says that over 600,000 pounds of gold have been disposed of this year. He says that gold is out of favor for at least a couple of reasons: Central Banks aren’t as interested, and investors are currently looking more to back stocks and bonds, since both are doing relatively well.

Lydon, however, was quick to point out that gold isn’t gone for good, especially when investors will want to hedge against inflation and markets when the need arises once again. Meantime, investors may be opting to buy just a small amount of gold to stick in their portfolios.

Gold ETFs
A gold exchange traded fund is a commodity ETF made up of one principal asset: Gold. That said, the fund is usually made up of gold backed-gold derivative contracts, which means the investor doesn’t own actual gold. Instead, when a gold ETF is redeemed, an investor gets cash equal to the gold’s value.

A Gold ETF exposes the investor to gold’s performance. It also may serve as an industry ETF, exposing investor to the gold mining industry or providing foreign exposure.

Gold ETFs have their disadvantages. In specific instances, a Gold ETF may not come with the same capital gain tax breaks as more traditional ETFs. Also, there may be an asset management fee, which would make the return a little less than the gold price increase. Additional costs may also be involved, such as a commission or a brokerage free. Some gold ETFs can also be very illiquid, which can impact when they can be sold and bought.

Investing in Gold ETFs isn’t necessarily that simple. The SPDR Gold Trust exchange-traded fund (GLD) was one pretty hot ETF commodity for awhile. Yet, only “authorized participants,” and not regular investors, could redeem or create shares. These participants are typically securities market participants, such as registered brokerage firms (Goldman Sachs (GS), Citi (C), JPMorgan Chase (JPM), Morgan Stanley (MS), Merrill Lynch-Bank of America (BAC) and others), that have agreements with the sponsor and trustee. Meantime, regular shareholders don’t have redemption rights and the Trust doesn’t have to ensure the gold, meaning that it isn’t liable for damage, loss, fraud, or theft.

Critics have accused GLD, and the entire ETF industry in general, of offering investors “on-demand liquidity” that in certain instances are based an underlying assets that are a lot less liquid and that this can distort underlying market prices.

If you believe you may have suffered losses because of Gold ETF fraud, contact our securities lawyers right away. Investing in certain exchange-traded funds isn’t for everyone and it is important that when your registered representative or investment adviser recommended an investment to you, it was not only appropriate according to the degree of financial risk that your portfolio could handle but also that the ETF was suitable for your goals and objectives.

Gold ETFs Are Liquidating By the Ton, Yahoo.com, May 21, 2013

More Blog Posts:
New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs, Stockbroker Fraud Blog, May 3, 2012

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement, Institutional Investor Securities Blog, June 5, 2013

Citigroup (C) Settle $3.5B securities lawsuit Over MBS Sold to Freddie Mac, Fannie Mae
Citigroup has settled the $3.5 billion mortgage-backed securities filed with the Federal Housing Finance Agency. The MBS were sold to Freddie Mac and Fannie Mae and both sustained resulting losses. This is the second of 18 securities fraud cases involving FHFA suing banks last year over more than $200B in MBS losses by Fannie and Freddie. The lawsuit is FHFA v. Citigroup.

J.P. Morgan International Bank Ltd. Slapped with $4.64M Fine by UK Regulator
The UK Financial Conduct Authority says that JPMorgan unit (JPM) J.P. Morgan International Bank Ltd. must pay a $4.64 million fine for controls failures and systems involving its retail investment advice and portfolio investment services. Per the agency, financial firms that don’t maintain the proper records not only put their clients at risk of getting involved inappropriate investments, but also they don’t have a way to determine whether the proper advice was given. Fortunately, investors were not harmed despite the risk exposure.

The UK regulator says the problems went on for two years. Among the problems identified: outdated files, insufficient key client data, inadequate record system, inadequate suitability reports, and insufficient communication with clients about suitability. FCA says that it wasn’t until after it identified the problems and notified the JP Morgan unit about them that the necessary modifications were made.

