September 25, 2014

SEC Investigates Pimco Exchange-Traded Fund for Artificial Inflation

The Securities and Exchange Commission is looking at whether Pacific Investment Management Co, artificially upped the returns of a fund that targeted smaller investors. At issue is the way the $3.6B Pimco Total Return ETF (BOND) purchased investments at a discount but depended on higher valuations for the investments when the fund worked out its holdings’ value soon after. This type of move could make it appear as if the fund made rapid gains when it was actually just availing of the variations in how certain investments are valued.

According to The Wall Street Journal, sources familiar with the probe say that SEC investigators have already interviewed firm owner Bill Gross. The regulator could be looking at whether investors ended up with inaccurate data about the performance of the fund. If so, this could be a breach of securities law, even if the wrongdoing wasn't intentional.

While the probe has been going on for at least a year, it seems to have recently escalated. Other Pimco executives have also been interviewed.

The WSJ reports that the investments involved appear to be small quantities of mortgage securities that are priced low because of their size and due to the fact that backers are typically small institutions. After Pimco would buy the investments, it would designate high valuations assigned by outside pricing companies, in part because a bigger mortgage bond pool would be used to compare them with. This type of action would create an instant gain on the bond. If this were done enough times, then the ETF’s early results could have gotten a boost.

It is not clear whether the alleged activity did inflate the ETF’s results. However, the fund made big gains early on, bringing in more investors. Within six months the funds had acquired $2.4 billion.

In other Pimco news, the firm is dealing with a bevy of investor withdrawals from its $222 billion Total Return Fund, which Gross manages, because of poor returns. Morningstar reports that since May of last year, they’ve taken out over $65 million from the fund. Investors are also withdrawing their funds from other Pimco mutual funds.

Pimco is an Allianz SE (ALV.XE) unit. Allianz is the biggest insurance company in Germany.

Our exchange-traded fund fraud lawyers work with investors in recouping their losses. Contact our institutional investor fraud law firm today.

Pimco ETF Draws Probe by SEC, The Wall Street Journal, September 23, 2014

SEC's investigation into Pimco could ripple through ETF, fixed income markets, Investment News, September 24 2014


More Blog Posts:
SEC To Examine Exchange Traded-Fund Regulation Again, Stockbroker Blog Fraud, March 22, 2014

Stifel, Nicolaus & Century Securities Must Pay More than $1M Over Inverse and Leveraged ETF Sales, Stockbroker Fraud Blog, January 14, 2014

Barclays to Pay $15M SEC Settlement Over Compliance Failures Following Lehman Brothers Acquisition, Pays $61.7M Fine to U.K.'s FCA Over Client Asset Issues, Institutional Investor Securities Blog, September 24, 2014

September 24, 2014

Barclays to Pay $15M SEC Settlement Over Compliance Failures Following Lehman Brothers Acquisition, Pays $61.7M Fine to U.K.'s FCA Over Client Asset Issues

Barclays Capital Inc. (BARC) has consented to pay $15 million to the U.S. Securities and Exchange Commission to resolve civil charges claiming that it did not make sure the financial institution was in proper compliance with securities laws and its own rules after acquiring Lehman Brothers' advisory division. According to the regulator, the firm did not adopt and execute written procedures and policies or keep up the needed records and books to stop certain violations.

For example, says the SEC, Barclays executed over 1,500 principal transactions with advisory client accounts but did not seek the necessary written disclosures and get the requisite customer consent. It also made money and charged fees and commissions that were not consistent with disclosures for 2,785 advisory client accounts, underreported assets under management by $754 million when amending its Form ADV a few years ago, and violated the Advisers Act’s custody provisions.

The violations caused clients to lose about $472,000 and pay more than they should have, while Barclays made additional revenue that was greater than $3.1 million. Barclays has since paid back or credited $3.8 million plus interest to customers who were affected. It also consented to remedial action and will retain a compliance consultant to perform an internal review.

Meantime, across the Atlantic, the U.K. Financial Conduct Authority also fined Barclays PLC. The amount is $61.7 million for not safeguarding client assets at the bank.

According to the British regulator, About 16.5 billion pounds in client assets were placed at risk between 11/07 and 1/12 due to poor arrangements between the bank and external custodians that were retained to deal with client trades and settlement.

Barclays accepts the FCA’s findings but maintains that it didn’t make money from these issues and customers did not sustain losses. A bank spokesperson said that Barclays identified and self-reported the matters that led to the FCA’s findings and it has since improved systems to resolve such problems and make sure the necessary processes are implemented.

The British regulator’s fine comes four months after the FCA fined it 26 million pounds for control failings over settling gold prices. The bank also put aside over $1.6 billion pounds for customers that were sold insurance they didn’t require or interest-rate swaps that led to losses.

Also in the UK, Barclays settled a lawsuit by client CF Partners LLP accusing it of offering advice on a takeover bid then buying carbon-trading firm Tricorona AB for itself. The resolution was reached after a judge ruled that the bank wrongly used confidential information to make its purchase.

The SSEK Partners Group is a securities law firm. Contact us today to find out if you have a fraud case.

Barclays Fined Twice in One Day for Compliance Failures, Bloomberg, September 23, 2014

Read the SEC Order
(PDF)

Barclays Fined $62 Million by U.K.'s FCA, The Wall Street Journal, September 23, 2013


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

Barclays to Pay $3.75M FINRA Fine for E-mail Retention and Record Preservation Violations, Stockbroker Fraud Blog, December 30, 2014

Securities Lawsuit Accuses Deutsche Bank, JPMorgan Chase, Credit Suisse, and Other Banks of Manipulating ISDAfix, Institutional Investor Securities Blog, September 4, 2014

September 23, 2014

T.J. Malone’s Lincolnshire Management Settles with SEC for $2.3M Over Purportedly Improper Allocations That Cost Its Funds

Lincolnshire Management has consented to pay $2.3 million to the Securities and Exchange Commission to settle charges alleging improper expense allocations involving two of its funds’ investments in the same company. The New York-based private equity firm, which is run by businessman T.J. Maloney, claims to oversee $1.7 billion.

Lincolnshire acquired PCS Inc. via its debut fund. Several years later it acquired Computer Technology Solutions with the intention of merging the two. However, reports Forbes.com, the first fund ran out of money, so Lincolnshire used its second fund to pay for the acquisition.

Commingling investments can be precarious, especially as each fund had a slightly different investor base. Because of this, the firm created expense allocation policies that were paid directly to it. This meant that each company’s allocation would be determined by the percentage of respective contributions to the total revenue of the overall revenue. However, the policies were never put in writing, which sometimes led to misallocations.

According to the SEC’s administrative order, Lincolnshire regarded Computer Technology Solutions and Peripheral Computer Support as one company that belonged to both funds. However, contends the regulator, from 2005 to 2013, the private equity firm directed more of the costs on the latter, which hurt the Lincolnshire fund that owned the company.

The agency is accusing Lincolnshire Management of breaching its fiduciary duty to the private equity funds when it properly benefited one over the other by misallocating the costs. The private equity firm is settling the SEC charges without denying or admitting to the alleged wrongdoing.

Previously in 2011, investors sued the Lincolnshire Management, claiming it got around paying them distributions by wrongfully taking out expenses and fees and interest related to a $99 million legal victory obtained by Lincolnshire portfolio entities. The trustee of the Acconci Trust claims that Maloney and the firm stole millions from the Lincolnshire Equity fund, with Maloney keeping $7.6 million from the judgment against Cendant Corp. Investors of the Lincolnshire Fund had expected an approximately $60 million distribution but received just $45 million.

Maloney sent investors a letter explaining that the firm and he were charging litigation costs and interest. The Acconci Trust also accused Lincolnshire of self-dealing. That securities fraud case has yet to be resolved.

The SEC has been looking into conflicts of interest and hidden fees at private equity funds. Due to the big fees that may be involved, disputes may arise between private equity firms and their clients.

Our securities lawyers represent high net worth individuals and institutions seeking to recover their securities fraud losses. Contact The SSEK Partners Group today to request your free case consultation. One of our private equity fund fraud attorneys can help you explore your legal options.

T.J. Maloney's Private Equity Firm Pays $2.3 Million To Settle SEC Charges, Forbes, September 22, 2014

SEC Charges New York-Based Private Equity Fund Adviser With Misallocation Of Portfolio Company Expenses, SEC.gov, September 22, 2014

Read the SEC Order (PDF)


More Blog Posts:
SEC to Dismiss Lawsuit Against SIPC Over Payments to Stanford Ponzi Scam Victims, Stockbroker Fraud Blog, September 11, 2014

Regulator Adjust Liquidity Rule for Big Banks, Institutional Investor Securities Blog, September 16, 2014

FINRA Fines Minneapolis Broker-Dealer $1M for Inadequate Supervision of Penny Stocks, Stockbroker Fraud Blog, September 13, 2014

September 20, 2014

SEC News: Regulator to Review Rule Change on New Hire Background Checks, Prepares Mutual Fund Regulations, and is Defendant of Oxfam America Lawsuit

FINRA Sends Background Check for New Hires Rule to the SEC
The Financial Industry Regulatory Authority is moving ahead with a rule change that would mandate that broker-dealers do a better job of vetting new hires. The SRO sent a rule to the Securities and Exchange Commission that would obligate brokers to implement written procedures to confirm the accuracy of information provided in an applicant’s U4 form.

Already, firms must review applicants for jobs. However, under the new rule, they would have to look into their public records.

FINRA says that because a lot of firms already have a system for background checks the rule shouldn’t be too expensive to implement. Some, however, feel that this could prove costly for smaller and medium-sized broker-dealers, who would likely have to hire a third-party provider.

Meantime, FINRA is going to review all financial public records in a one-time sweep to make sure its BrokerCheck database of representatives is current. There are about 630,000 brokers registered with the agency.

The SEC has 90 days to approve the rule change after the Federal Register publishes it. Meantime, it is soliciting public comment.

SEC Prepares Rules to Enhance Oversight of Mutual Funds, Hedge Funds
The SEC is in the process of developing new rules to improve oversight of firms, including mutual funds and hedge funds, as part of its attempt to obtain greater insight into whether the asset management industry presents any risk to the financial system. The requirements are likely to compel asset managers to provide regulators with more information about their mutual-fund portfolio holdings and require stress tests on funds to assess how well they would do in the event of economic turmoil.

The SEC is worried that derivatives are being used by certain mutual funds to enhance their returns. Officials are also interested in restricting the hedge fund-like tactics of alternative mutual funds, which include trading futures contracts and betting certain stocks against other stocks.

The potential rules would not be unlike the requirements placed on large financial institutions that regulators think might present a risk, should the economic or financial systems collapse. According to The Wall Street Journal, asset managers might have to limit using derivatives in the mutual funds bought by small investors. Firms would have to implement policies to manage certain product risks.

Oxfam Sues SEC to Incite Changes to Dodd-Frank Enforcement
Oxfam America wants the SEC to hurry its enforcement of certain Dodd-Frank Wall Street Reform and Consumer Protection Act provisions that impact oil companies and their disclosure of overseas payments. The international development charity filed its lawsuit in federal court.

OxFam says that the agency needs to speed up the finalization of a rule related to public disclosure of payments that companies, registered with the SEC, make to governments in return for mining and drilling rights. Until the rule is finalized the SEC can’t enforce it.

The SSEK Partners Group is a securities law firm. Contact our financial fraud lawyers today so that we can help you explore your legal options.

Oxfam America sues federal Securities and Exchange Commission to spur changes in Dodd-Frank enforcement, Business Journal, September 19, 2014

Rule proposal for new hire background checks moving to SEC, InvestmentNews, Septemer 18, 2014

SEC Preps Mutual Fund Rules, The Wall Street Journal, September 7, 2014


More Blog Posts:
SEC Files Charges in $4.5M Houston-Based Pump-and-Dump Scam, Stockbroker Fraud Blog, August 18, 2014

Securities Lawsuit Accuses Deutsche Bank, JPMorgan Chase, Credit Suisse, and Other Banks of Manipulating ISDAfix, Institutional Investor Securities Blog, September 4, 2014

SEC Charges Immigration Attorneys with Securities Fraud Involving EB-5 Immigration investor Program, Stockbroker Fraud Blog, September 4, 2014

August 11, 2014

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million

The U.S. State of Kansas has agreed to settle U.S. Securities and Exchange Commission fraud charges accusing it of failing to disclose in offering documents that the Kansas Public Employees Retirement System (KPERS), its pension system, was very underfunded. The regulator says that this established a repayment risk for bond investors. At issue were eight bond offerings valued collectively at $273 million.

According to the regulator’s order, the bond offers were issued via the Kansas Development Finance Authority (KDFA). Not only did the bond offering documents purportedly fail to disclose KPERS’ unfunded liability but also the paperwork did not describe what effect this could have on payments. The SEC said these poor disclosures stemmed from inadequate communications and procedures between KDFA and the state’s Department of Administration, which let the former know what data should have gone into the offering materials.

As a result, said the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit chief LeeAnn Ghazil Gaunt, Kansas gave investors were given an “incomplete” picture of the state's finances and its potential ability to pay back the bonds (because of other stresses on its budget). The state has since put into place new procedures and policies to make sure that the appropriate disclosures about pension liabilities are disclosed in offering documents.

Kansas settled the SEC charges without denying or admitting to the findings. The state also agreed to cease and desist from future violations of certain sections of the Securities Act of 1933. No fine was involved.

The SEC has been assessing muni bond disclosures nationwide. Previously, it sanctioned New Jersey for not disclosing to investors that two of its biggest pension plans were underfunded. Last year, the regulator charged Illinois for misleading pension disclosures.

Our municipal bond fraud lawyers represent institutional clients and high net worth individual investors. Contact The SSEK Partners Group today.

SEC Charges Kansas for Understating Municipal Bond Exposure to Unfunded Pension Liability, SEC.gov, August 11, 2014

Read the SEC Order (PDF)


More Blog Posts:
Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC, Institutional Investor Securities Blog, August 5, 2014

SEC Wants Texas’ Wyly Brothers to Pay $750M For Securities Fraud, Stockbroker Fraud Blog, August 7, 2014

FBI Probes Possible High-Speed Trading, Insider Trading Link, Institutional Investor Securities Blog, April 1, 2014

July 10, 2014

SEC Prepares Money-Fund Rules, Will Review Alternative Mutual Funds

Sources tell The Wall Street Journal that the U.S. Securities and Exchange Commission is getting ready to vote on rules that are supposed to stop investors from bailing out of money-market mutual funds, which is the reason that corporate lending became imperiled during the 2008 financial meltdown. Under the plan, certain money funds that cater to big institutional investors would have to lose the fixed price of $1/share an float in value the way other mutual funds do.

Municipalities, businesses, and individuals use money funds. Under the new rules, money funds would be allowed to place a temporary block on investors to keep them from taking their money out during stressful times. They would also be allowed to ask for a fee for share redemption.

The rules are set to make the money-fund industry less at risk of investor runs when the market is tumultuous. They would get investors accustomed to value fluctuations in their investments while making sure that funds are able to stop any outflows from turning into a flood.

The rules provide a floating share price for prime institutional funds. There would also be redemption “gates” and fees. Most of the SEC’s commissioners are expected to back the plan.

In 2008, Reserve Primary, a fund valued at $62 billion “broke the buck” when it fell below the $1 share/price that money funds try to keep up. The fund’s exposure to Lehman Brother Holdings Inc.’s debt after the latter filed for bankruptcy had caused the fund to suffer losses. The bankruptcy also led to a run on other money funds that only abated when the U.S. government got involved.

The U.S. Treasury Department and the SEC are also reportedly close to a deal that would ease tax rules on the smaller loses and gains sustained by floating-rate funds investors.

In 2010, the SEC put into place widespread changes to give the industry a stronger constitution. These included stricter rules on the types of securities funds could contain. However, critics said that there remained structural features that could compel investors to flee during early warnings of trouble.

In other SEC news, SEC’s Division of Investment Management Director Norm Champ says that the Commission will examine fund companies to take a closer look at alternative mutual funds’ liquidity, leverage, and other matters. The sweep will also assess whether the funds are in compliance with the industry’s regulations and laws. Champ spoke at an attorneys’ seminar early this month. Issues to be examined include whether the funds are properly assessing securities’ worth and if investors were properly apprised of the risks.

Alternative mutual funds usually use investment strategies similar to those of hedge funds. The probe is to take place just as retail investors, hungry for yield, rush to alternative funds.

Some 15 to 20 fund families will be examined. Areas of assessment are expected to include question of compliance when determining the value of assets, such as illiquid assets, derivatives, and private start-up company shares. The agency expects alternative funds to abide by a regulation that usually mandates that mutual funds pay investors within seven days after shares are redeemed. Fund governance will also be examined.

The SSEK Partners Group is a securities fraud law firm. We represent high net worth individual investors and institutional investors.

U.S. SEC review of alternative mutual funds is imminent-official, Reuters, July 8, 2014

Prime Money Funds Said to Float $1 Price Under SEC Plan, Bloomberg, July 10, 2014


More Blog Posts:
SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 7, 2014

Some Advisers Choose Alternative Investments Using Poorly Suited Benchmarks, Says Morningstar, Institutional Investor Securities Blog, July 9, 2014

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny
, Institutional Investor Securities Blog, July 7, 2014

June 23, 2014

Pennsylvania Private Equity Firm Settles SEC Charges Over “Pay to Play” Violations Related to Political Campaign Contributions

TL Ventures Inc. has agreed to pay almost $300,000 to settle Securities and Exchange Commission charges. The regulator contends that the Pennsylvania-based private equity firm violated “pay-to-play” rules for advisory fees it continued to get from state pension funds and the city of Philadelphia even after an associate made campaign contributions to the mayoral candidate and the state’s governor.

This is the SEC’s first case under the investment advisers’ pay-to-play rules, which went into effect in 2010. Under the rules, investment adviser are not allowed to provide compensatory services via pooled investment vehicles or to a government client for two years after a firm or one of its associates makes campaign contributions to political candidates or anyone able to impact the retention of advisers to oversee government client assets.

Philadelphia’s mayor gets to appoint three members of the Philadelphia Board of Pensions and Retirement. Pennsylvania’s governor gets to choose six of the state’s retirement system board members.

The SEC is also charging TL Ventures and Penn Mezzanine Partners Management L.P., an affiliated adviser, with improperly acting as unregistered investment advisers. Both claimed separately in 2012 that they were exempt from having to registers with the SEC. However, the regulators says that for purposes of determining whether they were exempt form these requirements or not, the two entities should have been integrated as a single investment adviser

TL Ventures settled without denying or admitting to the findings. The firm is paying $256,697 in disgorgement, $3,197 in prejudgment interest, and a $35,000 penalty.

If you suspect you were the victim of institutional investor fraud, please contact The SSEK Partners Group today.

Read the SEC Order Against TL Ventures (PDF)

Read the SEC Order Against Penn Mezzanine (PDF)

June 16, 2014

NY Hedge Fund Adviser Faces SEC Charges Over Conflicted Transactions and Whistleblower Retaliation

Candace King Weir and her hedge fund advisory firm Paradigm Capital Management will pay $2.2M to resolve Securities and Exchange Commission charges accusing the firm of executing prohibited principal transactions and acting against the whistleblower employee who notified the regulator about the conflicted activity. Weir is charged with causing the principal transactions to happen.

The agency contends that Weir facilitated the transactions between her firm and C.L. King & Associates, a brokerage firm that she also own, while trading for the hedge fund PCM Partners L.P. II. This type of transaction presents a conflict of interest between the client and adviser, and the latter is supposed to disclose that they are involved on both sides of the trade. The adviser also needs to get the client’s permission for this.

According to the Commission’s order, Paradigm did not give written disclosure to the hedge fund or obtain its consent. Paradigm’s head trader then reported the trading conduct.

Following the SEC investigation, the agency said that the hedge fund advisory firm had been involved in this type of trading strategy in a minimum of 83 principal transactions. The regulator says that the firm wanted to lower the tax liability of its investors that are hedge funds.

Weir would tell the advisory firm’s traders to sell the securities with unrealized losses from the hedge fund to a C.L. King proprietary trading account. The losses were then employed to offset realized gains made by the hedge fund. More than 45 securities positions were sold to the brokerage firm from the fund. 36 of them were bought back for the fund.

Because of Weir’s conflicted role, the SEC said even a written disclosure by Weir was not enough, nor was the establishment of a conflicts committee. The committee was comprised of executives that reported to Weir. The SEC also said there were other resulting conflicts from the committee. For example, Paradigm’s CFO, who was on the committee, was also C.L. King’s CFO. The regulator says that the conflicts committee denied its hedge fund client the proper disclosure and consent.

An SEC rule lets the agency file enforcement actions for whistleblower retaliation because of claims made about possible securities law violations. The Commission claims that Paradigm took retaliatory action after it found out that its former head trader made a whistleblower submission to the regulator. This included taking him out of his position, making him investigate the conduct he reported, switching his job to compliance assistant, taking away his supervisory duties, and marginalizing him in other ways.

Without admitting or denying the SEC findings, Weir and Paradigm agreed to the entry of the order finding that the violated certain sections of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. Both consented to cease and desist from future violations.

The SSEK Partners Group is a securities law firm that represents institutional investors and high net worth individuals in recouping their fraud losses.

SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower, SEC, June 16, 2014

Read the SEC Order (PDF)


More Blog Posts:
CTFC Issues Its First Whistleblower Award, Institutional Investor Securities Blog, May 30, 2014

Retirees Hurt, Brokers Enriched by $300 Billion 401(k) Rollover Boom, Stockbroker Fraud Blog, June 17, 2014

Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case, Stockbroker Fraud Blog, June 11, 2014

June 12, 2014

Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head

SEC Commissioner Wants Big Broker-Dealers To Hold More Capital
Securities and Exchange Commissioner Kara M. Stein wants the regulator to modify its capital rules for large brokerage firms so that they would be required to hold more capital in the event of a funding crisis. Stein wants the regulation to better factor the risk involved in short-term funding markets on which brokers depend. She also would like the latter to protect against failures that could upset the financial system.

Right now, the SEC is looking at new funding rules for brokers and placing limits on leverage, not unlike what regulators require for banks. However, Stein believes that the agency’s current approach, which is to protect customers but without considering how to keep companies in operation, needs work. The SEC Commissioner believes that the agency’s capital rules for big brokers should be based on preventing the failure of “systemically significant” firms. Stein also wants the SEC to finally implement the rules that were called for by the 2010 Dodd Frank Ac, including those that would limit the risks involving swap contracts.

FSI Unhappy With FINRA’s Proposal that Firms Link to BrokerCheck Site
The FSI, an interest group that represents independent broker firms, does not a approve of a Financial Industry Regulatory Authority proposal that would mandate that they include links to the latter’s BrokerCheck Database in broker-dealers’ online communications and on their websites. FINRA also wants a link to BrokerCheck.com included in firm registered representatives’ profiles.

The FINRA proposal, which has already been revised, is geared toward upping investor use of the BrokerCheck database. Since it was originally presented, the self-regulatory organization has removed a mandate that would require the links to go straight to a broker’s summary page on the database.

However, FSI wants FINRA To totally get rid of the requirement that firms include a link to BrokerCheck.com third party sites and in social media. While the proposal doesn’t mandate that brokerages include a link to BrokerCheck on individual messages posted on social media platforms, it does call for one in the “about” sections of Facebook, Twitter, PinInterest, and YouTube profile pages, as well as in the “background summary” area found on LinkedIn accounts.

New Chairman and Enforcement Division Heads at the CFTC
The U.S. Senate confirmed Timothy G. Massad as the Commodity Futures Trading Commission’s new head last week. J. Christopher Giancarlo and Sharon Y. Bowen were also confirmed as CFTC commissioners. They join commissioners Scott D. O’Malia and Mark Wejen.

Massad's first major appointment as CFTC Chairman is Aitan D. Goelman, who is now the new head of the CFTC’s enforcement division. Goelman is a 45-year-old trial lawyer and a former federal prosecutor. He takes over for David Meister, who is also an ex-federal prosecutor.

Our securities lawyers represent institutional investors and high net worth individuals that have sustained fraud losses. Contact The SSEK Partners Group today.

Brokers Need More Capital for Crisis, SEC’s Stein Says, Bloomberg, June 12, 2014

FSI gives revised Finra BrokerCheck link rule the thumbs down, InvestmentNews, June 12, 2014

Commodities Regulator Names New Enforcement Chief, The New York Times, June 10, 2014

CFTC Chairman Massad Announces the Appointment of Aitan Goelman as Director of Enforcement, CFTC, June 10, 2014


More Blog Posts:
State Senator Reprimanded For Violating the Texas Securities Act, Stockbroker Fraud Blog, May 8, 2014

Bank of America Could Settle Mortgage Probes for $12B, Institutional Investor Securities Blog, June 7, 2014

$500M MBS Settlement Reached Between Countrywide and Investors, Stockbroker Fraud Blog, May 10, 2014

June 11, 2014

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud

The Securities and Exchange Commission is charging Attorney Robert C. Acri with Illinois securities fraud related to a real estate venture. Acri is the founder of Kenilworth Asset Management, LLC, a Chicago-based investment advisory firm. He has agreed to settle by disgorging the funds that were misappropriated from investors, as well as commissions, interest, and a penalty. Monetary sanctions total about $115,000.

The SEC brought the real estate investment fraud charges after detecting possible misconduct when it examined the firm. The regulator’s Enforcement Division was alerted and a probe followed.

According to the findings of the investigation, Acri misled investors over promissory notes that were issued to supposedly redevelop an Indiana shopping center, misappropriated $41,250 for other purposes, and failed to tell investors that the firm received a 5% on every note sale. This amount would total $13,750. He also purportedly did not let investors know a number of material facts, including that the reason there even was an investment offer is that he was trying to rescue funds that other clients had invested earlier in the same real estate developer.

The developer, Praedium Development Corporation, had set up Prairie Common Holdings LLC to issue the promissory notes. One of Praedium’s main reasons for selling the notes to Kenilworth clients was to repay those earlier investors. (It had defaulted earlier on a half-million dollar loan.)

Meantime, these clients were not told that the loan default or the developer and an affiliate had been delinquent to pay property taxes, its mortgages, and certain invoices. They didn’t even know that Praedium was involved in the project or that one of its owners was a friend of Acri’s and in financial trouble. Acri used the $41,250 of client money to pay back other clients and make other payments he owed, including a settlement on a lawsuit.

He resigned from the investment advisory firm in 2012. As part of the settlement with SEC, Acri has agreed to cease and desist from violating federal securities laws’ anti fraud provisions and is barred from the industry. He has consented to not take part in penny stock offerings or appear before the Commission as a lawyer or for any entity that the agency regulates.

If you suspect that you were the victim of investment advisory fraud and suffered financial losses as a result, contact our securities law firm today.

Chicago-Area Attorney Charged After SEC Exam Spots Fraud in Real Estate Investment Offering, SEC.gov, June 11, 2014

Read the SEC Order (PDF)


More Blog Posts:
Bank of America Could Settle Mortgage Probes for $12B, Institutional Investors Securities Blog, June 7, 2014

SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014

SEC Files Order Against New Mexico Investment Adviser Over Allegedly Secret Commissions, Stockbroker Fraud Blog, June 10, 2014

June 4, 2014

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud

The U.S. Securities and Exchange Commission is temporarily shutting down investment adviser Scott Valente and his ELIV Group LLC. The regulator is charging both with defrauding about 80 investors of $8.8 million. The regulator says that Valente promised huge returns to customers, who are mostly from the Warwick and Albany areas.

However, rather than earning positive returns, he took close to $3 million of investor money and spent the funds on his own expenses, including mortgage payments and jewelry. Meantime, he charged these unsophisticated investors a 1% yearly fee for assets under management.

The SEC said that Valente kept the fraud going by issuing bogus investment statements every month that showed returns and assets under management that had been inflated. In fact, contends the regulator, in its few years of operation the investment firm lost $1.2 million and placed client money in illiquid and speculative privately held-companies. Also, while Valente said he had $17 million in assets under management, that amount was actually just $3.8 million.

Valente, who was fired in 2009 from Purshe Kaplan Sterling, founded Eliv Group in 2010. According to public records, in the 20 years that Valente has worked in the securities industry, he has been named in 17 customer complaints. The SEC says that even after it notified Valente he was under investigation, he continued with the securities fraud. Now, the regulator has gotten a temporary restraining order to keep his firm from out of business for now and his assets are frozen. The SEC wants a final judgment, along with penalties and disgorgement.

In other recent investment adviser news, regulators in Illinois and Massachusetts say they are looking at the RIAs in their state to find out if they have cybersecurity readiness. The survey will assess firm procedures and policies about hardware, authentication, electronic backup, encryption software, third party provider arrangements, insurance, and costs.

Please contact our investment fraud lawyers if you suspect your losses are because of securities fraud. The SSEK Partners Group represents high net worth individuals and institutional investors.


Read the SEC Complaint
(PDF)

Massachusetts, Illinois surveying RIAs about cybersecurity
, InvestmentNews, June 4, 2014

More Blog Posts:
State Senator Reprimanded For Violating the Texas Securities Act, Stockbroker Fraud Blog, May 8, 2014

SEC Charges Chicago Charter School Operator in $3.75M Bond Offering Fraud, Institutional Investor Securities Blog, June 2, 2014

FINRA Arbitration Panel Says Wells Fargo Must Repurchase $94M of Auction-Rate Securities from Investors, Stockbroker Fraud Blog, December 29, 2013

June 2, 2014

SEC Charges Chicago Charter School Operator in $3.75M Bond Offering Fraud

The Securities and Exchange Commission is charging United Neighborhood Organization of Chicago and UNO Charter School Network Inc. with bilking investors in a $37.5 million bond fraud offering. The SEC contends that the charter school operator made statements that were materially misleading about transactions where there was a conflict of interest.

The bond fraud offering involves school construction. According to the SEC, UNO did not disclose that it had a multi-million-dollar with a windows company that belonged to the brother of one of its senior officers. Investors also were not told that the conflict might impact the repayment of the bonds.

UNO had entered into grant agreements with the Illinois Department of Commerce and Economic Opportunity to construct three schools. Each agreement had provisions mandating that UNO certify that there were no conflicts. Breach of this provision could lead to grant payment suspension and recovery of money paid to UNO already.

Now, the SEC says that UNO breached the provision by contracting two companies whose owners are the siblings of its COO. UNO consented to pay one company about $11 million for windows and their installation. It said it would pay the other company around $1.9 million. Meantime, contends the regulator, UNO did give notice about these conflicts.

Without denying or admitting wrongdoing, UNO is settling and has consented to improve its training and internal procedures.

Our securities fraud lawyers represent institutional investors and high net worth individual investors in getting their losses back. Contact the SSEK Partners Group today.

SEC Charges Charter School Operator in Chicago With Defrauding Bond Investors, SEC, June 2, 2014

Read the Complaint (PDF)


More Blog Posts:
Stockbroker Fraud: Morgan Stanley Sues Convicted Ex-Broker, Former-Wells Fargo Broker Pleads Guilty, And Ex-John Thomas Financial Broker Evades Customer Complaints, Stockbroker Fraud Blog, May 29, 2014

FINRA Arbitration Panel Says Wells Fargo Must Repurchase $94M of Auction-Rate Securities from Investors, Stockbroker Fraud Blog, December 29, 2013

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor, Institutional Investor Securities Blog, December 14, 2013

May 28, 2014

SEC Takes Action to Stop Alleged Fraud Involving Transfer Agent

The SEC announced that it is filing fraud charges against IST Shareholder Services, a transfer agent based in Illinois, and its owner Robert G. Pearson. The regulator also obtained an emergency asset freeze in this matter. IST Shareholder Services is registered with the SEC under the name Illinois Stock Transfer Company.

The transfer agent and Pearson are accused of a misappropriation scam that bilked clients of over $1.3 million. The fraud was discovered when the Commission examined the firm. Pearson eventually admitted to the scam during questioning by SEC examiners.

Stock issuers usually use transfer agents to keep track of the entities and individuals that own the bonds and stocks. The agents document changes to securities ownership, keep up the security holder records for issuers, give out dividends and issue/cancel securities certificates. Now, the SEC is claiming that Pearson and his company misused money that belonged to clients and their shareholders to pay for their own business obligations and fund payroll.

The SEC says that Pearson misappropriated the funds from an IST bank account that held client funds. These clients used the transfer agent as an agent to pay shareholders their cash disbursements.

SEC examiners noticed a number of transactions that seemed to involve IST’s payroll instead of transfer agent-related activities. They questioned Pearson, who said at first that the local suburban bank holding IST’s general operating account could not deal with making payroll direct deposits. He said ‘probably not,’ when he was questioned about whether IST had sufficient monies in the customer account to cover payroll costs without taking customer funds. During later questioning, it became clear that Pearson used the money to cover payroll and related tax expenses.

Apparently, the transfer agent had not made enough to pay for its business costs. Pearson claimed that he intended to pay back the money that he took but did not have the cash to pay everything back enough.

The regulator says IST violated the SEC’s transfer agent regulations in multiple ways. It purportedly did not protect the securities and funds and failed to properly report securities that were lost or stolen. It also evaluates internal accounting controls or provides notice of termination or assumption of transfer agent services.

