Articles Posted in SEC Settlements

In a civil settlement reached with the US Securities and Exchange Commission, Deutsche Bank Securities will repay commercial mortgage-backed securities customers more than $3.7M over allegedly false and misleading statements related to their purchase of these investments. The firm and its ex-CMBS trading desk head trader Benjamin Solomon agreed to resolve the charges against them but without denying or admitting to regulator’s findings.

According to the SEC’s probe, when selling the CMBSs, Deutsche Bank (DB)’s salespeople and traders made statements that were false and misleading. This caused customers to pay too much for the securities because they were not given accurate information about how much the firm had paid for them. Deutsche Bank also is accused of not having properly designed procedures for surveillance and compliance that could stop and identify the types of wrongful behaviors that would cause commercial mortgage-backed securities buyers financial harm while allowing the firm to profit.

To resolve the CMBS fraud charges, Deutsche Bank will pay customers back all profits on the securities’ trades in which a misrepresentation was made. That figure is over $3.7M, including $1.48M of disgorgement. The bank will also pay a $750K penalty.

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The US Supreme Court has agreed to hear the appeal of an investment adviser who is challenging the liability findings against him in a securities fraud case presided over by a US Securities and Exchange Commission administrative law judge (ALJ). Raymond Lucia, also a former radio host, was accused of misleading prospective investors about his “Buckets of Money” investment strategy by claiming the methodology he used was back-tested when that was not the case. This created a false sense of security especially among retirees who were told that their money would grow.

An SEC ALJ found him liable for fraud, including that he violated the Investment Advisers Act. Lucia was not only barred from the securities industry but also ordered to pay a $300K fine. He appealed the ruling.

Lucia also questioned whether it was constitutional for the SEC to hire administrative law judges and if they should instead by appointed rather than brought in through human resources. In 2016, The U.S. Court of Appeals for the District of Columbia Circuit turned down Lucia’s appeal, finding that contrary to his contention, SEC judges are not officers with the power to make decisions but are, in fact, employees. Also, the Commission has to approve their rulings.

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In its complaint, the US Securities and Exchange Commission has submitted a civil junctive action accusing Malachi Financial Products, Inc. and its principal Porter B. Bingham, of municipal bank fraud targeting Rolling Fork, Mississippi. According to the regulator, Malachi and Bingham charged the city too much for municipal advisory services involving a muni bond offering from October 2015.

Rolling Fork had hired Malachi in the capacity of municipal adviser in 2015 because of a proposed bond offering to pay for a number of improvement projects in the city. The SEC contends that after the closing of the offering, the firm and its principal submitted two invoices to the bond trustee, one—for $33,000—was for services that were never rendered and had never been authorized by the Mississippi city. The other, for $22K, was in line with what Malachi and Rolling Fork had agreed upon.

Bingham purportedly did not disclose to Rolling Fork that he had received $2,500 from Anthony Stovall, who worked for Bonwick Capital Partners. LLC, prior to Malachi recommending to the city that it retain Stovall’s firm as an underwriter for the bond offering. Rolling Fork went on to hire the underwriting firm because of the recommendation.

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The US Securities and Exchange Group announced that Khaled Bassily, the ex-head of ConvergEx Groups’ transition management business, has settled institutional investor fraud charges accusing him of taking part in a scam to hide from certain clients, which included religious organizations, retirement funds, and charities, that they were paying substantially more than they thought for trading orders. Bassily, who agreed to pay more than $988K in disgorgement, prejudgment interest, plus a civil penalty, settled the case without denying or admitting to the charges.

The regulator brought the case against him in 2016. According to its complaint, over five years, Basily hid from transition management customers that their brokerage orders were being directed to an offshore affiliate where concealed charges were put into the price that they paid for selling and purchasing securities. These secret charges were an add on and frequently much higher than the commissions that customers paid for their orders. For example, stated the SEC’s complaint, one customer who paid $699K in commissions also paid $9.6M in these hidden fees.

Meantime, Bassily allegedly engaged in deceptive practices, including “false and misleading statements” to customers, working with traders to maximize theses hidden charges, and taking steps to hide these unauthorized charges from customers.

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Provectus Accused of Disclosure and Accounting Controls Violations Related to Executive Perks
The US Securities and Exchange Commission has filed civil charges against the biopharmaceutical company Provectus. According to the regulator, the Tennessee-based company committed violations related to disclosures and accounting controls. Among the alleged failures was that Provectus did not properly report that its then-CFO and former CEO made millions of dollars in perks as compensation.