Whistleblower’s Retaliation Action Against UBS Securities Can Go Ahead, Says Court
A district court judge made the decision not to dismiss ex-UBS Securities LLC (UBS) senior strategist Trevor Murray’s retaliatory action against his former employer. Murray was allegedly fired after he told his managers about possible securities law violations.

He contends that he was let go because he refused to write reports about UBS’s commercial MBS that were “more favorable to the financial firm.” Murray sued, arguing that the action violated the Dodd-Frank Act’s whistleblower protection provisions. UBS then tried arguing that Murray wasn’t a whistleblower because he didn’t tell the SEC about the alleged violation, but the judge said that a whistleblower is allowed to report alleged violations to governmental authorities and persons other than the regulator.

Former Goldman Sachs VP Consents to Pay $100K Payment SEC Pay-to-Play Action
Neil M. M. Morrison, an ex-Goldman Sachs & Co. (GS) vice president, will pay $100,000 to resolve an SEC action accusing him of taking part in an alleged pay-to-play scheme involving former Massachusetts state Treasurer Timothy Cahill’s gubernatorial campaign. The Commission said that he solicited the state’s underwriting business while “engaged” in Cahill’s campaign and that his use of the financial firm’s resources and work time are considered campaign contributions. By settling, Morrison is not admitting or denying the allegations.

Meantime, Goldman will pay approximately $12 million to settle the related proceedings against it, as well as $4.5 million to Massachusetts Attorney General Martha Coakley. Even though the firm wasn’t allowed to take part in municipal underwriting business for two years after Morrison’s alleged violations, the SEC says that Goldman still took part in 30 underwriting contracts with issuers in the state and made about $7.5 million in fees.

Citi settles U.S. suit over $3.5 billion in mortgage securities, Reuters, May 28, 2013

U.K. Regulator Fines JPMorgan Unit $4.64M For Failures in Investment Systems, Controls, Bloomberg/BNA, May 28, 2013

Internal Whistleblowing Deserves Protection, Judge Tells UBS, Law360, May 22, 2013

SEC Charges Goldman Sachs and Former Vice President in Pay-to-Play Probe Involving Contributions to Former Massachusetts State Treasurer, SEC, September 27, 2012

More Blog Posts:
FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement, Institutional Investor Securities Blog, June 5, 2013

Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013

American International Group (AIG) and Maiden Lane II dismissing lawsuit against the Federal Reserve Bank of New York regarding the $182.3 billion financial bailout that the insurer received during the 2008 economic crisis. In dispute was whether AIG still had the right to pursue a lawsuit over residential mortgage-backed securities losses and if the company had moved $18 billion of litigation claims to Maiden Lane, which is a New York Fed-created entity.

An AIG spokesperson said that in the wake of a recent ruling by a district judge in California that the company did not assign $7.3 billion of the claims to Maiden Lane, both are dropping their action without prejudice. This means that AIG can now pursue Bank of America (BAC) for these claims, which is what the insurer wants to do.

Bank of America had said that AIG could not sue it over the allegedly fraudulent MBS because the latter transferred that right when the New York Fed bought the instruments in question 2008. However, according to Judge Mariana R. Pfaelzer, even if the New York Fed meant for Maiden Lane II to have these claims, that intention was not made clear.

On Tuesday, in New York State Supreme Court, the insurer argued that the proposed $8.5 billion settlement reached between the bank and investors in MBS from Countrywide Financial Corp. is not enough. The judge there is trying to determine whether to approve the settlement, reached with investors who claimed that the firm had misrepresented the mortgages backing the securities.

AIG is one of a number of entities that oppose the settlement. At the hearing, one of its lawyers questioned why the settlement was merely $8.5 billion when investors initially asked for $50 billion.

AIG also is arguing that there may be a conflict of interest with those that arrived at the proposed settlement amount. The insurer is questioning whether trustee Bank of New York Mellon (BK), which does a lot of its trustee business with Bank of America, did a good enough job of researching the risks involving successor liability and investigating the loan files. Bank of NY Mellon also is the trustee for 530 trusts that are holding the securities under dispute. Another investor supporting the current proposed settlement is BlackRock Inc, which also has a strategic relationship with the bank.