At The SSEK Partners Group, our securities lawyers represent high net worth individuals and institutional investors, including corporations, banks, partnerships, financial firms, retirement plans, charitable organizations, large trusts, private foundations, municipalities, school districts and others. We understand that financial stakes are high and often losses can affect not just the client but many others involved.

You need to work with a securities fraud law firm that is experienced in handling your kind of case. Contact us today.

SEC Obtains Asset Freeze to Halt Fraud at Illinois-Based Transfer Agent, SEC, May 28, 2014

Read the Complaint (PDF)


More Blog Posts:
Insider Trading Headlines: Principal of Wynnefield Capital Now On Trial, Ex-Vitamin Company Board Member Settles His Case, and Clinical Drug Trial Doctors Face Charges Related to New Cancer Drug, Stockbroker Fraud Blog, May 23, 2014

FINRA Delays Submitting REIT Share Price Rule to the SEC, Revises Trading Surveillance System, Gets Approval to Rule Limiting Self-Trading, Institutional Investor Securities Blog, May 24, 2014

FINRA Conducts 170 Probes Into Possible Algorithmic Abuse, Institutional Investor Securities Blog, May 21, 2014

May 23, 2014

SEC Roundup: The Regulator Charges Ex-Deloitte Chief Risk Officer with Auditor Rule Violations, Ex-Clearing Firm Officials With Regulation SHO Violations, & Rafferty Capital Markets with Illegal Trade Facilitation

Ex-Deloitte LLP Chief Risk Officer Charged With Auditor Independence Rule Violations
The U.S. Securities and Exchange Commission is charging certified public accountant James T. Adams, an ex-chief risk officer, with violating auditor independence rules. The rules are there to make sure audit firms stay objective about their clients.

According to the SEC, while Adams was the advisory partner on Deloitte & Touche’s audit of a casino gaming corporation, he repeatedly accepted tens of thousands of dollars in casino markers. He then established a credit line with a casino operated by the gaming corporation client and used the markers to draw on that credit line.

Adams is settling the SEC charges with a two-year suspension that prevents him from working as an accountant for any Commission-regulated entity.


Ex-Penson Financial Services Officials Charged With Regulation SHO Violations
Ex-Penson Financial Services CEO and President Charles W. Yancey, former chief compliance officer Thomas R. Delaney II, and two of its ex-securities lending officials, Lindsey A. Wetzig and Michael H. Johnson, are accused of Regulation SHO violations. The SEC says that the clearing firm’s securities lending practices purposely violated Reg. SHO’s Rule 204. Penson is now bankrupt.

According to the SEC’s Enforcement Division, Delaney knew about the violations involving the sales procedures regarding customer margin securities but didn’t act to ensure compliance. Instead, he enabled the violations. The agency believes Yancey disregarded signs of Delaney’s involvement. The civil charges against Yancey and Delaney will be litigated.

Charges made in administrative proceedings against Wetzig and Johnson have been settled. The SEC is accusing the two of them of knowing about REG SHO’s requirements but purposely not complying.


Rafferty Capital Markets Charged with Illegally Facilitating Trades
Rafferty Capital Markets is now facing SEC charges that it illegally facilitated trades for an unregistered-broker-dealer. According to the Commission’s order, Rafferty agreed to serve as the brokerage firm of record solely in name for about 100 trades in asset-backed securities that the unregistered firm had introduced.

Even though Rafferty had the needed licenses and processed the trades, the unregistered firm was in charge of managing the business. Also, although five of the unregistered firm’s employees became registered Rafferty representatives, they did the work at the unregistered firm and the latter was solely in charge of their trading decisions (as well as deciding their compensation). Meantime, Rafferty executed the trades for the unregistered firm and kept 15% of the compensation.

The SECO says that Rafferty did not preserve communications with the registered representatives that worked for the unregistered firm or make sure the other firm fulfilled its record keeping obligations. As a result, contends the regulator, one of the representatives was able to hide two trades from Rafferty.

Without denying or admitting to the findings, which allege violations of the Securities Exchange Act of 1934 and other rules, Rafferty agreed to a cease-and-desist order. This includes a censure, $637,615 in disgorgement, $82,011 in prejudgment interest, and a $130,000 penalty.

If you suspect that you have been the victim of securities fraud, please contact The SSEK Partners Group today. We represent institutional investors and high net worth individuals.


SEC Announces Charges Against Four Former Officials at Clearing Firm Penson Financial Services for Regulation SHO Violations, SEC.gov, May 19, 2014

Read the SEC Order Against Rafferty Markets Capital (PDF)

Read the SEC Order Against Adams (PDF)


More Blog Posts:

R.P. Martin To Pay $2.2M in Libor Rigging, Institutional Investor Securities Blog, May 22, 2014

Credit Suisse to Pay $2.6B, Pleads Guilty to DOJ Charges Over U.S. Tax Evasion, Institutional Investor Securities Blog, May 20, 2014

SEC Investigates Merrill Lynch & Charles Schwab Over Allegations of Failures that Allowed Mexican Drug Cartels to Launder Money, Stockbroker Fraud Blog, May 22, 2014

April 30, 2014

NYSE Pays $4.5M to the SEC to Settle Allegations Over Compliance Failures, Exchange Rules Violations

The New York Stock Exchange and other entities have agreed to collectively pay $4.5 million to settle Securities and Exchange Commission allegations over regulatory and compliance violations. This includes the claim that there was a failure to abide by the duties of self-regulatory organizations to make sure their businesses follow federal securities laws and SEC-approved rules. Also facing charges are charged are NYSE Arca, NYSE Market, IntercontinentalExchange Inc. (ICE), which owns the NYSE, and Archipelago Securities, which is an affiliated routing broker.

As part of the agreement, the NYSE will get an independent consultant. All parties settled without denying or agreeing to the findings.

According to the regulator, the NYSE exchange took part in business practices that either violated exchange rules or engaged in certain actions that required such a rule where none existed. For example, the exchange used an error account that Archipelago maintained to trade out of certain securities positions even though there were no rules that allowed for the use of this type of account. Other violations alleged include those involving the Securities and Exchange Act of 1934 over numerous acts of purported misconduct, including:

• Providing customers with colocation services on disparate contractual terms with no exchange rule that allowed for these services.
• Operating a block trading facility that didn’t run according to approved rules.
• Distributing an automated feed of closing order imbalance data to floor brokers earlier than NYSE rules specify.

NYSE Arca is accused of not executing Mid-Point Passive Liquidity Orders in markets that were locked, which was counter the exchange rule in effect. Also, the Commission says that Archipelago did not set up policies that would reasonably allow it to stop the wrongful use of nonpublic, material data over error account trading. It also did not tell the SEC in a timely manner that the net capital rule, which exists to make sure that dealers and brokers can fulfill their financial duties and stay solvent, was violated.

NYSE is a self-regulatory organization. This means it makes its own rules and then submits them for SEC approval. In 2012, it paid $5 million for rule violation because it gave customers trading information before making the data available to the public.

Please contact The SSEK Partners Group if you suspect you were the victim of institutional investor fraud.

SEC Charges NYSE, NYSE ARCA, and NYSE MKT for Repeated Failures to Operate in Accordance With Exchange Rules, NYSE, May 1, 2014

SEC Fires First Shots Since ‘Flash Boys’ With NYSE Fine, Bloomberg, May 2, 2014


More Blog Posts:
FINRA Takes a Closer Look of Fixed Annuity Sales, Stockbroker Fraud Blog, April 30, 2014

WG Trading Co. Manager Pleads Guilty To $554M Securities Scam That Targeted Institutional Investors, Institutional Investor Securities Blog, April 29, 2014

SEC Files Fraud Charges Against American Pension Services and Its Founder Over $22M Investor Losses, Stockbroker Fraud Blog, April 30, 2014

April 29, 2014

WG Trading Co. Manager Pleads Guilty To $554M Securities Scam That Targeted Institutional Investors

Stephen Walsh, a WG Trading Co. money manager and principal has pleaded guilty to bilking institutional investors of more than $554 million over a period of 13 years. Walsh and EG’s ex-general partner Paul Greenwood were charged in 2009 with allegations accusing them of using the investment advisory firm and commodities trading to perpetuate their scam, which took place between 1996 and 2009. Charities, retirement plans, pension flans, and university foundations were among those bilked.

According to the Federal Bureau of Investigation, the two men raised $7.6 million, misappropriating hundreds of millions for their personal use. They were supposed to put the money in an equity index arbitrage program, which the represented as a conservative trading plan that had done very well for years.

Investors then either got promissory notes from WG Trading Company or became limited partners. Greenwood and Walsh made it seem as if interest would be paid at a rate that was the equivalent of investment returns made by a limited partner.

Unfortunately, in actuality, Greenwood and Walsh misappropriated hundreds of millions of dollars for their own use and to meet obligations on investments that had nothing to do with equity index arbitrage. They also issued promissory notes in part to hide trading losses and their theft. The notes materially misstated WG Trading Company’s financial state.

The men also issued bogus account statements that they sent to clients to make it seem as if there were actual returns. The money that they took went toward paying for cars, horse farms, collectible stuffed animals and other expenses.

This week, Walsh pled guilty to securities fraud. He faces a maximum of 20 years behind bars. He also consented to try of a forfeiture order of more than $50.7 million, which is how much he misappropriated and profited. Securities cases against Walsh by the Commodities Futures Trading Commission and the Securities and Exchange Commission are still pending.

If Walsh’s case had gone to trial then Greenwood, who pled guilty four years ago to commodities fraud, securities fraud, money laundering, and wire fraud, would have testified against him later this year. He not only agreed to forfeit at least $331 million to the US government for money procured from the fraud, but he consented to pay another $83.5 million for proceeds that he “personally obtained” because of the scam.

Also, in 2009, WG Trading Company’s ex-chief compliance officer Deborah Duffy pled guilty to securities fraud, conspiracy, and money laundering for her involvement in the scam. The FBI’s website says that Greenwood and Duffy have yet to received their sentences.

At The SSEK Partners Group, our securities lawyers are committed to helping institutional investors get their securities fraud losses back.

Investment Manager Principal of WG Trading Company LP and WG Trading Investors Pleads Guilty in Manhattan Federal Court to Role in Several-Hundred-Million-Dollar Fraud Scheme, FBI, April 25, 2014

WG Trading’s Walsh Guilty in $554 Million Investor Scam, Bloomberg, April 25, 2014


More Blog Posts:

Fidelity Investment, BlackRock, Other Asset Managers Take Issue with Plans to Expand Too Big to Fail Rules, Institutional Investor Securities Blog, April 28, 2014

Ex-Bank of America CFO to Pay $7.5M to Settle with NY Over Merrill Lynch Acquisition Allegations, Institutional Investor Securities Blog, April 26, 2014

SEC Files Fraud Charges Against American Pension Services and Its Founder Over $22M Investor Losses, Stockbroker Fraud Blog, April 30, 2014

April 9, 2014

SEC Says At Least 200 Private-Equity Firms Imposed Bogus Fees

According to the US Securities and Exchange Commission, over half of the approximately private-equity firms that it examined have charged unjustified expenses and fees to investors without their knowledge. The regulator’s findings are from its review of the $3.5 trillion industry.

It was the 2010 Dodd-Frank Act that gave the SEC more oversight over money managers, which allowed the agency to scrutinize some firms for the very first time. By the end of 2012, examiners had discovered that certain advisers were wrongly collecting money from companies included in their portfolio, improperly calculating fees, and using assets from the funds to pay for their own expenses. Bloomberg reports that a source in the know about the regulator’s findings said that while some of the issues seem to stem from mistakes, others might have been intentional.

SEC to Look Even More Closely At Private Funds
Per Dodd-Frank, the majority of private equity and hedge funds that are large or midsized have to register with the SEC. A lot of them hold illiquid and complex investments that are tougher to value than the ones at more conventional asset managers. They also can have complex fee structures that can be more difficult for investors to comprehend.

Now, reports Reuters, the SEC has set up a group to look more closely at both. The team will examine the way they disclose fees, value assets, and communicate with investors.

Private-Equity Firms
Private-equity firms use debt and investor capital to buy companies that they will then take public or sell for profit. Annual management fees are usually 1.5 – 2% of committed funds and the firms usually keep 15-20% of investment profits, which is also called carried interest. A lot of buyout firms will charge fees to the companies they obtain to help pay for related expenses, with investors sometimes getting part of the proceeds.

Unfortunately, according to some critics, abuse by private-equity firms can happen because these organizations tend to be so “opaque.” Managers get wide discretion and this can make it hard for investors to know what is going on.

In March, the SEC filed a securities case against Clean Energy Capital LLC and Scott Brittenham, who founded the firm, for allegedly misusing over $3 million to cover office rent, group photography sessions, bottled water, and tuition. The regulator says that investors should have gotten the money instead. The legal representation from Brittenham and Clean Energy Capital maintains that his clients thought the expenses were allowed under Delaware law and limited agreements.

If you are an investor who suspects you suffered losses because your financial representative engaged in negligence or misconduct, contact our securities lawyers today.

Exclusive: SEC forms squad to examine private funds - sources, Reuters, April 7, 2014

Bogus Private-Equity Fees Said Found at 200 Firms by SEC, Bloomberg, April 7, 2014

Detroit Reaches Settlement With Some Bond Insurers, The Wall Street Journal, April 9, 2014

Read the SEC Order Against Clean Energy Capital

More Blog Posts:
SEC Accuses Private Equity Manager of $9M Securities Fraud, Institutional Investor Securities Blog, January 30, 2014

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

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010

March 14, 2014

Ex-Goldman Trader Tourre Must Pay $825M in Securities Fraud Involving CDO Abacus 2007-AC1

Following a jury finding ex-former Goldman Sachs Group (GS) trader Fabrice Tourre liable for bilking investors in a synthetic collateralized debt obligation that failed, U.S. District Judge Katherine Forrest ordered him to pay over $825,000. Tourre is one of the few persons to be held accountable for wrongdoing related to the financial crisis. In addition to $650,000 in civil fines, Tourre must surrender $185,463 in bonuses plus to interest in the Securities and Exchange Commission’s case against him.

The regulator accused Tourre of misleading ACA Capital Holdings Inc., which helped to select assets in the Abacus 2007-AC1, and investors by concealing the fact that Paulson & Co., a hedge fund, helped package the CDO. Tourre led them to believe that Paulson would be an equity investor, instead of a party that would go on to bet against subprime mortgages. Paulson shorted Abacus, earning about $1 billion. This is about the same amount that investors lost.

Judge Forrest noted that for the transaction to succeed, the fraud against ACA had to happen. She said that if ACA had not been the agent for portfolio selection, Goldman wouldn’t have been able to persuade others to get involved in the transaction’s equity. It was last year that the jury found Tourre liable on several charges involving Abacus.

Also, in 2010 Goldman settled for $550 million with the SEC a related securities fraud case. The regulator accused the firm of misleading investors about the Abacus 2007-AC1 and misstating and leaving out key information about the CDO, which depended on subprime residential mortgage-backed securities.

The firm, however, resolved the charges without deny or admitting wrongdoing—although it did admit and regret the inadequacy of its marketing materials. $250 million was designated for investors and the rest was to go to the US Treasury.

Please contact our securities attorneys at The SSEK Partners Group today and ask for your free case assessment.

Big fine imposed on ex-Goldman trader Tourre in SEC case, Reuters, March 12, 2014

Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, SEC, July 15, 2010


More Blog Posts:
Goldman Sachs Must Contend with Proposed Class-Action CDO Lawsuit, Institutional Investor Securities Blog, January 22, 2014

Ex-Goldman Sachs Trader Fabrice Tourre’s Request for New Civil Trial in RMBS Fraud Case is Denied, Institutional Investor Securities Blog, January 10, 2014

Goldman Sachs Cleared in Securities Fraud Case Against Dragon Systems for Losses Related to $250M Loss in Sale to Lernout & Haspie, Stockbroker Fraud Blog, January 31, 2013

January 30, 2014

SEC Accuses Private Equity Manager of $9M Securities Fraud

The SEC says that Camelot Acquisitions Secondary Opportunities Management and owner Lawrence E. Penn III of stealing $9 million from a private equity fund. Also named in the securities fraud complaint are Altura Ewers and three entities, two of which are Camelot entities owned by Penn.

The regulator says that Penn, a private equity manager, reached out to overseas investors, public pension funds, and high net worth individuals to raise funds for Camelot Acquisitions Secondary Opportunities LP, a private equity fund that invests in companies that want to become public entities. He was able to get about $120 million of capital commitments.

According to the Commission, Penn paid over $9.3 million of the money to Ssecurion, a company owned by Ewer, as fake fees/ The two of them purportedly misled auditors about the fees that were supposedly related to due diligence, even forging documents up to as recently as last year.

The SEC is charging Penn, Ewers, Ssecurion, and Camelot entities with violating federal securities laws’ provisions related to records and books, antifraud, and registration applications. The regulator wants disgorgement of ill-gotten gains plus interest, payment of penalties, and a bar from violating the securities laws’ antifraud provisions ever again.

At the SSEK Partners Group, our securities lawyers represent high net worth clients and overseas investors with securities claims and financial fraud lawsuits against financial firms that are based in the US. Contact our private equity fund law firm today. Working with an experienced institutional investment fraud law firm can increase your chances of recovering everything that you are owed. Our securities attorneys have helped thousands of clients recoup their losses.

SEC Charges Manhattan-Based Private Equity Manager With Stealing $9 Million in Investor Funds, SEC, January 30, 2014

Read the SEC Complaint (PDF)

New York private equity manager, firm charged with $9 million theft, Reuters/Yahoo, January 30, 2014


More Blog Posts:
Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013
Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010

Plaintiffs Can Pursue Narrowed Claims Against Private Equity Firms, Institutional Investor Securities Blog, March 9, 2013

January 8, 2014

SEC in Action: Finds Nomura Holdings Not Ineligible Issuer Even with Judgment, Will Consider Redrafted Shareholder Proposal Regarding Exelon, & Puts Out Regulation M, Rule 105 Violation Sanctions

The Securities and Exchange Commission’s Division of Corporation Finance has given relief to Nomura Holdings, Inc. over an entry in the final judgment issued against its subsidiary Instinet, LLC last month. The staff said that Nomura made a good cause showing under 1933 Securities Act Rule 405(2), and now the SEC says it won’t consider the company an ineligible issuer even with the entry of that final judgment.

The SEC opened up an administrative proceeding action against Instinet, accusing it of purposely abetting and aiding and violating sections of the Investment Advisers Act. The claims involved purported soft dollar payments.

J.S. Oliver Capital Management, L.P., an Instinet customer, had asked for the payments for expenses it did not tell clients about. The Commission says that Instinet made the payments per JS Oliver’s request, even though there were red flags indicating that the requests for payment approval were improper. The Nomura subsidiary turned in a settlement offer that led to a cease-and-desist order against the brokerage firm, & the regulator accepted the settlement offer.

Responding to a no-action request from Exelon Corp. to leave out from the latter’s proxy materials a shareholder proposal for a pay ratio cap for certain named executives, this SEC division said the proposal would be excluded unless it is redrafted (or a request is made to the board of directors). SEC staff did not agree with Exelon that the proposal, which concentrates on senior executive compensation-related policies, was misleading, false, or pertained to mere ordinary business.

Canadian-registered portfolio management firm Qube Investment Management Inc. turned in the proposal, asking that the compensation committee or the board restrict how much each named Exelon executive officer could make to no more than 100 times the median annual total paid to all company employees. Qube said that at least one Exelon executive is making 200 times the pay of the average American worker.

Exelon argued that the proposal would properly limit the power of tis board to decide compensation, and under Pennsylvania law this subject was not appropriate for action by shareholders.

SEC staff agreed that there was some ground’s for Exelon’s argument about the proposal not being appropriate subject for shareholder action or that it could cause the company to violate state law. That said, staff noted that the defect could be fixed if it was reframed as a request or a recommendation.

In other SEC news, the Commission has just issued final rules to make clear the roles of its ethics counsel and general counsel. The regulator’s general counsel is to advise staff lawyers about professional duties arising from their official duties, as well as probe allegations of professional misbehavior. As for its ethic’s counsel, the SEC said its job did not include looking into allegations about professional misconduct or making referrals to the authorities. The rules and accompanying modification/clarifications will go into effect once they appear in the Federal Register.

Also, the SEC has sanctioned Axius Holdings, LLC. for violating Regulation M’s Rule 105. The Commission claims that Axius took part in 13 offerings that the rule covers between June 2008 and March 2010 and then went on to short the stock of the companies during the restricted periods.

As a result of these alleged trading activities, Axius and its owner Henry Robertelli purportedly made profits of about $31,000. Now, the two of them must pay disgorgement in that approximate amount, plus prejudgment interest and a monetary payment.

The SSEK Partners Group is a securities fraud law firm that represents institutional investors and high net worth individuals in recovering their money.

Read the SEC Order Regarding Nomura (PDF)

Letter from the SEC's Division of Corporation Finance Over Qube, Exelon, Shareholder Proposal (PDF)

Responsibilities of the General Counsel, SEC (PDF)


More Blog Posts:
RBS Securities’ Japan Unit to Pay $50M Criminal Fine Over Libor Manipulation, Institutional Investor Securities Blog, January 7, 2014

JPMorgan To Pay $2.6B in Penalties in Bernard Madoff Ponzi Scam Settlements, Stockbroker Fraud Blog, January 7, 2013

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor, Institutional Investor Securities Blog, December 14, 2013

December 10, 2013

Volcker Rule is Approved by SEC, FDIC, Federal Reserve, CFTC, and OCC

Five regulatory agencies in the US have voted to approve the Volcker Rule. The measure establishes new hurdles for banks that engage in market timing and will limit compensation arrangements that previously provided incentive for high risk trading.

While the Federal Reserve Board and the Federal Deposit Insurance Corporation voted unanimously to approve the Volcker Rule, the Securities and Exchange Commission approved it in a 3-2 vote, the Commodity Futures Trading Commission approved it in a 3-1 vote, and the Office of the Comptroller of the Currency’s sole voting member also said yes. President Barack Obama praised the rule’s finalization. He believes it will improve accountability and create a safer financial system.

Named after ex-Federal Chairman Paul Volcker, the rule sets up guidelines that impose risk-taking limits for banks with federally insured deposits. It mandates that they show the way their hedging strategies are designed to function, as well as set up approval procedures for any diversions from these plans. Per the rule’s preamble, banks have to make sure hedges are geared to mitigate risks upon “inception” and this needs to be “based on analysis” regarding the appropriateness of strategies, hedging instruments, limits, techniques, as well as the correlation between the hedge and underlying risks.

Banks with federal insured deposits won’t able to take part in proprietary trading, which involves engaging in risky investment endeavors for their own benefits. They also won’t be allowed to take ownership stakes in private equity funds and hedge funds.

Unlike an earlier version of the rule, which gave an exemption to the proprietary trading ban involving US Treasury securities, this final rule lets firms trade foreign debt. That said, foreign banks in the US will have to contend with stringent trading restrictions and overseas banks with US offices won’t be allowed to sell, buy or hedge investments for profit.

According to CNN.com, advocates of reform believe that with the Volcker Rule’s restrictions taxpayers wont have to bail out these institutions In the future. Meanwhile, representatives of the industry are calling measure burdensome and too complicated.

Banks wanted the rule to protect market timing (with the firms hold the securities to engage in customer transactions). They also wanted to keep their ability to trade for hedging purposes.

Now, with the Volcker Rule, to show that they are taking part in market making (rather than speculation), banks will need to demonstrate that trades are being determined by customers’ “reasonably expected near-term demands,” and that historic demand and existing market conditions have been factored into the equation. Also, although banks will now have to contend with more limits on foreign bond trading, they can still take part in the proprietary trading of federal, state, municipal, and government-backed entities’ bonds.

As for hedging, firms will have to identify specific risks that such activities would offset. Bankers involved in hedging won’t be compensated in a manner that rewards proprietary trading.

The SSEK Partners Group represents institutional investors and high net worth individual investors throughout the US. We help our clients recover their securities fraud losses

Financial regulators approve long-awaited Volcker Rule, CNN, December 10, 2013

Volcker Rule Challenges Wall Street, Wall Street Journal, December 10, 2013

READ: The Volcker Rule draft regulations and fact sheet, Washington Post, December 10, 2013


More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Blog, May 22, 2012

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds, Institutional Investor Securities Blog, February 28, 2012

CFTC Securities Headlines: Goldman Sachs Fined For Inadequate Broker Supervision in $118M Fraud, Firms Named in Precious Metal Scam, & Defendants to Pay $1.8M Over Off-Exchange Foreign Currency Scheme, Stockbroker Fraud Blog, December 14, 2012


December 7, 2013

SEC Considers Imposing Proxy Adviser Rules

The US Securities and Exchange Commission is looking at whether proxy advisers have become so influential when it comes to corporate elections that rules should be imposed in them to create greater transparency. At a recent SEC-hosted meeting, brokers, institutional investors, business groups, and unions debated about the role that proxy advisors Glass Lewis & Co. LLC and Institutional Shareholder Services Inc. have played in shareholder voting.

According to Bloomberg, research from non-profit organization Conference Board reports that with the growth in institutional investors’ percent of voting shares going up by over 50% there has been a growing demand for proxy research. However, there is concern by some that proxy advisors have a lot of power over the governance decisions of public companies yet they don’t have to contend with much Commission oversight. Critics think proxy advisors influence shareholders to vote blindly on proxy measures without getting disclosures about possible conflicts. Meantime, supporters of proxy advisors say that they provide an important service—especially to small institutional investors that lack the resources to assess every vote they make.

Mutual funds, pensions, and other mutual funds tend to be proxy advisers’ typical clients. SEC Commissioner Daniel Gallagher attributes proxy advisers’ “outsized role” to policy guidance issued by the agency in 2009 telling investment advisers they could fulfill an obligation to vote in the best interests of shareholders by depending on third party research.

It was just this year that Glass Lewis & Co. LLC and Institutional Shareholder Services Inc. consented to abide by a European Securities and Markets Authority recommendation that they obey a voluntary conduct code about disclosing the way they make recommendations and manage conflicts of interest. Still, Business Roundtable & the US Chamber of Commerce have asked for more disclosures.

The SSEK Partners Group represents investors with securities claims against financial firms, investment advisers, brokerage firms, brokers, and others. Contact our securities fraud law firm today.

SEC Considers More Oversight Over Proxy Advisers, Bloomberg, December 5, 2013

SEC official warns of investor over-reliance on proxy advisory firms, Reuters, December 5, 2013


More Blog Posts:
SEC Examines Proxy Advisory Firms, Institutional Investor Securities Blog, October 14, 2010

SEC Goes After Alleged Ponzi Scammers, Stockbroker Fraud Blog, November 15, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

December 2, 2013

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections

The Public Investors Arbitration Bar Association (PIABA) is working with consumer rights group Public Citizen to get the US Securities and Exchange Commission to release documents about its oversight of the Financial Industry Regulatory Authority’s selection of the arbitrators who preside over disputes between broker-dealers and investors. According to PIABA President Jason Doss, because customers are “forced” into only having securities arbitration as a resolution venue when they sign documents to set up brokerage accounts (in the event of future disputes), they should be allowed to know how FINRA decides who hears the arbitration cases.

PIABA is a lawyers’ group that represents investors with securities arbitration claims. Contending that this is an issue of “transparency,” the attorneys have been trying to gain access to these documents for the last few years.

The group’s efforts started in 2010 with a Freedom of Information Act query to the SEC asking for documents that address how the regulator inspects FINRA’s process for selecting arbitrators and looking into their backgrounds. However, even though FOIA grants the public access to federal agency records, it has exemptions. (The exemption exists to protect sensitive matters, such as customer’s private financial data.)

The Commission invoked such an exemption as its reason for turning PIABA’s request. The group made a second attempt to get the documents but this also proved unsuccessful and the lawyers’ group then sued the SEC. They lost their case earlier this year.

Now, Public Citizen’s legal arm has submitted a brief for PIABA in a federal appeals court to overturn the district court’s ruling, which allowed the records to stay undisclosed. (In June, after Reuters reported that a FINRA arbitrator presiding over a securities arbitration case involving Goldman Sachs had been criminally indicted in the past, FINRA modified the way it vets its arbitrators, of which there are about 6,000. Previous to that arbitrators were only vetted once as candidates for the job. Now they must be vetted yearly.)

Still, it will be up to the U.S. Court of Appeals for the District of Columbia Circuit to determine what kind of examination reports are in the exemption that the SEC is claiming. PIABA wants the court to restrict the exemption reports regarding the financial activities of an institution while allowing disclosure of information about FINRA’s administrative duties.

The SSEK Partners Group represents investors with securities arbitration claims against broker-dealers, investment advisers, brokers, hedge fund managers, mutual fund managers, and others. You want to work with an experienced FINRA arbitration lawyer that knows how to pursue your claim.

Our securities law firm knows how upsetting it can be to sustain financial losses caused by professional misconduct or negligence. We are here to help our investor clients recover their investment losses.

Investor advocates push to see trove of arbitration records, MSN, December 5, 2013

Public Investors Arbitration Bar Association

Public Citizen


More Blog Posts:
Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs, Stockbroker Fraud Blog, December 3, 2013

Financial Firms in the Headlines: UBS Charges Financial Planning Fees, MF Global Customers Seek to Cap Ex-Leaders’ Legal Defense Expenses, Ex-Thompson REIT CFO is Suspended, Stockbroker Fraud Blog, July 2, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

November 11, 2013

SEC May Propose New Swaps Margins & Title VII Rules

At a Securities Industry and Financial Markets Association conference last month, the Securities and Exchange Commission’s Division of Trading and Markets acting director John Ramsay said that the regulator will likely consider reworking a 2012 proposal that would establish margin requirements on specific swap trades now that international financial supervisors have established new margin requirements. It was The International Organization of Securities Commissions and the Basel Committee on Banking Supervision that issued the document setting up a final framework for margin requirements related to non-centrally cleared derivatives.

Ramsey said that in the wake of this document, the proposed rules that the SEC might withdraw are the ones that affect margin requirements as they pertain to certain swaps. The structure set up by the Basel-IOSCO document partially puts into place specific margin requirements on financial firms and the systematically integral non-financial entities that take part in non-centrally cleared derivatives transactions.

The regulator’s earlier proposal would have established margin requirements for security-based swap dealers and major swap participants while upping the minimum net capital requirements for brokerage firms allowed to implement the alternative internal model-based method to compute net capital. Now, however, said Ramsey, the agency could propose a new rule to make sure there is comment on a “full range of initiatives,” including the ones addressed in the Basel-IOSCO document.

Ramsay also spoke about a likely rulemaking sequence the SEC could use to put into place sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII, which was in part responsible for introducing swaps market regulation. He stated that the agency could assess Title VII rules that were finalized or proposed by the Commodity Futures Trading Commission to identify possible differences between CFTC rules and SEC rules. However, said Ramsey, even though the SEC is concerned that registrants might feel burdened from having to deal with two compliance regimes, this did not mean the agency would only issue rules that are in complete alignment with CFTC rules.

Contact our securities lawyers right away if you suspect that you are the victim of investment fraud.

International Organization of Securities Commissions

Securities and Exchange Commission’s Division of Trading and Markets


More Blog Posts:

ICE CEO Says US Equity Markets Lets Traders Advantage of Small Investors, Stockbroker Fraud Blog, November 7, 2013

SAC Capital Advisors to Pay $1.2B Penalty, Pleads Guilty to Insider Trading Violations, Stockbroker Fraud Blog, November 4, 2013

Lawmakers & Industry Folk Address the DOL Amending the Definition of Fiduciary, Reg A Plus Offerings, Oversight, Rogue Brokers, and Expungement Rules, Institutional Investor Securities Blog, November 7, 2013

November 7, 2013

Lawmakers & Industry Folk Address the DOL Amending the Definition of Fiduciary, Reg A Plus Offerings, Oversight, Rogue Brokers, and Expungement Rules

US House Passes A Bill Prohibiting the US Labor Department DOL From Amending Its Definition of “Fiduciary” Until SEC’s Uniform Conduct Standard is Established
A bill that would not allow the Department of Labor to amend its rules regarding the definition of the term “fiduciary” until after Securities and Exchange Commission adopts its own rule that places broker-dealers and investment advisers under a uniform standard of conduct has passed in the US House of Representatives. The DOL has been trying to revise its definition of “fiduciary” in the Employee Retirement Income Security Act (ERISA). Those who voted to prohibit revising the definition have been worried about possibly ending up with two rulemakings that were inconsistent with one another.


Reg A Plus Offerings and Their Oversight Get Capitol Hill Debate
At a Senate Banking Committee’s Securities, Insurance, and Investment Subcommittee hearing about developments involving the Jumpstart Our Business Startups Act, discussion ensued about Reg A Plus offerings. The SEC has yet to put out a proposal about “Reg A Plus,” which is the term used by its staff to refer to the new Reg A threshold.

Per the JOBS ACT’S Title IV, the SEC has to put in place a rule that will give exemption to certain offerings of up to $50 million (the current Reg A exemption is $5 million). While Reg A plus offerings would be exempt from SEC registration, they will have to adhere to state level registration unless found on a national securities exchange or sold to a “qualified purchaser.” Already, some in the industry are calling for a “workable definition” of what constitutes a “qualified purchaser” so that certain offerings would be exempt from state registration requirements.

