July 28, 2015

FINRA Orders Morgan Stanley to Pay $2.4M Over Ex-Broker’s Trades, Bars Former Merrill Lynch Trader from the Industry

A Financial Industry Regulatory Authority panel arbitration panel says that Morgan Stanley (MS) must pay at least $2.4M to settle the latest client claims accusing its former broker, Steven Mark Wyatt, of mishandling their investments. The brokerage firm fired Wyatt in 2012.

According to a group of doctors and their loved ones, Wyatt, who was their broker, made unauthorized and excessive trades in the stock market that cost them during and after the 2008 financial crisis. Wyatt bought thinly-traded stocks for the investors and placed speculative bets on exchange-traded funds and other securities in their portfolios.

This is the latest batch of claims against Wyatt, Morgan Stanley, and managers at the Mississippi branch where he worked. The claimants believe that Morgan Stanley failed to detect warning signs of Wyatt’s purported wrongdoing. Other employees named in this securities case are adviser Hilary Zimmerman, currently a Morgan Stanley senior vice president, and branch manager Fred Eugene Brister III. The claimants contend that Brister failed to properly supervise Zimmerman and Wyatt. They say that their accounts were mismanaged and suspect trading occurred.

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July 25, 2015

Ex-Oppenheimer Employees Resolve SEC Charges Over Unregistered Penny Stock Sales

The Securities and Exchange Commission said that Scott A. Einsler, Arthur W. Lewis, and Robert Okin, three former Oppenheimer & Co. (OPY) employees, have settled charges involving the unregistered sales of billions of shares of penny stocks for a customer. The actions are related to part of an enforcement action that the brokerage firm settled with the regulator, as well as with the U.S. Treasury Department’s Financial Crimes Enforcement Network. Under that agreement, the firm paid $20 million to resolve those claims.

In this latest order instituting administrative proceedings that have been resolved, Eisler, who used to be a registered representative at an Oppenheimer Florida branch, is accused, along with former supervisor and branch manager Lewis, of executing the penny stock shares in illegal unregistered distributions. While securities laws grant exemption liability for brokers who make a reasonable inquiry into the facts involving the proposed sale of a customer, the SEC said that the two men did not make the required inquiry even though there were significant warning signs. Also, according to the regulator, Lewis and Okin, previously the head of the private client division, committed supervisory failures when they did not address the warnings.

To resolve the proceedings against him, Eisler consented to pay $50,000 and he will be barred from the securities industry and penny stock sales for a year. Lewis also will pay a penalty for the same amount and his bar from the industry in a supervisory capacity is also for a year. Okin will pay $125,000 and also serve a yearlong supervisory bar from the industry. All three men agreed to settle without denying or admitting to the SEC’s findings.

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July 24, 2015

SEC Awards Over $3M to Whistleblower

In the third highest award that the Securities and Exchange Commission has issued under its whistleblower program, the regulator is giving one individual $3 million for providing information that helped expose a complex fraud. The tip provided by the whistleblower included details and specifics about the scam, which would have been difficult to detect otherwise. Related actions also resulted because of the information this person provided.

Since inception four years ago, the SEC whistleblower program has paid out over $50 million to 18 whistleblower. The biggest award to date was $30 million, issued last year. A $14 million whistleblower award was issued in 2013.

Under the program, whistleblowers that provide the regulator with original information that helps the SEC pursue a successful enforcement action are eligible for 10-30% of the money collected if the sanction exceeds $1 million. The SEC is legally bound to protect the confidentiality and identity of whistleblowers.

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July 23, 2015

U.S. Chamber of Commerce Wants the SEC to Reform Its In-house Trials

The US Chamber of Commerce is calling on the U.S. Securities and Exchange Commission make reforms to the way it conducts in-house trials. The Chamber wants the regulator to put into place a uniform policy of when such trials should take place, amend its rules to allow for more pretrial discovery, and set up a process that would let defendants challenge the choice of an in-house venue.

Critics believe that the SEC’s administrative trials violate the Constitution because there is limited discovery and no jury. Depositions are not allowed nor are counterclaims. To appeal a ruling by an administrative law judge, the person has to go to the Commission first before it can go to a circuit court of appeals.

The SEC has increased its use of in-house trials, which are presided over by one of its judges, ever since the 2010 Dodd-Frank Act went into effect. The Chamber of Commerce is concerned that this is causing serious issues of fairness. The lobbying group made nearly forty recommendations, including that the SEC revise certain deadlines and update its rules.

The chamber believes that some of the rules that preside over the SEC in-house court are no longer appropriate for certain complex cases, such as those involving insider trading. It wants more streamlining of investigations, modifications to the Wells notice process, less duplicate efforts among regulators, and clarification of the SEC’s policy regarding admission of guilt in enforcement actions.


