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



May 22, 2012

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked

In a letter to the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission the Office of the Comptroller of the Currency Administrator of National Banks, and the Federal Deposit Insurance Commission, Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) spoke out against what they are calling the current draft of the Volcker rule’s “JPMorgan loophole,” which they say allows for the kinds of trading activities that resulted in the investment bank’s recent massive trading loss. Merkley and Levin want the regulators to make sure that the language in October’s draft version is more stringent so that “clear bright lines” exist between legitimate activities and proprietary trading activities that should be banned (including risk-mitigating hedging and market-making).

According to Levin and Merkley, who are both principal co-sponsors of the Volcker rule and its restrictions on proprietary trading, the regulation’s latest draft disregarded “clear legislative language and clear statement of Congressional intent” and left room for “portfolio hedging.” Under the law, risk-mitigating hedge activities are allowed as long as they aim to lower the “specific risks” to a financial firm’s holdings, including contracts or positions. This is supposed to let banks lower their risks by letting them to take part in actual, specific hedges. However, the senators are contending that because the language that was necessary to enforce wasn’t included in the last draft, hence the "JPMorgan loophole" (among others) that will allow proprietary trading to occur even after the law goes into effect. They blame pressure from Wall Street lobbyists for these gaps.

The senators are pressing the regulators to get rid of such loopholes and put into effect a solid Volcker Rule, with stricter language, and without further delays. They noted that despite getting trillions of dollars in public bailout money, a lot of large financial firms continue to fight against the “most basic… reforms,” which is what they believe that Wall Street has been doing with its resistance to the Volcker rule. (Also in their letter, Levin and Merkley reminded the regulators that it was proprietary trading positions that resulted in billions of dollars lost during the recent economic crisis.)

SSEK Talking to Investors About JPMorgan Trading Losses
JPMorgan Chase's (JPM) over $2 billion loss was on a series of complex derivative trades that it claims were made to hedge economic risks. Now, according to a number of people who work at trading desks that specialize in the kind of derivatives that the financial firm used when making its trades, the financial firm's loss has likely grown to closer than $6 billion to $7 billion.

Read the Letter by Merkley and Levin

Volcker Rule Resource Center, SIFMA


More Blog Posts:
JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ, Institutional Investor Securities Blog, May 19, 2012

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss, Institutional Investor Securities Blog, May 17, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Recordhttp://www.stockbroker-fraud.com/lawyer-attorney-1132963.html, Stockbroker Fraud Blog, March 15, 2012

Continue reading "Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked" »

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 " »

February 28, 2012

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds

With regulators tasked with finalizing the Volcker rule, Democratic lawmakers want them to make sure that the rule makes clear that banks are allowed to invest in venture capital funds. The proposed rule is geared toward lowering financial system risk by not letting banks to take part in proprietary trading, while limiting how much they can invest in private equity and hedge funds.

The lawmakers, 26 of whom have written to the federal agencies working on the rule, noted that venture capital firms are not as high risk as private equity and hedge funds. The Volcker rule would be an implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 619. Once finalized, it will go into effect on July 21.

Meantime, European Union Council of Ministers President Margrethe Vestager wants to make sure that the Volcker rule treats non-U.S. sovereign debt and US government securities the same. Vestager wrote to Federal Reserve Chairman Ben Bernanke making her case that the federal agencies need to make sure the extraterritorial application of the Volcker rule doesn’t happen. Vestager is concerned that otherwise the competition for non-US banks would be impeded.

She called on Bernanke to make sure the demarcation between proprietary trading and market-making that is beneficial is made clear so markets can keep working effectively and properly and banks don’t have to curb their market-making. Vestager said that currently, the proposed rule takes US government securities out of its scope, but that non-US government securities remain within. She says this would create an uneven playing field where US treasury bonds would have the advantage over EU sovereign debt in the sovereign debt markets. She also expressed worry that the rule’s proprietary trading ban would impact non-US banks if their trades were to occur through US counterparties and exchanges. Similar concerns have been expressed by European Commissioner for Internal Markets and Services, Michel Barnier. Speaking at a US Chamber of Commerce event, he said that it wouldn’t be acceptable for US rules to so widely impact foreign capital markets and other countries especially with a lack of “international coordination.” Asian governments have also expressed concerns about the rule’s potential reverberations.