There are those who believe that Reg A Plus offerings would benefit “Main Street businesses” that are not the likeliest candidates for other JOBS Act provisions. That said, the existing blue sky registration process puts in place additional limitations and burdens that might discourage those who would use a new Reg A Plus exemption.

Meantime, the North American Securities Administrators Association has put out a proposal (and is seeking comment) on streamlining the review of Reg A Plus offerings by the states. NASAA says long standing state policies will have to be modified and a “peel back” of certain requirements is necessary to make the offerings more viable.


Sen. Markey Worries About Rogue Brokers, Expungement of Violations from Public Records
In letters to the SEC and the Financial Industry Regulatory Authority, US Sen. Edward Markey (D-Mass) expressed his concerns about the high rate of broker-dealers that are able to get certain complaints removed from their records. Markey co-authored the bill that eventually led to the creation of FINRA’s BrokerCheck, which is the online database that provides information about the records of broker-dealers and brokers that the public can access. However, he worries that with such a high expungement rate for these advisers, investors are not getting an accurate picture of these people’s records.

The senator from Massachusetts believes that expunging settlement deals from a broker’s records should be prohibited. Meantime, FINRA said it has started to make changes to preserve the integrity of its BrokerCheck system and enhance investor protections.

Markey also voiced worry about a report in the Wall Street Journal noting that millions of dollars in arbitration awards aren’t paid because some firms file for bankruptcy instead. Markey wants the SRO to make brokerage firms carry insurance to cover arbitration awards. He is dismayed that there are thousands of brokers who keep selling securities even after being kicked out by FINRA. He told the SRO that it needs to do a better job of finding “rogue brokers” who stay in business even though they’ve been expelled.


The SSEK Partners Group represents individual and institutional investors that have sustained losses from broker fraud. Contact our stockbroker fraud law firm today.


U.S. House passes bill to delay fiduciary rules at SEC, Labor Dept, Reuters, October 29, 2013

NASAA Outlines Plan for Streamlined State Review of JOBS Act-related Multi-State Offerings, North American Securities Administrators Association, October 30, 2013

Senator: Finra too weak to go after deadbeat broker, Investment News, October 25, 2013


More Blog Posts:

Judge Dismisses Shareholder Lawsuit Suing Bank of America For Allegedly Concealing AIG Fraud Case, Institutional Investor Securities Blog, November 6, 2013

JPMorgan’s Admission to CFTC of “Reckless” Trading Could Lead to More Securities Fraud Cases, Institutional Investor Securities Blog, November 4, 2013

Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?, Stockbroker Fraud Blog, November 6, 2013

October 24, 2013

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.

As for proposed rule 3110(c)(3)(A), this will be modified so it is clear that it doesn’t establish a strict liability duty mandating the ID’ing and getting rid of all conflicts of interest as they relate to the inspections taking place at a location. Members will have to implement procedures designed so that they don’t let the effectiveness of inspections become compromised by such conflicts.

The SSEK Partners Group represents investors that have sustained financial losses because of broker fraud. Contact our securities law firm today.

FINRA Rules

US Securities and Exchange Commission


More Blog Posts:
North American Securities Administrators Association Releases 2013 List of Top Threats to Investors, Stockbroker Fraud Blog, October 22, 2013

SEC Looking to Simplify Disclosure Rules to Minimize “Information Overload” for Investors, Stockbroker Fraud Blog, October 16, 2013

FINRA Arbitration Panel Awards Ex-Wedbush Securities Broker $4.2M Against the Firm, Institutional Investor Securities Blog, October 4, 2013

October 11, 2013

SEC Officers Guidance on Liability and Compliance for Brokerage Firms

The Securities and Exchange Commission has published answers to frequently asked questions as guidance about liability that may come out of the Exchange Act related to the responsibilities of chief compliance officers and other legal and compliance staff at broker-dealers. The advisory was issued so firms could consider which circumstances and facts may result in grounds for supervisory liability.

In the FAQ, the SEC notes that for purposes of the Exchange Act Sections 15(b)(4) and (6), a person is a supervisor depending on the specifics of a case and whether he/she had the required ability, responsibility, or authority to impact the behavior of the employee(s) whose conduct is in question. There are, however, legal personnel and compliance staff who can assume a key role without assuming such supervision.

The Commission said that brokerage firms are responsible for establishing compliance programs that make sure compliance with regulations and laws occurs. Firms may want to include processes to identify incidents of noncompliance, a robust monitoring system, and procedures delineating who is tasked with what responsibility and/or supervisory role. The regulator says that compliance and legal staff do play a key part in broker-dealers efforts to create and put into effect a compliance system that works.

The SEC that says that a person with supervisory duties, that also works in a legal or compliance role has to supervise reasonably with the intent to make sure that violations of the Commodity Exchange Act, federal securities laws, and the Municipal Securities Rulemaking Board rules do not happen. The person must either reasonably discharge these duties or know that others are doing so appropriately. Such a “supervisor” can’t just act as “bystander” or turn a blind eye to red flags, wrongdoing, or other indications of irregularity.

Our stockbroker fraud law firm represents clients that have sustained huge losses not just due to broker misconduct but also over the inadequate supervision that allowed such wrongdoing, carelessness, and negligence to arise.

The SEC's Guidance on Liability and Compliance for Brokers
(PDF)


More Blog Posts:
Puerto Rico Municipal Bonds, Stockbroker Fraud Blog, October 9, 2013

JPMorgan to Pay $920M to Settle London Whale Debacle & $80M Over Credit-Card Practice Allegations, Institutional Investor Securities Blog, September 19, 2013

SEC Lifts Ban on General Solicitation, Institutional Investor Securities Blog, September 23, 2013

September 23, 2013

SEC Lifts Ban on General Solicitation

Beginning today, September 23, the SEC’s ban on general solicitation is no longer in effect. Those raising funds for corporations can now publish equity offerings on websites for crowdfunding, as well as blog and tweet about them. The move comes in the wake of the Jumpstart Our Business Startups Act, which was passed last year.

That said, even with the lifting of the general solicitation ban, raising funds for companies will likely remain a difficult endeavor. Funds can only be raised from investors that are accredited, and now, the latter will have to show proof that they fulfill the wealth criteria for accreditation by having an income greater than $200K during the last two years or a net worth of $1M (the value one’s primary residence is not included.)

Would-be fundraisers will need to provide extensive disclosure of offerings not just to the Commission, but also to the public, and there will be tight restrictions and the risk of penalty of a yearlong fundraising ban for violations. Also, in order to avail of being able to engage in general solicitation, startups will have to file a Form D with the regulator at least 15 days prior to starting to solicit. An amended Form D will have to be turned in within 30 days after the termination of an offering.

Still, there are those in the crowdfunding industry that believe that allowing for general solicitation should open up opportunities not just for businesses and entrepreneurs, but also for over 8.7 million accredited investors. Some expected there to be an increase in parties registering as accredited investors.

If you suspect that your investment loses are due to securities fraud, please contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings, SEC, July 10, 2013

Starting Monday, Startups Can Broadcast Their Fundraising From the Rooftops — If They Heed the Fine Print, All Things D, September 20, 2013

The JOBS Act (PDF)


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

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012

Regulatory Reform: Delay or Destruction?, Institutional Investor Securities Blog, August 26, 2013

August 30, 2013

Securities and Exchange Commission Report: Enforcement Division & OCIE Collaborate, Broker-Registration in Private Funds, Conflict Minerals Regulation, Short Sale Rules, and New Commissioner Confirmations

Lawyers Not Happy About Growing Collaboration Between SEC’s Enforcement and OCIE

A number of lawyers have expressed dismay that the collaboration efforts between the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations and its Enforcement Division are increasing. There is concern that examinations are ending up becoming the start of later investigations. For example, examiner interviews with the employees of registrants can later turn into the basis of enforcement actions, and some attorneys say this brings up issues of due process.

Meantime, SEC officials have acknowledged the growing collaboration between these two divisions.


Commission’s Trading Division Looks at Broker-Registration in Private Funds
At a recent gathering John Ramsay, the acting direct of the SEC’s Division of Trading and Markets, said that the group is continuing to look at broker-dealer registration matters as they relate to the private fund sector. David Blass, the TM chief counsel, previously had pointed to two practices that implicate registration requirements for brokerage firms, including when private fund advisers get compensation that is transaction-based for broker activities that supposedly relate to at least one of the funds’ portfolio companies.

Ramsey also said that broker-dealer registration requirements as they relate to high-frequency firms are also getting a closer look. He noted that there are questions as to whether firms that are not registered are “appropriately not registered.” These nonregistered brokerage firms’ activities, presentation to the marketplace, and transactions will be up for greater scrutiny.


DC Circuit Asked by Business Groups to Look At Ruling Upholding SEC Conflict Minerals Regulation
The Business Roundtable, the National Association of Manufacturers, and the US Chamber of Commerce is asking the U.S. Court of Appeals for the District of Columbia Circuit to consider a ruling by a lower court upholding the SEC’s conflict minerals regulation. The groups don’t believe that the agency’s record supports the rule, which mandates that US companies and foreign private issuers report their “conflict minerals” use from the Democratic Republic of Congo and the countries near it.

Plaintiffs filed a lawsuit contending that the SEC did not perform sufficient cost-benefit analysis for the rulemaking while misconstruing the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 1502 by not including a de minimis exemption. The Commission had adopted the rule pursuant to that section. They also claimed that the rule improperly compels speech that is “stigmatizing” by making issuers publish conflict material disclosures on their websites, which is a 1st Amendment violation.

SEC Warns About the Use of Options to Get Around Short Sale Rules
The Commission’s Office of Compliance Inspections and Examinations has put out a “risk alert” warning about the use of options trading strategies to get around its rules regarding closing out short sales. The alert talks about these tactics, including strategies to make it seem that the securities were delivered (when they hadn’t been) upon the settling of a short sale, that are employed by some clearing firms, brokerage firms, and their customers to circumvent Regulation SHO.

The SEC staff mentions a number of “red flag” tactics, including excessive/exclusive trading in securities that are “hard-to-borrow,” holding huge “fail-to-deliver” positions, failing to deliver on positions, employing married puts and/or by-writes to fulfill the regulations close-out requirement, and using the same trader as contra-party to make multiple big trades in a number of securities that are hard-to-borrow.


New SEC Commissioners Are Confirmed
Kara Stein and Michael Piwowar were sworn in as SEC Commissioners last month. Both were unanimously approved by the US Senate. Piwowar replaces Commissioner Troy Paredes and Stein replaces Elise Walter.

Attorneys Decry Increasing Convergence Between SEC Exam, Enforcement Functions, Law.Stanford.Edu, August 15, 2013


Our securities law firm is here to help institutional investors recoup their investment fraud losses. Contact the The SSEK Partners Group today.

SEC Trading Division Continues to Focus On Broker Registration in Private Fund Space, AlacraStore, August 14, 2013

Nat'l Ass'n of Mfrs. v. SEC (PDF)

Short Sale Rules Alert, SEC

More Blog Posts:
Securities Headlines: UBS to Pay $4.5M Over Unregistered Assistants, $6M Ponzi Scam Allegedly Funded Reality Show, & Cherry Picking Allegations Lead to SEC Charges, Stockbroker Fraud Blog, August 30, 2013

Texas Money Manager Sued by SEC and CFTC Over Alleged Forex Trading Scam
, Stockbroker Fraud Blog, August 6, 2013

JPMorgan Found Liable in Billionaire’s Subprime Mortgage Lawsuit for Over $50M in Damages, Institutional Investor Securities Blog, August 28, 2013

August 26, 2013

Regulatory Reform: Delay or Destruction?

10 Democrats in the US Senate are calling on the Obama Administration to delay a proposal by the Department of Labor involving retirement plan-related investment advice until after the SEC makes a decision over whether to put out its own proposal about retail investment advice. The Commission is looking at whether it should propose a rule that would up the standard for brokers who give this type of advice. The lawmakers are worried that the two rules might conflict and obligate investment advisers and brokers to satisfy two standards.

Meantime, the Labor Department is getting ready to once more propose a rule that would broaden what “fiduciary” means for anyone that gives investment advice about retirement plans. Its previous proposal in 2010 met with resistance from the industry and some members of Congress. Even now there are also Republican lawmakers that want the DOL to wait until after the SEC makes a decision.

Commission Chairman Mary Jo White says she would like the agency to make this decision as “as quickly as we can.” Also, earlier this month she said it would be “premature” to talk about whether the regulator will change or withdraw a recent proposal to amend Regulation D to improve requirement for companies wanting a more relaxed general solicitation arena.

In a letter to House Financial Services Capital Markets Subcommittee Chairman/Rep. Scott Garrett (R-N.J.), White said the proposal is still subject to comment and it was too early to talk about what the SEC might do. Garrett and Financial Services Oversight Subcommittee Chairman Patrick White had written her following the Commission’s proposal to up Reg D requirements for companies wanting to employ general solicitation in private offerings.

The SEC put out the proposal on the same day that it adopted rules regarding private placement and general solicitation, per the Jumpstart Our Business Startups Act. Contending that the proposed amendments violate the JOBS Act, Reps. White and Garrett want them withdrawn. For example, the proposed changes would mandate that issuers submit notice, via Form D, 15 days before advertising offerings.

The two men say that imposing this type of waiting period on solicitation violates the Act. In response, Commission Chairman White said their concerns would be noted in the SEC’s comment file.

Earlier this week US President Barack Obama met with Federal Reserve Chairman Ben Bernanke and other senior regulators and called for the full implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to officials, while Mr. Obama praised the regulators for all the work they’ve done up to now to implement the act’s reforms and consumer protections, he made it clear that they need to complete implementing all the reforms that have yet to be set in place. Regulators have been challenged with finishing up the rules needed to fully implement the law, touted as the most important reform of the country’s financial sector since the 1930’s.

The SSEK Partners Group is a securities law firm that represents institutional clients and high net worth individuals with financial fraud claims. Contact our securities fraud attorneys today.

Senate Democrats urge delay in Labor fiduciary-duty rules, Investment News, August 6, 2013

Obama Meets With Financial Regulators on Dodd-Frank Progress, Bloomberg, August 19, 2013

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


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

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

Professional Athletes, Celebrities Often Targeted for Securities Fraud, Stockbroker Fraud Blog, August 14, 2013

August 17, 2013

SEC and DOJ Sue Bank of America Over Alleged $850M RMBS Fraud

Bank of America (BAC) and two subsidiaries are now facing SEC charges for allegedly bilking investors in an residential mortgage-backed securities offering that led to close to $70M in losses and about $50 million in anticipated losses in the future. The US Department of Justice also has filed its securities lawsuit over the same allegations.

In its securities lawsuit, submitted in U.S. District Court for the Western District of North Carolina, the Securities and Exchange Commission contends that the bank, Bank of America Mortgage Securities (BOAMS) and Banc of America Securities LLC, which is now known as Merrill Lynch, Pierce, Fenner & Smith, conducted the RMBS offering, referred to as the the BOAMS 2008-A and valued at $855 million, in 2008. The securities was sold and offered as “prime securitization suitable for the majority of conservative RMBS investors.

However, according to the regulator, Bank of America misled investors about the risks and the mortgages’ underwriting quality while misrepresenting that the mortgage loans backing the RMBS were underwritten in a manner that conformed with the bank’s guidelines. In truth, claims the SEC, the loans included income statements that were not supported, appraisals that were not eligible, owner occupancy-related misrepresentations, and evidence that mortgage fraud was involved. Also, says the regulator, the ratio for original-combined-loan-to-value and debt-to-income was not calculated properly on a regular basis and, even though materially inaccurate, it was provided to the public.

The Commission believes that because there were a material number of loans that were not in compliance with the bank’s underwriting guidelines and concentration of risky wholesale loans were not proportionate, BOAMS 2008-A sustained an 8.05 percent cumulative net loss rate through June of this year, which is the greatest loss of rate of any BOAMS securitization, comparably speaking, and this violated of the Securities Act of 1933.

As for the Justice Department’s RMBS fraud case, which is also a civil suit, the government says that not only did Bank of America lie to investor about the risks, but also it made false statements after purposely not conducting appropriate due diligence and also including in the securitization high-risk mortgages of a disproportionate quantity that were originated via third party mortgage brokers.

This securities lawsuit is part of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group’s ongoing initiatives to target misconduct involving this section of the market. U.S. Attorney Tompkins says that now, Bank of America will have to deal with consequences arising from its alleged actions.

The SSEK Partners Group helps institutional investors and others recover their RMBS fraud losses. Contact us today to request your free case assessment. Our securities attorneys have helped thousands of investors recoup their investment losses.

SEC Charges Bank of America With Fraud in RMBS Offering, SEC, August 6, 2013

Department of Justice Sues Bank of America for Defrauding Investors in Connection with Sale of Over $850 Million of Residential Mortgage-Backed Securities, DOJ, August 6, 2013


More Blog Posts:
Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

Texas Securities Case: SEC Alleges Ponzi Scam Involving Virtual Currency Bitcoin, Stockbroker Fraud Blog, July 28, 2013

Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark, Stockbroker Fraud Blog, July 4, 2013

July 31, 2013

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor

The Government Accountability Office is recommending that the SEC look at eight other criteria for who should qualify as an accredited investor for purposes of the 1933 Securities Act Regulation D Rule 506. The criteria is divided into two categories: understanding financial risk and financial resources. The independent, nonpartisan agency that works for Congress put out its recommendations to the regulator on July 18.

Under the 1933 Act, accredited investors can take part in certain private and limited exempt offerings. To qualify as an accredited investor a person needs to have at least $200,000 for each of the last two years or a net worth of $1 million without factoring in his/her main residence. While market participants that were surveyed agreed that net worth was the most essential criterion, they indicated that having an investment advisor and liquid investments could balance capital formation interests and investor protection.

Investor advocates and state securities regulators consider this criteria to be outdated and they are calling for substantive changes. Even SEC Commissioner Elisse Walter told broker-dealers at a recent gathering that the agency “desperately” must modify the definition of an accredited-investor.

Also on July 18 the GAO issued a report criticizing the Commission for having an organizational culture that wasn’t “constructive,” saying this could hurt the latter’s ability to execute its mission. The GAO pointed to a structure that was “siloed,” morale that was “low” and an aversion to risk. Its findings were compiled with information from ex-and current SEC employees, interviews, surveys, and other research over the past year.

Unsatisfactory communication and leadership, dissatisfaction with promotional opportunities, and inadequate collaborations among divisions were among the problems mentioned. There was concern by some SEC staff that the agency’s senior officials are too risk averse due to fear of public scandal. They believe that this has led to managers becoming reluctant to end cases or make decisions because senior officers want to lower the risk of future criticism. There also was worry that this could mean that the Commission might not go after cases involving “evolving market practices” or other matters that don’t have much precedent.

The GEO is offering a number of recommendations, including that the SEC come up with a strategic plan to hire and keep staff and come up with incentive for staff to get behind a workplace environment that promotes collaboration and communication.

It was the Dodd-Frank Wall Street Reform and Consumer Protection Act that mandated the GAO come up with this report.

The GAO
Referred to the “congressional watchdog,” the GAO looks at the way the US government spends the money of taxpayers. It is its mission to help Congress fulfill its constitutional duties and assist in enhancing the performance of the government and ensuring the latter’s accountability to the American people.

The SSEK Partners Group represents institutional and high net worth individuals with FINRA arbitration and securities fraud lawsuits against negligent financial firms and/or their representatives. Your case consultation with us is free.


SEC: Alternative Criteria for Qualifying As An Accredited Investor Should Be Considered, GAO, July 2013 (PDF)

SEC: Improving Personnel Management Is Critical for Agency's Effectiveness, GAO, July 2013 (PDF)


More Blog Posts:
Both Sides Rest in Ex-Goldman Sachs Bond Trader Fabrice Tourre's Trial For Alleged Mortgage-Backed Securities Fraud, Institutional Investor Securities Blog, July 29, 2013

FINRA Reports Losses After Squandering Profit From NYSE Payment, Stockbroker Fraud Blog, July 23, 2013

DOJ’s $5B Securities Lawsuit Against Standard & Poor’s Can Proceed, Says Judge, Institutional Investor Securities Blog, July 22, 2013

July 6, 2013

Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.

Then, the Appellate Division, First Department reversed the ruling on appeal, finding that Bear Stearns’ settlement offer, the Commission’s order, and associated documents are not prone to any other interpretation besides that the firm knew and purposely took part in illegal late trading on behalf of certain clients that received preferential treatment and, also, the Commission’s order required disgorgement of money obtained via activities that were not legal.

Holding, the First Department said that disgorgement can be determined per matter of law when settlement funds are considered “disgorgement,” facts show that the funds came from an enterprise that was not legal, and what was paid makes up a reasonable estimation of all of the profits made. The court also said that the party doesn’t have to profit from all of the money that ends up being disgorged. Following further appeal, the New York Court of Appeals reversed this decision, returning the action to a lower court for resolution and discovery.

“Remember the old movie thrillers about Godzilla fighting King Kong (or the language-dubbed Japanese version when the G’ monster battled “Mothra,” to the death)?” said Institutional Investor Fraud Lawyer William Shepherd. “ I guess “art” imitates life as we now have a live 21st century behemoth battle as the Insurance Industry takes on Wall Street. Maybe this would have been a fair fight a decade ago, but today - not even close. Banks buy Wall Street firms. Wall Street firms parlay bank deposits into war chests, and … advantage Wall Street. It’s not that J.P. Morgan (JPM) needs Vigilant Life’s money, it’s just that, well, the money is there for the taking - candy from a baby. Politicians, judges and the rest of us take note: There’s a new gang in town and they get what they want when they want it.”

Contact our securities lawyers at The SSEK Partners Group today.

June 26, 2013

SEC Tells Financial Firms That Settling Without Denying or Admitting to Wrongdoing is No Longer Allowed in Certain Securities Cases

Securities and Exchange Commission Chairman Mary Jo White recently announced that defendants in certain securities cases would no longer be allowed to accompany an agreement to settle with the statement that they are doing so but without admitting or denying wrongdoing. Speaking to a columnist with The New York Times, White said that in certain instances, admissions are necessary for there to be public accountability. However, White also did say that most SEC cases still would be settled under the “nether admit nor deny standard,” which provides the accused incentive to settle while compensation to victims sooner.

The new policy was announced to SEC enforcement staff last week in a memo from George Canellos and Andrew Ceresney, the regulator’s enforcement division co-leaders. They went on to say that in cases that warrant such an admission, if the accused were to refuse then a securities lawsuit might be the next step.

Securities cases that require admissions of wrongdoing will have to satisfy certain criteria, such as intentional misconduct that was egregious, wrongdoing that hurt a lot of investors or put them at risk of serious financial harm, or unlawful obstruction of the Commission’s investigation.

“This policy change is long overdue,” said SSEK Founder and Stockbroker Fraud Lawyer William Shepherd. “Over the past decade, the SEC has accommodated the targets it has been investigating far too often. Only rarely is there the requirement of admission of wrongdoing, and almost never for large financial firms and their management. When one is caught with a hand in the cookie jar, it’s time to say ‘I did it and I’m sorry, rather than “I neither admit nor deny it was my hand.”

The change policy comes in the wake of complaints that the SEC has been to lax with its enforcement, especially when it came to pursuing securities fraud cases against large financial institutions involved in the economic crisis, such as JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), which all settled cases against them without denying or admitting guilt. Having to admit wrongdoing potentially could hurt financial firms because plaintiffs in private securities cases and class action fraud litigation may then cite the acknowledgement of culpability, thereby strengthening their claims. This could force banks to have to pay out millions of dollars than if they hadn't admitted to doing anything wrong.

S.E.C. Has a Message for Firms Not Used to Admitting Guilt, Stockbroker Fraud Law Firm, NY Times, June 22, 2013

Defense Bar Reacts With Dismay At Revision of SEC ‘No Admit/Deny’ Policy, Bloomberg/BNA, June 20, 2013

Securities and Exchange Commission


More Blog Posts:
CBOE Will Pay $6M Penalty Over SEC Charges Alleging Failure to Enforce Trading Rules, Institutional Investor Securities Blog, June 12, 2013
Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action, Stockbroker Fraud Blog, April 28, 2013

NASAA President Pushes for State Regulation of “Reg A Plus” and for Private Lawsuits Over Small Offerings, Institutional Investor Securities Blog, May 28, 2013

Continue reading "SEC Tells Financial Firms That Settling Without Denying or Admitting to Wrongdoing is No Longer Allowed in Certain Securities Cases " »

June 15, 2013

SEC Risk Fin Director Wants Public Input About Investor Protection-Related Costs and Benefits

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

June 12, 2013

CBOE Will Pay $6M Penalty Over SEC Charges Alleging Failure to Enforce Trading Rules

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

May 30, 2013

Former SEC Commissioner Wants SEC Shareholder Proposal Process Revamped

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

May 28, 2013

NASAA President Pushes for State Regulation of “Reg A Plus” and for Private Lawsuits Over Small Offerings

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

May 24, 2013

SEC Securities Policy Roundup: Neither Admit, Nor Deny Policy, Pursuit of Injunctions for Misconduct, and SRO Oversight Get Closer Scrutiny

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

May 16, 2013

Hedge Fund Manager Philip Falcone Consents to $18M Securities Fraud Settlement

Hedge fund billionaire Philip Falcone and his Harbinger Group (HRG) have reached an $18 million securities fraud settlement, an agreement in principle, with the SEC over allegations that he fraudulently took a $113 million loan from one of his funds to cover his taxes, manipulated the market, and gave preference to certain clients, including Goldman Sachs (GS). Falcone, who will personally pay $4 million, is settling the financial fraud case without admitting or denying wrongdoing. Although he can remain has CEO of his group and stay associated with Harbinger Capital Partners, he is barred from raise new money or using his hedge funds to make investments for two years.

The ban, however, doesn’t apply to the nine investment advisers that Falcone runs through the company. (This, some say, is so that Falcone can unwind the hedge fund without hurting investors.) The pending deal is once again raising questions about whether the SEC is doing enough to take action against wrongdoers in the industry.

For instance, Harbinger Group’s business that involves Falcone acting as a private equity investor in different companies is not really impacted by the SEC settlement. Also, the independent monitor selected by the SEC to watch the firm is one who was on a list that Falcone recommended.

The SEC’s commissioners still have to approve this settlement. Apparently an agreement for resolution had stalled until now because Falcone refused to allow the SEC to apply an injunction against fraud. Because the regulator dropped that bid, Falcone not only settled but he is willing to pay more than previously.

If you suspect that your financial losses are a result of securities fraud, contact our institutional investment fraud law firm today and ask for your free case assessment.

Philip Falcone Settles With SEC, Agrees to Two-Year Ban, CNBC, May 9, 2013

Billionaire Hedge Fund Manager Phil Falcone's Sweet Deal With The SEC, Forbes, May 9, 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

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

May 15, 2013

SEC Sues Traders Over Alleged Scam Involving Bribe Paid to Venezuelan Official to Get Bond Trading Business

The SEC is suing four traders affiliated with brokerage firm Direct Access Partners for their alleged involvement in a financial scam that involved millions of dollars paid in illicit bribes to a Venezuelan banking official to obtain that bank’s bond trading business.

According to the regulator, DAPs’ global markets group made fixed income trades for clients in foreign sovereign debt, generating revenue of over $66M from markup/markdown transaction fees on principal trade executions in Venezuela bonds sponsored by the state for BANDES (Banco de Desarrollo Económico y Social de Venezuela). The bank’s finance VP, María de los Ángeles González de Hernandez is accused of allegedly authorizing the illicit trades and receiving part of the revenue.

The securities scam is said to have taken place between October 2008 and at least June 2010. Because of the purported kickbacks paid to Gonzales, DAP was given the bank’s profitable trading business, while she was provided with incentives to get into trades with DAP at significant markdowns and markups regardless of the prices that BANDES paid. The traders are also accused of fooling DAP’s clearing brokers, inter-positioning one broker-dealer to cover up their involvement in the transactions, performing internal wash trades, and taking part in huge roundup trades to bulk up revenue.

Per the Commission regarding the trades: Thomas Bethancourt executed the trades that were fraudulent and kept track of the illicit markdowns/markups; Iuri Bethancourt was given over $20M in illicit proceeds through his shell company, which would pay Gonzales; Hurtado, who allegedly earned over $6M in kickbacks, was the one who paid Gonzales and acted as her intermediary with the traders; and Hurtado’s wife, Haydee Pabon, purportedly was given about $8M in markdowns/markups on BANDES trades under the guise of finders’ fees.


Read the Complaint
(PDF)


More Blog Posts:

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

Continue reading "SEC Sues Traders Over Alleged Scam Involving Bribe Paid to Venezuelan Official to Get Bond Trading Business" »

May 14, 2013

SEC Roundup: Regulator Addresses CDS Portfolio Margin Program & Ex-Commission Officials Want DC Circuit to Grant SIPC Protection to Stanford Ponzi Scam Victims

Ex-Commission Officials, Others Want DC Circuit to Grant Stanford Ponzi Scam Victims SIPC Protection
Former SEC Officials, law professors, and trade groups are among those pressing the U.S. Court of Appeals for the District of Columbia Circuit to reject the regulator’s bid to compel Securities Investor Protection Corporation coverage for the investors who were bilked in R. Allen Stanford’s $7 billion Ponzi scam. Inclusion under the Securities Investor Protection Act would allow the fraud victims to obtain reimbursement for losses.

However, SIPC, which is a federally mandated non-profit corporation, doesn’t believe that the Stanford investors, who purchased certificates of deposit from Stanford International Bank Ltd. in Antigua, fall under this protection. Following a failure to act on the SEC’s request to initiate liquidation proceedings for brokerage firm Stanford Group Co., the regulator asked the court for a novel order that would make the organization comply.

Last year, the district court rejected the SEC’s application, finding that Stanford’s investors were not, for Securities Investor Protection Act purposes, covered. The agency then went to the DC Circuit.

Now, in an amicus brief filing, the academics and ex-SEC officials, including Paul Atkins and Joseph Grundfest, are arguing that the appeals court should turn down the regulator’s bid to expand who is “covered through SIPC” because it would not be in line with statutory history, “contravenes” the statute’s “plan language,” and is in conflict with over four decades of judicial precedent.


SEC Division of Trading and Markets Address Credit Default SwapsPortfolio Margin Program Questions
In other SEC news, its Division of Trading and Markets recently addressed questions related to temporary approvals that were given to several brokerage firms/ futures commission merchants that allow their involvement in a program that would mix and position portfolio margin customer positions in cleared credit default swaps.

The SEC is now granting conditional exemptive relief from certain 1934 Securities Exchange Act requirements related to a program that would portfolio and mix margin customer positions in certain cleared CDSs. In March, the Commission gave conditional approval to Goldman Sachs & Co. (GS), J.P. Morgan Securities LLC (JPM), and five other banks to take part in the program. They now can temporarily determine the portfolio margin figures for client positions in commingled CDs according to a model created by ICE Clear Credit, the largest credit default swaps clearing house in the world, while division staff assess the financial firms’ margin methodologies.

Now, ICE Clear Credit participants have questions. They want to know what is the margin treatment of a portfolio that has just single-name CDS positions as well as what is the clearing participants' affiliates’ margin treatment. Responding, SEC division staff said that a FCM/BD client account that has just single-name CD positions would be subject to applicable margin requirements per FINRA Rule 4240. They also said that BD/FCM clearing participants have to deal with affiliates’ single-name CD positions as if they were “customer positions” for margin purposes. SEC staff said that this is in line with FINRA and Commission broker-dealer financial responsibility rules regarding how affiliates are to be treated.

Read the SEC's Response to Questions About CDS Portfolio Margin Program (PDF)

Read the Amicus Filing to the DC Circuit


More Blog Posts:
Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed, Institutional Investor Securities Blog, April 10, 2013

FINRA Bars Former Wells Fargo Advisors Broker that Bilked Child with Cerebral Palsy, Stockbroker Fraud Blog, April 26, 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

May 10, 2013

Lawmakers Tackle Investment and Securities Matters

US Senators John Thune (R-SD), Richard Burr (R-NC), and Tom Coburn (R-Okla) have introduced a bill that would mandate that public pension plans reveal more information about the way they calculate liabilities and assets or place at risk the favorable tax treatment for bonds that are issued by the states and cities. S. 799 is a companion legislation to a bill that was recently unveiled in the US House of Representatives.

Like S. 799, SRLR 710 would make pension plans notify the Treasury Department about what assumptions and methods they use to determine assets, debt, and liabilities. Failure to abide by these tougher disclosure requirements would lead to the revocation of tax exemptions for specific bonds put out by municipalities and states. The senators’ bill also would prohibit federal bailout for any public pension funds.

Another Republican, Rep. Ann Wagner from Missouri, recently presented HR 1626, which would prohibit the Securities and Exchange Commission from being able to make companies reveal their political spending. The legislation, co-sponsored by Rep. Scott Garrett (R-N.J.), would amend the 1934 Securities Exchange Act.

It was nearly two years ago that a group of law professors petitioned the SEC to mandate the disclosure of how much companies allot toward political spending. Many have called on the Commission to push such rulemaking forward. However, some Republicans believe that ordering this type of disclosure exceeds the bandwidth of the SEC’s mission, which they say doesn’t include discretionary rules.