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July 22, 2015

Wells Fargo Must Pay Woman Over $8M For Alleged Fraud Involving Childhood Trust

Wells Fargo Bank (WFC) must pay a Dallas woman over $8 million. Texas State Judge Emily Tobolowsky said that the bank defrauded Angela Militello in its role as trustee for a trust that family members set up for her when she became an orphan at the age of seven.

Militello contends that in 1999, a trust officer sent to her by the bank told her to set up a new account and gave her papers for establishing a revocable trust. After Militello filed for divorce in 2006, she asked the trust officer about withdrawing $200,000 from the trust to purchase a home for her and her child.

The trust officer gave her a check for that amount and a form asking for approval of the completed sale of a percentage of the assets in the trust. The remainder of assets was to be sold within a few months. Militello claims that Wells Fargo and a third party conspired to sell the assets in her trust at way below market value and fraudulently charge her tfor the property taxes after a buyer purchased the assets.

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July 17, 2015

JPMorgan Settles Class Action Mortgage-Backed Securities Case for $388M

JPMorgan Chase & Co. (JPM) has consented to pay $388 million to resolve a securities lawsuit filed by investors claiming that the bank misled them about the safety of $10 billion of mortgage-backed securities (MBSs). Included among the plaintiffs in the case are the Laborers Pension Trust Fund for Northern California, the Fort Worth Employees’ Retirement Fund, and the Construction Laborers Pension Trust for Southern California.

The funds, and other investors in nine offerings that were made prior to the financial crisis, contend that JPMorgan misled them about the appraisals, underwriting, and credit quality of home loans that were underlying the securities. Following the collapse of Lehman Brothers Holdings Inc. in 2008, the certificates’ value dropped to 62 cents on the dollar.

JPMorgan is settling the case but has denied any wrongdoing. It will be up to a judge to decide on whether to approve the deal.

According to a copy of the securities action filed in 2010, the lawsuit is for entities and persons that acquired the bank’s Mortgage Pass-Through Certificates. The certificates involved were allegedly sold pursuant to or traceable to a misleading Registration Statement from 2007, as well as misleading and false Prospectus Supplements that also were issued that year. According to the Complaint, examples of purportedly false and misleading statements found in offering documents included claims that the loans had received investment grade credit rating, and loans backing the Certificates had specific loan to value ratios.

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July 16, 2015

Oz Management to Settle SEC Charges Over Inaccurate Data by Paying $4.25M

Investment adviser Oz Management, LP has agreed to pay a $4.25M penalty to settle SEC charges that it provided inaccurate trading data to four prime brokers. This led to inaccuracies in the books and records of the brokers, including the inaccurate listing of about 552 million shares. Also, the inaccurate trading information resulted in inaccuracies in the information given to the regulator during investigations.

The SEC’s order said that for almost six years, up through the end of 2013, the firm misidentified certain trades in information given to the brokers. Trade settlement was not impacted. However, in addition to the erroneous listings previously mentioned, the wrong information was also woven into the data that the brokers electronically provided to regulators.

Because of this, about 14.4 million shares were inaccurately reported when addressing SEC requests. It was this inaccurate information that the Financial Industry Regulatory Authority used to make a number of referrals to the agency.

The SEC discovered the purported violations during a 2013 probe when it realized that Oz Management’s files didn’t identify trades the same way as was noted on blue sheets. In certain trades the investment adviser did not characterize the sales as short or long in the same way that they were marked when they were sent to the market. Instead, the trades were filtered according to other factors.

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July 14, 2015

$30M Fraud that Bilked NHL Players Leads to Guilty Convictions

A federal jury has found two men accused of running a financial scam that bilked investors, including several National Hockey League players, of $30 million guilty of money laundering, conspiracy, and wire fraud. The trial against Phillip Kenner, an Arizona financial adviser, and Tommy Constantine, a former professional race car driver, lasted ten weeks.

According to prosecutors, from 2002 to 2013, Kenner convinced at least 13 NHL players to invest $100,000 in a Hawaii real estate development. He met the players through a college friend who was drafted by the league.

He and Constantine stole the players' money, causing $13M in losses. They used the funds to pay for their lavish lifestyles.

The two men, in a second scam, convinced many of the same hockey players to invest $1.4M in Eufora, a prepaid debit card business owned by Constantine. This money went into bank accounts controlled by the two men.

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July 11, 2015

Ex-Deutsche Bank Employees May Face Libor Rigging Charges

Bloomberg reports that according to sources, the U.S. Department of Justice is getting ready to file securities charges against former employees of Deutsche Bank AG (DB) for manipulating the London interbank offered rate. The government is looking at five ex-traders who may have rigged the U.S. dollar equivalent of the interest-rate benchmark. If the criminal charges do go through these would be the first ones against the German bank’s traders over Libor.