Meantime, the attorney who negotiated the $8.5 billion proposed settlement between BofA 22 institutional investors says that not only is this the biggest settlement in the history of private litigation, but also it is worth almost two times as much as Countrywide, which is valued at $4.8 billion.

AIG argues against $8.5 billion settlement with BofA, Reuters, June 4, 2013

Court allows AIG to sue Bank of America for fraud, The Boston Globe, May 8, 2013

More Blog Posts:
AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013

Bank of New York Mellon Corp. Must Contend with Pension Fund Claims Over Countrywide Mortgage-Backed Securities, Institutional Investor Securities Blog, April 10, 2012

Bank of America Subpoenaed by Massachusetts Over Bryn Mawr CLO II Ltd. and LCM VII Ltd. CLOs that Cost Investors $150 Million, Stockbroker Fraud Blog, February 14, 2012

Despite the damage attributed to them during the 2008 credit market crisis, synthetic collateralized debt obligations are once again in high demand among investors. The popularity of these risky investments, with their high returns and rock-bottom interest rates, are so high that even after being denounced by investors and a lot of lawmakers back in the day, now Morgan Stanley (MS) and JPMorgan Chase (JPM ) in London are among those seeking to package these instruments.

CDOs allow investors to bet on a basket of companies’ credit worthiness. While the basic version of these instruments pool bonds and give investors an opportunity to put their money in a portion of that pool, synthetic CDOs pool the insurance-like derivatives contracts on the bonds. These latest synthetic CDOs, like their counterparts that existed during the crisis, are cut up into varying levels of returns and risks, with investors wanting the highest returns likely buying portion with the greatest risk.

Granted, synthetic CDOs do somewhat spread the risk. Yet, also can increase the financial harm significantly if companies don’t make their debt payments.

The Wall Street Journal reports that a source in the know says that Morgan Stanley and JP Morgan are attempting to draw in even more investors, which the banks need enough of if they are to actually move forward with these latest synthetic CDOs. Due to rules now in place mandating that banks put aside huge quantities of capital against possible losses against such instruments, the two giants are not expected to invest in their deals.

What makes these newer CDOs different from their credit crisis-era ones? (An investor usually buys one of the (generally) six CDO slices.) One slice has been reportedly harder to sell because its yield is not enough. Also, buyers of the slices that aren’t as high risk would now likely receive more protection against possible losses than buyers of similar slices did several years ago.

Creditflux, a data provider, reports that during 2007, financial firms put out $634 billion of synthetic CDOs. In 2009, sales plummeted to $98 billion. While certain banks and hedge funds have been working together to put together private, small deals that have packaged derivatives into trades that are custom made, those deals were usually small and credit rating firms generally haven’t assessed them.

Another source says that there is now also a differently purposed CDO in development that Citigroup (C) Inc. is selling. This CDO uses derivatives linked to the bank’s loans portfolio and involves shipping companies outside the United States. The financial firm’s purported need to make room for new loans while being able to hold less capital to cushion possible shipping loan losses is said to be the motivation for the approximately $500 million deal (expected to bring in 13-15% in yearly yields). The WSJ says that investors of this type of CDO will be “on the hook” for certain losses, reports the WSJ.

Another security that investors seem to be hungry for these days are collateralized loan obligations. CLOs are tied to corporate debt, and to date, this year, over $35 billion of CLs have been sold in this country.

At Shepherd Smith Edwards and Kantas, LTD, LLP, we haven’t forgotten the massive losses investors took from synthetic CDOs during the 2008 financial crisis. We continue to represent investors that have suffered securities fraud losses linked to these investments. Contact our institutional investor fraud law firm today and ask for your free case evaluation.