Political spending by companies is also an issue that Rep. Michael Capuano (D-Mass.) and Sen. Robert Menendez (D-N.J.) are tackling. Their bills, HR 1734 and S. 824, would mandate that companies get majority shareholder approval before they can use funds for political contributions and notify the SEC of such spending. Corporate shareholders would have to approve an “overall political budget.”
Both men introduced similar bills during the 112th Congress with no success.

In other news, Rep. Louise Slaughter (D-N.Y.) is requesting that law firm Greenberg Traurig LLP to disclose what its relationships are in the political intelligence industry because of allegations that the firm may have communicated market-moving data about Medicare Advantage to Height Securities, a political intelligence firm. Height Securities then allegedly passed the information on to certain clients and several insurers’ shares reportedly went soaring.

Slaughter, who introduced the original draft of the Stop Trading on Congressional Knowledge Act in 2006, made the request to Greenberg Traurig CEO Richard Rosenbaum in writing. A spokesperson for the law firm says that it no longer has a relationship with Height and that Greenberg Traurig has since concluded that providing government relations services to those in political intelligence can lead to unintended use of such services.

Meantime, Representatives Carolyn Maloney from New York and Maxine Waters from California, two other Democratic lawmakers, are asking the lawmakers tasked with appropriations to make sure that the funding the SEC receives for the next fiscal year is $1.674 billion, which is what President Barack Obama also wants. Their letter, signed by 51 other lawmakers, noted how it is imperative that Congress “fully fund” the regulator so that effective rulemaking and proper oversight of the securities market can happen.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities fraud law firm that represents institutional investors throughout the US.

Greenberg Traurig law firhttp://www.govtrack.us/congress/members/ann_wagner/412548m at the center of ‘political intelligence’ case, Washington Post, May 6, 2013

S. 779: Public Employee Pension Transparency Act

HR 1626: Focusing the SEC on Its Mission Act

Democrats Urge Appropriators to Fully Fund SEC, Committee on Financial Services-Democrats, April 23, 2013


More Blog Posts:
Texas Securities Fraud: IMS Securities Settles FINRA Case Alleging Inadequate Supervision of Wholesale Representatives, Stockbroker Fraud Blog, March 27, 2013

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012

Annuity Assets are Hot Commodities Among Investment Managers Private-Equity Groups, and Hedge Fund-Controlled Entities, Institutional Investor Securities Blog, October 20, 2012

April 16, 2013

SEC Roundup: Number of Securities Cases Brought Against Attorneys Rises, Permission Granted to Announce Material Information Via Social Media, & Clearing Agency Rulemaking Process Gets Streamlined

Under Rule of Practice 102(e), SEC to File More Securities Cases Against Lawyers
According to the Commission, it intends to bring even more cases against lawyers under its Rule of Practice 102(e). The amount cases had already gone up in the wake of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the 2002 Sarbanes-Oxley Act. Now, the regulator’s Office of the General Counsel is getting referrals from its Enforcement Division about possible lawyer misconduct.

The cases being brought generally involve alleged securities violations, such as active involvement in financial fraud and the obstruction of probes, with judgment errors and close calls not included. Per rule 102(e), the SEC can bar or censure individuals from practicing or appearing before it for different reasons. Some attorneys, however, are worried about the way the regulator interprets the rule, such as what ‘active participation’ in fraud actually entails. There are also concerns that the rule could be used as a “tactical tool” against attorneys.


Social Media Now An Avenue for Announcing Material Information
The Securities and Exchange Commission says that companies can now use social media to make material information announcements, as long as investors are notified which sites to go to for this data. This is the first time that the subject of Regulation Fair Disclosure to corporate information published on social media sites was directly addressed. The announcement was issued in a rare report pursuant to the 1934 Securities Exchange Act’s Section 21(a).

The report was spurred by Netflix Inc. (NFLX) CEO Reed Hastings’s Facebook post June 2012 announcing that subscribers had experienced more than 1 billion hours of content. The SEC later sent a Wells notice to the company saying that the information should have been disclosed through other avenues. However, following an investigation, the regulator discovered that there has been uncertainty over the way Regulation FD and the Commission’s 2008 Guidance applies to disclosures that take place through social media.


Clearing Agency Rulemaking Process Gets Streamlined
The SEC has finalized a rule that streamlines the rulemaking process for clearing agencies that are registered with both the regulator and the Commodity Futures Trading Commission. The 1934 Securities Exchange Act’s rule 19b-4 amends an interim rule that lets SRO rule changes go into effect upon filing, as long as the proposed modifications are not related mainly to securities futures and they don’t impact the securities clearing operations of the agencies.

The latest amendments bring non-securities products, including security-based swaps and swaps that aren’t mixed, under the umbrella of the interim rule. The final rule is supposed to make sure that the clearing agencies involved don’t have to deal with unnecessary delays in implementing changes to rules that primarily involve non-security products and that modifications are filed with the SEC.

If you suspect that your financial losses are a result of institutional investor fraud, please contact Shepherd Smith Edwards and Kantas, LTD, LLP right away.

Read the Amendment to Dual Filing Clearing Agencies' Rule Filing Requirements, SEC (PDF)

Read the Report Addressing Disclosures Over Social Media (PDF)

The SEC Rules of Practice (PDF)


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

Texas Securities Fraud: IMS Securities Settles FINRA Case Alleging Inadequate Supervision of Wholesale Representatives, Stockbroker Fraud Blog, March 27, 2013

Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed
, Institutional Investor Securities Blog, April 10, 2013

April 3, 2013

“Substituted Compliance” Should Regulate Cross-Border Swaps, Says SEC Chairman Elisse Walter

According to Securities and Exchange Commission Chairman Elisse Walter, the best way to regulate global over-the-counter derivatives regulation is via “substituted compliance.” Such an approach would let a market participant comply with domestic requirements in a certain area through compliance with comparable foreign regulation while also allowing the domestic regulator to keep applying specific policy requirements of local law when the foreign one fails to impose requirements or protections that compare.

Per its Dodd-Frank Wall Street Reform and Consumer Protection Act Title VII mandate, the SEC intends to put forth a proposal on how to tackle cross-boarder issues. Although the Commission hasn’t figure out how it will go forward with this proposal, Walter stressed that “substituted compliance” could act as a “a reasonable and necessary middle ground” between making foreign participants abide by domestic regulation and widely recognizing foreign swap regimes. She believes that while efforting to give the maximum substituted compliance possible, properly tailored cross-border regulation would take care of the potentially significant regulatory gaps that are likely to exist between jurisdictions.

Walter believes that regulators need to be participating in the world debate on how to cut down systemic risk. Also, noting that brokerage firms, investment advisers, and other market participants that the SEC oversees differs from traditional banking institutes, Walter cautioned that failure to identify these key differences ups the risk that there will be weaker financial institutions and less options for businesses looking for investment capital.

If you are an institutional investor who has been the victim of securities fraud, please contact Shepherd Smith Edwards and Kantas, LTD LLP right away. We would be happy to provide you with a complimentary, no obligation case evaluation.

Read Chairman Elisse Walter's Speech for the ASIC Forum, SEC, March 24, 2013


More Blog Posts:
Deutsche Bank Settles Massachusetts CDO Case for $17.5 Million, Stockbroker Fraud Blog, April 1, 2013

Citigroup Will Pay $730M in Bond Lawsuit Alleging It Misled Debt Investors, Institutional Investor Securities Blog, March 20, 2013

March 24, 2013

SEC Actions Roundup: Bridge Premium Finance Settles Over Alleged $6M Ponzi Scam, Ex-Lancer Group Hedge Fund Manager’s Lawyer Sues Over FOIA Request, & Private Equity Firm Ranieri Partners Settles Securities Allegations

SEC Settles with Bridge Premium Finance Over Alleged $6M Ponzi
The U.S. District Court for the District of Colorado has approved a proposed settlement between the SEC and Premium Finance LLC, William Sullivan, and Michael Turnock. The three of them are accused of selling financing so that small businesses could cover their insurance premiums. The alleged Ponzi scam purportedly cost investors $6 million, even as they were promised up to 12% in returns.

Judge John Kane had initially rejected the proposed settlement, which came with SEC’s standard language allowing defendants to resolve cases without denying or admitting to the allegations. Pointing to strong federal policy that favors consent judgments and the “limited and deferential” review the courts have over such agreements, last month the Commission asked the court to reconsider. It also noted that such admissions could hurt the regulator’s enforcement program, potentially causing harm to the public. Turnock and Sullivan also filed a response to the complaint and admitted to some of the allegations.

Ex-Lancer Group Hedge Fund Manager’s Lawyer Sues the Commission Over FOIA Request
David Dorsen, the attorney for former Lancer Group hedge fund manager Michael Lauer, is suing the Securities and Exchange Commission for allegedly failing to respond properly to a Freedom of Information Act request. The SEC had sued Lauer in 2003, accusing him of misrepresenting hedge funds’ value. He was ordered to pay $62 million. Lauer has since been combatting the decision, even up to a certiorari petition that the US Supreme Court rejected last year.

Now, in his FOIA case, Dorsen is contending that the regulator sued his client without having pursued or received the right to carry out a formal probe and without sending a Wells notice to Lauer. Dorsen says that this case is a “public service” intended to enhance accountability and transparency on the part of the SEC.


Private Equity Firm Ranieri Partners Settles Securities Fraud Allegations
In re Ranieri Partners LLC, the private equity firm has settled SEC allegations accusing William M. Stephens, an unregistered broker, of improperly soliciting over $500 million from investors for funds run by Ranieri. Donald W. Phillips, an ex-Ranieri senior managing partner, was tasked with supervising Stephens.

Per the regulator, as a consultant Stephens’ job was to merely act as a “finder.” Yet, the Commission contends, the private equity fund sent him due diligence materials, private placement memoranda, and other documents to give to investors. Stephens even allegedly gave investment advice to one Ranieri client.

The Commission believes that Phillips disregarded the “red flags” indicating that Stephens was working beyond the scope of his designated duties. To settle the securities fraud allegations, Ranieri will pay $375,000, Phillips will pay $75,000, and Stephens has agreed to an industry bar. All of them settled without admitting to or denying the securities allegations.

Freedom of Information Act

Mortgage pioneer Ranieri's firm settles SEC charge, Reuters, March 11, 2013

SEC v. Bridge Premium Finance LLC
(PDF)


More Blog Posts:
Demand Notes Used to Help Pay For Ailing Real Estate Business Were Securities, Says District Court, Stockbroker Fraud Blog, March 23, 2013

Bulk of American Securitization Forum’s Board Resigns
, Institutional Investor Securities Blog, March 21, 2013

March 16, 2013

State of Illinois Settles Securities and Exchange Commission Fraud Charges

Without denying or admitting to the charges, the state of Illinois has settled the securities fraud case filed against it by the SEC. The Commission contends that Illinois misled investors about municipal bonds and the way it funds its pension obligations. There will be no fine imposed on the state. Illinois, has, however, implemented numerous remedial actions and put forth corrective disclosures related to the charges over the last few years.

Per the Commission, even as the state offered and sold over $2.2 billion of municipal bonds between 2005 and 2009, it did not tell investors the effect problems with its pension funding schedule might have. Illinois is also accused of not disclosing that it had underfunded its pension obligations, which upped the risk of its overall financial condition.

The regulator’s order contends that Illinois had set up a 50-year pension contribution schedule in the Illinois Pension Funding Act. However, it turns out that the schedule was not sufficient to take care of both a payment amortizing the plans’ actuarial liability, which was unfunded, and the price of benefits accrued during a current year. Also, the statutory plan ended up structurally underfunding the state’s pension duties while backloading most pension contributions into the future. The structure caused stress on both the pension systems and Illinois’s ability to fulfill its competing obligations.

The SEC also claims that Illinois misled investors about the impact modifications to its funding plan might have. Even though the latter disclosed certain legislative amendments, it failed to reveal how these changes might affect the contribution schedule and whether or not it would be able to meet its pension obligations. Such misleading disclosures, says the SEC, was a result of different institutional failures.

The Commission believes that the state did not have the correct mechanisms in place that could identify and assess key information about its pension systems into disclosures while failing to properly train staff working with the disclosure process or hire disclosure counsel.

Among the steps the state took to remedy process deficiencies and improve its pension closures:

• Putting out dramatically better disclosure in its bond offering documents’ pension section.

• Appointing a disclosure committee to put together and assess pension disclosures.

• Hiring disclosure counsel.

• Putting out written procedures and policies.

• Putting into place disclosure controls.

• Setting up training programs.

The state has agreed to the SEC’s order to cease and desist from making or causing violations involving the Securities Act of 1933’s Sections 17(a)(2) and 17(a)(3).

Our securities fraud lawyers represent institutional and investment clients throughout the US. Your first case evaluation is free. Clients do not pay legal fees unless financial recovery is made and any payment would come from the compensation received.

SEC Charges Illinois for Misleading Pension Disclosures
, SEC.gov, March 11, 2013

Read the SEC Order
(PDF)

Securities Act of 1933 (PDF)


More Blog Posts:

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

Private Fund Advisers Have Fiduciary Duty to Client Funds, Says SEC’s Di Florio, Institutional Investor Securities Blog, May 10, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty
, Stockbroker Fraud Blog, April 14, 2012

February 7, 2013

Corporate Reform Coalition Praises SEC for Considering Political Spending Mandate Disclosure Rule

The Corporate Reform Coalition is pleased that the SEC has indicated that its staff is looking at whether to proceed with a rule that mandates disclosing corporate political spending. The group says that by including this possible rulemaking in its semi-yearly regulatory agenda, the Commission has made a critical move to protect investors, tackle the influx of secret corporate spending that has occurred since the US Supreme Court's ruling in Citizens United, and help in the disclosure of key political spending information.

The CRC is comprised of over 80 pension funds, socially conscious investors, and consumer associations that seek greater accountability and transparency in corporate political spending. According to CRC co-chair Lisa Gilbert, that the regulatory agency has indicated that it intends to put out a notice of proposed rulemaking by April is “one step further” toward its commitment to a rule. However, some disclosure attorneys are reportedly skeptical that the SEC will actually take on this rulemaking.

Following the US Supreme Court’s ruling in Citizens United v. Federal Elections Commission in 2010, shareholders have been wanting more transparency related to how companies spend their lobbying money. In 2011, the Committee on Disclosure of Corporate Political Spending turned in a rulemaking petition to the SEC seeking regulations that would mandate disclosures. 322,000 comment letters have since followed—most from investors supporting mandated disclosure.

Last year, the SEC's Division of Corporation Finance, which would be tasked with writing new disclosure rules, said that in the wake of so much investor interest, staff was thinking about whether to suggest that the Commission go ahead with a rulemaking. The SEC then included this possibility in its semi-annual agenda regulatory in December.

Group Applauds SEC for Movement On Corporate Political Spending Issue, Bloomberg/BNA, January 9, 2013

Related Web Resources:
Corporate Reform Coalition

Disclosure Regarding the Use of Corporate Resources for Political Activities, Office of Information and Regulatory Affairs


More Blog Posts:
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

SEC Whistleblower Office Will Place More Emphasis on Anti-Retaliation Provisions and Publicity This Year, Institutional Investor Securities Blog, January 29, 2013

Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit, Stockbroker Fraud Blog, February 6, 2013

February 5, 2013

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed

The U.S. District Court for the District of Columbia has decided to dismiss the last two counts in the Citizens for Responsibility and Ethics in Washington’s Federal Records Act lawsuit against the Securities and Exchange Commission. The public interest group wants to make the SEC reconstruct about 9,000 documents related to certain enforcement probes.

Judge James E. Boasberg said that to the degree that the act’s section 3106 mandates an affirmative duty to act when I comes to destroying records, the Commission has not taken advantage of its discretion in taking internal remedial steps and, as a result, has satisfied any “duty to imposed.”

It was in August 2011 when allegations surfaced that the SEC may have improperly destroyed files related to MUIs—matters under inquiry. Sen. Chuck Grassley (R-Iowa) began questioning the agency after a whistleblower drew the matter to his attention. SEC General Counsel Mark Cahn then proceeded to order the Enforcement Division to cease from destroying documents from closed cases until notice was given to do otherwise. Then, after a probe, then-SEC Inspector General H. David Kotzlater determined that the division did not behave improperly when it got rid of such files. CREW, however, went on to file its Federal Records Act case in the hopes of obtaining a declaratory judgment noting that the destruction of the documents had violated the FRA.

Last May, the district court threw out three of the plaintiff’s causes of action. Two causes, however, were allowed to move forward: one seeking a declaratory judgment that would make the SEC act to restore the destroyed documents and the other for a writ of mandamus demanding the same relief. Now, the court has dismissed both causes of action.

The court noted that section 3106 of the FRA provides that should records be unlawfully taken away, modified, defaced or destroyed, an agency head has to let the Archivist know, and if unlawful removal does happen, then the head has to go to the Attorney General and ask that an action be initiated so the records can be covered.

Counter to CREW’s argument, the SEC, however, contended that the responsibility to ask the AG to make such an action is only applicable to records that were taken out of an agency’s custody and not ones that were destroyed. The district court sided with the regulatory agency, noting that legislative history cannot override the plain meaning of a statute. (Section 3106’s second clause solely refers to documents that have been removed, which is only what would trigger the mandatory enforcement duty.)

In regards to the second claim, the court said that mandamus is proper as long as the defendant possesses a clear duty to act, the plaintiff has “a clear right to relief, “ and there is no other remedy that would suffice. Therefore, as the plaintiff cannot demonstrate that the SEC had a “clear duty to act” and it has an adequate remedy under the Administrative Procedure Act, said the court, the defendants are entitled to summary judgment.

Securities Fraud
Please contact our institutional investor fraud law firm and ask for your free case assessment.

Related Web Resources:
Federal Records Act

Court Tosses Public-Interest Lawsuit Challenging SEC Document Destruction, BNA Securities Law Daily, January 18, 2013


More Blog Posts:
SEC Whistleblower Office Will Place More Emphasis on Anti-Retaliation Provisions and Publicity This Year, Institutional Investor Securities Blog, January 29, 2013

CFTC Director Says Corporate Compliance Employees Should Have Comprehension of Dodd-Frank Whistleblower Requirements’Anti-Retaliation Provisions, Institutional Investor Securities Blog, June 14, 2012

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

January 29, 2013

SEC Whistleblower Office Will Place More Emphasis on Anti-Retaliation Provisions and Publicity This Year

According to Securities and Exchange Commission Office of the Whistleblower Chief Sean McKessy, the unit will take a more aggressive approach to publicizing its activities and figuring out how to better enforce the anti-retaliation provisions of its bounty program. McKessy spoke at the DC Bar organized enforcement conference earlier this month and noted that his views were his own and not necessarily that of the SEC.

McKessy said that despite the Commission’s efforts to offer whistleblower provisions that incentivize internal reporting, some corporations have still not told employees about the bounty program. Per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC can now offer 10-30% of a monetary penalty greater than $1 million that is collected because of “original information” voluntarily offered up by an informant.

Also, per the statute, the SEC has the authority to enforce its anti-retaliation provisions, which protects whistleblowers that provide this information, or commit certain other lawful acts, from retaliatory actions—particularly from employers. McKessy, however, noted that it is too soon to know whether the agency will incorporate an anti-retaliation action to its whistleblower program.

He also said that during its second year, the Office of the Whistleblower would continue to work through reward claims. So far, the SEC office has only issued one award to a whistleblower since the program started. It has received over 3,300 quality tips from possible informants.

Our institutional investment fraud lawyers represent clients throughout the US. We also represent clients located abroad with securities cases against firms based here. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

Office of the Whistleblower, SEC

In Year Two, SEC Whistleblower Office To Focus on Publicity, Anti-Retaliation Role, Bloomberg/BNA, January 11, 2013

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

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

CFTC Director Says Corporate Compliance Employees Should Have Comprehension of Dodd-Frank Whistleblower Requirements’Anti-Retaliation Provisions, Institutional Investor Securities Blog, June 14, 2012


January 24, 2013

SEC News Roundup: Commission to Present Money Market Mutual Fund Reform Proposal, Achieves Record Number of Insider Trading Settlements During FY 2012

Commission to Present Money Funds Reform Proposal
According to SEC Commissioner Daniel Gallagher, staff members are putting together a money market mutual fund reform proposal that will address the problems that occurred in 2008. Another area that will likely be looked at more closely in the proposal would be the floating the net asset value of the funds. Gallagher, who made his comments at a US Chamber of Commerce, said this was important because there are “serious” related issues involving tax, accounting, and operations that need to be tackled.

Meantime, the Financial Stability Oversight Council is looking at three draft money fund reform recommendations that it wants the SEC to deal with, including floating NAVs, a stable NAV that has a capital buffer with a cap of 1% of a fund’s value in addition to delayed redemptions, and a stable NAV along with a 3% capital buffer that could be lowered if applied along with other measures.

It was just in August that then-SEC Chairman Mary Schapiro experienced a huge setback when the commission did not back certain reform measures. Commissioners Gallagher, Troy Paredes, and Luis Aguilar all refused to vote on an SEC proposal until further study of reform initiatives that the SEC had done in 2010 could be fully assessed. The staff’s report came out in December.

Gallagher also expressed dismay that the SEC had not come up with a final rule to get rid of the bar on general solicitation and advertising for certain private placements, which the Jumpstart Our Business Startups Act is mandating. He noted that the Commission has not decided on whether to take part in rulemaking to set up a uniform fiduciary standard for those who give personalized investment advice about securities to retail clients.

SEC Achieves Record Number of Insider Trading Settlements During FY 2012, Says NERA Report
According to a new report provided by the National Economic Research Associates Inc., the Commission settled a record number of insider trading cases during the last fiscal year. These settlements were reached with 118 individuals and eight companies.

Overall for FY 2012, the SEC reached 714 settlements—the most since FY 2007. Also, notes the report, individual settlements reached the highest level of value ($221,000) since the Sarbanes-Oxley Act of 2002, as did the number of settlements made over alleged financial firm-related misappropriations and misrepresentations (208) and those involving trading violations (48). The number of securities settlements with individuals also reached a record high at 537 since 2005. That said, companies’ median settlement values went down to $1 million from $1.4 million during FY 2011.

Contact Shepherd Smith Edwards and Kantas, LTD, LLC to request your free case evaluation with an experienced institutional investment fraud lawyer.

Related Web Resources:
SEC to Issue Proposal on Reform Of Money Funds 'Soon,' Gallagher Says, Bloomberg/BNA, January 17, 2013

NERA Releases 2012 Fiscal Year-End SEC Settlement Trends Report, Yahoo, January 14, 2013


More Blog Posts:
SEC Whistleblower Office Will Place More Emphasis on Anti-Retaliation Provisions and Publicity This Year, Institutional Investor Securities Blog, January 29, 2013

CFTC Director Says Corporate Compliance Employees Should Have Comprehension of Dodd-Frank Whistleblower Requirements’Anti-Retaliation Provisions, Institutional Investor Securities Blog, June 14, 2012

January 9, 2013

SEC Roundup: Lawmakers Question Structural Reform Costs, Enforcement Director Khuzami to Step Down, & New Commission Chairman Names General Counsel is Named

Lawmakers Question the SEC About Costs Related to Structural Reform
Per the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967, the Securities and Exchange Commission has been tasked with assessing how to restructure its operations to better its use of internal communications and resources. The restructuring plan is being referred to as the Mission Advancement Program. However, lawmakers are concerned that this effort may be too expensive—especially because of the costs associated with retaining independent consultant Booz Allen Hamilton Inc. to help with the restructuring.

Earlier this month, House Oversight Committee Chairman Darrell Issa (R-Calif.) asked the SEC for information about how much the Commission expects to save through the Booz Allen-recommended reforms, its 2012 fiscal year budget for Office of the Chief Operating Officer, CEO Jeffery Heslop’s yearly compensation, the May 2011 contract between the agency and Booz Allen, and the payments that have been made to the latter.


SEC Enforcement Division Director Robert Khuzami to Step Down
After nearly four years, SEC Division of Enforcement Director Robert Khuzami is going to be leaving his post. During his time with the agency, the former prosecutor reorganized the division into five units with subpoena powers.

Also, while under Khuzami, the enforcement division has brought a record number of securities cases, experienced its “most productive” insider trading enforcement period, including its handling of the Galleon Management/Raj Rajaratnam probe that led to charges against 29 defendants, set up its Office of the Whistleblower, and established a cooperation program allowing for non-prosecution agreements, cooperation agreements, and deferred prosecution agreements as incentives for companies and individuals willing to fully cooperate with Commission investigations and enforcement actions.


SEC Chairman Elisse Walters Appoints New General Counsel
Newly appointed SEC Chairman Elisse Walter has named Geoffrey F. Aronow to the post of agency general counsel. He succeeds Mark Cahn, who vacated the position at the end of last year.

It will be Aronow’s job to lead the he Office of the General Counsel in providing advice to the SEC on enforcement actions, federal court proceedings, and rulemakings. He previously served as the Commodities Futures Trading Commission head from 1995 to 1999. While at the CFTC, he oversaw investigations, recommended actions, litigated in court and on administrative proceedings, and worked with international, state, federal, and local regulatory authorities and law enforcement.

Our securities fraud lawyers represent clients with investment fraud claims against financial firms, brokerage firms, investment advisers, brokers, financial representatives, and others. Having your own legal representation can allow you to maximize how much you recover.

Enforcement Director Robert Khuzami to Leave SEC, SEC, January 9, 2013

Securities and Exchange Commission Lawmaker Demands Answers From SEC On Costs Concerns Over Structural Reform, BNA/Bloomberg, January 8, 2013

SEC Names Geoffrey Aronow as General Counsel, SEC, January 7, 2013


More Blog Posts:
Clearing House Association Wants Greater Protections for Clearing Members, Institutional Investor Securities Blog, December 31, 2012

GAO Says Most Financial Regulators Don’t Have the Procedures/Policies to Coordinate Dodd-Frank Rules, Institutional Investor Securities Blog, December 24, 2012

Morgan Stanley Must Pay Ex-Manager $1M, Stockbroker Fraud Blog, January 3, 2013


January 7, 2013

SEC Investor Advisory Members to Deal with Crowdfunding, Fiduciary Standard, and Pay Ratio Disclosures

According to the Securities and Exchange Commission Investor Advisory Committee, its subcommittees are try to come up with possible recommendations about crowdfunding, a uniform fiduciary standard, and pay ratio disclosures. Also during the first quarter of this year, the SEC is expected to seek economic data that is supposed to help it decide whether it should establish a uniform fiduciary standard for investment advisers and broker-dealers that gives investment advice to retail investors.

Under Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the committee has to “advise and consult” with the Commission on its investor protection initiatives and rulemaking priorities. While the SEC is not required to act on the recommendations, it must “promptly” evaluate them and disclose whether it will take related action. The committee’s first set of recommendations, to make the general solicitation ban under the Jumpstart Our Business Startups Act less stringent, was issued last year.

At the SEC Investor Advisory Committee’s January 18 meeting, subcommittee chairpersons talked about current and ongoing efforts. Investor as Purchaser subcommittee chairman Barbara Roper said that her group and the Investor Education subcommittee are working together to figure out where in a possible crowdfunding regime investors may be facing possible risks. Also, the group is trying to figure out where investor education might be most needed.

Meantime, Investor as Owner subcommittee chairman Anne Sheehan said her group intends to set up a meeting that includes shareholders and issuers so that they can talk about how the SEC can make companies reveal a ratio that compares the median yearly income of employees’ to that of their CEOs. The Dodd-Frank Act also ordered this rulemaking.

As for Market Structure subcommittee Chairman Steven Wallman, said that his group is talking to the Depository Trust and Clearing Corporation about a report that the DTTC commissioned to find out whether establishing shorter settlement cycles for municipal bonds, corporate bonds, and equities would benefit the market. Wallman says that the DTTC’s report needs to provide more research on how these cycles might affect retail investors. The subcommittee also wants to make progress when it comes to certain market structure issues, such as dark pools, decimalization, and market fragmentation.

Investor Advisory Committee Meeting, SEC, January 18, 2013

Investor Advisory Committee Meeting, SEC, January 18, 2013

Institutional Investor Fraud
Our institutional investment fraud attorneys represent clients nationwide. Contact our securities fraud law firm today.

More Blog Posts:
Pension Plans’ Shareholder Derivative Claims Against UBS is Reinstated by 1st Circuit Appeals Court, Institutional Investor Securities Blog, January 4, 2013

Clearing House Association Wants Greater Protections for Clearing Members, Institutional Investor Securities Blog, December 31, 2013

District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor, Stockbroker Fraud Blog, December 15, 2012

December 17, 2012

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds

The U.S. Securities and Exchange Commission has filed civil charges against Morgan Keegan founder Allen Morgan Jr. and several other former mutual fund board members for allegedly failing to supervise the managers accused of inaccurately pricing toxic mortgage-backed assets prior to the financial crisis. According to Reuters, this is a rare attempt by the regulator to hold a mutual fund’s board accountable for manager wrongdoing and it is significant. (Fund manager James Kelsoe hasconsented to pay a $500,000 penalty related to this matter and he is barred from the securities industry in perpetuity. Comptroller Joseph Thompson Weller consented to pay a $50,000 penalty.)

Last year, Morgan Keegan and Morgan Asset Management consented to pay $200 million to settle SEC subprime mortgage-backed securities fraud charges accusing them of causing the false valuations of the securities in five funds and failing to use reasonable pricing methods. (This allegedly led to “net asset values” being calculated for the funds.) The inaccurate daily NAVS would then be published and investors would buy shares at inflated prices. The funds’ value eventually declined significantly.

According to the Commission, the eight ex-board members violated laws mandating that fund directors help decide what a security’s fair value is when market quotations don’t exist. Instead of trying to figure out how fair valuation determinations work, the directors allegedly gave this task to a valuation committee but without providing “meaningful substantive guidance.”

Allen Morgan Jr., who is a Morgan Keegan cofounder, was CEO and Chairman until 2003.The seven other board members facing SEC charges include Kenneth Alderman, Mary S. Stone, W. Randall Pittman, Albert C. Johnson, James Stillman R. McFadden, Jack R. Blair, and Archie W. Willis III.

Already, Morgan Keegan is contending with over 1,000 arbitration lawsuits involving its bond funds that had invested in high risk MBS but were marketed as safe. When the subprime market collapsed, the funds lost up to 80% of their value.

Recently, Morgan Keegan and over 10,000 investors in a closed-end fund reached a $62 class million settlement. Lion Fund LP, the lead plaintiff and a Texas hedge fund, claimed that it had made a $2.1 million investment.

Morgan Keegan is owned by Raymond James (RJF), which bought the firm from Regions Financial Corporation. Other securities lawsuits still pending against it also involve conventional and open-ended funds.

Unfortunately, too many people and entities sustained huge losses because the risks of a number of types of securities leading up to the global crisis and the housing bubble’s implosion were downplayed by financial firms and their representatives. At Shepherd Smith Edwards and Kantars, our subprime mortgage-backed securities lawyers represent investors throughout the US. Contact our securities law firm today.

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation, SEC, December 10, 2012

SEC Order
(PDF)


More Blog Posts:
Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Continue reading "Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds" »

December 15, 2012

Some Private Fund Advisers are Exercising Inadequate Controls, Says SEC Commissioner Elisse Walter

According to Securities and Exchange Commissioner Elise Walter, examinations of newly registered private fund advisers has already revealed numerous instances of poor controls by a number of members, especially when expenses and fees are involved. Some of these instances, she reports, are on the border of misconduct. Walter, who President Obama named to take the place of current SEC Chairman Schapiro when she steps down this week, expressed her own views (which may not be the same as the regulator’s) at the Commission’s enforcement panel at the National Law Journal's Regulatory Summit in DC earlier this month.

Over 1,500 advisers to hedge funds and private funds are now also SEC registered in the wake of rules adopted per the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raises the total number of those that have completed Commission registration to 4,061 private fund advisers and 11,002 investment advisers, with 37% offering advise to hedge funds and other private funds.

The Commission’s Office of Compliance Inspections and Examinations will perform adviser “presence” exams looking at certain risk areas for the next two years. This is a new process for advisers, which is why the SEC has been engaged in outreach to make sure expectations and procedures are clear.

Walter noted that already during exams, SEC staff has seen some advisers erroneously calculating fees they are to receive, getting fees they aren’t entitled to from portfolio companies, inappropriately covering their expenses using fund assets, and engaging in other questionable behavior. She cautioned that advisers should take a close look at their expense tables and income, while ensuring that their business practices are in line with the representations they’ve made and their commitments to clients.

However, the SEC commissioner also reported that staff have seen a lot of new registrants, mature businesses in particular, that have set up good risk management and control programs and compliance. She also said that it was too early to reach more conclusions based on this nascent exam program. Walter did, though, make it clear that not only does the Commission take advisers’ fiduciary duty to clients “very seriously,” but also, she noted, staff examiners will “follow the money.”

Regarding the rulemaking that occurred to establish an SEC whistleblower bounty program, she pointed out related two issues that “bothered” her: that a culpable whistleblower who was not criminally convicted might be entitled to an award for stepping forward and she worries about how the program may be impacting internal corporate compliance processes. Walter says that staff will monitor both issues over the next couple of years.