Earlier this year, Deutsche Bank agreed to pay $2.5B to regulators for rigging Libor and other benchmarks: $600M to the New York Department of Financial Services, $775M to the DOJ, $800M to the Commodities Futures Trading Commission, and $340M to the U.K’s Financial Conduct Authority. The latter had doubled its fine because of what it considered the bank’s “slow” and “ineffective response to questions and purportedly “false, inaccurate, or misleading” statement that it made.

The global settlement included a ban against Deutsche Bank’s traders who had engaged in interest rate rigging. The bank’s DB Group Services in the U.K. also pleaded guilty to one count of wire fraud for its involvement in the scam to defraud counterparties to interest rate swaps by manipulating U.S. Dollar LIBOR contributions.

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July 9, 2015

Bipartisan U.S. Senate Bill Wants to Up SEC Fines For Securities Law Violations By Almost Ten Times

U.S. Senators Chuck Grassley (R-Iowa) and Jack Reed (D-R.I.) introduced a bipartisan bill this week that would allow the Securities and Exchange Commission to impose much higher civil monetary penalties against individuals and financial firms that violate securities laws. The measure is called the Stronger Enforcement of Civil Penalties Act of 2015.

Senator Grassley said that the current SEC fines are “decimal dust,” which don’t serve as much of a deterrent. He said that a penalty “should mean something.” He and Senator Reed said they want to enhance investor protections. As Mr. Reed pointed out, over half of American households own securities, with many dependent on the market for their retirement and their kids’ college education. He said that investors shouldn’t have to incur substantial losses while violators get away with a “slap on the wrist.”

Under the new bill, the SEC would be able to impose up to $1 million against individuals for every serious offense as long as the penalty isn’t already tied to illegal funds that that the person received. Serious offenses would include deceit, fraud, deliberately ignoring regulations, and manipulation. The current maximum penalty for individuals over such offenses is $160,000.

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July 6, 2015

Wells Fargo, LPL Financial, and Raymond James to Pay Investors of Retirement Accounts and Charities Over $30M for Mutual Fund Overcharges

The Financial Industry Regulatory Authority said that LPL Financial, LLC (LPLA), Raymond James & Associates (RJF), Raymond James Financial Services, Wells Fargo Advisors, LLC (WFC), and Wells Fargo Advisors Financial Network, LLC must pay over $30M in restitution plus interest to customers who were impacted when the firms did not waive mutual fund sales charges for certain retirement and charitable accounts. According to the self-regulatory organization, between July 2009 and the end of 2014 the financial firms either improperly overcharged certain investors who had purchased Class A mutual fund shares or sold them Class B or C shares instead. The latter two come with ongoing, high back-end fees.

Mutual funds typically offer different share classes for sale. Each class has its own sales fees and charges. Although Class A shares come with an initial sales charge, they usually have lower annual fees than Class B and C shares. However, mutual funds will usually waive Class A sales charges when selling them to charities and some retirement accounts.

The broker-dealers offered these waivers for the retirement and charitable plan accounts under limited conditions. The waivers also were disclosed in prospectuses. Yet, according to FINRA, at various times since at least July 2009, the firms did not actually waive the sales charges for these customers when they were offered the Class A shares.

Because of this, contends the agency, over 50,000 eligible retirement accounts and charitable organizations either paid sales charges for the Class A shares or bought other share classes that required them to pay higher ongoing fees and other expenses. FINRA said that the firms did not properly supervise the sale of these mutual funds and depended on its brokers to offer the waiver discounts even though they weren't properly trained.

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July 3, 2015

Two Former-Bank of Oswego Executives are Indicted for Fraud

A federal grand jury has indicted ex-Bank of Oswego president and CEO Dan Heine and former CFO Diana Yates with running a widespread, five-year conspiracy to hide the Oregon-based bank’s troubled financial state from regulators. According to the indictments, the two of them authorized secret deals to conceal bad loans in the bank’s portfolio from the Federal Deposit Insurance Corp and its own board of directors.

According to the indictment, from September 2009 through last year, Yates and Hein conspired to defraud the bank. The reason for the allege conspiracy was to deceive its shareholders, board of directors, the public, and regulators by making the bank seem more financially robust.

Among their alleged acts:

• Using a bank employee to act as a straw man in a bogus real estate transaction.

• Having the bank make loans to a middleman. The latter would allegedly send loan proceeds to other beleaguered bank borrowers so that they could make their loan payments.

• Having the bank make loans and withdrawals from customer accounts without customer approval or knowledge.

• Mischaracterizing assets in reports to the Board and the FDIC, as well as making false entries in the report about the status of different loans and transactions.

• Hiding information about loans from bank insiders

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