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Merrill Lynch, a Bank of America Corp. (BAC) unit must pay a $12.5M fine to resolve Securities and Exchange Commission allegations accusing the brokerage firm of having weak controls that led to mini-flash crashes. This is the largest penalty ever imposed for alleged market access rule violations.

According to the SEC, at least 15 times from 2012 to 2014, the bank established internal trading limits that were too high and, as a result not effective. These caused disruptions in the market.

Even though there were red flags, said the regulator, Merrill Lynch purportedly did not adequately assess whether it had controls that were reasonably designed and the brokerage firm did not remedy the issues when they arose fast enough. In one example cited by the SEC, Merrill Lynch purportedly applied a 5-million shares/order limit for one stock that traded at only about 69,000 shares/day. Because of this erroneous orders compelled certain stock prices to drop and then recover abruptly within seconds. For example, nearly 3% of Google’s stock dropped in under a second.

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Aozora Bank Ltd. has asked a New York appeals court to allow it to sue Credit Suisse (CS) again over losses that it claims it sustained from a $1.5B collateralized debt obligation.  The Japanese lender claims that a lower court erred in dismissing the claims it had previously brought on the grounds that they were submitted too late.
It was last year  that New York Supreme Court Judge Charles E. Ramos  threw out the CDO fraud lawsuit on the grounds that the state’s statute of limitations had already passed.  In New York, fraud claims can be brought within two years from when a plaintiff could have, with reasonable diligence, realized that it was defrauded or within six years of when a transaction had closed.
Aozora believes that Credit Suisse employed a “trash bin” for its assets that were toxic. The Japanese lender purchased the Jupiter High-Grade CDO V Ltd CDO notes for $40M on 5/11/07 but did not file it’s case until 6/26/13. Ramos said that Aozara failed to prove that there was no way  it could have discovered the problems with the Jupiter V notes that it purchased from Credit Suisse before that filing date.

The 2nd U.S. Circuit Court of Appeals has revived the lawsuit brought by a whistleblower who accused JPMorgan Chase & Co. (JPM) of firing her for cautioning that a client might be engaging in money laundering and fraud. Jennifer Sharkey was a private wealth manager and vice president at the firm when she was let go in August 2009.

Sharkey claims that she was terminated a week after telling JPMorgan that they needed to pay attention to “red flags” and let go of the client who was responsible for about $600K of yearly billings. She sued her former employer after she was fired.

Last year, U.S. District Judge Robert Sweet in Manhattan threw out the case. Sweet said that the firm may have let Sharkey go for other reasons, including allegations that she lied about communications with another client or her performance was poor. Sharkey has countered that she did not lie.

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The SEC has filed insider trading civil charges against Leon G. Cooperman and his Omega Advisors. According to the regulator, the hedge fund manager made illicit profits when he bought Atlas Pipeline Partners  securities right before it sold its natural gas processing facility in Oklahoma.
Cooperman is accused of using his position as one of Atlas Pipeline’s biggest shareholder to obtain confidential information about the upcoming sale.  This, even after Cooperman and his firm had agreed not to to make trades using the information he was given. When the sale of the facility, for $682 million, was announced publicly, Atlas Pipeline’s stock price went up by over 31%. 
The SEC, in its complaint, said that when Cooperman’s firm was sent a subpoena regarding its trading involving Atlas Pipeline securities, Cooperman allegedly spoke to the executive who had given him the nonpublic information and attempted to make up a story about the trading. The executive was reportedly upset to find out that Cooperman had traded before the announcement of the sale. 

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The U.S. Securities and Exchange Commission is awarding over $4M to a whistleblower for providing original information that led to a successful fraud case. This is individual is the 34th whistleblower that the SEC’s program has awarded since 2011, upping the total amount granted in such awards to over $111M.
In what was the second biggest award issued by the regulator to date, he SEC awarded $22M to an to an ex- Monsanto Co. financial executive last month. The individual had reported alleged accounting violations involving Roundup, the company’s weed killer. According to media reports, Monsanto offered distributor rebates to raise sales but moved the costs into the following fiscal year. As a result, the company moved up its revenue while postponing the reduction that resulted from the costs. 
Under the SEC Whistleblower program, individuals who voluntarily give the regulator unique information that leads to a successful enforcement case are entitled to 10-30% of the sanctions collected when that amount is over $1M. Since the program’s inception five years ago, the Commission has received over 14,000 tips. 

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Deutsche Bank (DB) and the U.S. Department of Justice have yet to reach a settlement over allegations about the way that the German lender packaged toxic mortgages leading up to the 2008 financial crisis. According to The Wall Street Journal, The DOJ wants the bank to pay $14B. Deutsche Bank, however, said it has no plans to pay “anywhere near the number cited” and sees that figure as a starting point in negotiations.