To speak with a private fund adviser fraud lawyer, contact our securities fraud law firm today. Your first consultation with Shepherd Smith Edwards and Kantas, LTD, LLP is free.

What SEC Registration Means for Hedge Fund Advisers, SEC, May 11, 2012

Claim and Award, SEC Office of the Whistleblower


More Blog Posts:
Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses, Stockbroker Fraud Blog, November 8, 2012

Private Fund Advisers Have Fiduciary Duty to Client Funds, Says SEC’s Di Florio, Institutional Investor Securities Blog, May 10, 2012

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

November 30, 2012

“Tone” of SEC Probe Can May Be Affected by Self-Reporting, Says Enforcement Division Official

According to Securities and Exchange Commission Stephen Cohen, when an entity self-reports possible wrongdoing, the “tone” of the SEC investigation into the matter may be impacted in a manner that benefits that party. Cohen, who spoke while participating at a Securities Docket's Securities Enforcement Forum panel in DC last month (he made it clear that his views are his own), said that this is very important to the SEC when figuring out how much of a penalty to impose.

Cohen noted that although in the past the SEC hasn’t done a stellar job about making public what credits are given to the entities that have self-reported violations, he says the regulator has been doing a better job. For example, in 2010 the Commission announced that it had entered into a non-prosecution deal with Carter’s Inc. (CRI) after the kids’ clothing marketing company did a thorough job of self-reporting the insider trading and financial fraud incidents involving its ex-EVP of Sales Joseph M. Elles. Carter’s also implemented complete remedial action and thoroughly cooperated with the SEC’s probe.

There was also the deferred prosecution of Tenaris S.A. (TN) last year over allegations that the steel pipe products manufacturer bribed Uzbekistan officials during a bidding process over supplying pipeline and made nearly $5 million in profits. Such misconduct is a violation of the Foreign Corrupt Practices Act and Tenaris agreed to pay $5.4 million in disgorgement in addition to prejudgment interest.

The Deferred Prosecution Agreement is being used by the SEC to facilitate and reward those that cooperate in Commission probes. Cooperation generally involves giving the agency information about the misconduct and working with the agency during the investigation. The regulator says that not only did Tenaris conduct a global, complete internal assessment of its controls and operations but also it was the one that found out about the FCBA violations by its employees and notified the SEC. Following its self-discovery, Tenaris also took a closer look at compliance and control measures and made significant modifications to its anti-corruption policies and practices. It also consented to pay a $3.5 million criminal penalty as part of a Non-Prosecution Agreement that it reached with the US Justice Department.

Cohen acknowledged that not every act merits reporting. He also said that if possible violations are found out before an entity is able to self-report, that party may still be able to get credit if it demonstrates that the problem was under serious investigation or steps are taken to fix the matter.

Additionally, in 2010 the SEC had identified four general considerations for determining how to credit individuals that cooperate with Commission probes, including the assistance provided, the relevance of the matter in which cooperation occurred, how important it is for society that the individual is made accountable for the misconduct, and, depending on the cooperating person’s risk profile, whether or not it is appropriate to provide credit.

Throughout the US, our securities fraud attorneys represent institutional and individual investors. Contact the institutional investment fraud law firm of Shepherd Smith Edwards Kantas, LTD, LLP today.

Self-Reporting Can Impact Tone Of SEC Investigation, Official Says, Bloomberg/BNA, October 19, 2012

Deferred Prosecution Agreement, SEC (PDF)

Foreign Corrupt Practices Act, US Department of Justice


More Blog Posts:
California Securities Lawsuit Claiming Negligent Misrepresentation Over Allegedly Flawed Bond Offering Documents May Proceed, Says District Court, Stockbroker Fraud Blog, November 13, 2012

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

Federal Sentencing Judges Cannot Later Reopen Fraud Cases to Add Restitution, Rules Fifth Circuit, Institutional Investor Securities Blog, November 13, 2012

November 10, 2012

SEC Roundup: $62M Securities Fraud Award Against Ex-Lancer Group Hedge Fund Manager Stands, Investment Management Division Adopts Risk-Based Approach to Regulatory Initiatives, & Conflicts of Interest Areas Now Are Priority

The US Supreme Court has decided not to review a ruling by the U.S. Court of Appeals for the Eleventh Circuit affirming a $62M award against Michael Lauer, an ex-Lancer Group Hedge Fund manager, in the securities lawsuit filed against him by the Securities and Exchange Commission. The federal appeals court had said that the district court’s decision granting the Commission’s motion for summary judgment on liability and remedies was proper.

Per the SEC fraud lawsuit, Lauer is accused of misrepresenting the hedge funds’ true value by artificially inflating the value of holdings found in shell companies that were thinly traded. The Commission contends that he hid his scam by making false statements in investor newsletters, private placement memoranda, and phone calls. (Lauer has since been acquitted of related criminal charges.)

In his certiorari petition filed earlier, Lauer argued that federal court couldn’t strike a defendant’s motion to dismiss due to lack of subject matter jurisdiction without evaluating whether it had such jurisdiction. He also claimed that the appeal’s court ruling that the district court’s decision was grounded in enough evidence was not de novo review.

In other SEC news, Norm Champ, the director of the Division of Investment Management, said the group is now employing a risk-based approach to regulatory initiatives. He said that this approach resembles what the SEC's Office of Compliance Inspections and Examinations uses for examinations. Champ made his statements during a teleconference at an American Law Institute-Continuing Legal Education Group-organized conference on life insurance company products. He said that the views he was expressing are his own.

Champ noted that the division, which he took charge of a few months ago, has been choosing its priorities, focusing, in particular, on the SEC’s objectives to protect investors, allow for capital formation, and keep up efficient and fair markets. The potential impact of the respective regulatory initiatives is also being addressed.

Champs also spoke about the division’s new Risk and Examination Group. (The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act had required the division to retain its own examiners). The group who will work with risk personnel to better determine the risks that the investment management industry must contend with and where further efforts should be focused.

Meantime, Office of Compliance Inspections and Examinations director Carlo di Florio says the SEC’s National Exam Program is making conflicts of interest a key area of concentration. Speaking to the National Society of Compliance Professionals, di Florio talked about a number of these priority conflict areas, including portfolio management, compensation, broker-dealer and investment adviser affiliations, valuation, exchanges, and transfer agents.

Regarding the issue of compensation, di Florio said that staff was looking at where retail customers’ interests may have become a lower priority compared to financial incentives for representatives. The subject of portfolio management brought up the question of whether there may be situations in which an investment advisor might have incentive to favor one client over another. As for conflicts of interest related to valuation, the staff is considering whether investment advisers or broker-dealers might have incentives for giving relatively illiquid positions high marks and/or inflating valuations so they can charge additional fees and bring in investors. The topic of exchanges compelled staff to consider whether there might be some line blurring occurring between SRO regulatory and business functions.

SEC Division of Investment Management Director Norm Champ's Remarks, SEC, November 1, 2012

High Court Won't Hear Lancer Founder's Appeal, FINalternatives, October 31, 2012

Read Office of Compliance Inspections and Examinations's Director's Carlo di Florio's Remarks, SEC, October 22, 2012


More Blog Posts:
Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt, Institutional Investor Securities Blog, August 30, 2012

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Blog, May 22, 2012

Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses, Stockbroker Fraud Blog, November 8, 2012



October 29, 2012

Institutional Investor Securities Blog: Putnam Advisory Accused of Massachusetts Securities Fraud in $3B CDO Offerings, SEC Claims Yorkville Advisors Fixed Books To Attract Investors, and FINRA Seeks Comments on Revised Proposal Over Bond Market Research

The Massachusetts Securities Division is claiming that Putnam Advisory Co. deceived investors about its actual involvement in Pyxis 2006 and Pyxis 2007, two $1.5 billion collateralized debt obligations comprised of midprime and subprime mortgage-backed securities. In its administrative complaint, the state contends that Putnam represented to investors that it would act as an independent advisor when to the Pyxis CDOs when, in fact, Magnetar Capital, a hedge fund, was also involved creating in and structuring key aspects of both and even recommended that certain collateral to be included in them while then proceeding to take a substantial short position on that collateral. Putnam denies the allegations.

The state says that Magnetar proceeded to benefit from the downgrades of subprime assets in the two CDOs while making a net gain of about $67 million on aggressive positions and equity investments linked to the two of them. Meantime, Putnam earned $8.81 million in collateral management fees for the Pyxis CDOs. Massachusetts Secretary of Commonwealth William F. Galvin says that his office will continue to look at how banks misled the buyers of subprime mortgage-backed securitized debt instruments.

In other securities news, the SEC is accusing Yorkville Advisors LLC, its president and founder Mark Angelo, and CFO Edward Schinik of revising certain books to appeal to potential investors and succeeded in getting pension funds and funds of funds to invest $280 million into two Yorkville hedge funds. This allegedly let Yorkville charge at least $10 million in excessive fees. All three three defendants are denying the allegations.

Per the SEC, Yorkville, Angelo, and Schinik allegedly misrepresented the assets’ liquidity and safety of the funds’ assets and charged excessive fees to investors by fraudulently inflating the investments’ value. This included “falsely” presenting Yorkville as a firm that “employed a robust valuation procedure” and was in charge of an investment portfolio that was highly collateralized.

The Commission’s allegations stem from its Aberrational Performance Inquiry, which employs analytic data to determine risk and look for hedge funds with returns that are “suspicious.” The SEC claims that the defendants did not abide by Yorkville’s valuation practices, disregarded negative data about specific investments, failed to disclose adverse information from an auditor, and misled investors about the funds’ liquidity and the role played by a third-party valuation firm.

Meantime, the Financial Industry Regulatory Authority wants comments on a revised proposal that tackles conflicts of interest stemming from bond market research. While current FINRA rules are imposed on research analysts and research reports for equities research, the modifications, which the SEC must approve, would impose requirements on research analysts and research reports that examine debt securities.

Per the proposed revisions, brokerage firms would set up, maintain, and put into effect procedures and policies that would identify and deal with conflicts of interest having to do with debt research analysts’ public appearances, the preparation and distribution of debt research reports, and interactions between the analysts and others. Also, a “higher tier” of institutional investors that would be able to get institutional debt research without having to affirmatively elect to do so in writing would be set up. Institutional investors would qualify for this tier by satisfying the “qualified institutional buyer” definition and other requirements. Also, firms that have limited principal debt trading activity would, for the first time, obtain an exemption.

The revised proposal was developed following comments criticizing the original one as being too “burdensome.” As with the first proposal, this one continues to “treat retail investors and institutional investors as customers and counterparties, respectively,” said FINRA chairman and CEO Richard Ketchum, while retail debt research and equity research will get equal protections and institutional debt research becomes exempt from a lot of structural provisions.

In the matter of Putnam Advisory Co., LLC, Sec.State.Ma.US (PDF)

SEC v. Yorkville Advisors, Mark Angelo, and Edward Schinik (PDF)

Text of Proposed New Finra Rule: Debt Research Analysts and Debt Research Reports, FINRA


More Blog Posts:

FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld, Institutional Investor Securities Blog, October 12, 2012

Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt, Institutional Investor Securities Blog, August 30, 2012

FINRA Arbitration Panel Tells Merrill Lynch to Pay $1.34M to Florida Couple Over Allegedly Misrepresenting Fannie Mae Preferred Shares' Risks, Stockbroker Fraud Blog, October 17, 2012

September 26, 2012

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.

According to the Commission, Jawad employed bogus marketing materials claiming double-digit returns to get investors to take part in a number of hedge funds that he managed. He then allegedly redirected the funds into accounts under his control and used some of the money to pay for his own expenses. He also is accused of setting up bogus assets, providing investors with false accounts statements, and making up a fake buyout of the funds so investors would believe that their interests would be redeemable. Older investors were paid off using newer investors’ money. As for Custis, he allegedly sent investors misleading and false statements about the purported purchase of hedge funds assets, while consistently misrepresenting that a buy was “imminent” and would lead to them making a profit.

Over another Ponzi scam, the SEC is suing Georgia private fund manager Angelo Alleca and his Summit Wealth Management Inc. for bilking about 200 investors of approximately $17 million. Claiming to employ a supposed fund-of-funds strategy, Alleca, the Commission contends, was using clients’ money to play the stock market and losing badly.

Per the regulator's complaint, the defendants sold and offered interests in Summit Fund, which they told clients was a fund-of-funds. (The strategy for this fund is supposed to involve investing in other investment products to diversify the money while keeping exposure risks low.) However, not only did Alleca sustain financial losses when he allegedly opted to instead use investors money to engage in securities trading, but also he then hid the losses, made the fraud worse, and sustained even more losses. The SEC wants an emergency asset freeze so that more investment losses don’t happen.

Two Hedge Fund Managers Sentenced To Three-Year Prison Terms For Defrauding Investors Of Nearly $1 Million, Justice.gov, September 19, 2012

SEC Names Hedge Fund Manager, Lawyer in Alleged $37M Ponzi Scheme, Bloomberg/BNA, September 21, 2012

SEC v. Alleca
(PDF)


More Blog Posts:
Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches, Institutional Investor Securities Blog, September 25, 2012

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading, Stockbroker Fraud Blog, September 22, 2012

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

September 20, 2012

SEC Charges Advanced Equities with Securities Fraud Related to Private Equity Offerings

The Securities and Exchange Commission is charging investment advisory firm and broker dealer Advanced Equities Inc. and its cofounders Keith G. Daubenspeck and Dwight O. Badger with securities fraud related to two private equity offerings that were made for a California alternative energy company. Badger, who spearheaded the sales initiatives for the offering and allegedly made misstatements about the company’s finances, is charged with misleading investors. Daubenspeck is accused of not correcting these misstatements, therefore allegedly inadequately supervising Badger. Daubenspeck is the Advanced Equities’ parent company’s ex-chief executive and board chairman. All three parties have agreed to a cease-and-desist order entry but they are not denying or admitting to the charges.

Per the SEC, for the Silicon Valley company’s 2009 offering, Badger led close at least 49 outside investor presentations and a minimum of five in-house sales calls with Advanced Equities brokers related to this between January and March 2009 alone. He claimed that the energy company had over $2 billion in order backlogs when actually this never went above $42 million. He also said that a national grocery chain had placed a $1 billion order even though that was only worth $2 million, and although a letter of intent for making future buys was signed, it was a non-binding one. Badger also is accused of making a misstatement when he said that a US Department of Energy loan of over $250 million had been granted to the company after it had sought a $96.8 million loan. (He also allegedly again made a misstatement about the loan application in 2010 during the follow-up offering.) His misstatements were then repeated to investors during phone calls and in e-mails by brokers, Advanced Equities’ investment banking team, and the broker-in-charge at the firm’s branch in New York. (The SEC believes that these individuals should have known that the statements that Badger made were untrue.)

Meantime, Daubenspeck allegedly did not say anything after he heard Badger issue the misstatements about the grocery store order, order backlog, and loan application even though he took part in at least two of the internal sales calls attended by Advanced Equities brokers during the 2009 offering. The SEC contends that although these misstatements should have been warning signs that there was the danger that the wrong information would get to investors, Daubenspeck allegedly did not take reasonable steps to fix these misstatements and did not properly supervise Badger.

To settle the securities fraud allegations, Advanced Equities will pay a $1 million penalty and it has consented to cease and desist from making or causing future securities law violations of the laws it allegedly violated. It also has agreed to be censured and it will retain an independent consultant to assess its sales procedures and policies. As for Daubenspeck, he has agreed to a $50,000 penalty and supervisory suspension of one year, while Badger has consented to a $100,000 penalty and a one-year ban from associating with any dealer, broker, municipal securities dealer, investment adviser, or transfer agent.

SEC Charges Chicago-Based Investment Firm with Misleading Investors in Private Equity Offerings, SEC (PDF)


More Blog Posts:
Texas Securities Fraud: Ex-Stanford Chief Investment Officer Gets 3-Year Prison Term for Her Part in $7 Billion Ponzi Scam, Stockbroker Fraud Blog, September 18, 2012

IRS Pays Whistleblower $104M for Exposing Tax Evasion at UBS AG, Institutional Investor Securities Blog, September 13, 2012

US Government Sells $18B of AIG Stock and Turns a $12.4B Profit, Institutional Investor Securities Blog, September 11, 2012

Continue reading "SEC Charges Advanced Equities with Securities Fraud Related to Private Equity Offerings" »

September 18, 2012

SEC Enforcement Roundup: Commission to Make Closer Examination of Revenue-Sharing Between Brokers and Investment Advisers, NYSE to Pay $5M For Alleged Compliance Issues, and Enforcement Director Khuzami Praises His Division’s Performance

The Securities and Exchange Commission is ramping up its examination of revenue-sharing arrangements between brokers and investment advisers. It made this announcement in a related administrative order involving advisory firms Focus Point Solutions Inc. and H Group Inc. and their owner Christopher Keil Hicks, who have consented to pay $1.1 million to settle charges that they did not disclose to their clients certain revenue-sharing payments that posed possible conflicts of interests.

Hicks and Focus Point Solutions are accused of not telling clients that in return for specific services, they were getting a portion of the revenues from a brokerage firm that managed mutual funds, which were being recommended to investors. Hicks’ other firm, H Group Inc., allegedly improperly voted on its clients’ behalf to make Focus Point a sub-adviser to one mutual fund (most of that fund’s shareholders were clients of H Group.)

Meantime the New York Stock Exchange has consented to pay $5 million to settle compliance failure charges that allegedly gave some customers an advantage over certain trading information. The Securities and Exchange Commission announced the charges, which are the first of its kind, on September 14. This is also the first financial penalty for an exchange.

According to the Commission, under Regulation NMS, market data cannot be sent to proprietary customers before the same information has been sent out in consolidated feeds, which give quote and trade information to the public. Yet, starting in 2008, the NYSE allegedly violated this regulation over a certain time period when it sent the data through its proprietary feeds first. NYSE also allegedly failed to ensure proper compliance when it did not correctly monitor the proprietary feeds’ speed compared to the speed of the consolidated feeds. According to SEC Enforcement Director Robert Khuzami, even just “milliseconds” of a head start in terms of access to market data “disproportionately disadvantages retail and long-term investors.”

Although the NYSE is settling, it is not denying or admitting to wrongdoing. It and parent NYSE Euronext Inc. (NYX), however, have consented to having an independent party examine their market data delivery systems. On its website NYSE said that the SEC did not accuse it of taking part in any intentional misbehavior or that the data delays had hurt any investors.

Khuzami also recently spoke about the SEC’s other enforcement efforts. At a Practicing Law Institute conference, he said that the Division of Enforcement is doing well. He partially credits its performance to an organizational restructuring that took place in 2010, the agency’s whistleblower program, and stronger investigative work. Khuzami noted that the restructuring generated five specialized units, which has let SEC staff become experts in certain enforcement areas, and, with the help of data-driven analytics, allowed the Commission to look into violations.

Khuzami said that contrary to the idea that his division has not been investigating purported violations that allegedly took place during the 2008 economic crisis, these investigations have been taking place and that 75% of them have gone to litigation. Also, he noted that the SEC has begun a number of initiatives to try to identify additional violations, such as private fund analysis for zombie-funds and looking at whether hedge fund performances are aberrational compared to a certain strategy’s benchmark.

Khuzami also spoke about the SEC whistleblower program that was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, saying that it has already been “successful.” In just one year, August 2011 – 2012, the program has received about 2,870 tips—about 8 a day—with financial fraud, disclosure, market manipulation, and offering fraud among the most common alleged violations named. Khuzami said most tips in the US have from Texas, Florida, New York, and California. Whistleblower fraud tips have also come from abroad.

In re Focus Point Solutions Inc., SEC, Admin. Proc. File No. 3-15011 (PDF)

NYSE fined after some clients got early look at data, Reuters/Yahoo News, September 14, 2012

Division of Enforcement, SEC


More Blog Posts:
SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro's Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal, Institutional Investor Securities Blog, September 7, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

SEC Study Reports that Many Retail Investors Are Financially Illiterate, Stockbroker Fraud Blog, September 5, 2012

Continue reading "SEC Enforcement Roundup: Commission to Make Closer Examination of Revenue-Sharing Between Brokers and Investment Advisers, NYSE to Pay $5M For Alleged Compliance Issues, and Enforcement Director Khuzami Praises His Division’s Performance" »

September 7, 2012

SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro's Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal

In a recent joint statement, Securities and Exchange Commissioners Troy Paredes and Daniel Gallagher expressed dismay over Chairman Mary Schapiro's announcement regarding a staff proposal to revamp the money market mutual fund industry that she said would no longer move forward because it would have failed to garner the necessary votes. Gallagher and Paredes expressed concern that her announcement made it seem as if they and Commissioner Luis Aguilar are not worried (and may even be dismissive) about “strengthening money market funds.”

Schapiro recently made it known that she would not be able to get three votes needed to move forward the proposal, which includes reforms to the regulations that preside over money market funds. Under the proposal, funds would have had to either lose their $1 fixed net asset value while floating their NAVs or keep up an under 1% capital buffer. Per her statement, Schapiro said the three commissioners told her that they “will not support a staff proposal to reform the structure of money market funds,” which she believes will protect retail investors and decrease need for taxpayer bailouts in the future. She called on policymakers to look at other ways of dealing with the “systemic risks” involving money market funds. A day after her announcement, the Treasury Department and the SEC were already looking at alternative means to reform the money fund industry.

Paredes and Gallagher want to make it clear that even though they rejected the proposal, this does not mean they are abandoning their duty to regulate money market funds, which fall under the SEC’s jurisdiction for regulation, or that they are unsupportive of making improvements to the way the agency performs oversight. The two of them think the proposal lacks the necessary analysis and data as support and that investors and issuers could have been left with “significant costs” while the system would have possibly become burdened with new risks. They also are concerned that the changes put forward by the proposal would not stop a run on funds. Gallagher and Paredes said that they believe that the SEC “can do better.”

Meantime, Commissioner Aguilar issued his own statement He said that he believes that the cash management industry needs to be examined further before a productive discussion regarding whether more structural changes need to be implemented to SEC-registered money market funds, which is just one industry segment, can take place.

Aguilar talked about how not having this wider foundation of information and knowledge in place could cause harmful repercussions. He also expressed worries that Schapiro’s proposal would compel investors to transfer money from the market fund market, which is transparent and regulated, into the unregulated market.

If you are a money market fund investor who suffered financial losses you feel may have been caused by financial fraud, contact our securities lawyers today.

Statement of SEC Chairman Mary L. Schapiro on Money Market Fund Reform
, SEC, August 22, 2012

Statement Regarding Money Market Funds By Commissioner Aguilar
, SEC, August 23, 2012

Statement on the Regulation of Money Market Funds by Commissioner Gallagher and Commissioner Paredes, SEC, August 28, 2012


More Blog Posts:
SEC Reviewing LIBOR-Related Disclosures by Issuers, Institutional Investor Securities Blog, August 10, 2012

Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt, Institutional Investor Securities Blog, August 30, 2012

SEC Study Reports that Many Retail Investors Are Financially Illiterate, Stockbroker Fraud Blog, September 5, 2012

August 10, 2012

SEC Reviewing LIBOR-Related Disclosures by Issuers

According to SEC Division of Corporation Finance director Meredith Cross, Corp Fin is now looking at issuers’ closers related to the LIBOR scandal. Cross said that right now we are in the ‘early stages” for these types of disclosures, which could be more material for financial institutions. She also spoke about how companies that issue payments according to the London InterBank Offered Rate would have to consider their own circumstances when determining whether they should/shouldn’t make disclosures to shareholders about how exposed they were to the controversy. Cross, who addressed a Federal Regulation of Securities Committee panel at this year’s American Bar Association meeting in Chicago on August 3, made it clear that the views she is expressing are her own and not that of the SEC or any other staffers.

European and US regulators have been looking into whether a number of financial institutions rigged LIBOR, which is considered the global benchmark interest rate for banks to borrow from other banks in the London interbank market. A couple of months ago, Barclays Bank PLC (BCS) consented to pay $360 million to settle charges made by the Commodity Futures Trading Commission and the US Justice Department that it engaged in the manipulation of its LIBOR submissions.

Cross said that the SEC division would likely look at the disclosures belonging to companies that, per media reports, experienced computer breaches. If any of these companies that were reportedly hacked only reports in its disclosure that it may have been “infiltrated,” Cross said that this would be a potential red flag. Also, while Cross spoke about how issuers need to make sure their disclosures are accurate, she emphasized that Corp Fin isn’t looking for disclosures to reveal too much that they show hackers how to get in. (It was nearly a year ago that Corp Fin put out guidance on how companies should disclose incidents involving data breaches, cyber security, and related expenses.)

Last month, US News said the LIBOR controversy may very well be the “mother of all scandals” and the one that could cause major banks’ insolvency, as well as criminal charges to finally be filed. Meantime, regulators are also being accused of contributing to the rigging of LIBOR when they allegedly disregarded clear indicators that the rates were being fixed. Rather than bringing in law enforcement agencies, regulators were busy looking at how to improve ongoing practices.

LIBOR Fraud May Be the Mother of All Bank Scandals, US News, July 23, 2012

Issuers' LIBOR-Related Disclosures Now Under SEC Scrutiny, Official Says, BNA/Bloomberg, August 7, 2012

SEC Division of Corporation Finance

More Blog Posts:
Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012

Continue reading "SEC Reviewing LIBOR-Related Disclosures by Issuers" »

June 5, 2012

FINRA Initiatives Addressing Market Volatility Approved by the SEC

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a "limit up-limit down" proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

The second proposal involves modifying current market-wide circuit breakers that can stop trading taking place in exchange-listed securities on US markets. The current market-wide circuit breakers have only been triggered once (in 1997) since they were adopted nearly 24 years ago. These changes will reduce the percentage-decline threshold for triggering a trading stop that is market-wide, while shortening the duration of time that the cessation lasts.

SEC Chairman Mary Schapiro has said that the initiatives are the result of a lot of work done to come up with a sophisticated, effective, and doable way to take care of markets in the wake of too much volatility. She also talked about how in today’s electronic markets, there is a need for a properly calibrated automated way to limit or pause trading should prices change too much or too quickly.

The SEC, FINRA, and the exchanges plan to closely monitor the pilot to ensure that any rules that are permanently approved are as effective as possible. February 4, 2013 is the deadline for implementing all these changes.

Shepherd Smith Edwards and Kantas, LTD LLP Partner and securities lawyer William Shepherd, however, is already skeptical of this new plan: “Such limits are not new and are of questionable value. Commodities markets have limit circuit breakers, as do a number of stock markets outside the US. The SEC has employed limits from time to time, notably after the stock market crash of 1987. This latest effort comes as a result of the so-called ‘flash crash’ in 2010. While no definitive cause was ever determined, many observers insist that stock manipulation by large players was involved. If implemented at all, as before, any such limits would likely be short lived.”

Our securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represent institutional and individual investors.

SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market, SEC, June 1, 2012

SEC approves plan to ease volatility in US stocks, Reuters, June 1, 2012


More Blog Posts:
Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms, Institutional Investor Securities Blog, March 10, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012


May 31, 2012

ABA Presses for Self-Funding for SEC and CFTC

The American Bar Association is in strong favor of self-funding for both the Commodity Futures Trading Commission and the Securities and Exchange Commission. It is calling on Congress to quickly deal with this need to increase the agencies’ resources.

In a letter to lawmakers on the House Financial Services Committee and the Senate Banking Committee, ABA Task Force on Financial Markets Regulatory Reform co-chairs William Kroener III and Giovanni Prezioso talked about how not having sufficient funding sources for the SEC and the CFTC is going to substantially hurt the regulators’ ability to complete their assigned regulatory missions. The ABA believes that self-funding would effectively deal with this problem.

Both the CFTC and SEC have acknowledged that they are short on funds. The two regulators have partially attributed this to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which doesn’t authorize self-funding despite the fact that SEC Chairman Mary Schapiro, past SEC chairmen, certain senators, and securities lawyers had pressed for it.

Right now, the SEC and CFTC are funded via congressional appropriations. The ABA, however, doesn’t believe that the two agencies should get their funding this way. The letter noted that one of the regulators could be left short of the funds needed to do its job should “overall funding priorities change,” as they can with congressional appropriations. It pointed to the Jumpstart Our Business Startups Act, which brings with it new statutory mandates, as well as the other regulatory and legislative demands that need to be addressed in the wake of the recent economic crisis. Prezioso and Kroener also wrote about how changing financial markets, “shifting public attitudes,” the “cross-border” capital flow expansion, and “growing marketplace complexity” are making it harder for both the SEC and the CFTC to fulfill their duties and ensure that their goals are in alignment with keeping the financial system “stable and dynamic.”

The SEC is currently making more in fees than what it gets in total as a yearly budget. For example, from 2005 to 2009 the SEC collected about $7.4 billion in registration and transaction fees and gave them over to the US Treasury. Meantime, Congress appropriated $4.5 billion for the Commission’s budgets. The ABA, however, does not believe that fees from enforcement cases should be part of any self-funding mechanism. (The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Reserve Board are all self-financed.)

Our institutional investment fraud lawyers represent clients throughout the United States. We also have clients that are located abroad but who have claims against a financial firm, broker, or investment adviser that is based in this country. Shepherd Smith Edwards and Kantas, LTD, LLP represents both institutional and individual clients. Your first consultation is free.

Read the ABA's Letter (PDF)

Securities and Exchange Commission

Commodities Futures Trading Commission

American Bar Association


More Blog Posts:

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012

May 30, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott
Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

3 Former IndyMac Executives Are Accused of Fraud, New York Times, February 11, 2011

Read the SEC Complaint (PDF)


More Blog Posts:
SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

Continue reading "Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge" »

May 26, 2012

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission's practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

At this Congressional hearing, a number of the lawmakers were “sympathetic” to Rakoff’s reasoning, said Rep. Carolyn Maloney (D-N.Y.). Rep. Al Green (D-Texas) stressed the importance of holding businesses accountable for alleged wrongdoings. The Democrats, however, were clearly mindful of the fact that SEC did not have the resources to take on additional, lengthy lawsuits, as well as of the delays that a change in the SEC’s current settlement policy would cause for investors seeking financial recovery, and they did not call for any actual policy change.

Meantime, SEC Enforcement Director Robert Khuzami, who was also at the hearing, talked about how not only would securities cases take longer to resolve if defendants were made to deny or admit wrongdoing when settling, but also, there would be a lot less settlements.

His views were backed by a number of attending Republican lawmakers who support the SEC’s settlement policy. Committee Chairman Spencer Bachus (R-Ala.) said he felt that agencies should have the primary discretion when it comes to deciding whether to settle or try a case, while Vice Chairman Jeb Hensarling (R-Texas) also said that eliminating the SEC’s policy would result in a huge increase in the number of securities lawsuits.

Earlier this month, at the Alan B. Levenson Symposium in Washington, current and former judges spoke for federal judges’ right to turn down settlement agreements if they didn’t think they had been given enough facts or considered the deals to be fundamentally unfair. They spoke about the importance of judicial independence and how judges shouldn’t be forced to merely rubber stamp settlement deals. For example, U.S. District Court for the District of Columbia Judge Beryl Howell said that regardless of whether parties had agreed to a settlement, a court still must be given sufficient facts to be able to determine whether a deal is reasonable.

Contact our SEC securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.

Examining the Settlement Practices of U.S. Financial Regulators, House.gov, May 17, 2012

Courts Must Reject Settlement Pacts Where Necessary, Former, Current Judges Say, Bloomberg BNA, May 15, 2012

SEC v. Citigroup Global Markets, Inc., Justia (the Opinion and Summary)


More Blog Posts:
SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2012

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

May 8, 2012

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.

Citing the US Supreme Court’s ruling in Basic v Levinson, the circuit court found that the misleading statements made by Morgan Keegan brokers and the alleged failure to reveal the known risks involving ARS could have easily been perceived by a reasonable investor to be a modification of the information about ARS that Morgan Keegan had made available. The 11th circuit panel also said that seeing as Morgan Keegan knew there were auctions that were failing in 2007 and early 2008, giving clients "general cautionary language" about the debt behind trading confirmations was not enough. (Although the panel agreed that a written disclosure of the risks involved could trump any sales pitch omissions, it pointed to circuit precedent, which did not allow this “as a matter of law.”)

The appeals court rejected the district judge’s narrow focus on how many alleged victims there might have been, as well as his emphasis on the Commission having to prove institutional intent.

Investors were left in a financial bind when the $330 billion ARS market froze in February 2008. They could not get their now frozen money from this largely, illiquid debt, which was a shock to them seeing as most of them were told that auction-rate securities were liquid, like cash. Morgan Keegan and other financial firms have since been pursued by regulators, as well as investors seeking financial recovery.

