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David Lerner Associates to Pay NJ Over Nontraded REIT Sales

David Lerner Associates has agreed to pay a $700K penalty to resolve allegations accusing it of illegally selling nontraded real estate investment trusts in the state of New Jersey. In the consent order from the New Jersey Bureau of Securities, the firm also agreed to pay $50K to a fund for investor education, as well as $100K for costs.

At issue are the nontraded REITs Apple 9, Apple 8, and Apple 7. In early 2014, the three REITs merged together and became Apple Hospitality REIT Inc (APLE). Investors complained to the state regulator about the sale of the three REITs, which raised money to purchase hotels. After the NJ regulator contacted the firm about possible failures in its compliance system related to the sale of the non-traded real estate investment trusts, David Lerner Associates said it would assess its sale of the REITs there.

BNP Paribas will pay the New York Department of Financial Services (DFS) $350M to settle a probe into allegations that it was involved in currency rigging in the bank’s foreign exchange business. In a statement, the French bank said that it “deeply regrets” the misconduct, which took place between ’07 and ’13.

The DFS said that over a dozen BNP Paribas sales people and traders in NY as well as other trading hubs rigged forex rates and took part in other illegal activities. BNP Paribas traders worked in online chat rooms with traders from competing companies, making fake trades and improperly sharing customer information that should have stayed confidential. Members of the bank’s sales team are also accused of misleading customers regarding prices.

Among the alleged misconduct cited by the DFS is that of a BNP Paribas trader in NY who is accused of not only rigging different currencies but also of executing bogus trades overnight to move rates and then frequently cancelling the trades within seconds of making them. In another example cited, one of the bank’s traders in Japan allegedly improperly disclosed customer information involving yen trading with several competitor traders.

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Prosecutors have indicted a California man over his alleged involvement in an investment scam that bilked an ex-NFL player of $4.5M. Kenneth Ray Cleveland faces multiple counts of money laundering and wire fraud.

The 63-year-old money manager served as the NFL player’s financial adviser for years beginning when the ex-pro athlete, who played with the Indianapolis Colts for several years, graduated college and joined the NFL. Court documents don’t name the victim.

According to prosecutors, Cleveland used $2M of the ex-NFL athlete’s funds to pay other clients in a Ponzi scheme he allegedly ran. The money manager used another $2M of the player’s money to cover his own expenses, including his mortgage.

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Eight years after Bernard Madoff was sentenced to 150 years in prison for defrauding investors in a $65 billion Ponzi scam, thousands of his victims have still not seen any of the money that they lost. These investors’ claims are being handled by Madoff Victim Fund administrator Richard Breedon, whose firm RCB Fund Services was retained by the federal government to give $4B back to them.

Breeden had estimated last year that up to 40,000 victims would get their first recovery checks by the end of 2016. That didn’t happen. Now, he has stated that the initial distribution will happen this year and will be larger than what would have gone out previously. Claims processes and inadequate paperwork by some investors were some of the reasons cited for the delay.

It is Breedon’s job to recommend to the federal government which claims to reject or pay. His fund accepts recovery claims from all of types of investors who entrusted their money to Madoff, including feeder funds. Breedon’s fees come out of investors’ recovery.

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At the yearly general meeting in Germany, Deutsche Bank AG (DB) told shareholders that the German lender is nearing an agreement with ex-executives in which they would have to help pay for the fines that the financial institution paid for their past misconduct. Deutsche Bank has been trying to determine whether it could hold these former executives liable for the different regulatory investigations to which it has been subject. An agreement is expected in the next months.

Bloomberg reports that according to Deutsche Bank CEO John Cryan, former management teams made the German financial institution “too complex and inefficient” when they placed short-term earnings before long-term interest. As a result of misconduct fines that Deutsche Bank was ordered to pay, it experienced two years of losses in a row, not to mention that earlier this year, the German lender agreed to pay US regulators $7.2B because of the way it dealt with mortgage-backed securities leading up to the 2008 financial crisis.

Meantime, along with Nomura Holdings (NMR), Deutsche Bank is dealing with other fraud allegations,this time in Italy for allegedly aiding Banca Monte dei Paschi di Siena S.p.A. in hiding the latter’s losses. In the use of complex derivative trades, thirteen ex-managers at all three banks have been charged with market manipulation and false accounting. The German bank also is accused of running an international crime organization during the relevant period.

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The US Securities and Exchange Commission is charging two-ex Nomura (NMR) head traders with fraud. Kee Chan and James Im ran Nomura Securities International Inc.’s commercial mortgage-backed securities desk. The regulator claims that they purposely lied to customers to inflate profits for themselves and the firm. As a result, said the SEC, the two of them made an additional over $750K in trading profits for the desk. They received healthy bonuses as a result.

