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In a Securities and Exchange Commission case linked to parallel criminal charges, the regulator has filed insider trading charges against Avaneesh Krishnamoorthy, the risk management VP of a New York-based investment bank. Krishnamoorthy is accused of trading on confidential information prior to the acquisition of a publicly-traded tech company by a private equity firm. He allegedly made about $48K in illicit profits. Also charged as a relief defendant is his wife Shreya Achar.

According to the SEC, Avaneesh Krishnamoorthy began trading in Neustar Securities after learning that Golden Gate Capital was going to buy the company. He used two brokerage accounts that his employer didn’t know about. Golden Gate Capital had approached the investment bank about financing the acquisition.

Meantime, the U.S. Attorney’s Office for the Southern District of New York has filed its own case against Krishnamoorthy. He faces one criminal securities fraud charge.

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The US Securities and Exchange Commission has awarded almost $4M to an individual who gave the regulator specific details regarding “serious misconduct” and provided help, including “specialized” expertise and knowledge, during the agency’s probe into the allegations. In its release announcing the award, the SEC did not provided more details about the case because to do so might give away the identity of the whistleblower, which it always seeks to protect.

Since the SEC Whistleblower Program was established in 2011, the agency has awarded 43 individuals about $153M for voluntarily giving the agency useful and original information that ended up rendering a successful enforcement action Already, such actions stemming from whistleblower-provided information has resulted in over $953M in financial remedies imposed against those found to be have engaged in misconduct or other wrongdoing. Whistleblowers can be awarded anywhere from 10-30% of the money collected if that sum is $1M or greater.

As we mentioned, typically the identities of SEC whistleblowers are kept confidential. One of the reasons for this is so that the whistleblower is protected from professional or financial retaliation, especially if the individual blew the whistle on an employer.

Ex-Merrill Lynch Broker Pleads Guilty to Bank Fraud
Jeffrey Kluge, a longtime Merrill Lynch broker, has pleaded guilty to defrauding two banks of more than $8.7M. His bank fraud ran from 2001 through November 2016.

Kluge’s plea agreement said that he fabricated account statements under Merrill Lynch’s name and pledged fake collateral to the banks so he could set up multi-million dollar credit lines. For instance, in 2001 he was able to get a $150K credit line with Alliance Bank in Minnesota by telling the financial institution that he had enough municipal bond funds as collateral. In fake account statements he sent the bank as evidence of these bond holdings, Kluge concealed from Alliance Bank that he had already promised the assets in the accounts for loans from the firm.

In 2007, Kluge was able to get a $1M credit line from Platinum Bank, which is also in Minnesota. He defrauded Platinum Bank in similar fashion.

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Bloomberg reports that according to sources, the US Securities and Exchange Commission has launched a probe into Statim Holdings. Inc., an Atlanta, Georgia-based financial firm, after the latter told investors in its main hedge fund that there was no risk of financial losses for investing. The regulator’s investigation comes in the wake of a state probe by the Georgia Securities Division. Statim is helmed by Joseph A. Meyer.

Meyer told investors in the Arjun fund’s main share class that they would never sustain financial losses. However, they have to commit their funds for a decade or lose 50% of their principal should they decide for early redemption.

The hedge fund manger has said that he uses a computerized system that he designed and he invests the bulk of clients’ funds in Treasury bonds. In 2015 Bloomberg News placed Arjun at number eight in its list of hedge funds that had assets ranging from $250M and $1B. BarclaysHedge has given 17 awards to Arjun.

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Raymond James Financial Inc. (RJF) has agreed to pay $150 million to resolve all investor claims involving the Jay Peak Resort’s immigrant visa fraud. The EB-5 scam was created in 2007 by third parties and offered to foreign investors.

Although settling, the firm noted in a statement that it was never the placement agent for the fraudulent program nor did it play any other role in the scam. Raymond James also stated that it was never involved in selling the investments. The broker-dealer said that the Raymond James Financial advisor that worked with the brokerage accounts of the investment partnerships involved in the scam is no longer working the firm.

Already, investors have brought several lawsuits over this fraudulent EB-5 Immigrant Investor program. They had invested in a number of related projects at the Jay Peak ski resort. They did so to help themselves gain permanent US residency.

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The Federal Home Loan Bank of New York will pay Lehman Brothers and its Special Financing unit a $70M settlement in an interest-rate swaps case. The plaintiffs sued FHLBNY two years ago seeking over $150M that they claim they were owed related to their position on more than 350 swaps and options transactions.

Lehman filed for Chapter 11 bankruptcy protection in 2008. The move froze the markets while spurring the end of millions of derivative transactions in which it was involved. A few days later, when FHlBNY ended its swaps with Lehman, it did so with a $16.5B notional amount.