Over the last few years, a number of financial firms have had to pay back billions in dollars of ARS to their clients. Our auction-rate securities lawyers have been helping investors recover such losses. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

Broker Omissions Could Doom Morgan Keegan, Courthouse News Service, May 7, 2012

Fraud lawsuit vs Morgan Keegan revived, Chicago Tribune, May 2, 2012

SEC v. Morgan Keegan & Co., 11th U.S. Circuit Court of Appeal (PDF)


More Blog Posts:
Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, January 11, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million, January 14, 2012

Texas Securities Fraud: Raymond James Financial Services Pays Elderly Senior Investor About $1.8M Following Loss of Appeal, Stockbroker Fraud Blog, December 2, 2011

May 4, 2012

SEC Changes to Enforcement Have Led to Enhanced Results, Says Khuzami

According to Securities and Exchange Commission Enforcement Director Robert S. Khuzami, the restructuring that has recently taken place at that agency’s division is allowing the SEC to not just improve the quality of its efforts but also its results. He spoke at a Practicing Law Institute conference earlier this month.

Not only has the enforcement division set up several specialized units that are each assigned a specific area of enforcement to focus on, but also market specialists from the private sector have been hired. Khuzami also said that the SEC has improved its handling of complex securities cases and is now detecting signs of alleged wrongdoing sooner.

In the last fiscal year, the Commission has opened 735 enforcement cases—a record number—and imposed $3 billion in penalties and disgorgement against alleged offenders. Moving forward, the Commission intends to continue placing a lot of its attention on going after parties that committed securities laws violations related to the economic crisis of 2008. The SEC has so far initiated 107 such securities cases. 74 of these are against individuals.

Khuzami also noted that non-prosecution agreements, deferred prosecution deals, and cooperation agreements, which were first created in early 2010, have been helpful in not just resolving some securities cases more swiftly, but also in allowing investigators to pinpoint certain complex fraud cases. (Deferred prosecution and non-prosecution agreements are deals in which the SEC agreed not to issue an enforcement action in exchange for those suspected of wrongdoing agreeing to work with the SEC, as well as executing any stipulated actions. Cooperation agreements are deals involving where parties that helped with enforcement actions and investigations are given credit). The Commission has entered into over three dozen cooperation agreements already, and more deals, involving deferred prosecution, are expected.

Khuzami also touted the SEC’s whistleblower program, which he says has been getting several quality submissions a day from parties with what appear to be valid claims. David Rosenfeld of the SEC’s New York regional office, who also spoke at the conference, said that pursuing those involved in insider trading was another SEC priority.

Also presenting at the conference were US Department of Justice officials. They said that they are continuing to look for leads in areas of securities law that were considered high priority (insider trading, Ponzi scams, large investment fraud, bank fraud, and market manipulation.) The Justice Department is using a number of tools, including wiretaps and court-ordered telephone surveillance techniques, as part of their enforcement efforts.

At Shepherd Smith Edwards and Kantas, LTD, LLP, we consider it our job to help investors of securities fraud to recoup their losses. Working with an experienced securities fraud law firm increases your chances of financial recovery and of getting back as much of your investment loss as is possible. Contact our SEC securities fraud lawyers today.

SEC Restructuring, DOJ Tactics Improving Securities Enforcement Results, Officials Say, Bloomberg/BNA Daily, April 19, 2012

Enforcement 2012: Multi-Agency Enforcement Efforts, Practicing Law Institute, May 2, 2012


More Blog Posts:
Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund, Institutional Investor Securities Blog, April 30, 2012

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investor Securities Blog, April 14, 2012

May 1, 2012

Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund

The SEC has ordered investment adviser Montford Associates and Ernest Montford Sr. to pay $650K in penalties for failing to disclose that it had received $210K from an allegedly fraudulent hedge fund that it had recommended to clients. The name of the fund is SJK Investment Management. Its owner, Stanley Kowalewski, is accused of using the fund to commit a $16.5 million fraud. Investors that put their money in the fund included the Tallulah Falls School’s endowment program, St. Joseph’s/Candler Hospital System, Georgia Ports Authority, Sea Island Co. Retirement Plan, and Savannah Country Day School Foundation.

Although Montford Associates and Ernest Montford are not accused of involvement in Kowalewski’s securities fraud, the two of them allegedly lied to investors by not telling them about the compensation they were getting for the referrals. Montford and his investment adviser firm were paid "marketing and syndication fees” and “consulting services.”

The SEC contends that failure to disclose the payments for the recommendations violates federal securities laws. The Commission also says that even though Montford was aware that these nonprofits, many of them charitable organizations and schools, were run by part-time volunteers that depended on his investment advice and he knew they wanted consistent, stable investments, he still pushed them to move their investments to SJK so that Kowalewski could manage their money.

In addition to the $650,000 penalty, Montford Associates and Montford must pay disgorgements of $130,000 and $80,000, each with prejudgment interest. They also must set up a Fair Fund so that their clients that were harmed can use the penalties and disgorgement. Both must also cease and desist from committing/causing future violations of the Advisers Act and Advisers Act Rule 204-1(a)(2). Montford also is barred from associating with brokers, investment advisers, municipal securities dealers, dealers, transfer agents, municipal advisors, and nationally recognized statistical rating organizations.

As for the SEC’s hedge fund fraud case against Stanley Kowalewski, the Commission is accusing the hedge fund manager of using millions of dollars in client funds to buy his residence and a beach home and directing $10 million in unfounded fees to his investment management company and himself. He allegedly tried to hide his financial scam by sending fraudulent account statements to investors each month. These updates grossly exaggerated the actual values of assets and returns.


SEC Fines Adviser Over Ties To Hedge Fund Accused Of Fraud
, FINalternatives.com, April 30, 2012

Securities and Exchange Commission v. Stanley J. Kowalewski, et al, Case No. 1:11-cv-00056-TCB (N.D. Ga.), SEC.gov, August 29, 2011


More Blog Posts:

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Fraud, March 29, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Fraud, August 20, 2011

Silicon Valley Man Faces SEC Securities Fraud Charge After Allegedly Bilking Internet Start-Up Investors of the “Next Google” of Millions, Stockbroker Fraud Blog, April 19, 2012


Continue reading "Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund " »

April 26, 2012

SEC to Make Sure Rule Writing Process Incorporates Better Cost-Benefit Analysis

In the wake of criticism that the Securities and Exchange Commission has not done enough to assess its rules’ economic impact, its Office of the General Counsel and Risk, Strategy, and Financial Innovation Division is providing staff with guidance that it needs to conduct a more thorough economic analysis during the entire rule writing process. One of the requirements is that there must be a cost-benefit evaluation when rules that are congressionally mandated or discretionary are involved. This guidance is now binding.

However, SEC Chairman Mary Schapiro was quick to point out to the House Oversight Subcommittee on TARP and Financial Services that many of the rules that are written already follow this guidance. Now, staff will assess the cost-benefits of 28 rules that the Commission is proposing in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The guidance comes following a report that was issued in January. In it, the Office of the Inspector General blamed the SEC for not conducting cost-benefit analysis when writing Dodd-Frank mandated rules. In addition to providing more comprehensive cost-benefit analysis, the SEC must also note the justification for the proposed rule, identify reasonable options to the rule, evaluate any economic repercussions, and find a baseline point for beginning the analysis. The SEC will be hiring more than three dozen economists to join its staff. If the Commission ends up being able to properly implement this guidance, then Congress may have to legislate.

Commenting on this recent development, Shepherd Smith Edwards and Kantas, LTD, LLP Partner and Institutional Investment Fraud Lawyer William Shepherd said, “How high should the cost of regulations be on a mega-billion dollar industry with record profits in a recession after just ripping off investors worldwide for trillions of dollars because of lack of regulations? Wall Street is an industry of whiners who thinks they are the victims because the cops say slow down in a construction zone or school district.”

Rep. Scott Garrett (R-NJ), who authored HR 2308, the SEC Regulatory Accountability Act that similarly seeks to enhance the Commission’s cost-benefit analysis in similar fashion as the guidance, still plans to keep pushing for his bill’s passage. HR 2308 made it through the House Financial Services Committee a couple of months ago.

Garrett would prefer for the cost-benefit mandate to become statute so that the requirements that the SEC must meet are clear, which should hopefully ensure that any rules the Commission does end up writing doesn’t slow economic growth. Garrett’s spokesperson sent BNA an email stressing that another reason it was important for the order to become law rather than mandated SEC guidance is that that future SEC chairmen might choose not to adhere to it.

Our securities fraud attorneys at Shepherd Smith Edwards and Kantas, LTD, LLP represent institutional and individual investors throughout the United States.

New SEC Guidance Directs Staff to Enhance Cost-Benefit Analysis in Rulewriting Process, Bloomberg/BNA, April 18, 2012

Garrett Urges SEC Chairman to Support Cost-Benefit Analysis, US Congressman Scott Garrett, Congressman Garrett, April 25, 2012

Office of the General Counsel and Risk, Strategy, and Financial Innovation Division

More Blog Posts:
Broker Fiduciary Rule Delayed by Cost-Benefit Analysis, SEC Says, Institutional Investor Securities Blog, March 7, 2012

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud BLog, July 30, 2011

April 16, 2012

SEC Chairman Says Commission Shouldn’t Impose Industry-Wide Bars On Offenders that Committed Misconduct Before Dodd-Frank Statute’s Enactment

Speaking at the Rocky Mountain Securities Conference in Colorado a few days ago, Securities and Exchange Commission Chairman Daniel Gallagher said that the imposition of an industry-wide bar, which is authorized under Section 925 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, shouldn’t be applied to misconduct that happened before the financial reform statute was enacted. He talked about how many of the cases that have been brought to the agency for consideration under Section 925 involve “pre-enactment” conduct.

Gallagher said this raised the question of “basic fairness.” He believes that imposing an industry bar on conduct that took place before the legislation was passed is unfair. He said that choosing not to apply the Dodd-Frank provision to “pre-enactment” conduct would show that the SEC is here to not just prevent bad behavior and protect investors and markets, but also to “afford procedural fairness” so that any SEC enforcement action that a party is subject to is “legitimate.” He noted that while there are many defendants that undoubtedly deserve to have the SEC enforce actions against them, there should be limits, such as not subjecting them to sanctions that didn’t exist at the time that their conduct occurred. During his speech, Gallagher was clear to note that the views he is expressing are his alone and not the SEC’s.

Commenting on Gallagher’s statements, Institutional Investment Fraud Attorney William Shepherd said, “When assessing past behavior in the securities markets and whether certain sanctions against wrongdoers is or is not appropriate, does Wall Street really want to rely on this standard: ‘we face a question of basic fairness?’”

Prior to Dodd-Frank, the SEC was not clearly authorized to suspend or bar someone from the entire industry. Now, the SEC can bar an individual from associating with any regulated entity.

Gallagher is not the only SEC commissioner to disagree with application of the industry-wide bar to “pre-enactment” conduct. Last year, then-commissioner Kathleen Casey warned about doing this, noting that although Section 925 is ambiguous enough that such bar enactments over alleged misconduct that occurred before Dodd-Frank is allowable, she questioned whether a federal court would strike down these actions. Also, In re Lawton, SEC Chief Administrative Law Judge Brenda Murray came to the conclusion that Section 925 could not be applied retroactively. In the wake of that ruling, the case has been cited by other ALJs refusing impose the industry-wide bar on “pre-enactment” behavior.

Our institutional investment fraud lawyers have helped thousands of investors recover their losses. Your initial consultation with Shepherd Smith Edwards and Kantas, LTD, LLLP is free.

Remarks at the 44th Annual Rocky Mountain Securities Conference by Commissioner Daniel M. Gallagher, SEC.gov, April 13, 2012

Dodd-Frank, SEC.gov (PDF)


More Blog Posts:
FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record, Stockbroker Fraud Blog, March 15, 2012

April 14, 2012

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients

Accused of not putting in place policies to prevent analyst huddles, Goldman Sachs Group Inc. (GS) will settle for $22 million the allegations made against it by US regulators. According to the Securities and Exchange Commission and FINRA, due to the nature of the financial firm’s internal control system research analysts were able to share non-public information with select clients and traders.

To settle the securities case, Goldman will pay $11 million each to FINRA and the SEC. It also consented to refrain from committing future violations and it will reevaluate and modify its written policies and procedures so that compliance won’t be a problem in the future. The financial firm has agreed to have the SEC censure it. By settling Goldman is not denying or admitting to the allegations.

Meantime, FINRA claimed that Goldman neglected to identify and adequately investigate the increase in trading in the financial firm’s propriety account before changes were made to analysis and research that were published. The SRO says that certain transactions should have been reviewed.

This is not the first time that Goldman has gotten in trouble about its allegedly inadequate control systems. Last year, it agreed to pay $10 million to the Massachusetts Securities Division over ASI and the huddles. In 2003, the financial firm paid $9.3 million over allegations that its policies and controls were not adequate enough to stop privileged information about certain US Treasury bonds from being misused.

The latest securities actions are related to two programs that the financial firm created that allegedly encouraged analysts to share non-public, valued information with select clients. The SEC says that during weekly “huddles” between 2006 and 2011, Goldman analysts would share their perspectives on “market color” and short-term trading with company traders. Sales employees were also sometimes present, and until 2009, employees from the financial firm’s Franchise Risk Management Group who were allowed to set up large, long-term positions for Goldman also participated in the huddles.

Also in 2007, the financial firm established the Asymmetric Service Initiative. This program let analysts share ideas and information that they acquired at the huddles with a favored group made up of approximately 180 investment management and hedge fund clients.

The SEC contends that ASI and the huddles occurred so that Goldman’s traders’ performances would improve and there would be more revenue in the form of commissions. The financial firm even let analysts know that it would be monitoring whether ideas discussed at the huddles succeeded and that this would be a factor in performance evaluations. The Commission said that the two programs created a serious risk, especially considering that a lot of ASI clients were traders who did so often and in high volume.

Meantime, FINRA claimed that before changes were made to published analysis and research, Goldman would neglect to identify and adequately investigate the increase in trading in the financial firm’s proprietary account. The SRO says that there were certain transactions that should have been reviewed.

This is not the first time that Goldman has gotten in trouble over its allegedly inadequate control systems. Last year, it agreed to pay $10 million to the Massachusetts Securities Division over ASI and the huddles. In 2003, the financial firm paid $9.3 million over allegations that its policies and controls were not adequate enough to stop privileged information about certain US Treasury bonds from being misused.

Read the SEC order in this case (PDF)

Read the FINRA order in this case (PDF)

Goldman Sachs to Pay $22 Million Over Analyst Huddle Claims, Bloomberg, April 12, 2012


More Blog Posts:
Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

Wirehouses Struggle to Retain Their Share of the High-Net-Worth-Market, Institutional Investor Securities Blog, April 6, 2012

Continue reading "Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients" »

March 17, 2012

SharesPost, its CEO, and Fund Manager Settle with the SEC

The Securities and Exchange Commission says that it has reached a securities settlement in its administrative proceeding against SharesPost. Along with its Chief Executive Officer Greg Brogger, the online platform that serves as a secondary market for pre-IPO shares will pay $100,000 in penalties.

According to the SEC, SharesPost was matching up the sellers of private company stock and buyers even though it wasn’t a registered broker-dealer. Also, the online service allegedly let other broker-dealers’ registered representatives present themselves as SharesPost employees and make commissions on securities transactions, allowed one of its affiliates to manage pooled investment vehicles that were supposed to buy stock in single private firms and interests in funds that Sharespost made available, and published on the website third-party information about issuers’ financial metrics, research reports, and a valuation index that it created.

The SEC noted that although it is open to innovation in capital markets, products and new platforms have to abide by the rules, including making sure that basic disclosure and fairness occur. The Commission said that that broker-dealer registration is key in helping protect customers—especially considering that there are risks involved in the secondary marketplace for pre-IPO stocks for even the most sophisticated investors.

The Commission also settled its securities case against FB Financial Group and its fund manager Laurence Albukerk. The fund manager is accused of providing offering materials that did not let investors know he was making extra fees because he was buying Facebook shares using an entity that his wife controlled. Albukerk and his financial firm have agreed to pay pre-judgment interest plus disgorgement of $210,499 and $100,000 fine. Sharespost, Brogger, Albukerk, and FB Financial Group agreed to settle without denying or admitting to any wrongdoing.

Meantime, in a related securities fraud lawsuit filed in civil court, the SEC accused Frank Mazzola and his financial firms Facie Libre Management Associates, LLC and Felix Investments of making secret commissions and taking part in improper self-dealing. Mazzola and the firms allegedly made a number of false statements to investors about offerings in Zynga, Facebook, and Twitter while not revealing that certain prices were raised as a result of commissions.

Facie Libre also allegedly sold Facebook interests even though it didn’t own some of these shares. Both of the firms and Mazzola are accused of misleading an investor into thinking they had acquired Zynga stock, as well as of making misrepresentations about Twitter revenue. This case is still open. Felix Investments and Mazzola have, however, settled a related but separate action with the Financial Industry Regulatory Authority with the firm consenting to pay a $250,000 fine and Mazzola a $30,000 fine.

In the wake of electronic markets and Wall Street banks all rushing to present investors with an opportunity to trade stakes in popular technology companies prior to them going public, regulators and lawmakers have been more closely scrutinizing private share trading over the last year. That said, alternative online investment platforms, which are called “shadow markets," can be very risky.

“The real shock is the lack of problems the SEC finds with such trading in pre-public shares,” says Shepherd Smith Edwards and Kantas, LTD LLP Founder and stockbroker fraud lawyer William Shepherd. “The penalties levied are only for firms not being licensed to sell securities engaging in such practices and/or for ‘self-dealing.’ Meanwhile, this entire practice flies in the face of both the letter and intent of securities laws that have been on the books since the 1930’s. Wall Street screams about new regulations while it ignores current ones. In driving terms, think of this as the police watching as drag races are being held in your neighborhood, ignoring red lights and stop signs on every corner, and being only concerned with whether the drivers are licensed."

SEC charges SharesPost, Felix over pre-IPO trading, Reuters, March 14, 2012

Advisen News: SEC Settles With SharePost, Fund Managers, Advisen, March 15, 2012


More Blog Posts:

SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims, Institutional Investor Securities Blog, March 7, 2012

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In, Stockbroker Fraud Blog, January 6, 2012

Continue reading " SharesPost, its CEO, and Fund Manager Settle with the SEC" »

March 15, 2012

SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected

In a primarily procedural decision, the U.S. Court of Appeals for the Second Circuit has ruled that the Securities and Exchange Commission’s case against Citigroup, which resulted in a proposed $285M securities fred settlement, be stayed pending a joint appeal of U.S. Senior District Judge Jed Rakoff’s ruling that the civil lawsuit proceed to trial. Rakoff had rejected the settlement on the grounds that he didn’t believe that it was “adequate.” He also questioned the Commission’s practice of letting parties settle securities causes without having to admit or deny wrongdoing. The trial in SEC v. Citigroup Global Markets, Inc. had been scheduled for July 2012.

In December, the SEC filed a Notice of Appeal to the 2nd Circuit contending that the district court judge made a legal mistake in declaring an unprecedented standard that the Commission believes hurts investors by not allowing them to avail of “benefits that were immediate, substantial, and definite.” The notice also stated that it considered it incorrect for the district court to require an admission of facts or a trial as terms of condition for approving a proposed consent judgment—especially because the SEC provided Rakoff with information demonstrating the “reasoned basis” for its findings.

The 2nd circuit’s ruling deals a blow to Rakoff’s decision, which other federal judges have cited when asking if the public’s interest is being served when federal agencies propose settlements. The three-judge panel’s appellate ruling, which was a per curiam (unsigned) decision, found that the SEC and Citi would likely win their contention that Rakoff was in error when he turned down the securities settlement. The appeals court justices said that they had to defer to an executive agency’s evaluation of what is best for the public and that there was no grounds to question the SEC’s claim that the $285M securities settlement with Citigroup is in that interest.

The 2nd circuit said that Rakoff “misinterpreted” precedent related to his discretion to determine public interest and went beyond his judicial authority. Also, per the appellate panel, while district court judges should not merely rubber stamp on behalf of federal agencies it is not their job to define the latter’s policies.

It is important to note, however, that the 2nd circuit’s ruling only tackles the preliminary issue of whether the securities case should be stayed pending the completion of the appeal. The panel said it would be up to the justices that hear the appeal to resolve all matters and that this ruling should not have any “preclusive” impact. Counsel would also be appointed to argue Rakoff’s side during the appeal.

Ruling Gives Edge to U.S. in Its Appeal of Citi Case, NY Times, March 15, 2012

Second Circuit: Rakoff, Mind, Wall Street Journal, March 15, 2012


More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional investor Securities Blog, November 9, 2011

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Continue reading "SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected" »

March 13, 2012

As the US House Passes Package of Bills to Open Capital Market Flow to Small Businesses, the Senate Prepares Similar Legislation

It’s been less than one week since US House passed a package of six bills that would open up capital flow to small businesses. Now, it is the Senate is preparing to introduce its own version of legislation to assist small businesses in raising capital. Both Republican and Democrat senators are expected to work together to push forward the bills package, which would ease up the restrictions of SEC regulations to attract investors and help out startups and small businesses.

The legislation, which made it through the House by a 390-23 vote, has President Barack Obama’s support. Called the Jumpstart Our Business Startups Act (H.R. 3606), the bills would allow crowdfunding (this involves raising capital from a bigger pool of small-scale investors that the Commission has not classified as “accredited.”), increase the shareholder reporting trigger for all community banks and companies, set up an initial public offering “on-ramp” for emerging growth companies, increase the Regulation A offering cap to $50 million, and eliminate the general solicitation ban.

The House also approved several amendments to the package. Among these was one that would up the shareholder threshold for all firms to $2,000. The original bill had only increased the threshold to 1,000. Per the amendment, only 500 shareholders under the 2,000 limit can be non-accredited. Another amendment mandates that the Securities and Exchange Commission conduct a study regarding whether it can enforce the Exchange Act’s Rule 12g5-1.

While the Senate’s small business capital legislation will likely have many similarities to the House’s version, with the Senate bill, the Export-Import Bank would be given new legislative authority. This independent agency helps US companies trying to make sales internationally with financing. Also, whereas the House legislation is comprised of six bills, the Senate’s small business legislation takes up just three of the bills and with modifications.

The first bill would set up a classification for new emerging growth companies that would phase in specific SEC regulations over five years. This should help lower the expenses of going public. Companies would be able to keep this status for this time period or until exceeding $1B in yearly gross revenue. Another bill increases the ceiling for how many shares a private company can sell during a public offering before being required to register with the SEC, from $5 million to $50 million. Meantime, the third bill calls for getting rid of SEC crowdfunding restrictions.

Additional investor protections are expected. Also, several other bills involving small businesses will likely be included.

Contact our securities fraud attorneys at Shepherd Smith Edwards and Kantas, LTD LLP today. Our investment fraud law firm represents institutional and individual clients.

Senate follows House in introducing bill to help small businesses raise capital
, Associated Press/Washington Post, March 12, 2012

House Clears Legislative Package To Ease Flow of Capital to Small Firms, Bloomberg/BNA, March 9, 2012


More Blog Posts:

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions, Institutional Investor Securities Blog, February 29, 2012

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds, Stockbroker Fraud Blog, February 28, 2012

March 10, 2012

Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms

Securities and Exchange Commission's Division of Trading and Market Associate Director David Shillman reported that the staff is almost ready to recommend three market rules for adoption. He noted that the Commission would likely bundle recommendations dealing with consolidated audit trail, market-wide circuit breaker changes, and limit up-limit down mechanisms. Schillman made his comments at SEC Speaks, which was sponsored by the Practising Law Institute, on February 24.

FINRA and the national securities exchanges submitted the proposal on limit up-limit down last year. Per the proposal, trades in listed securities would need to be executed within a range connected to recent instrument prices. The limits are set up to take the place of single stock circuit breakers (pilot basis-approval was given). Shillman noted that although single stock circuit breakers “have worked relatively well," they are a “relatively blunt instrument” and a wrong trade can happen prior to the break’s activation. Such mistakes would be avoided with limit up-limit-down.

The exchanges and FINRA also proposed to update current market-wide circuit breakers, which would tighten the trigger-window for a market-wide stoppage to a 7% index from a 10% price movement. The pause that occurs in trading would also be shortened. Meantime, in 2010, the SEC had proposed a “consolidated audit trail,” which would be a national database for capturing in real time details on the National Market System securities and listed options. The customer’s identity would be included in the data.

Also addressing the audience at SEC speaks wasTrading Markets associate director Brian Bussey. He spoke about the Commission’s attempts to adopt final entity definitions for swaps. Bussey noted that even if the SEC were to adopt product and entity definitions, market participants are still anticipating an “implementation plan” for swaps rules (per the Dodd-Frank Wall Street Reform and Consumer Protection Act). The plan would include compliance dates for different rules, per the law’s Title VII. Prior to adopting the plan, there will be a concept release asking for comment.

Associate director Michael Macchiaroli, who also spoke, stated that current staff members believe that security-based swap dealers should have to contend with current net capital rule that involves a net liquid assets test. Broker-dealers that become swap dealers and those that are solely security-based swap dealers would also be subject to the same requirements. He said that financial firms, depending on their qualifications, will either be able to use models to calculate required capital or they will have to deal with a prescribed grid. Minimum capital requirements will vary from $100 million to $5 billion.

Contact our stockbroker fraud law firm to request your free case evaluation. Shepherd Smith Edwards and Kantas, LTD LLP represents investors nationwide.

SEC Staffer Says Recommendations On Volatility, CAT Proposals Coming Soon, , Bloomberg BNA Daily, March 2, 2012

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


More Blog Posts:

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012

March 7, 2012

US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims

According to the Securities and Exchange Commission Enforcement Division’s Chief Counsel Joseph Brennan, the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders is impacting the types of violations the federal regulator is now filing against defendants. Brennan says to look out for more possible control person liability and aiding and abetting claims. Speaking at the SEC Speaks conference by the Practising Law Institute in Washington, Brenner said the views he was expressing are his own.

In the high court’s 2011 ruling, the decision honored, under Rule 10b-5 of the 1934 Securities Exchange Act, a narrow perspective of primary liability in a private lawsuit. The majority held that an investment adviser who was a legally separate entity from the mutual fund that submitted an allegedly prospectus couldn’t be held primarily liable in a private action even if that adviser had played a key role in developing the statement. Justice Clarence Thomas wrote that the statement’s maker is the entity or person with final authority over the statement (including its content and how it should be communicated).

The Exchange Act’s SEC Rule 10-b5(b) makes it illegal to either issue any statement of material fact that is untrue or leave out a key fact. The Supreme Court’s ruling establishes an even higher pleading bar in private securities fraud cases where the plaintiff wants to hold defendants liable for other’s misstatements.

The ruling, however, has not had a big impact on who the SEC can charge. It also hasn’t had a big influence on SEC enforcement decisions involving other statutes and provisions.

Also discussing Janus at the same gathering was SEC Deputy Solicitor John Avery. He noted while that the decision signified a significant “change” and the “narrowing” of how primary liability for issuing false or misleading statements is defined, it remains unclear whether SEC actions are covered under the ruling. While some district courts have found that Janus applies to SEC actions, federal appellate courts have not issued any decisions related to this matter.

Avery said that the ruling has, however, changed the way the SEC files charges. The federal agency, which is authorized to pursue aiders and abbettors accused of violative conduct, might now charge those that played a role in creating the statement as abbettors and aiders even though they wouldn’t be liable per Janus. However, in certain cases, this authority won’t work too well.

Meantime, federal courts are starting to deal with whether Janus is applicable beyond the context of Rule 10b-5. In four out of five SEC cases, the courts have ruled against applying Janus outside the rule.

Contact our securities fraud law firm to request your free case evaluation.


SEC Looking to Aiding/Abetting Claims In Wake of Janus Decision, Official Says, BNA Securities Law Daily, February 27, 2012

Janus Capital Group Inc. v. First Derivative Traders and the Law of Unintended Consequences, Forbes, September 21, 2011

Read the Supreme Court's Opinion (PDF)


More Blog Posts:

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012


Continue reading "US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims " »

March 5, 2012

House To Vote On GOP Legislation Related to Small Business' Access to Capital

This week, the House is slated to vote on a Republican legislative package to make it easier for small businesses to access capital. On February 28, House Majority Leader Eric Cantor (R-Va.) presented his Jumpstart Our Business Startups Act’s final version, which is comprised of six bills that would revise securities laws to make this capital flow happen. Included in this package is a bill calling for more shareholder reporting triggers for community banks. Meantime, Senate Majority Leader Harry Reid (D-Nev) has said he plans to push forward a similar package in the US Senate.

As both the House and Senate move forward with their legislative packages, Senator Scott Brown (R-Mass) is asking the Senate to push forward his bill, which would allow for a crowdfunding-related securities registration exemption. His bill (S. 1971) and Sen. Jeff Merkley's (D-Ore.) S. 1970 similarly are pressing for letting issuers raise up to $1 million yearly through crowdfunding. However, Merkley’s bill establishes a part for states to play in regulating crowdfunding securities, while Brown’s bill does not. The Senator from Massachusetts believes a national framework is necessary, rather than making entrepreneurs comply with each state’s securities law mandate. Also, while Merkeley’s bill calls for giving investors a private right of action to file a civil suit against fraud issuers, Brown doesn’t believe this is necessary and sees current fraud laws as “solid” and merely in need of enforcement. He did, however, say that he and Merkeley share the same desire for investor protection.

Regarding the issue of the Securities and Exchange Commission’s capital formation efforts on small businesses, SEC Division of Corporation Finance Director Meredith Cross said it is hard right now for the regulator to evaluate their impact. Cross, who was part of a panel at the Practising Law Institute's SEC Speaks conference on February 24, said her views are her own.

Cross said the division is prioritizing a number of actions for 2012, including completing its asset-backed securities and Dodd-Frank Wall Street Reform and Consumer Protection Act rulemaking, making headway in regards to proxy plumbing initiatives, and beginning the process of updating the Commission’s beneficial ownership reporting rules.

Right now the SEC is working on a number of capital formation initiatives. Staffers are also putting together a concept release that will seek public feedback on whether the general solicitation ban, which prevents issuers from using advertising or employing general solicitation to draw investors to private offerings should be reassessed.

Throughout the US, contact Shepherd Smith Edwards Karats, LTD, LLP to speak with an experienced securities fraud lawyer about your institutional fraud case. Your first consultation is free.

Brown Renews Plea for Senate To Advance Crowdfunding Exemption, Bloomberg/BNA, March 2, 2012


More Blog Posts:

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2012

$78M Insider Trading Scam: "Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

February 27, 2012

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements

Securities and Exchange Commission Chairwoman Mary L. Schapiro said that the agency’s practice of reaching settlements with financial firms without them having to admit wrongdoing has “deterrent value” despite the fact that some of these firms have been charged more than once for violating the same securities laws. Schapiro noted that the commission ends up bringing a lot of the same kinds of securities cases so that people don’t forget their obligations or that they are being watched by an entity that will hold them responsible.

The SEC will often settle securities fraud cases with a financial firm my having the latter pay a fine and not denying (or admit) that any wrongdoing was done. Expensive court costs are avoided and a resolution is reached.

The SEC has said that financial firms won’t settle if they have to acknowledge wrongdoing because this could make them liable in civil cases filed against them over the same matters. Schapiro says the SEC only settles when the amount it is to receive by settling is about the same as it would likely get if the commission were to win the lawsuit in court.

As settlements often come with an agreement that the financial firm will overhaul its compliance, Schapiro considers there to be a “deterrent effect.” She also noted that settling allows investors to recoup their losses sooner rather than later, which would be the likely scenario if, and only if, the SEC were to win by going through litigation.

However, not everyone agrees that this “deterrent effect” actually does take place or that settling without denying or admitting does a lot of good. It was just last November that US District Judge Jed Rakoff turned down the SEC’s proposed $285 million mortgage-backed securities settlement with Citigroup and insisted that the securities fraud case be resolved through trial. Rakoff questioned why Citigroup was being allowed to settle without having to admit or deny wrongdoing even though the financial firm made $160M while investors lost more than $700 million. The SEC had accused Citigroup of selling collateralized debt obligations to investors even as the financial firm bet against the CDOs.

The New York Times, which analyzed enforcement cases, says that almost all large Wall Street financial firms have settled fraud cases multiple times by promising not to violate a law that they weren’t supposed to violate to begin with. A number of the settlements also repeatedly gave these companies exemptions from punishments that regulators and Congress had set up so as to prevent multiple violations.

Also among The New York Times’ findings:
• At least 51 fraud cases at 19 Wall Street firms in the past 15 years involved alleged violations of antifraud laws that the companies had previously agreed not to break.
• In almost 350 instances, the SEC let financial firms get around certain sanctions that should have been imposed.

Obtaining financial recovery can be tough—especially if you go for it without an experienced securities fraud law firm representing you. At Shepherd Smith Edwards and Kantas, LTD, LLP, we have helped thousands of investors recoup their losses.

Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements, The New York Times, February 22, 2012

Judge Rakoff Squashes Citi's $285 Million SEC Settlement, Forbes, November 28, 2011


More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation, Institutional Investor Securities Blog, January 28, 2012

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

February 10, 2012

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors

U.S. District Court Judge Robert Wilkins says that the Securities and Exchange Commission doesn’t need to go through a full civil trial in order to make the Securities Investor Protection Corp. start liquidation proceedings to compensate the victims of Allen Stanford’s $7B Ponzi scam for their losses. This ruling is a partial victory for the SEC, which has been trying to get the brokerage industry-funded nonprofit to help the investors recoup their losses. The dispute between the two groups has centered around the interpretation of the SIPC’s mission and whether or not it supports the SEC’s efforts to protect investors.