Local US governments have also taken issue with the Volcker Rule. Local and state officials are worried that the rule could make it more costly for them to raise funds from investors. Municipalities have also expressed concern that it could limit banks’ buying of their bonds while raising the interest rates that bond issues could end up paying to bring in investors.

Shepherd Smith Edwards and Kantas, LTD LLP represents institutional and individual investors with securities fraud claims and lawsuits.

Local, state and foreign officials attack Volcker Rule, The Washington Post, February 28, 2012

Volcker Rule Must Allow Banks to Invest In Venture Capital Funds, Democrats Urge, BNA Banking Daily, February 23, 2012

EU Urges Equal Treatment for US Bonds, Foreign Sovereign Debt Under Volcker Rule, Bloomberg/BNA, February 24, 2012

Read Vestager's Letter (PDF)


More Blog Posts:

SEC Seeks to Impose Tougher Penalties for Securities Fraud, Institutional Investor Securities Blog, December 29, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Blog, October 31, 2011

SEC Warning to Investors: Watch Out for Fraudsters Posing As Regulators, Stockbroker Fraud Blog, February 27, 2012

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 " »

September 16, 2011

President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M

President Barack Obama says he supports Senate bill, S. 1544, which would let companies sell up to $50 million in securities in a public offering without having to register with the SEC. That’s a huge leap from the current $5 million threshold that is allowed under Regulation A of the 1933 Securities Act.

Called the Small Company Capital Formation Act, Senators Jon Tester (D-Mont.) and Pat Toomey (R-Pa.) introduced the bill earlier this month. If passed, Tester said it would relieve some regulatory burdens. S. 1544 is almost identical to H.R. 1070, which Rep. David Schweikert (R-Ariz.) introduced in the House earlier this year.

Senator Tester says that the new rule will help entrepreneurs create jobs and raise additional capital. Greater transparency of offers would also be enhanced, giving investors access to more information. On his Web site, Tester speaks about the need to do everything possible to push for “innovation, entrepreneurship, and job creation.” Tester says the bill streamlines new companies’ ability to be successful and have the capital they need for growth. With this capital, they can concentrate on succeeding rather than getting mired in “government paperwork.” Senator Pat Toomey has the Small Company Capital Formation Act will make it easier for small companies and start-ups to go public.

Meantime, Republican lawmakers have introduced a series of job bills that could also affect securities laws. The Entrepreneur Access to Capital Act, H.R. 2930, exempts crowdfunding from the 1933 Securities Act‘s registration requirements for business individuals who invest under $10,0000 or under 10% of their annual income and companies that raise under $5 million. In his jobs plan, President Obama has also said that he supports this proposed measure.

Other Republican Bills:
H.R. 2930: Introduced by Rep. Patrick McHenry (R-N.C.), this bill would exclude crowdfunding from the 500 shareholder cap of the 1934 Securities Exchange Act, while preempting state regulation. McHenry said that if passed the bill would give smaller investors a chance to get into startups, which they currently cannot do because of current SEC regulation.

S. 1538: Known as the Regulatory Time-Out Act, this bill would set up a one-year moratorium on key regulations with a $100 million or greater yearly effect on the economy.

Access to Capital for Job Creators Act: Introduced by GOP whip Rep. Kevin McCarthy (R-Calif.), the bill would get rid of the SEC’s current ban on general solicitation. Currently, the Commission’s Section 4(2) of the 1933 Act or its Rule 506 of Regulation D doesn’t let private placement issuers use general solicitation or advertising to get investors to put money in their offerings. McCarthy believes that this ban keeps small companies from being able to draw in capital that they need.

Our securities fraud attorneys are here to help investors that have been victims of financial fraud recoup their losses.


Republican Lawmakers Sponsor Slew Of Job Bills Impacting Securities Laws, BNA Securities Law Daily, September 16, 2011

American Jobs Act, White House, September 8, 2011

Tester, Toomey introduce bill to help businesses raise capital, cut red tape, and create jobs, Senate.gov, September 12, 2011


More Blog Posts:
Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stockbroker Fraud Blog, August 31, 2011

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Blog, August 29, 2011

Continue reading "President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M " »

Contact Us

(800) 259-9010

Our Other Blog

Recent Entries