According to Lehman, due to interest rate fluctuations after its bankruptcy filing, FHLBNY returned and “cherry picked” other end dates. As a result, claims the plaintiff, the latter “massively understate” how much it owed Lehman.

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To settle charges over a high-pressure sales contest involving its financial advisers and brokerage clients, Morgan Stanley (MS) will pay $1 million to Massachusetts Secretary of the Commonwealth William Galvin. By settling, the firm did not deny or admit to the charges. It must, however, reassess its sales contest policies and notify the state of what is included in them, as well as what changes it might make in the wake of this review.

It was last year that Galvin charged the broker-dealer for cross selling and encouraging wealthy clients to borrow against their brokerage accounts. He also accused senior Morgan Stanley staff of knowing about the contest, determining that it violated the firm’s own internal policies (in addition to Massachusetts securities rules), but yet allowing the contest to continue for a few more months. It was only then that the firm’s Compliance and Risk decided that the contest was “impermissible.”

The program, which also involved a similar contest in Rhode Island, ran between ’14 and ’15. 30 financial advisers at five Morgan Stanley offices participated. The financial representatives are accused of persuading investors to set up new lending accounts. The broker-dealer purportedly rewarded them with bigger “business development allowances” when their efforts were successful. Advisers were given $1K for every 10 loan accounts that were opened, $3K for every 20 accounts, and $5K for every 30 accounts.

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In separate bond fraud lawsuits, two groups of municipal bond holders are suing Bank of Oklahoma Financial (BOKF), also called BOK Financial Corp. They claim that the bank was not a responsible trustee to certain conduit bondholders that were harmed by fraud.

The first securities lawsuit is a class action brought by eight plaintiffs in the U.S. District Court for the Northern District of Oklahoma. They are claiming a number of causes of action, including gross negligence, aiding and abetting fraud, breach of fiduciary duty, civil conspiracy, and aiding and abetting breach of fiduciary duty.They want a jury trial and over $5M in compensatory damages.

The second case includes 20 individuals and a company. All of them invested in conduit bonds. They brought their case in Tulsa District Court in Oklahoma and are asking for exemplary damages of up to $5M, as well as yet-to-be determined actual damages.

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In Manhattan, U.S. District Judge Katherine Polk Failla ruled that a few dozen funds may pursue their mortgage-backed securities fraud lawsuits against Wells Fargo & Co. (WFC) According to Reuters, five lawsuits are involved and plaintiffs include funds from Prudential Financial Inc.(PRU), BlackRock Inc. (BLK), TIAA-CREF, and Pacific Investment Management Co. (PIMICO) Judge Failla also said that the National Credit Union Administration (NCUA) could proceed with its MBS fraud claims against the San Francisco-based bank, which it filed on behalf of five credit unions that failed after they bought $2.4B in residential mortgage-backed securities.

The funds are seeking to hold Wells Fargo liable for breach of contract and conflict of interest involving over four dozen trusts, breach of due care, and breach of fiduciary duty. Failla, however, did not allow claims contending violation of a NY law related to mortgage trusts, as well as claims of general negligence, to proceed.

The investors contend that the bank took “virtually no action” to make sure that lenders either bought back the faulty securities or fixed the loans that were backing the securities once they knew that the loans were poorly underwritten or had defaulted. They accused Wells Fargo of failing to act despite being aware of these problems.

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Former Citigroup Global Markets Traders to Pay Penalties for Spoofing
Ex-Citigroup Global Markets Inc. (C) traders Jonathan Brims and Stephen Gola have settled spoofing charges that the US Commodity Futures Trading Commission brought against them. According to the regulator, the two men engaged in spoofing while trading for the firm, and they must now pay $200K and $350K in civil monetary penalties, respectively. They also are temporarily “banned from trading in futures markets.” Goal and Brims won’t be allowed to resume trading in the futures markets until six months after they’ve paid their penalties in full.

According to their respective orders, the two men engaged in spoofing, which involves making a bid or offer with the intention to cancel the bid or offer prior to execution of the bid. They did this over 1,000 times in different Chicago Mercantile Exchange US Treasury futures products. They would make offers or bids of at least 1,000 lots even though they planned to cancel the orders before they actually occurred.

The orders were made after another small offer or bid was made on the other side of the same market “or a correlated futures or cash market.” The CFTC said that the two men initiated the orders in order set up or increase an already existing imbalance in the order book. They purportedly canceled the orders after the smaller orders were filed or if they determined that there was too high a risk that their orders might actually go through.

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