SIPC had been pushing for a trial. However, Wilkins said that a trial doesn’t comport with the agency’s purpose, which is to give immediate, summary proceedings upon the failure of a securities firm. Wilkins is mandating a “summary proceeding” that would be fully briefed by the end of this month. However, in regards to the SEC claim that it should be able to determine when the SIPC has failed to fulfill its duties, Wilkins said that this was for the court to decide.

SIPC has a reserve fund that is there to compensate investors that have suffered losses because a brokerage firm has failed. Under SIPC protections, customers of a broker that has failed can receive up to $500,000 in compensation ($250,000 in cash). Although not intended as insurance against fraud, SPIC covers the financial firm’s clients but not those that worked with an affiliate, such as an offshore bank. For example, Stanford International Bank is an Antiguan bank, which means that it should fall outside SIPC-provided protections. However, Stanford Group Company, which promoted the CDs to the investors, is a member of SIPC. (Also, SEC has maintained that Stanford stole from the brokerage firms’ clients by selling the CDs, which had no value, and that this was not unlike the Bernard L. Madoff Ponzi scam that credited $64B in fake securities to client accounts.)

Meantime, Stanford has been charged by both federal prosecutors and the Commission with bilking investors when he and his team persuaded them to buy $7B in bogus CDs from Stanford International Bank. He then allegedly took billions of those dollars and invested the cash in his businesses and to support his lavish lifestyle. Stanford’s criminal trial is currently underway.

Wilkins noted that even if the SEC’s lawsuit against SIPC succeeds, this wouldn’t mean that Stanford’s victims would get their money right away. It would still be up to a Texas court to decide on claims filed by former Stanford clients.

Judge Hands SEC Initial Victory In Suit Against Insurance Fund, The Wall Street Journal, February 9, 2012

Securities Investor Protection Corporation
Compensating Stanford’s Investors, NY Times, June 20, 2011


More Blog Posts:

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011

SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation, Institutional Investor Securities Blog, September 23, 2011

Continue reading "SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors" »

January 31, 2012

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking

In their efforts to move forward with rulemaking for over-the-counter derivatives, some are saying that the Commodities Futures Trading Commission and the Securities and Exchange Commission may find themselves grappling with differences that could pose a challenge for industry participants. For example, differences between proposed and final regulations could set up compliance issues. Also, the regulators appear to be working at separate paces to put into effect the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII, which issued a directive to both regulators ordering them to establish a regulatory regime to oversee swaps.

According to reform legislation, security-based swaps are swaps based on one loan or security or on a securities index that is narrowly based. In general, the CFTC’s jurisdiction includes all swaps except for security-based swaps, which the SEC oversees.

With the other types of swaps under its charge, the CFTC has to write a lot more swap regulations compared to the SEC. So far, under Title VII the CFTC has finalized 25 swap rules. The SEC has adopted three. (Just last January, the CFTC adopted rules addressing cleared swaps customer collateral segregation, registering significant swap participants and swap dealers, and business conduct for swap dealers interacting with counterparties.) However, together the regulators have jointly put forward proposals for definitions for products and key entities under Title VII. These definitions, however, have yet to be made final and some have expressed concern that the regulators are forging forward with adopting final rules without adopting the key definitions that certain requirements will be relying upon.

While the SEC has divvied up its rulemaking into the first and second halves of the year, the CFTC’s two blogs for swaps rulemaking have been separated between before March 31 and after. It doesn’t help that some of the rulemaking items that the SEC doesn’t plan to tackle until the latter part of the year will likely be dealt with by the CFTC by the end of March.

It might be tough for market participants to work with separate standards of business conduct. The SEC and CFTC have proposed rules that overall cover the same behavior, but there are key differences between their proposals when it comes to risk disclosure, counterparty verification, and safe harbors for advisors of special entities. And, in an effort to mute conflicts of interest, the CFTC has introduced requirements that Dodd-Frank is not requiring. Meantime, the SEC will continue to depend on its antifraud authority, per federal securities law.

It doesn’t help that swaps could fall into either the SEC jurisdiction or that of the SEC depending on whether a broad or narrow index of securities is their basis. This could prove especially challenging if, for example, an SEC-regulated swap also were to fall under the CFTC rules because of a broader index. Also, while SEC’s proposed registration requirements would let dual registrants undergo a simplified registration process that is expedited, the final rule of the CFTC doesn’t accommodate a process this simplified.

SEC, CFTC Divergence on Swaps Rules Could Signal Compliance Challenges Ahead, Bloomberg BNA, January 27, 2012

Our institutional investment fraud attorneys represent investors throughout the US. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.


More Blog Posts:
Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud
http://www.securities-fraud-attorneys.com/, Institutional Investor Securities Blog, January 29, 2012

January 29, 2012

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud

According to The New York Times, by allowing that there be exemptions to certain regulations and laws, the Securities and Exchange Commission is letting Goldman Sachs, JPMorganChase, Bank of America, and other large financial firms avoid the liability that is supposed to come with losing securities fraud lawsuits while still making it possible for them to avail of the certain advantages that make it easier for them to raise investor money.

The newspaper analyzed investigations conducted by the SEC in the last decade and discovered almost 350 instances involving the federal agency giving Wall Street firms and other financial institutions a break. In one example cited by The New York Times, although JPMorganChase has settled six securities fraud cases in the past 13 years, the financial firm has also been granted at least 22 waivers. (Waivers may grant permission to underwrite certain bond and stock sales and/or manage mutual fund portfolios.) Another example involves Merrill Lynch and Bank of America (The two financial firms merged in 2009) settling 15 securities fraud cases while being granted at least 39 waivers.

Former regulators and securities experts say that granting the Wall Street firms the waivers gave them certain powerful advantages. According to former SEC chairman David S. Ruder, without the waivers a financial firm that agrees to settle securities fraud charges could be faced with “vast repercussions” that could prevent them from staying in operation.

SEC officials say the waivers are to allow for the stock and bond markets to stay accessible to companies that have the actual need to raise capital, which they believe is just as important as protecting investors. While the SEC has taken away certain privileges in securities fraud cases over misleading or false statements that were made about a financial firm’s own business, it doesn’t do the same when a Wall Street firm faces civil charges for allegedly lying about a specific security that it created and it is selling.

Many believe that the government is continuing to be “too soft” on Wall Street—even as the SEC has toughened up its investigations against financial firms accused of alleged fraud. Recently, there have been federal judges that have spoken out against the SEC’s habit of letting financial firm’s settle by letting them promise not to violate the law again. More than half the waivers issued have gone to Wall Street firms that had settled fraud charges at least once before.

The SEC has complained that settling is more affordable for it than going to court. However, even as the Commission has turned to Congress for tougher laws against fraud as well as increased penalties, why have nearly half of the waivers it has granted gone to Wall Street firms that have settled fraud charges in the past with the promise to never violate those laws again? That’s what many want to know.

S.E.C. Is Avoiding Tough Sanctions for Large Banks, The New York Times, February 3, 2011

SEC Seeks to Impose Tougher Penalties for Securities Fraud, Institutional Investor Securities Fraud, December 29, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Fraud, October 13, 2011

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on LinkedIn, Stockbroker Fraud Blog, January 6, 2012

Continue reading "Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud" »

January 19, 2012

UBS Global Asset Management to Pay $300,000 to Settle SEC Charges Related to Alleged Mutual Fund Price Violations

The Securities and Exchange Commission says that UBS Global Asset Management will pay $300,000 to resolve charges that it did not give securities in three mutual fund portfolios the proper price. This alleged failure caused investors to receive a misstatement regarding the funds’ net asset values. By agreeing to settle the charges, UBSGAM is not admitting to or denying the findings.

The SEC start investigating UBSGAM after SEC examiners conducted a routine check of the financial firm. According to its order, in 2008 UBSGAM bought about 54-complex fixed-income securities of $22 million, which was an aggregate purchase price. The majority of the securities were part of subordinated tranches of nonagency MBS with underlying collateral, which were were mortgages that weren’t in compliance with requirements to be part of MBS-guaranteed or to have been issued by Fannie Mae, Freddie Mac, or Ginnie Mae. CDO’s and asset-backed securities were among these securities.

After the securities were bought, 48 of them were priced substantially over the transaction price. This is because the pricing sources that provided the valuations to UBSGAM didn’t appear to factor in the price that the funds paid for the securities. Some quotations were not priced on a daily basis, while others were formulated using ending price from the last month. It wasn’t until over 2 weeks after UBSGAM started getting price-tolerant reports pointing out such discrepancies that it’s Global Valuation Committee finally met.

By using the prices that the 3rd party pricing service or a broker-dealer provided, the SEC contends that the mutual funds did not abide by their own valuation procedures, which mandate that the securities use the transaction price value until the financial firm makes a fair value determination or gets a response to a price challenge based on the discrepancy noted in the price tolerance report. The transaction price can be used for 5 business days, when a decision would have to be made on the fair value. The SEC concluded that by not making sure that these procedures were being followed, the financial firm caused the mutual funds to violate the Investment Company Act’s Rule 38a-1.

The SEC also determined that due to the securities not being timely or properly priced at fair value for a number of days in 2008, the funds were misstated (up to 10 cents in some cases) and they were then purchased, sold, or redeemed based on NAVs that were not accurate and higher than they should have been.

Read the SEC's Order Against UBS (PDF)


More Blog Posts:
SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million, Institutional Investor Securities Blog, January 14, 2012

$78M Insider Trading Scam: "Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

Continue reading "UBS Global Asset Management to Pay $300,000 to Settle SEC Charges Related to Alleged Mutual Fund Price Violations" »

December 29, 2011

SEC Seeks to Impose Tougher Penalties for Securities Fraud

The Securities and Exchange Commission has issued a proposal seeking to impose larger penalties on wrongdoers. The proposal comes in the wake of criticism that the agency isn’t doing enough to punish the persons and entities that played a role in the recent credit crisis and calls for:

• Capping fines issued against individuals at $1 million/violation rather than just $150,000.
• Raising penalties against firms from $725,000/action to $10 million.
• Multiplying by three how much the SEC can seek using an alternative formula that calculates the violator’s gains.
• Permission to determine penalties according to how much investors lost because of an alleged misconduct.
• Permission to triple the penalty if the defendant is a repeat offender and has committed securities fraud within the last five years.

The proposal was included in a letter sent to Senator Jack Reed by SEC Chairman Mary Schapiro last month. Reed heads up a subcommittee that oversees the Commission. In her letter, Schapiro said she believed the proposed changes would “substantially” improve the agency’s enforcement program.

The SEC has come under fire for failing to detect a number of major scandals before they blew up, including the Madoff Ponzi scam and the Enron fraud. Recently, US District Judge Jed Rakoff, who rejected the SEC’s proposed $285 million securities settlement with Citigroup, questioned a system that allows wrongdoers to pay a fine, as well as other penalties, without having to admit or deny wrongdoing. Now, the Commission appears to be working hard to rehabilitate its image so that it can be thought of as an effective and credible regulator of the securities industry.

According to Investment News, another way that the SEC may be attempting to re-establish itself is by targeting investment advisers. The Commission has reported filing a record 140 actions against these financial professionals in fiscal 2011, which is a 30% increase from 2010. One reason for this may be that a lot of the actions deal with inadequate paperwork that can easily be identified, which is causing the agency to quickly score a lot of “successes.” This approach to enforcement is likely allowing the SEC to discover small fraud cases before they turn into huge debacles. (If only SEC staffers had requested the appropriate documents related to trades made by Bernard Madoff’s team years ago, his Ponzi scam may have been discovered before the losses sustained by investors ended up hitting $65 million.

The agency’s revitalized efforts are likely prompting some financial firms to work harder on compliance. Investors can only benefit from this.

SEC's Schapiro Asks Congress to Raise Limits on Securities Fines, Bloomberg/Businessweek, November 29, 2011


More Blog Posts:
SEC Files Charges in $27M Washington DC Ponzi Scam, Stockbroker Fraud Blog, November 21, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges, Institutional Investor Securities Blog, December 16, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements, Institutional Investor Securities Blog, November 5, 2011

Continue reading "SEC Seeks to Impose Tougher Penalties for Securities Fraud" »

December 16, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges

The Securities and Exchange Commission has charged six ex-executives of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) with securities fraud. The Commission claims that they not only knew that misleading statements were being made claiming that both companies had minimal holdings of higher-risk mortgage loans but also they approved these messages.

The six people charged are former Freddie Mac CEO and Chairman of the Board Richard F. Syron, ex-Chief Business Officer and Executive Vice President Patricia L. Cook, and former ex-Single Family Guarantee Executive Vice President Donald J. Bisenius. The three ex-Fannie Mae executives that the SEC has charged are former CEO Daniel H Mudd, ex-Fannie Mae's Single Family Mortgage Executive Vice President Thomas A. Lund, and ex- Chief Risk Officer Enrico Dallavecchia.

In separate securities fraud lawsuits, the SEC accuses the ex-executives of causing Freddie Mac and Fannie Mae to issue materially misleading statements about their subprime mortgage loans in public statements, SEC filings, and media interviews and investor calls. SEC enforcement director Robert Khuzami says that the former executives “substantially” downplayed what their actual subprime exposure “really was.”

The SEC contends that in 2009, Fannie told investors that its books had about $4.8 billion of subprime loans, which was about .2% of its portfolio, when, in fact, the mortgage company had about $43.5 billion of these products, which is about 11% of its holdings. Meantime, in 2006 Freddie allegedly told investors that its subprime loans was somewhere between $2 to 6 billion when, according to the SEC, its holdings were nearer to $141 billion (10% of its portfolio). By 2008, Freddie had $244 billion in subprime loans, which was 14% of its portfolio.

Yet despite these facts, the ex-executives allegedly continued to maintain otherwise. For example, the SEC says that in 2007, Freddie CEO Syron said the mortgage firm had virtually “no subprime exposure.”

It was in 2008 that the government had to bail out both Fannie and Freddie. It continues to control both companies. The rescue has already cost taxpayers approximately $150 billion, and the Federal Housing Finance Administration, which acts as its governmental regulator, says that this figure could rise up to $259 billion.

Today, Freddie Mac and Fannie Mae both entered into agreements with the government that admitted their responsibility for their behavior without denying or admitting to the charges. They also consented to work with the SEC in their cases against the ex-executives.

The Commission is seeking disgorgement of ill-gotten gains plus interest, financial penalties, officer and director bars, and permanent and injunctive relief.

Ex-Fannie Mae, Freddie Mac execs charged with fraud, USA Today/AP, December 16, 2011

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud, SEC, December 16, 2011


More Blog Posts:

Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010

Continue reading "Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges " »

November 28, 2011

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Regard this proposed fiduciary standard rule, Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd said: “The goal is to lower the duties of Wall Street. The term “fiduciary duty” was defined by courts centuries ago. Since passage of the Investment Advisor’s Act of 1940 – 71 years ago – no special definition of the “fiduciary duty” of financial advisors has been necessary. Current law does not exempt stockbrokers from a fiduciary duty when the circumstances arise in which the broker has assumed the role of a fiduciary. Example: ‘I will take care of you and properly invest your money for you.’ What is being currently proposed is nothing more than a “safe harbor” for brokerage firms to disclose their conflicts, etc. Is it time to occupy Wall Street?”

Our securities fraud attorneys are committed to helping our institutional investor clients recoup their losses from negligent broker-dealers and investment advisers.

Disclosure of Services, Conflicts and Duties, FINRA, October 2010

Study on Investment Advisers and Broker-Dealers, SEC (PDF)


More Blog Posts:

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions, Institutional Investor Securities Blog, January 3, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

November 5, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements

Without denying or admitting to wrongdoing, Banco Espirito Santo S.A. a banking conglomerate based in Portugal, has consented to pay nearly $7M in disgorgement, prejudgment interest, and civil penalties to settle Securities and Exchange Commission allegations that it violated securities transaction, investment adviser, and broker-dealer registration requirements. The bank has also agreed to a bar from future violations, as well as an undertaking that it pay a minimum interest rate to US clients on securities bought through BES.

According to the SEC, between 2004 and 2009 and while not registered as an investment adviser or broker-dealer in the US, BES offered investment advice and brokerage services to about 3,800 US resident clients and customers. Most of them were immigrants from Portugal. Also, allegedly the securities transactions were not registered even though they did not qualify for a registration exemption.

The SEC says that by acting as an unregistered investment adviser and broker-dealer BES violated sections of the Exchange Act and the Advisers Act. The bank violated the Securities Act when it allegedly sold and offered securities in this country without registration or the exemption.

The SEC says BES used its Department of Marketing, Communications, and Customer Research in Portugal to send out marketing materials to clients outside the country. Customers in the US ended up getting materials not specifically designed for US residents. BES also worked with a customer service call center to service its US customers. Via phone, these clients were offered securities and other financial products. The representatives were not registered as SEC broker-dealers and had no US securities licenses even though they serviced US clients. US Customers were also offered brokerage services through ESCLINC, which is a money transmitter service in Rhode Island, Connecticut, and New Jersey. ESCLINC acted as a contact point for the investment and banking activities of BES’s US clients.

Registration Provisions
The SEC has set registration provisions in place to help preserve the securities markets’ integrity as well as that of the financial institutions that serve as “gatekeepers,” said SEC New York regional office director George S. Canellos. He accused BES of “brazenly” disregarding these provisions.

State securities laws and US mandate that investment advisers, brokers, and their financial firms be registered or licensed. You should definitely check to make sure that whoever you are investing with or seeking investment advice from his properly registered. It is also important for you to know that doing business with a financial firm or a securities broker that is not registered can make it hard for you to recover your losses if that entity were to go out of business and even if the case is decided in your favor (whether in arbitration or through the courts.)

Banco Espirito Santo To Pay Nearly $7 Mln To Settle SEC Charges, The Wall Street Journal, October 24, 2011

Portugese Bank Agrees to $7M Settlement With SEC Over Alleged Registration Breaches, BNA Broker-Dealer Compliance Report


More Blog Posts:
President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M, Institutional Investor Securities Blog, September 16, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, April 8, 2011

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011

Continue reading "Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements " »

October 20, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal

Citigroup has consented to pay $285 million to settle a Securities and Exchange Commission complaint accusing the bank of misleading investors in a $1 billion derivatives deal—a collateralized debt obligation called Class V Funding III. It was Citigroup that chose the assets for the portfolio that it then bet against. Investors were not told that Citigroup’s interests were contrary to theirs. The $285 million will go to the deal’s investors.

According to the SEC, Citigroup had significant influence over the $500 million of portfolio assets that were selected. It then took a short position against the assets, standing to profit if they dropped in value. All 15 investors were not made aware of any of this and practically all of their investments (in the hundreds of millions of dollars) were lost when the CDO defaulted in under 9 months after it closed on February 28, 2007. Credit ratings agencies had downgraded over 80% of the portfolio.

Financial instrument insurer Ambac, which was the deal’s biggest investor and had taken on the role of assuming the credit risk, was forced to pay those who bet against the bonds. In 2009, Ambac sought bankruptcy protection.

Meantime, Citigroup made about $126 million in profits from the short position and earned about $34 million in fees. S.E.C.’s division of enforcement director Robert Khuzami says that under the law, Citigroup was required to give these CDO investors “more care and candor.”

Per the SEC’s civil action, Citigroup employee Brian Stoker is the one that mainly put the deal together, while Credit Suisse portfolio manager Samir H. Bhatt was primarily in charge of the transaction. Credit Suisse was the CDO transaction’s collateral manager.

Stoker is fighting the SEC’s case against him. Meantime, Bhatt has settled the SEC’s charges by agreeing to pay $50,000. He has also been suspended from associating with any investment adviser for six months. Credit Suisse Group AG settled for $2.5 million.

As part of this settlement, Citigroup will pay a $95 million fine. It was just last year that the financial firm agreed to pay $75 million over federal claims that it purposely didn’t let investor know that their subprime mortgage investments were losing value during the financial crisis. Citigroup has said that since then, it has revamped its risk management function and gone back to banking basics.

Last year, Goldman Sachs Group Inc. agreed to settle for $550 million allegations that it did tell investors that the hedge fund that helped choose a CDO’s assets also was betting against it. JPMorgan Chase & Co. settled similar allegations earlier this year for $153.6 million.

Citigroup to Pay $285 Million to Settle SEC Claims on Mortgage-Linked CDO, Bloomberg, October 19, 2011

Citigroup to Pay Millions to Close Fraud Complaint, NY Times, October 19, 2011


Related Blog Resources:
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investors Securities Blog, November 11, 2010

Continue reading "Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal " »

October 13, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam

The Securities and Exchange Commission has received an emergency order to stop a Ponzi scam that bilked victims of about $26 million. Investors in PermaPave Companies were promised significant returns if they would place their money behind water-filtering natural stone pavers. According to the SEC, which has filed a securities complaint, Eric Aronson, a convicted felon, is the mastermind behind the scheme.

Aronson, who pleaded guilty to fraud in another case more than 10 years ago, is now accused of persuading about 140 people to buy promissory notes from PermaPave Companies and promising up to 33% in returns. Between 2006 and 2010, Aronson and company executives Robert Kondratick and Vincent Buonauro Jr., allegedly used new investor money to pay older clients while spending some of the Ponzi funds on gambling trips to Las Vegas, jewelry, and expensive cars. He also allegedly misappropriated about $2.6 million to repay victims of the earlier securities scam to which he entered a guilty plea.

Some of the investors’ funds that went into the Ponzi scam were also allegedly used to buy Interlink-US-Network, Ltd., which was a publicly traded company. Interlink later put out a Form 8-K falsely stating that LED Capital Corp. had said it would put $6 million into it. LED Capital did not have the money and never made such an agreement.

The SEC says that when investors began demanding that they be paid the money they were owed, Aronson accused them of committing a felony because they lent PermaPave Companies money at interest rates that were exorbitant—even though he was the one who promised them such high percentages. The Commission is accusing both Aronson and attorney Frederic Aaron of making false statements to get investors to change their securities into ones that would defer payments owed for several years.

U.S. District Court Judge Jed S. Rakoff is granting the SEC’s request that the defendants and relief defendants’ assets be frozen. Meantime, the Commission wants to bar Aronson, Buonauro, and Kondratick from being able to work as directors and officers of public companies and keep them from taking part in penny-stock offerings. The SEC also wants permanent and preliminary injunctions against the defendants, the return of illicit profits plus prejudgment interest, and civil monetary penalties.

Aronson, Kondratick, and Buonauro have been arrested in connection with the Ponzi scam.

Ponzi Scams
To succeed, Ponzi schemes need to bring in new clients so that their money that they invest can be used to pay older clients their promised returns. Unfortunately, with hardly any legitimate earnings, Ponzi scams can fall apart when it becomes a challenge to recruit new investors or too many investors ask to cash out.

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme, SEC.gov, October 6, 2011

3 New York Men Arrested In Alleged Landscaping Ponzi Scheme, The Wall Street Journal, October 6, 2011

SEC Claims Author Used Ponzi Scheme to Repay Prior Fraud Victims, Bloomberg Businessweek, October 6, 2011


More Blog Posts:

SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation, Institutional Investor Securities Blog, September 23, 2011

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam, Institutional Investor Securities Blog, March 17, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Continue reading "SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam " »

September 24, 2011

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

JPMorgan to pay $153.6M to settle fraud charges, Boston Herald, June 21, 2011

Court Tosses Some SEC Claims Against IA Exec Over Role in JPM CDO Deal, BNA Securities Law Daily, October 28, 2011


More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Blog, October 27, 2011

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011


***This post has been backdated.

Continue reading "Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed" »

September 20, 2011

SEC Proposes Restricting Financial Firms From Betting Against Financial Products Sold to Investors

The SEC has taken steps to prevent financial firms from betting against their packaged financial products that they sell to investors. Its proposal, introduced this week, also seeks to prevent the types of conflict witnessed in last year’s civil lawsuit against Goldman Sachs through a ban on third parties being able to set up an asset-backed pool allowing them to make money from losses sustained by investors.

The proposal comes following a report by US Senate investigators accusing Goldman of setting itself up to make money from investor losses sustained from complex securities that the financial firm packaged and sold. It would place into effect a provision from the Dodd-Frank Wall Reform Consumer and Protection Act, which requires that the commission ban for one year placement agents, underwriters, sponsors, and initial buyers of an asset-backed security from shorting the pool’s assets and establishing material conflict. Restrictions, however, wouldn’t apply when a firm is playing the role of market-maker or engaged in risk hedging. The SEC also wants the industry to examine how the proposal would work along with the “Volcker rule,” which would place restrictions on proprietary trading at banks and other affiliates.

SEC’s Securities Case Against Goldman
The SEC accused Goldman of creating and marketing the ABACUS 2007-AC1, a collateralized debt obligation, without letting clients know that Paulson & Co. helped pick the underlying securities that the latter then went on to bet against. Last year, Goldman settled the securities case with the SEC for $550 million.

In settlement papers, Goldman admitted that it did issue marketing materials that lacked full information for its ABACUS 2007-AC1. The financial firm said it made a mistake when it stated that ACA Management LLC “selected” the reference portfolio and did not note the role that Paulson & Co. played or that the latter’s “economic interests” were not in line with that of investors. The $550 million fine was the largest penalty that the SEC has ever imposed on a financial services firm. $250 million of the fine was designated to go to a Fair Fund distribution to pay back investors.

Volcker Rule
Named after former Federal Reserve Chairman Paul Volcker, the proposed rule is designed to limit the kinds of high-risk investments that helped contribute to the recent financial crisis. It would also restrict the financial firms’ use of their own money to trade. Bloomberg.com reports that overseas firms with businesses in the US may also be subject to these limits on proprietary trading. Per Dodd-Frank, October 18 is the deadline to establish rules to execute the provision.

Volcker Rule May Be Extended to Overseas Banks With Operations in the U.S., Bloomberg, September 16, 2011

SEC moves to limit firms' bets against clients, Reuters, September 19, 2011

Volcker Rule Delay Is Likely, Wall Street Journal, September 12, 2011


More Blog Posts:
Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claim, Institutional Investor Securities Blog, March 2, 2011

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investor Securities Blog, October 27, 2010

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010

Continue reading "SEC Proposes Restricting Financial Firms From Betting Against Financial Products Sold to Investors" »

September 10, 2011

SEC Spent $100K More Than Necessary By Failing to Follow Office of Personnel Management Guidelines In Director’s Hiring

According to the Office of the Inspector General, by failing to abide by its own practices when hiring Henry Hu as Division of Risk director, as well as the guidelines provided by the Office of Personnel Management, the Securities and Exchange Commission unnecessarily spent $100,000. Details of these findings were provided in a report released by the SEC late last month.

The “unprecedented arrangement” with Hu covered his living expenses in DC when he worked as an SEC division director between 9/09 through 1/11. He is now back at work as a professor at the University of Texas Law School.

Specifically faulted over this matter was ex-SEC Executive Director Diego Ruiz, who the Office of Personnel Management said was the person mainly responsible for the offer to cover Hu’s living costs while he worked for the Commission. Ruiz, who has resigned from the agency, was also allegedly involved in the SEC’s misuses of its independent leasing authority. Because Ruiz is no longer with the agency, no disciplinary action will be taken against him.

Hu was approached by the SEC after an op-ed piece that he’d written about Goldman Sachs was published. In his article, Hu talked about how the financial firm’s use of credit default swaps related to its loans to AIG had resulted in an distorted incentive because it let Goldman Sachs not have to deal with economic exposure to losses on the loans even as it retained its right to call the loans. SEC Chairman Mary Schapiro later offered him a position at the agency as head of a new unit that would colloquially be called the “Office of Smart People.”

The SEC paid back the University of Texas 314,198.26 for Hu’s benefits and salary. The agency also spent approximately $120,000 to cover Hu’s plane fare, living costs, and housing. The per diem that Hu was given was a first for the SEC and not in line with OPM guidelines.

The offer to Hu did not include a cap on how much the agency would pay for living expenses. Per the SEC report, and even as these costs mounted, the agency did not attempt to renegotiate the terms of the agreement when it was renewed with Hu.

Usually federal employees are given a $9,000 relocation allowance. However, SEC Chairman Mary Schaprio, reportedly told the OIG that she believed the agreement with Hu was similar to other hiring arrangements previously made with the SEC.

The OGI is recommending that the SEC’s COO establish guidelines for arramagnements made under the Intergovernmental Personnel Act, which was the statute used to hire Hu. Guidelines should include specifics regarding when a per diem arrangement like the one made with Hu can be offered and financial caps should be included.

Securities Fraud
Contact our securities fraud law firm. Shepherd Smith Edwards and Kantas represents institutional and individual investors throughout the US.

OIG: SEC Blew $100,000 by Not Following Guidance in Hire Arrangements for Director, BNA Securities Law Daily, September 30, 2011

Read the OIG Report (PDF)


More Blog Posts:

SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee, Stockbroker Fraud Blog, June 24, 2011

August 10, 2011

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts

Three years after five Wisconsin school districts filed their securities fraud lawsuit against Stifel, Nicolaus & Company and the Royal Bank of Canada, the Securities and Exchange Commission has filed charges against the brokerage firm and former Stifel Senior Vice President David W. Noack over the same allegations. The charges stem from losses related to the sale of $200 million in high-risk synthetic collateralized debt obligations (CDOs) to the Wisconsin school districts of West Allis-West Milwaukee School District, the School District of Whitefish Bay, the Kimberly Area School District, the School District of Waukesha, and the Kenosha Unified School District No. 1.

The SEC says that not only were the CDOs inappropriate for the school districts that would not have been able to afford it if the investments failed, but also the brokerage firm did not disclose certain material facts or the risks involved. The school districts are pleased that the SEC has decided to file securities charges.

Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“It is our belief that the five Wisconsin school districts and the trusts established to make these investments were defrauded by Stifel, Royal Bank of Canada and the other defendants. Contrary to the way they were represented, the $200 million CDOs that were devised, solicited, and sold by the defendants to our clients in 2006 were volatile, complex, extremely high risk, and totally inappropriate for them. To protect residents and taxpayers, the districts later hired lawyers and others to investigate the investments and their fraud risk. Unfortunately, the failure of the investments did result in losses for the school districts, which in 2008 filed their Wisconsin securities fraud complaint in Milwaukee County Circuit Court. The school districts' goal was to obtain full recovery of the monies lost in this scheme, while protecting and maintaining the districts’ valuable credit ratings. The districts’ lawyers have already examined three million pages of documents regarding in this matter. Meantime, the districts have taken the proper steps to report to the SEC the nature and extent of the wrongdoing uncovered. In the past year, the districts have given the SEC volumes of documents and information for its investigation.”

The school districts had invested the $200 million ($162.7 million was borrowed) in notes that were tied to the performance of synthetic CDOs. This was supposed to help them fund retiree benefits. According the SEC, however, Stifel and Noack set up a proprietary program to facilitate all of this even though they knew that they were selling products that were inappropriate for the school districts and their investment needs.

Stifel and Noack allegedly told the school districts it would take “15 Enrons” for the investments to fail, while misrepresenting that 30 of the 105 companies in the portfolio would have to default and that 100 of the world’s leading 800 companies would have to fail for the school districts to lose their principal. The SEC claims that the synthetic CDOs and the heavy use of leverage actually exposed the school districts to a high risk of catastrophic loss.

By 2010, the school districts' second and third investments were totally lost and the lender took all of the trusts’ assets. In addition to losing everything they’d invested, the school districts experienced downgrades in their credit ratings because they didn’t put more money in the funds that they had set up. Meantime, despite the fact that the investments failed completely, Stifel and Noack still earned significant fees.

The SEC is alleging that Noack and Stifel violated the:
• The Securities Act of 1933 (Section 17(a))
• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission wishes to seek disgorgement of ill-gotten gains along with prejudgment interest, permanent injunctions, and financial penalties.


Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School Districts, SEC.gov, August 10, 2011

SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011

Read the SEC Complaint

School Lawsuit Facts


More Blog Posts:

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation, Institutional Investor Securities Blog, June 18, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2, Institutional Investor Securities Blog, April 7, 2011

Continue reading "SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts" »

July 28, 2011

Whistleblowers to Be Awarded from $453 Million SEC Fund

According to Sean McKessy, the head of Securities and Exchange Commission’s Whistleblower Office, the agency has a $453 million fund from which to award bounties under its new whistleblower program. Kessey recently spoke during a BNA webinar.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires that certain whistleblowers receive 10-30% of an award in a successful prosecution or action. The percentage of the award will depend on the how significant the information the whistleblower provided was to the outcome of the action, how much help he/she gave, and the SEC’s degree of interest in stopping certain kinds of misconduct, such as insider trading. The percentage awarded remains at the SEC’s discretion.

As our securities fraud lawyers mentioned in a recent blog post, there have been mixed reactions over whether someone who decides to turn whistleblower should go to an employer first before going to the SEC. House Republicans have even introduced a new bill that would mandate that a whistleblower have reported its information internally in order to qualify for part of the whistleblower bounty. For now, however, while the new program offers incentives for a whistleblower to go inside the corporation with his/her information first, the SEC doesn’t require it. ( As noted by McKessey, that the final rules left on this requirement “evidence a determination that doing so could be detrimental to the program and inconsistent with the statute.”) For example, if an employee were to report an issue to internal compliance, which then resulted in the company launching a probe and discovering additional violations, under the SEC’s incentive program, the whistleblower to be eligible for a bounty amount that would factor in all violations and not just the one that he/she initially reported.