One of Wall Street's Riskiest Bets Returns, Wall Street Journal, June 4, 2013

Synthetic CDOs Making Comeback as Yields Juiced, Bloomberg, March 20, 2013

CreditFlux

More Blog Posts:
Bank of America Subpoenaed by Massachusetts Over Bryn Mawr CLO II Ltd. and LCM VII Ltd. CLOs that Cost Investors $150 Million, Stockbroker Fraud Blog, February 14, 2012

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

Ex-Securities and Exchange Commissioner Paul Atkins wants the agency to rework its shareholder proposal rule, including the process that the staff employs to determine when issuers can leave the proposals out of their proxy materials. Atkins pointed to the recent increase in shareholder proposals that are pressing companies to reveal their political spending even though the majority of shareholders oppose such resolutions. He spoke against special interest groups using these proposals to push their agendas.

Atkins made his comments during an interview with BNA. Referring to the no-action process that lets SEC staff figure out the major issues that end up on issuers’ proxies for shareholders to vote on, he said that this action was very subjective and doesn’t have much transparency, actual due process, or accountability.

Under the SEC’s 1934 Securities Exchange Act Rule 14a-8, its shareholder proposal rule, the procedures that eligible investors can have their proposals included in the proxy materials of a company are laid out. The rule also lets issuers leave out proposals in certain, limited situations. (Still, issuers have to tell the SEC Division of Corporation of Finance why the proposal is being left out) and the staff can then grant no-action relief.

Just a couple of years ago, the Commission was reviewing the US proxy voting system’s inner workings. On July 14, 2010, the regulator put out a concept release seeking public comment on the transparency, accuracy, and efficiency of the voting process. (Recommendations that the shareholder proposal process be modified have been making their way through the SEC on numerous occasions in the last three decades.)

Still, supporters of the shareholder proposal process stand by it, believing that it is a key communication channel between shareholders and corporations. Also, considering all the changes coming down under the JOBS Act and the Dodd-Frank Act, they don’t think that now is the time to tinker with it.

Institutional Investor Securities Fraud
At SSEK Partners Group, our securities lawyers have decades of combined experience in securities law and the securities industry. We represent institutional and individual investors and clients that “opt out” of class actions. Our institutional investment fraud law firm represents corporations, high net worth individuals, partnerships, private foundations, banks, charitable organizations, financial firms, municipalities, large trusts, school districts, retirement plans, and others that have sustained substation losses impacting hundreds, perhaps even thousands of individuals.

Shepherd Smith Edwards and Kantas, LTD, LLP seeks to recover damages and losses sustained from negligence, securities fraud, and other illegal and improper actions committed by financial firms and/or their representatives in the investment and sale of financial instruments and the management of investors assets. Your case assessment with us is a free, no obligation consultation.

Related Web Resources:
Securities Exchange Act of 1934

Final Rule: Amendments to Rules on Shareholder Proposals, SEC

More Blog Posts:
Congress Regulates the Securities Regulators, Stockbroker Fraud Blog, April 30, 2013

SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements, Stockbroker Fraud Blog, April 21, 2013

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed, Institutional Investor Securities Blog, February 5, 2013

Many banks are reportedly greeting bipartisan Senate bill S. 710 with satisfaction, as it would exempt them from provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to regulating municipal advisers. The bill was introduced by US Senators Patrick Toomey (R-Pa) and Mark Warner (D-VA) last month.

The Dodd-Frank Act established municipal advisers as a new class of regulated individuals that advise local and state governments about financial matters, such as the use of derivatives and bond issuances. Per the law’s Section 975, municipal advisers must register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. Critics, however, have called the SEC’s proposed definition of what constitutes a municipal adviser as too broad.

The senators’ legislation makes it clear that banks and those that work for them are not municipal advisers unless they actually take part in municipal adviser activities. It is similar to HR 797, which was proposed by US Representatives Gwen Moore (D-Wis.) and Steve Stivers (R-Ohio) earlier this year.

In other securities law news, three Republican lawmakers have unveiled a bill that would make public pension plans reveal more information or risk the tax status of bonds that were put out by municipalities and states. Per HR 1628, certain municipality issued-bonds would no longer have tax-exempt status if retirement plans did not abide by disclosure requirements.