The SEC contends that Provectus did not have “sufficient controls” in place regarding the reporting and disclosure of entertainment and travel expenses of executives. Ex-CEO Dr. H. Craig Dees is accused of using fabricated, limited or “non-existent expense documentation” for millions of dollars of benefits of which investors were not informed. Then-CFO Peter R. Culpepper is accused of receiving more than $199K in undisclosed and unauthorized benefits and perks.

The Commission has filed a separate securities fraud case against Dees. Not only did he allegedly get $3.2M in reimbursements and cash for business travel that he didn’t go on, but also, he is accused of hiding these perks, which personal expenses, including restaurant tips and cosmetic surgery for women friends.

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Ex-Philadelphia Eagles Player Who Bilked Former Coaches is Sentenced to 40 Years
Merrill Robertson Jr., a former Philadelphia Eagles football player, will serve 40 years in prison for a $10M fraud that bilked investors. Among his investor fraud victims were coaches he knew from when he played football at the University of Georgia and the Fork Union Military Academy.

The SEC also filed a case against him in a parallel civil case. According the regulator, Robertson, Sherman C. Vaughn Jr., and their Cavalier Union Investments diverted almost
$6M of investors’ money to pay for their own expenses and repay earlier investors.

Investment Advisers Accused of Mislead Investors About Conflicted Transactions
The US Securities and Exchange Commission has filed charges against Mohlman Asset Management, LLC, Mohlman Asset Management Fund, LLC, and Louis G. Mohlman, accusing them of misleading investors and engaging in conflicted transactions. Mohlman and the two investment advisers managed two private funds.

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The US Securities and Exchange Commission has imposed a $1.75M penalty on Ameriprise (AMP) related to its sale of F-Squared Alpha Sector strategies. The financial firm must also disgorge $7.3M.

According to the regulator, F-Squared Investments made mistakes when calculating the historical performance of its Alpha Sector investment strategies. These sector rotation strategies were predicated upon the use of an algorithm that gave off a “signal” noting whether to sell or purchase certain exchange-traded funds that collectively comprised the industries in the S & P 500 Index.

However, claimed the regulator, F-Squared erred when it implemented these signals prior to when they could have happened. The Commission accused the firm of employing back-tested and hypothetical historical performance data that was inflated, rather than using what the AlphaSector’s performance would have been if there hadn’t been any signal-related errors, to come up with the investment’s track record.

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SEC Awards Whistleblower $4.1M
A company insider who notified the US Securities Exchange Commission about a “widespread, multi-year securities law violation” involving the employer, is getting a $4.1M whistleblower award. The individual, who is a foreign national employed abroad, also provided information and help during the regulator’s probe. Further details about the case have been kept confidential so as to protect the confidentiality and anonymity of the whistleblower.

This is the third whistleblower award issued this month by the SEC. The regulator awarded two other people $8M each for their help in another successful enforcement action.

To date, the SEC whistleblower program has awarded 50 whistleblowers over $179M.

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Nehal Chopra, founder of the hedge fund Ratan Capital Management, and her husband Paritosh Gupta have settled US Securities and Exchange Commission charges alleging that they acted improperly: He, by sharing confidential investment recommendations with her and she, by not disclosing to her clients that her husband was the one who gave her this information.

Gupta worked at Brahman Capital, a hedge fund firm. He later launched Adi Capital Management, also a hedge fund firm. Brahman and Ratan are competitors in their field.

According to the SEC, Gupta provided Chopra with information developed for Brahman’s own clients, as well as the timing of Brahman’s sizes and positions, and he advised her about certain investments. In one example noted by the regulator, Gupta asked his wife about the size of her firm’s position in one security. After she responded, he advised her to increase that position. Ratan would go on to buy more shares that day.

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David Webb, the ex-Illinois mayor of the city of Markham, has agreed to partially resolve fraud charges brought by the SEC accusing him of involvement in a $5.5M municipal bond scam. The regulator accused Webb of taking part in a pay-to-play scheme that involved a $75K bribe from a construction contractor. In return, Webb is accused of directing one of the city’s construction projects to the contractor. The alleged fraud involved a $5.5 muni bond offering that the city offered in 2012.

According to the Commission’s complaint, at a Markham council meeting that year, talks took place to authorize the $5.5M of general obligation bonds to help pay for certain city projects. It was during this conversation that an attendee spoke out saying she’d heard that the owner of a roller rink stood to “improperly benefit.” The owner of the rink was Markham’s city attorney at the time and the roller ring was one of the city projects involved. Webb, however, responded by saying “I don’t make deals” even though he purportedly had recently been paid the bribe to the construction contractor. The regulator claims that the pay-to-play scam involving the city’s Roesner Park development project was already in place.

The bond offering was approved.

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