If you suspect that your broker-dealer is engaged in financial fraud, you may want to come forward to voice your concerns and consider filing a whistleblower lawsuit. If you are a victim of securities fraud, you may be able to recover your losses.

Contact our stockbroker fraud attorneys today.

SEC Has $453 Million Fund for Awards of Whistleblower Bounties, US Law Watch, July 22, 2011

Whistleblower Bounties


More Blog Posts:

Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

New Bill Calls for Whistleblowers to Notify Financial Firms of Alleged Violations, Institutional Investor Securities Blog, July 23, 2011

Ex-UBS Employee Can Proceed with Her Whistleblower Claim, Says District Court, Institutional Investor Securities Blog, February 15, 2011

July 11, 2011

Ban on Private Securities Offerings Solicitations Could Be Revised by SEC or Congress, Says Ex-Official

According to ex- SEC's Office of International Corporate Finance chief Sarah Hanks, there is the strong possibility that Congress or the Securities and Exchange Commission will modify the agency’s ban on the general solicitation for private securities offerings and the number of shareholders that trigger reporting requirements. Hanks says that comments made by lawmakers and SEC Chairman Mary Schapiro indicate congressional intent to loosen the requirements, as well as “regulatory momentum.” Such changes could happen in the next couple of years.

Restricted securities are securities that did not go through the SEC’s registration and public processes. Requirements don’t allow issuers of nonpublic offerings relying on Section 4(2) of the 1933 Act or its safe harbor—Rule 506 of Regulation to use advertising or general solicitation to draw investors to their placements. The 1934 Securities Exchange Act’s Section 12(g) mandates that an issuer register securities “held of record” by at least 500 individuals and if the issuer’s total assets are over $10 million.

It was just recently that it became known that the SEC was investigating Goldman Sachs Group Inc.'s (GS)’s reselling of Facebook-issued securities to investors. Earlier this year, the investment bank made the decision to limit the offering to offshore investors over concerns that the degree of media attention might result in a violation of US securities laws. According to The Wall Street Journal, although Facebook executives had to restructure the deal, the private offering of up to $1.5 billion in Facebook shares stayed on track. As of January, more than $7 billion in orders came through from foreign investors.

Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd notes, “Private placements have always been the source of many problems for investors. Special treatment of these investments is nothing more or less than loopholes in the regulation of securities sales. Over the past decade there has been constant erosion of the roadblocks designed to prevent sales of such investments without at least some modicum of safeguards for investors. The only reason to lower the bar is to allow those manufacturing and selling these securities to make more money faster.”

Related Web Resources:
SEC, Congress Could Revise, in Near Future, Private Placement Rules, Former Official Says, BNA Securities Law Daily, June 8, 2011

Goldman Sachs limits Facebook deal, Skepsi News, January 26, 2011

1933 Securities Act


More Blog Posts:
FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011

National Securities Corp., Independent Financial Group LLC, & Centaurus Financial Inc. among broker-dealers sought by Massachusetts securities regulators over private placements, Stockbroker Fraud Blog, April 19, 2010

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investor Securities Blog, May 29, 2011

May 29, 2011

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings

In a 3-2 vote, the Securities and Exchange Commission has agreed to propose a rule (mandated by Congress) that exempts Felons and Bad Actors” from private offerings pursuant to Rule 506 of Regulation D under the 1933 Securities Act. The SEC has also agreed—again in a 3-2 vote—to adopt final rules to set up a whistleblower bounty program.

Under the financial reform legislation’s Section 926, the SEC must bar the sales and offerings of securities by recidivist violators that are subject to certain disciplinary proceedings and sanctions or have a misdemeanor or a felony related to the sale or purchase of a security from being able to avail of the safe harbor act’s Rule 506. The rule lets issuers avoid the reporting requirements of the 1933 Act. It also makes up for approximately 93% of private securities that Reg D. offers.

The proposal would prevent a private placement from taking advantage of the rule if the issuer or individual covered by the rule had a disqualifying event, such as a criminal conviction, restraining order, court injunction, certain commission disciplinary orders, U.S. Postal Service false representation orders, commission “stop orders” to suspend exemptions, suspension or expulsion from membership in a “self-regulatory organization” (or from association with an SRO member), or final orders of insurance, state securities, banking, or credit union regulators. Covered persons include officers, directors, managing members of the issuer, 10-percent beneficial owners, and promoters of the issuer.

SEC Chairman Mary Schapiro has said that the proposal would advance the goal of decreasing the “danger of fraud” in private offerings. She also said that by covering events that took place before Dodd-Frank was enacted, the proposal fulfills the intent of Congress to protect investors from bad actors. She says that to address any concerns, the SEC is seeking comment until July 14.

Regarding the SEC proposal, Shepherd Smith Edwards founder and securities fraud attorney William Shepherd says, “What took you so long?”

Throughout the US, contact our securities fraud attorneys today.

Related Web Resource:
SEC Proposes Rule to Disqualify Felons and Bad Actors From Securities Offerings, SEC.gov, May 25, 2011

1933 Securities Act (PDF)


More Blog Posts:

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011

SEC Proposes New Rule to Verify Swap Transactions, Institutional Investors Securities Blog, January 27, 2011

May 24, 2011

SEC Has Lax Revolving Door Policy, Says POGO

According to the Project on Government Oversight, the Securities and Exchange Commission has too loose of a revolving-door policy. The independent nonprofit issued a report early this month and is calling on the agency and Congress to “strengthen and simplify” restrictions post-employment.

POGO says that even though the SEC appears to have strict restrictions when it comes to former employees representing entities that the Commission oversees, many ex-employees can start representing clients within days of resigning from the SEC as long as they submit a post-employment statement.

POGO says it reviewed five years of post-employment statements submitted by ex-SEC employees who wanted to represent a client within two years of resigning from the federal agency. Between 2006 and 2010, 789 ex-employees filed post-employment statements noting their plans to represent an outside client before the SEC. 131 employers were named on these statements. The firms that recruited the most ex-SEC employees during this time were ACA Compliance Group, Deloitte & Touche LLP, Ernst & Young, O’Melveny & Myers, LLP, Wilmer Cutler Pickering Hale and Dorr, LLP, DLA Piper, KPMG, LLP, Morrison & Foerster, LLP, FTI Consulting, Inc., Kirkpatrick & Lockhart Preston Gates Ellis, LLP, and Sidley Austin, LLP.

In addition to simplifying and strengthening post employment restrictions, POGO says that SEC and Congress need to:

• Verify the accuracy and completeness of the statements.
• Allow post-employment statements to be made publicly accessible online.
• Publicly disclose the commission’s ethics waivers and recusal database
• Utilize and strengthen ethics enforcement authority.
• Review confidential treatment procedures and Freedom of Information Act Exemptions.
• Make post-employment restrictions also applicable to other financial regulators.

Our securities fraud attorneys represent institutional investors in the US and abroad.

Revolving Regulators: SEC Faces Ethic Challenges with Revolving Door, POGO, May 13, 2011

Project on Government Oversight

Read the POGO Report


More Blog Posts:

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011

SEC Adopts New Rules Regarding Shareholder Say-On-Pay, Institutional Investors Securities Blog, January 29, 2011

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stokbroker Fraud Blog, May 24, 2011

Continue reading "SEC Has Lax Revolving Door Policy, Says POGO" »

May 16, 2011

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market

UBS Financial Services Inc. has consented to a $160 million settlement over charges that it took part in anticompetitive practices in the municipal bond market. The Securities and Exchange Commission and the US Justice Department announced the settlement together. 25 state attorneys generals and 3 federal agencies had accused the financial firm of rigging a minimum of 100 reinvestment transactions in 36 states, which placed the tax-exempt status of over $16.5 billion in municipal bonds at peril. Justice officials say that the unlawful conduct at issue, which involved former UBS officials, took place between June 2001 and June 2006.

According to SEC municipal securities and public pensions enforcement unit chief Elaine Greenberg, ex-UBS officials engaged in “secret arrangements,” played various roles, and took part in “illegal courtesy bids, last looks for favored bidders, and money to bidding engagements” in the guise of “swap payments” to “defraud municipalities” and “win business.” The SEC contends that between October 2000 until at least November 2004, the financial firm rigged a minimum of 12 transactions while serving as bidding agents for contract providers, won at least 22 muni reinvestment instruments, entered at least 64 “courtesy” bids for contracts, and paid undisclosed kickbacks to bidding agents at least seven times. The SEC says that UBS indirectly deceived municipalities and their agents with their fraudulent misrepresentations and omissions and rigged bids to make them appear as if they were competitive when they actually weren’t.

UBS, which left the municipal bond market in 2008, says that the “underlying transactions” involved were in a business that is no longer a part of the financial firm and that the employees who were involved don’t work there anymore. Of the $160 million settlement, $47.2 million will go to the SEC, which in turn will give the money to the 100 muni issuers as restitution, about $91 million will go to the states, and $22.3 million will go to the IRS.


Related Web Resources:

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, The Bond Buyer, May 5, 2011

UBS to Pay $160 M to Resolve Charges Over Muni Bond Market Probe, BNA Securities Law Daily, May 5, 2011

United States Justice Department

Internal Revenue Service

Securities and Exchange Commission


More Blog Posts:

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court, Institutional Investors Securities Blog, January 17, 2011

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011


Continue reading "UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market" »

March 30, 2011

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans

Rep. Randy Neugebauer (R-Texas), who is the Financial Services Oversight Subcommittee chairman, and Rep. Spencer Bachus (R-Ala.), the House Financial Services Committee chairman, have sent a letter to US Securities and Exchange Commission Chairman Mary Schapiro asking her about Boston Consulting Group Inc.’s recent report on the recent report on SEC reform. Even though BCG is an independent consultant, the two GOP members are questioning the report’s impartiality.

In their letter, they asked Schapiro to disclose what (if any) editorial input the SEC provided on the content of the BCG report. They also want to see any earlier drafts that BCG may have sent the SEC Chairman. Neugebauer and Bachus said that given the regulatory failures from the 2008 economic collapse, it was important that BCG was allowed compete independence to do its job and that the report did not undergo any editorial deletions, review, or insertions by the SEC.

Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967 had directed the SEC to retain the services of an independent consultant to analyze the agency’s structure and operation, as well as suggest reforms. BCG issued its report on March 10. Among its recommendations: for the SEC:

• Hire staff with “high-priority” skills
• Invest in key technology systems,
• Improve oversight over SROs (self-regulatory organizations)
• If Congress determines that the SEC cannot fulfill expectations by further optimizing its resources, the lawmaking body should “relax” funding constraints

BCG has said that it stands by the report’s “integrity and independence.” Meantime, Schapiro has said that the report confirms her own worries that the SEC lacks the resources to do all that it is expected to accomplish.

Our institutional investment fraud lawyers have successfully represented clients throughout the US.

Related Web Resources:
Integrity of report on SEC questioned, Washington Post, March 18, 2011

Statement From Chairman Schapiro on Independent Consultant Report of SEC Organization and Operations, SEC, March 10, 2011

Read the BCG Report (PDF)

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

Continue reading "Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans" »

March 2, 2011

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Worst-Case Scenario Losses for JP Morgan & Chase May Be As High as $4.5 Billion, Institutional Investors Securities Blog, February 28, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Continue reading "Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims " »

January 29, 2011

SEC Adopts New Rules Regarding Shareholder Say-On-Pay

The Us Securities and Exchange Commission has adopted a “say-on-pay” rules that will allow the shareholders of publicly listed companies to weigh in on executive compensation via advisory votes. The new rules, which implements a Dodd-Frank Wall Street Reform and Consumer Protection Act, gives shareholders more input regarding executive compensation. This should hopefully help curb the practice of paying financial firm executives lavish compensation packages. The SEC approved the vote by 3-2 on Tuesday.

Shareholders would get a vote on "golden parachute” pay packages related to an acquisition or merger and companies would have to offer up more disclosures. Although the vote on say-on-pay is non-binding, companies will likely want to avoid being associated with a “no” vote. Some companies, including Apple Inc. and Microsoft Corp, have already adopted say-on-pay proposals on their own.

Also that day, the SEC proposed new reporting requirements for private fund advisers, with advisers to private funds valued at more than $1 billion upheld to more frequent and rigorous reporting. Reporting requirements would vary depending on the type of fund. Meantime, advisers to funds valued at under $1 billion would only have to report once a year on leverage, credit providers, fund strategy, and credit risk related to trading partners.

In addition, advisers of large hedge funds would also be required to disclose more information than private equity fund managers because hedge funds are considered more high risk and use leverage more often than private equity funds. Per SEC Chairman Mary Schapiro, the toughest reporting requirements under the rule would affect approximately 200 large hedge fund advisers in the US who represent over 80% of assets under management, as well as some 250 large private equity fund advisers.

The rule requires that the Financial Stability Oversight Council be given better information about hedge funds, liquidity funds, and private equity funds. This is for making sure that trading activities do not endanger the wider marketplace.

The SEC is also proposing to make it tougher for individuals to qualify as “high net-worth” when it comes to certain high risk investments.


Related Web Resources:
SEC adopts shareholder say-on-pay rules

SEC, in Split Vote, Adopts 'Say on Pay' Rule, Wall Street Journal, January 25, 2011

Say-on-pay rule proposal, SEC, January 25, 2011

Financial Stability Oversight Council, US Department of the Treasury

Continue reading "SEC Adopts New Rules Regarding Shareholder Say-On-Pay" »

January 27, 2011

SEC Proposes New Rule to Verify Swap Transactions

Under Rule 15Fi-1, the Securities and Exchange Commission’s proposed rule under the 1934 Securities Exchange Act, certain security-based swap participants and security-based swap dealers would provide counterparties with an electronic “trade acknowledgement” to acknowledge and verify specific security-based swap transactions. The SEC’s proposal comes under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s mandate that the commission set up standards for the documentation and confirmation of SBS transactions.

Per the proposal, an SBC entity would have to fulfill the following requirements:
• Depending on how the transaction is executed, give trade acknowledgement within 15 minutes, 30 minutes, or 24 hours of execution.

• Electronic processing of security-based transactions for SBS entities that have the capability.

• Written policies and procedures designed to get verification of the terms delineated in the trade acknowledgement.

The proposed rule would specify which SBC entity has to provide trade acknowledgement, let an SBS entity fulfill the requirements of the rule through the processing of the transaction through a registered clearing house, identify which details must be contained in the trade acknowledgement, and for SBS Entities that are also brokers, give limited exemption from the requirements of Rule 10b-10 under the Exchange Act.

Other recent SBS-related rules that the SEC has proposed under the Dodd-Frank Act deal with the mandatory clearing of security-based swap, the defining of security-based swap terms, security-based swap reporting and repositories, security-based swap fraud, and security-based swap conflicts.

Related Web Resources:
SEC Proposes Rule for the Timely Acknowledgment and Verification of Security-Based Swap Transactions, SEC.gov, January 14, 2011

Proposed Rule, SEC (PDF)

Continue reading "SEC Proposes New Rule to Verify Swap Transactions " »

January 13, 2011

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers

The US Securities and Exchange Commission has adopted amendments to delay the expiration date of Rule 206(3)-3T under the 1940 Investment Advisers Act. The temporary rule, which was supposed to expire on December 31, 2010, will now stay in effect until December 31, 2012.

Rule 206(3)-3T gives investment advisers that are also broker-dealers who are registered with the SEC another way to satisfy the Advisers Act’s Section 206(3) requirements when they work in a principal capacity with certain advisory clients. Section 206(3) does not allow investment advisers to effect or take part in a transaction for a client while acting either as broker for a person besides the client or as principal for its own account unless the client has been informed of the role that the adviser is playing and has given his or her consent. The SEC says it is completing its study on broker-dealers and investment advisers, per the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate, and it will deliver the report to Congress by January 21.

Under Rule 206(3)-3T, an adviser is allowed to comply with Section 206(3) of the Advisers Act by, among other things:

• Providing written prospective disclosure about principal trade conflicts.
• Getting revocable written consent from the client that prospectively gives the adviser the authority to enter into principal transactions.
• Making certain written or oral disclosures and getting the client’s consent prior to each principal transaction.
• Sending the client confirmation statements that disclose that the adviser notified the client that it could act in a principal capacity and it has the client’s consent.
• Giving the client an annual report that itemizes the principal transactions.


Related Web Resources:

Advisers Act Rule 206(3)-3T (Temporary Rule Regarding Principal Trades with Certain Advisory Clients), SEC

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions, Stockbroker Fraud Blog, December 9, 2010

1940 Investment Advisers Act

Continue reading "SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers" »

December 18, 2010

Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses

Hedge fund manager and investment adviser Trueblue Strategies LLC owner Neil Godbole has agreed to settle for $40,000 Securities and Exchange Commission charges that he hid his investors’ trading losses. Godbole also agreed to an advisory industry bar for a minimum of five years and to cease and desist from future 1940 Investment Advisers Act violations. By settling, he is not denying or agreeing that he committed any wrongdoing.

Per the securities fraud charges, Godbole started to manage the Opulent Lite LP, a now failed hedge fund, in 2005. At its height, the hedge fund managed about $30 million in assets and had about 70 investors. Until 2008, Godbole invested mainly in S&P index options and short term Treasury bonds.

In February 2008, he lost about $8.3 million as a result of a number of unprofitable deals, which he did not disclose. Also, the SEC claims that Godbole told investors that the fund was valued at $28.7 million when it was actually worth $18.5 million.

In attempt to make up the financial losses, Godbole started to use what he called a “rollover strategy” that involved the opening of options positions when each monthly trading period ended. The SEC says that throughout that year, the hedge fund manager misrepresented the fund’s trading results and asset value. When he told investors in December 2008 that the fund’s asset value was more than $26 million, the asset value had actually dropped to under $14.4 million.

The SEC says that any losses for that year that Godbole did disclose were “paper losses” related to the rollover strategy and in 2008, he had the hedge fund pay his management fees based on the inflated fund value. Investors were harmed when he had the fund redeem units at an inflated value.

It wasn’t until 2009 that Godbole notified investors of the funds’ losses and actual financial state. Many investors sought to pull out. The hedge fund was liquidated by March of that year.

Related Web Resources:
SEC Charges San Francisco’s Opulent Lite Hedge Fund For Concealing Losses, Newsroom Magazine, December 1, 2010

Saratoga fund manager settles with SEC, Business Journal, December 2, 2010

1940 Investment Advisers Act, SEC


Continue reading "Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses " »

December 16, 2010

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.


Related Web Resources:
Bank of America settles allegations of kickbacks, collusion, Los Angeles Times, December 8, 2010

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Bank of America, Stockbroker Fraud Blog

Continue reading "Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits " »

December 11, 2010

SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore "Red Flags" Indicating Massive Fraud

Securities and Exchange Commission Inspector General H. David Kotz says that his office is looking into a complaint that a regional official told examiners to not go after “red flags” that were found in an exam of an investment adviser where a “massive fraud” was discovered. The official in question reportedly played a significant part in an earlier exam of the investment firm, and although the securities fraud was going on then, it was not uncovered at the time.

The anonymous complaint also claims that the regional office had a hostile work environment because management failed to discipline the official even after an earlier OIG investigation found that the person had watched pornography on an SEC computer. In his semiannual report to Congress, Kotz says that the OIG is almost done with its probe and will present its findings.

The OIG also determined that Bank of America Inc.’s Troubled Asset Relief Program fund's status played a role in the “favorable” $33 million settlement that SEC staffers had initially recommended to resolve charges that the investment bank issued misleading proxy disclosures related to its Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff, however, refused to approve that settlement, and Bank of America eventually settled the case for $150 million.

Kotz says that the OIG has probed into allegations from an ex-Enforcement attorney that the division was negligent in how it handled an insider trading probe. A report of its findings will be issued during the next semiannual reporting period.

Other pending OIG investigations involve:
• Allegations that attorneys at a regional office did not properly investigate a law firm for alleged obstruction of justice related to an SEC case. Improper preferential treatment may have been a factor.
• Allegations that an SEC official violated ethics rules while providing testimony to a congressional committee.
• Allegations that a staff member acted in an abusive and intimidating manner toward contract staff.
• Complaints that SEC staff leaked information about an investigation of an examination to the media.
• Allegations that at least one contractor worked at the SEC before a background probe had been completed.


Related Web Resources:
OIG Semiannual Report, SEC

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement, Stockbroker Fraud Blog, August 6, 2009


Continue reading "SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore "Red Flags" Indicating Massive Fraud " »

December 9, 2010

Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues," such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge's ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

Continue reading "Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC" »

November 22, 2010

SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps

The Securities and Commission has agreed to propose an antifraud rule that deals with the issue of security-based swaps-related fraud, manipulation, and deception. The proposed Rule 9j-1 would bar fraud and manipulation in the offer, sale, and purchase of the swaps. Unlike regular securities transactions, securities-based swaps involve ongoing payments and deliveries between when they are bought and sold. The issues of payments, deliveries, and other rights and obligations are also tackled.

SEC Chairman Mary Schapiro says that the proposed rule would be an important way to make sure that the swap market is run with integrity while allowing the Commission the chance to target potential fraud or other misconduct through enforcement. The relevant change with this proposed rule from current antifraud provisions Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Act is that the proposed rule is applicable to ongoing rights and activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has given oversight of security-based swaps to the SEC, while the Commodity Futures Trading Commission is charged with overseeing non-security-based swaps. The CFTC had already proposed its anti-manipulation rule amendments dealing with manipulative and fraudulent conduct of swaps under its jurisdiction.

The SEC has also agreed to propose rules to effect a whistleblower bounty program.


Related Web Resources:
SEC Targets Security-Based Swaps, FuturesMag.com, November 19, 2010

SEC reveals security-based swap rules, GFSNews, November 22, 2010

Securities and Exchange Commission

Continue reading "SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps" »

November 21, 2010

SEC Adopts Direct Access Rule Prohibiting "Naked" Access to ATSs or Exchanges

The Securities and Commission has adopted a rule that prohibits brokers from having “naked” access to alternative trading systems (ATS) or exchanges while requiring brokers with market access to put into place supervisory procedures and risk management controls to prevent market errors and other problems. Under the 1934 Securities Exchange Act's new Rule 15c3-5, both broker-dealers that belong to an ATS or an exchange and ATS broker-dealer operators that allow direct trading by persons who aren’t dealers or brokers must put into place certain supervisory procedures and controls to effectively get rid of “naked” access arrangements (also known as “unfiltered” access arrangement) that have allowed customers to bypass broker-dealers and their risk management controls completely while giving them direct electronic access to an ATS or an exchange.

Also per the new rule, new risk management controls must be put into place to stop orders that exceed capital thresholds or pre-set credit, do not comply with regulatory requirements, or appear erroneous in another way. Brokers-dealers also must implement certain controls before the orders are sent to ATSs or exchanges, set up, document, and maintain procedures to regularly evaluate the risk management controls, and tackle any problems as soon as possible.

The SEC believes that to put into place these new systems will initially cost broker-dealers some $100 million. Maintenance of the systems is expected to cost about $100 million a year.

Related Web Resources:
SEC Adopts New Rule Preventing Unfiltered Market Access, SEC.gov, November 3, 2010

SEC rule to clamp down on ‘naked access,' Financial Times, November 4, 2010

Continue reading "SEC Adopts Direct Access Rule Prohibiting "Naked" Access to ATSs or Exchanges" »

November 3, 2010

Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know

The Securities and Exchange Commission is seeking comments on whether amendments should be made to federal securities laws so that private litigants can file transnational securities fraud lawsuits. Comments are welcomed until February 18, 2011. The SEC says to refer to File No. 4-617.

In its request, the SEC points to the US Supreme Court's ruling in Morrison v. National Australia Bank. The decision placed significant limits on Section 10(b) antifraud proscriptions’s extraterritorial reach. That said, Congress, through Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929Y, gave back to the government its ability to file transnational securities fraud charges. It is under the new financial reform law that Congress has ordered the SEC to determine whether a private remedy should apply to just institutional investors or all private actors and/or others.

Included in what the study will analyze are how this right of action could impact international comity, the economic benefits and costs of extending such a private right of action, and whether there should be a narrow extraterritorial standard. The SEC also wants to know if it makes a difference whether:

• The security was issued by a non-US company or a US firm.
• A firm’s securities are traded only outside the country.
• The security was sold or bought on a foreign stock exchange or a non-exchange trading platform or another alternating trading system based abroad.

Related Web Resources:
Morrison v. National Australia Bank (PDF)

US Securities and Exchange Commission

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

SEC Seeks Comments on Extension Of Private Actions to Global Securities Fraud, Alacrastore, October 27, 2010

Continue reading "Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know " »

October 25, 2010

SEC Commissioner Luis Aguilar Encourages Agency Not to Refrain From Exercising Enforcement Powers from Dodd-Frank to Protect Investors

SEC Commissioner says the Securities and Exchange Commission should go back to employing a “muscular approach” and use its new enforcement powers bestowed under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform legislation gives the SEC more authority and enforcement tools in the areas of extraterritorial reach, subpoenas, aiding and abetting liability, and whistleblowing. The SEC also now has oversight over hedge and private equity funds and over-the-counter derivatives.

Aguilar spoke on October 15 at the University of California at Berkeley's Center for Law, Business and the Economy. He says that his views are his own.

Aguilar says that Americans must feel as if the SEC will use whatever tools and powers at its disposal to protect investors from. He notes that action, not rhetoric, is now required. Aguilar cites areas that the SEC has been slow to deal with in terms of enforcement action. For example, there is the area of clawbacks. Aguilar noted that even though the 2002 Sarbanes-Oxley Act lets the commission bring an enforcement action against CFO’s and CEO’s to recover incentive pay and bonuses related to a financial restatement because of misconduct, the SEC waited five years to exercise this authority when it brought action against ex- CSK Auto Corp. (CAO) CEO Maynard Jenkins. Aguilar says that if the law had been enforced earlier, less investors might have been harmed.

The SEC commissioner wants the SEC to “resist” the trend toward an entrenched two-tier market where different investors are overseen and protected differently. He says that recent SEC cases involving pension funds and auction-rate securities are clear indicators that institutional investors also need protections.

Our securities fraud law firm works with institutional investors throughout the US. We have helped many clients recoup their financial losses.

Related Web Resources:
Speech by SEC Commissioner: An Insider’s View of the SEC: Principles to Guide Reform, SEC.gov, October 15, 2010

SEC Commissioner Luis Aguilar

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

Continue reading "SEC Commissioner Luis Aguilar Encourages Agency Not to Refrain From Exercising Enforcement Powers from Dodd-Frank to Protect Investors " »

October 14, 2010

SEC Examines Proxy Advisory Firms

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is reviewing the proxy process to determine how information is transmitted to shareholders and the public. They are also studying how shareholder votes are counted.

She says the exam will focus on the role of proxy advisory firms, the types of conflicts they deal with, the way these issues affect their business and the voting process, and the role that the agency should play when it comes to regulate proxy advisory firms. She expressed commitment to a “top-to-bottom review of proxy infrastructure” and the role that proxy advisory firms face.

Schapiro made her remarks in front of the Economic Club of New York last month. At the event, she also noted that although the Obama Administration has increased the SEC’s budget—the Dodd-Frank Wall Street Reform and Consumer Protection Act did not give the agency the ability to oversee its own budget—she said that she still would like the SEC to be self-funded.

The financial regulatory reform legislation did provide the SEC with reserve funds to go toward hiring and technology upgrades. Schapiro says that the agency has been successful in its efforts to recruit from hedge funds, trading desks, institutional and retail investment firms, and credit ratings agency analysts.

Related Web Resources:
Chairman Mary L. Schapiro, SEC.gov

Continue reading "SEC Examines Proxy Advisory Firms " »

September 30, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC

The state of New Jersey has settled Securities and Exchange Commission charges involving the alleged fraudulent marketing of municipal bonds. This is the first time that the SEC has filed charges against a US state for allegedly violating federal securities law.

The charges, brought by the SEC’s Municipal Securities and Public Pensions Unit, involved $26 billion in approximately 79 bond offerings that were offered between August 2001 and April 2007. The SEC accused New Jersey of concealing from bond investors the fact that the state didn’t have the money to fulfill its obligations under two of its largest pension plans for state employees and teachers. New Jersey also allegedly using accounting tricks to avoid increasing taxes to fund a 2001 benefits increase for both plans and hid this information from investors. As a result, the SEC contends that losses totaling approximately $2.4 billion were covered up.

The SEC says that New Jersey did not have written procedures on how to review bond documents and failed to train employees about its disclosure obligations. A training program regarding disclosures is now in place.

By agreeing to settle, New Jersey is not admitting to or denying the charges. It has, however, agreed to cease and desist from future violations. The SEC did not order a monetary fine or penalty as part of the settlement.

Related Web Resources:
State of New Jersey Resolves Three Year Inquiry by The U.S. Securities and Exchange Commission in Connection With Bond Offerings Between 2001 and 2007, New Jersey.gov, August 18, 2010


SEC Charges State of New Jersey for Fraudulent Municipal Bond Offerings, SEC.gov, AUgust 18, 2010

NJ Settles SEC Charges Of Fraudulent Municipal Bond Offerings, The Wall Street Journal, August 18, 2010

Continue reading "NJ Settles Municipal Bond Offering Fraud Charges with SEC" »

September 29, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors

Judge Ellen Segal Huvelle says she will approve the $75 securities settlement between Citigroup and the SEC once the agreement includes changes that the bank has already made to its disclosure policy in the agreement. The federal judge says she wants the changes added to the settlement terms so that executives can’t revise them. She also wants the $75 million used to compensate shareholders who lost money because of Citigroup’s misstatements.

Last month, Huvelle had refused to approve the settlement over Citibank’s alleged failure to fully disclosure its exposure to subprime assets by almost $40 billion. The SEC accused the investment bank of misleading investors and telling them that its exposure was only $13 billion. When questioning the agreement, Huvelle asked why Citigroup shareholders should have to pay for the bank executives’ alleged misconducts. She also wanted to know why only two individuals were pursued.

The SEC had also filed cases against former CFO Gary Crittenden and ex-investor relations head Arthur Tildesley Jr. Both men have settled the cases against them without denying or admitting wrongdoing.

Despite giving conditional approval of the settlement, Huvelle noted that she didn’t think the $75 million would “deter anyone” unless Citibank abided by the changes to the disclosure policy. She also noted that the bank was “doing a disservice to the public” because other Citigroup executives were not held accountable for their alleged involvement.

The Wall Street Journal reports that lawmakers and others have becoming extremely frustrated at the considerably small number of senior executives that have been charged in connection with the financial debacle that has impacted Wall Street. The SEC has said that it can only file charges when there is sufficient evidence. Meantime, defense attorneys have argued that the multibillion dollar losses by investment firms were a result of bad business calls and not intentional fraud.


Related Web Resources:
Citigroup's $75 Million Settlement With SEC Gets Green Light -- Almost, Law.com, September 28, 2010

US court approves SEC settlement with Citi, Financial Times, September 24, 2010

Judge Won't Approve Citi-SEC Pact, Wall Street Journal, August 17, 2010

Continue reading "Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors" »

September 8, 2010

Municipal Securities Rulemaking Board Can Expand Public Information on Municipal Variable Rate Demand Obligations and Auction Rate Securities, Says SEC

The US Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board’s proposal to expand publicly available information about auction rate securities and municipal variable rate demand obligations. The SEC also approved letting the MSRB require that municipal securities dealers provide more information about these securities while allowing them to make this data available through its Electronic Municipal Market Access website. The disclosures will hopefully enhance transparency for investors that want to assess key information regarding the degree of dealer support, auction liquidity, and variable rate securities resales.

Once the approval is implemented, which could take nine months, the MSRB will gather liquidity facility documents for variable rate demand obligations from municipal securities dealers. Documents may include stand-by purchase agreements, letters of credit, and identifying information related to the provider of the liquidity facility that was available at the time of the interest rate. Dealers will have to report ARS bidding data and documents defining auction procedures and interest rate setting mechanisms to the MSRB. All documents and information from the dealers will be made accessible through the EMMA Web site. EMMA currently offers free public access to interest rate information for ARS and VRDOs.

MSRB regulates banks and securities firms that trade, underwrite, and sell municipal securities. It also gathers and gives out market information and is committed to ensuring the key municipal market data is available and free to the public. This data allows retail investors to evaluate the risks and benefits. MSRB is a self-regulatory organization subject to Securities and Exchange Commission oversight.

Related Web Resources:
MSRB Receives SEC Approval to Create Additional Transparency for Variable Rate Securities, MSRB, August 26, 2010

Municipal Market Rulemaking Board Asks SEC To Approve Expansion, Wall Street Journal, August 27, 2010

Municipal Securities Rulemaking Board

Electronic Municipal Market Access

Stockbroker-fraud.com

Continue reading "Municipal Securities Rulemaking Board Can Expand Public Information on Municipal Variable Rate Demand Obligations and Auction Rate Securities, Says SEC" »

Contact Us

(800) 259-9010

Our Other Blog

Recent Entries