The measure, by Representatives Paul Ryan (R-Wis.), Darrell Issa (R-Calif.), and Devin Nunes (R-Calif.), seeks to address worries related to local and state pension plans, including the concern that some public pension plans may be determining liabilities and debt with “unreasonably high discount rates,” perhaps even distorting the asset values to hide debt. The three men believe that these “accounting gimmicks” has resulted in unfunded liabilities being under-reported by trillions of dollars.

The proposed legislation would also modify the Internal Revenue Code so that plans would have to report not just their financial information but also what assumptions and methods they used to make their calculations. Plans would also have to apply a uniform accounting standard to make disclosures. Disclosed data would be made available online by the Secretary of the Treasury. Meantime, the federal government would not be able to rescue plans that couldn’t fulfill their obligations.

Securities Fraud
Our securities lawyers At Shepherd Smith Edwards and Kantas, LTD, LLP, represent investors that have suffered losses due to securities fraud and other forms of industry negligence. We have helped thousands of investors get back their financial losses via arbitration and the US courts. Your first case evaluation with us is free.

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

Senate bill S. 710: Municipal Advisors Relief Act of 2013

HR 797: Municipal Advisor Oversight Improvement Act of 2013

More Blog Posts:
Lawmakers Tackle Investment and Securities Matters, Institutional Investor Securities Blog, May 10, 2013

Municipal Advisor Bill Passes Vote by US House of Representatives, Institutional Investor Securities Blog, September 21, 2012

Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court, Stockbroker Fraud Blog, July 21, 2012

State Securities Regulators and others are battling over how the US Securities and Exchange Commission should create a $50 million offering cap for exempt offerings under regulation A. The Jumpstart Our Business Startups Act had ordered the SEC to establish the new exemption but gave no deadline. Referred to by SEC staff as “Reg A Plus,” the agency’s Division of Corporation Finance rulemaking team has been working on the measure.

In a letter, the North American Securities Administrators Association urged the regulator to refuse to succumb to some commenters’ requests that state securities regulators not be included when it comes to the new exempt offerings. NASAA believes that state regulator oversight is key to making sure that these offerings are part of a successful public marketplace.

The letter, written by NASAA President A. Health Abshure, was in response to comments calling on the Commission to define what is a “qualified purchaser” under the 1933 Securities Act so that new offerings (or at least part of them) would be exempt from state blue sky registration. Abshure believes that limited state oversight for the new exemption would make it easier for scammers to use this exemption. He also says that making the securities freely tradable could increase the chances of financial fraud and abuse, which is why state regulation is so important.

Meantime, NASAA also is pushing for changes to federal law so that private lawsuits involving small offerings are allowed. This too stems from new investment opportunities under the JOBS Act.

Under the JOBS Act, the SEC has been ordered to lift its general solicitation bar involving certain private placements and set up a new regulatory regime for crowdfunded securities. Abshure says NASAA is worried that there aren’t enough civil remedies for investors that are harmed because the arbitration agreements prevents securities lawsuits.

State securities regulators are likely to press for more restrictions to class actions and Abshure wants the SEC to use its power under the Dodd-Frank Act to limit or prohibit mandatory predispute arbitration agreements. He also is calling for a uniform fiduciary standard for investment advisers and broker dealers. Abshure said that imposing a uniform high standard of behavior for advisers and broker-dealers would only build investor confidence in the financial services industry and its products.

If you are an investor who has suffered losses and you suspect that securities fraud was involved, your best chances for recouping losses are by working with an experience institutional investor fraud law firm. Contact Shepherd Smith Edwards and Kantas, LTD LLP today. The sooner you begin exploring your options, the more time your securities lawyer has to work on your arbitration claim or lawsuit.