In a statement, the firm said that it expected the final figure to be much lower and closer to what other banks have paid over similar allegations. InvestmentNews reports that it has not been uncommon for the DOJ in its investigation into MBSs to first put forward higher penalties than the eventual settlement that is reached.

Other firms and their deals over their mortgage lending activities include Bank of America (BAC) for $16.7B, Citigroup (C) for $7B, JPMorgan Chase (JPM) for $9B, Goldman Sachs (GS) for $5.1B, and Morgan Stanley (MS) for $3.2B. Goldman Sachs admitted to wrongdoing when it settled claims that it did not properly vet MBS before selling them as quality debt to investors.

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Former SAC Trader To Close Down Hedge Fund In The Wake of Losses
Andrew Bazarian will close down his Pinyin Capital Management Hong Kong Ltd.’s hedge fund in the wake of massive losses sustained by the fund, a lack of investor interest, and the exodus of Blue Pool Capital, its largest backer. Bazarian, a former SAC trader, started the fund in 2014 with Blue Pool’s $100M pledge. He left SAC to start the pan-Asian portfolio before the firm pleaded guilty to charges of insider trading.
Bazarian’s hedge fund is not the only one to shutter because of poor returns and investors leaving the industry. In July alone, investors throughout the world withdrew about $25.2B from hedge funds.  According to Bloomberg, others that have closed down hedge funds in Asia AMP Capital, Lazard Asset Management, and Pine River Capital Management. 
Telecommunications Company to Pay $1.25M for Not Disclosing Credit Risks 
The Securities and Exchange Commission said that Portugal Telecom SGPS S.A. will pay a $1.25M penalty for not properly disclosing the degree of credit risk involved in investments in debt instruments issued by Grupo Espirito Santo’s companies. By settling, Portugal Telecom is not denying or admitting to the findings. It has, however, consented to the regulator’s cease-and-desist order.

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Raymond James and Robert W. Baird Are Charged With Compliance Failures

The Securities and Exchange Commission said that Robert W. Baird and Co. and Raymond James & Associates (RJF) will pay $250K and $600K, respectively, to settle charges accusing them of compliance failures in their own wrap free programs. Both firms resolved the charges without admitting or denying to them. They did, however, consent to the regulator’s orders, which found that they violated the Investment Advisers Act of 1940 and Rule 206(4)-7.

According to the SEC’s investigation, Raymond James and Robert W. Baird did not put into place the necessary policies and procedures that would have allowed them to figure out how much in commissions  their clients were charged when sub-advisers “traded away” with a brokerage firm that was not part of the wrap fee programs. As a result, said the regulator, the advisers could not let clients know the “magnitude of the costs” nor did the firm consider these commissions when trying to figure out whether the wrap fee program or sub-advisers were appropriate for clients. Because of this, claims the SEC, some clients did not know that they were paying for more than the single wrap fee for investments that were bundled.


Two ARCP Ex-Accounting Executives Face SEC and Criminal Charges For Allegedly Inflating the REIT’s Performance

Brian S. Block and Lisa P. McAlister are facing criminal and civil charges for allegedly overstating the performance of the American Reality Capital Properties (ARCP), now called VEREIT Inc. The two former ARCP accounting executives are accused of inflating a key metric that investors and analysts used to evaluate the publicly-traded real estate investment trust.

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The deferred prosecution deal between a HSBC Holdings PLC (HSBC) unit and the US government is now at risk as prosecutors consider whether to file a criminal charge against the bank. It was in 2012 that the HSBC said it would pay $1.92B to resolve a money laundering investigation involving its top executives and lax oversight that allowed drug cartels and terrorists entry into the U.S. financial system. HSBC admitted that it did business with sanctioned countries, such as Iran, and helped Mexican drug cartels launder funds.

As part of the deal to avoid prosecution, the bank agreed to retain an independent monitor to make sure that it complied with anti-money laundering requirements. HSBC is still on probation.

Now, however, the Justice Department is looking into whether the bank has broken any U.S. laws since the deferred prosecution deal was put in place. That deal includes a section stating that HSBC could still be held responsible for its conducted related to the money laundering charges.

Andrew Caspersen is now permanently barred from the investment industry. The Securities and Exchange Commission announced the ban.

Caspersen, who used to be the managing principal at Park Hill Group and is the son of financier and philanthropist Finn M. W. Caspersen, had pleaded guilty to criminal charges of securities fraud and wires fraud. He admitted to bilking investors of over $38M and misappropriating over $8M. Park Hill fired him earlier this year.

The ex-Wall Street executive admitted to having a “gambling addiction” and his involvement in a scam to raise $95M. His fraud victims included family and friends. According to his attorney, Caspersen lost $123M by speculating on put options in the S & P index. His sentencing hearing is in November.

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