Commercial Mortgage-Backed Securities
CMBSs are asset-backed securities that have commercial real estate loans as their underlying assets. These debt obligations are often called bonds. CMBSs are illiquid securities.

According to the Commission, while serving as trade intermediaries with customers seeking to sell and buy CMBSs on the secondary market, Im and Chan made it seem as if they were working out bond purchases with a third-party seller at more than what Nomura paid to obtain the bonds. Im even allegedly told a customer that he had sought to deceive on purpose. Meantime, Chan is accused of modifying a customer email to protect his lie regarding a bond’s bid price.

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In the wake of Puerto Rico’s bankruptcy filing, hedge funds are competing with the U.S. territory’s workers to get paid. The island has guaranteed retirees and workers $49 Billion in benefits. However, the federally appointed oversight board expects that it will have to cut pension costs by 10%.

Even worse for bondholders, they could get less than 25% of what bondholders are owed. This is true even for bondholders with General Obligation debt, which was supposed to have been constitutionally guaranteed. Creditors that own COFINAs, Puerto Rico sales tax bonds, are being offered up to 58 cents on the dollar should the territory’s finances get better. Both sides will appear in federal court in San Juan Puerto Rico in an attempt to try to work out a deal.

It was just recently that Puerto Rico’s oversight board submitted for Title III bankruptcy protection to help lower Puerto Rico’s $74 Billion of debt and deal with the Commonwealth’s pension crisis. Under Title III, the island can make pension recipients accept reduced benefits.

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In Manhattan appeals court, a panel for the Appellate Division, First Department ruled that Ambac Assurance Corp. must prove all common law fraud elements in its mortgage-backed securities case against Countrywide Home Loans. The insurer, which underwrote 17 residential mortgage-backed securitizations, filed its RMBS fraud lawsuit against Bank of America’s (BAC) Countrywide in 2010.

Bank of America purchased Countrywide in 2008. That same year, the bank settled civil fraud charges related to questionable mortgage practices from before the 2008 financial crisis by agreeing to pay $16.65B to state and federal authorities.

According to the RMBS fraud case, Ambac put out insurance policies that were irrevocable and without conditions when it guaranteed a number of principal payments plus interest to investors that backed Countrywide RMBSs. The financial guaranty insurer is now accusing Countrywide of breaking warranties and contractual representations involving securitizations and its business practices, as well as of putting out false statements about its loans and operations and, as a result, fraudulently compelling Ambac to issue certain policies.

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Ex-SAC Capital Advisors LP Portfolio manager Mathew Martoma is asking for another trial. Martoma is serving nine years behind bars after he was convicted for insider trading in Wyeth LLC and Elan Corp. stock based on illegal tips and making $275M in the process. He believes his conviction should be overturned because of a ruling issued by the US Supreme Court last year.

The Supreme Court case involved a man accused of engaging in insider trading after his brother-in-law, a former Citigroup (C) investment banker, gave him the illegal tip. The nation’s highest court upheld the conviction against Bassam Salman in a unanimous ruling. The justices said that a person could be convicted for sharing insider tips with a friend or relative regardless of whether or not there was a profit for the tipper.

Martoma is accused of obtaining confidential information from two physicians involved in clinical trials for an Alzheimer’s drug. His defense attorney is contending that the prosecution did not bring enough evidence to demonstrate that the person who tipped Martoma shared the information because he was paid money. The lawyer also claims that instructions the jurors received were flawed because they allowed for a conviction on the grounds of the promise that the tipper was motivated by the possibility of friendship instead of because of a preexisting personal connection. Prosecutors are arguing that the financial relationship between Martoma and one of the physicians, who testified that he was paid $1K/hour for consulting with Martoma, was sufficient to support the earlier conviction.

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According to Bloomberg, US prosecutors are conducting a criminal probe into whether hedge funds inflated the value of bonds to enhance the fees they were paid. Sources told the news media outlet that prosecutors want to know whether hedge funds solicited fake price quotes from brokers, which would have let the funds artificially raise the value of illiquid securities in their portfolios.

Just this week, a witness in the residential mortgage-backed securities fraud criminal trial against three ex-Nomura Holdings Inc. traders—they are accused of lying about RMBS prices to clients—stated under oath that he had given a Premium Point Investments LP trader fake quotes. The witness, ex-broker Frank DiNucci Jr., claims that two of the defendants, Michael Gramins and Ross Shapiro, are among the ones that trained him to lie to customers about bond prices. DiNucci, who pleaded guilty to fraud and conspiracy and making misrepresentations,previously worked at Nomura. He also worked at Auriga USA LLC and AOC Securities LLC.

Because certain securities are hard to price, hedge funds depend on brokers and third parties for estimates and quotes to determine how to value debt. Holding artificially inflated securities in the portfolios can allow a hedge fund to tout a better performance and get paid more for performance and management fees. It also allows them to conceal when some holdings do poorly.

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