The JOBS Act (PDF)

North American Securities Administrators Association

More Blog Posts:
SEC Working to Create $50M Reg A Offering Cap to Commissioners ASAP, Institutional Investor Securities Blog, December 8, 2012

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Are Likely, Institutional Investor Securities Blog, October 27, 2012

Investment Opportunities to Get More Advertising Exposure Because of JOBS Act Mandate Lifting Ban on General Solicitation, Stockbroker Fraud Blog, January 29, 2013

New SEC Chairman Reviews “Neither Admit, Nor Deny Wrongdoing” Policy
Securities and Exchange Commission Chairman Mary Jo White is taking a closer look at the agency’s practice of letting defendants that settle cases with it not have to admit to or deny the allegations. Critics of the policy have been vocal about how they believe that this lets violators get out of having to be accountable for any wrongdoing while not doing much to prevent them from repeating such actions again. Currently, the U.S. Court of Appeals for the Second Circuit is trying to determine whether a district court acted properly when it turned down the $285M securities settlement reached between Citigroup (C) and the SEC over the financial firm’s involvement in a 2007 collateralized debt obligation.

Testifying in front of Congress in her new role as SEC Chairman for the first time, White spoke about how despite her decision to review the practice, she does believes the policy has saved agency resources while giving investors’ their money back much quickly than if wrongdoing had to be proven.

SEC Seeks Ways to Better Customize Injunctive Relief for Misconduct
According Andrew Ceresney, the SEC’s co-director of enforcement, the agency is continuing to look at whether when seeking injunctions, such relief should be more closely tailored to the actual misconduct in question. Speaking at a conference in DC, Ceresney said that the regulator’s Enforcement Division wants to make injunctions signify more than just an admonishment to defendants. He says that such modifications should become more evident in the months to come.

Usually, SEC injunctive relief involves the agency barring defendants from committing the same alleged future securities law violations in the future. Critics believe that such relief doesn’t really do much.

SEC Commissioner Says SEC Oversight Is Even More Necessary Today
SEC Commissioner Luis Aguilar says that ongoing conflicts of interests and new competitive challenges mandate a “closer working relationship” between the Commission and the industry’s self-regulatory organizations. He also spoke about how it is the agency’s job to reassess how it can best offer appropriate SRO oversight.

Making sure to stress that the views he expressed were his own, Aguilar made his address, The Need for Robust SEC Oversight of SROs, earlier this month. He said that the SEC must continue to enforcement action against SROs that don’t meet their regulatory and legal duties. He noted that SROs must do their job to act as the first line of defense when it comes to overseeing the industry and all market activities, and also, it is the SEC’s job to act against them when they don’t.

Testimony on SEC Budget by Chair Mary Jo White, SEC, May 7, 2013

SEC Trying ‘Creative’ Ways to Tailor Injunctive Relief to Misconduct, Official Says, BNA, May 7, 2013

The Need for Robust SEC Oversight of SROs, SEC, May 8, 2013

The Financial Industry Regulatory Authority says that LPL Financial LLC must pay a $7.5 million fine for inadequately supervising more than 28 million business emails between 2007 and 2013. This is the largest fine the SRO has ever imposed over an e-mail case.

According to FINRA, LPL’s systems for overseeing and storing e-mails failed a minimum of 35 times. It contends that the firm did not succeed in fulfilling its duty to retain e-mails, supervise its representatives, and properly respond to requests by regulators. The SRO attributes these problems to the brokerage firm’s failure to put enough resources toward updating its e-mail system as its business grew quickly.

Among the e-mail failures:

• Not keeping up access to hundreds of millions of emails during migration to a less costly email archive (80 million emails were corrupted)
• Not retaining and reviewing 3.5 million Bloomberg messages over a seven-year period
• Not archiving emails received by customers via third party advertising platforms transmitted via e-mail.

In addition to the paying the fine, LPL will have to set up a $1.5 million fund to pay brokerage customers that may have been affected by the e-mail failures. However, by settling this FINRA case, the broker-dealer is not denying or admitting to wrongdoing. The financial firm maintains that it is the one that reported the e-mail issues to FINRA in 2011. It also says that it has taken on a thorough redesign of its e-mail systems, policies, and procedures while working with independent experts to make sure the proper actions are taken.

Institutional Investment Fraud Lawyer William Shepherd disagrees with LPL’s claim that no wrongdoing occurred: “Some observers claim that this firm has done nothing but carry insurance and not supervise its brokers for years. They all but said so when they asked one of their client OSJs to consider taking over conducting supervision for them. In other words they wanted to become some sort of clearing firm that also gets a piece of the commission pie. This fine and action demonstrates in no uncertain terms that they simply did not supervise.”

FINRA also claims that during its investigation into this matter, LPL made misstatements, including the statement that the e-mail problems weren’t identified in June 2011 when firm staff had information that could have allowed the issues to be sussed out in 2008. A LPL is also accused of making the misstatement that there were no red flags to help identify these e-mail issues when actually there were.

The e-mail system problems resulted in the firm’s failure to produce all the emails that state and federal regulators asked for. The SRO speculates that the brokerage firm may have even failed to give certain private litigations and FINRA arbitration claimants the emails that they needed.

LPL to Pay $9 Million for Systemic Email Failures and for Making Misstatements to FINRA, FINRA, May 21, 2013

FINRA fines LPL Financial $9 million for email violations, Reuters, May 21, 2013

More Blog Posts:
LPL Financial Continues to Stay on Regulators’ Radar, Stockbroker Fraud Blog, April 10, 2013

LPL Financial Ordered to Pay $100K for Lack of Adequate Oversight that Resulted in Unsuitable Investments for Clients, Stockbroker Fraud Blog, November 29, 2011

SEC Submits Request for Data on Whether to Make Brokers & Investment Advisers Abide by Uniform Fiduciary Standard, Stockbroker Fraud Blog, April 4, 2013

Pointing to the US Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., the U.S. District Court for the Northern District of Illinois dismissed the SEC’s allegations that a group of entities and persons violated broker-dealer registration requirements in an alleged $44 million international boiler room scam. The broker fraud case is SEC v. Benger.

Claiming the transactions were extraterritorial and not within the scope of the regulator’s reach, defendants sought summary judgment even though a lot of the allegedly fraudulent activity is said to have happened in the US. The district court, however, found that investors became irrevocably bound in their countries upon submission of buying offers even though they turned those offers in to escrow agents in this country. Moreover, the issuer became irrevocably bound in Brazil when accepting the purchase offers, and when the sale went through the titled passed either there or the countries where investors got the stock certificates regardless that the agents that served as middlemen were located here.

In Morrison, the Supreme Court determined that the 1934 Securities Exchange Act’s key federal securities antifraud provision is only applicable to securities transactions that can either be found on U.S. exchanges or that took place domestically. Following that decision, and seeking to give back exterritorial reach to both Justice Department and the SEC, Congress issued the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929P, which gives federal courts jurisdiction over enforcement actions involving conduct that took place in the US that played a part in significantly furthering a violation/behavior taking place abroad that will have a likely effect domestically.

The Commission believes that, in effect, Dodd-Frank, overturned Morrison.
Speaking at a DC panel-hosted cross-border securities litigation panel, the SEC's Office of International Affairs Director Jacobs said that Morrison’s transactional test doesn’t succeed in reducing the regulator ability to go after federal securities law cross border violations. She said that the agency is still deciding what to do in the wake of the district court’s ruling in Benger and that the regulator has a full docket of investigations that it is continuing to move forward on.

Meantime, some commenters have suggested that Dodd-Frank’s efforts have been incomplete. Private litigants have had problems with Morrison’s test, with federal district courts turning down plaintiffs’ efforts to file securities actions involving non-US investments. However, in an effort to get around Morrison, big institutional investors have brought their non-US securities cases to state courts instead, as well as to foreign courts. They have also attempted to file related lawsuits involving their American Depositary Receipts.

If you are an institutional investor that has suffered losses because of securities fraud, please contact our stockbroker fraud law firm right away.

Morrison v. National Australia Bank Ltd. (PDF)

SEC v. Benger (PDF)

More Blog Posts:
SEC Submits Request for Data on Whether to Make Brokers & Investment Advisers Abide by Uniform Fiduciary Standard, Stockbroker Fraud Blog, April 4, 2013

Stakeholders With $55M Securities Fraud Case Against Government Over AIG Bailout Get Class Action Certification, Institutional Investor Securities Blog, March 19, 2013

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG, Institutional Investor Securities Blog, February 20, 2013