July 30, 2014

SEC News: Ex-Harbinger COO Settles Hedge Fund Fraud Case and Regulator Files More Charges in “Solar Farm” Scam and Football-Like Boiler Room Case

Ex- Harbinger Capital Partners LLC COO Admits Wrongdoing in Hedge Fund Case
Peter A. Jenson, the former chief operating officer at Harbinger Capital Partners LLC, has agreed to pay $200,000 and admit to wrongdoing in the U.S. Securities and Exchange Commission’s case accusing him of assisting in hedge fund fraud. The scam involved his former firm and its owner Philip A. Falcone and sought to misappropriate millions of dollars so Falcone could pay his taxes.

The SEC charged Jenson, Falcone, and Harbinger in 2012. As part of his settlement, Jenson is acknowledging that he knew about the violations committed by Harbinger and Falcone. He said that he helped Falcone take part in a related party loan by failing to make sure the lender, Harbinger Capital Partners Special Situations Fund, had its own counsel, the loan was consistent with the fiduciary duties that Falcone owed the Special Situations Fund, and that Falcone paid an interest rate on the loan that was “above market.”

Jenson also admitted that he failed to tell investors about the loan in a timely manner and acted so as to compel the lender to hurry Falcon’s loan payment once investors in the Special Situations Fund were allowed to redeem their investments.

SEC Files More Charges in Penny Stock Scam Involving Solar Farms
The SEC is filing securities fraud charges against MSGI Technology Solutions and its CEO J. Jeremy Barbera. The regulator claims that they bilked investors by promoting a joint venture involving solar energy farms on land that purportedly belonged to an electricity provider run by Christopher Plummer. The agency previously charged Plummer and another penny stock company and CEO with putting out misleading press releases.

Now, the regulator is contending that Barbera also conspired with Plummer. The two of them are accused of falsely portraying in press releases that MSGI was a successful renewable energy company involved in solar energy projects that were about to become profitable. In fact, the penny stock company has no customers, operations, or revenue. Also, Plummer’s company didn’t have the financing or assets required to generate solar energy farms.

Barbera and MSGI are settling the SEC charges, which includes Barbera paying a $100,000 penalty. He also has consenting to a permanent bar from either acting as a director or an officer of a public company or taking part in a penny stock scheme again.

SEC Files More Charges in Boiler Room Scam That Touted Super Bowl Connection
The SEC has filed charges against four executives and their three companies, CalPacific Equity Group, DBBG Consulting, and DDBO Consulting, for their involvement in a boiler room scam that promoted a company that had new technology that was supposedly going to be used during Super Bowl 2013.

Senior investors and others were pressed into buying stock in Thought Development Inc., which purportedly developed a laser-line system that could create a line on a football field for a first-down marker that would be visible not only on TV but also by officials, players, and live fans. There was no such deal with the Super Bowl.

The scam raised about $1.7 million from over 110 investors who were led to believe that an IPO was about to happen and that their funds would go toward developing the technology. The SEC says that instead, at least half of offering proceeds were paid as commissions and fees to sales agents or kept by these companies.

The defendants have consented to settle the SEC charges. Meantime, two of the people previously charged in the scam, Dean Baker and Daniel Dritsas, have entered into plea deals in criminal cases related to the allegations.

The proposed final judgment in the Harbinger case (PDF)

Read Jenson's Consent (PDF)

The SEC's Complaint in the "Solar Farm" Penny Stock Case (PDF)

SEC Announces Additional Charges in Football-Related Boiler Room Scheme, SEC, July 24, 2014


More Blog Posts:
Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS, Stockbroker Fraud Blog, July 28, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds, Stockbroker Fraud blog, July 23, 2014

Deutsche Bank, UBS Being Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays
, Institutional Investor Securities Blog, July 30, 2014

July 28, 2014

Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS

LavaFlow Inc., a Citigroup (C) business unit, has consented to pay $ 5million to resolve U.S. Securities and Exchange Commission charges that it did not protect subscribers’ confidential trading data in its alternative trading system. LavaFlow consented to the SEC order without denying or admitting to the allegations.

Per the order, which institutes a settled administrative proceeding, LavaFlow, which runs an electronic communications network ATS, let an affiliate that runs a smart order router application to access and utilize confidential data related to non-displayed orders belonging to subscribers. The order router was not within ECN’s operations and LavaFlow lacked the proper procedures and safeguards to protect this confidential information.

Even though LavaFlow only let the affiliate use the confidential data for ECN subscribers that were also order router customers, the firm did not get subscribers’ consented for their confidential data to be used like this. LavaFlow also failed to disclose this use to the SEC.

LavaFlow has since discontinued this practice. Prior to that, however, the smart order router executed over 400 million shares over three years.

The SEC also claims that LavaFlow aided and abetted a violation by the affiliate that ran smart order router Lava Trading Inc., which kept offering brokerage firm services after it reregistered. During this several month period, Lava Trading made about $1.8 million. Citigroup Financial Products owns Lava Trading.

The SEC order says that LavaFlow violated certain rules of Regulation ATS and aided, abetted, and caused Lava Trade to violate the Securities Exchange Act of 1934. Of the $5 million settlement, $1.8 million in disgorgement of funds made by Lava Trading while it wasn’t registered, $350,000 in prejudgment interest, and a $2.85 million penalty. LavaFlow has been ordered to cease and desist from future violations.

Alternative Trading System
This is a venue that executed stock traders fro traders, including broker-dealers. These stock trading venues are typically run by banks competing with more traditional order flow exchanges. Federal rules mandate that ATS have safeguards to protect its subscribers’ confidential trading information. In the last few months, trading systems have undergone closer regulator scrutiny, especially in relation to high-frequency traders and their relationship to exchange operators.

Just last week, Barclays (BARC) sought to have a dark pool lawsuit filed against it by New York regulators dismissed. The state’s Attorney General Eric Schneiderman claims the British bank lied about giving preferential treatment to high-frequency traders and committed securities fraud.

According to the complaint, Barclays falsely portrayed how clients orders are routed and claims to protect the order from high-speed firms when actually the dark pool LX is operated to the advantage of traders. The bank is now arguing that Schneiderman used misleading data and cherry-picked facts to supports his claims.

Barclays claims that the dark pool lawsuit doesn’t succeed in identifying a specific fraud, failed to establish any material misstatements, and did not identify victims or any real harm.

The bank also says that the Martin Act, which the regulator claims Barclays violated, doesn’t apply to the lawsuit. Under the New York State securities law, prosecutors only have to prove that fraud occurred and doesn’t insist on proof that a firm meant to bilk investors. Barclay, however, said the act doesn’t apply to claims about how a dark pool is run and that Schneiderman’s office is overstepping its mandate in trying to regulate dark pools, which is an SEC job.

Since the case was filed, a number of clients have left Barclay’s LX and trading volume has declined by 75%.

Citigroup Business Unit Charged With Failing to Protect Confidential Subscriber Data While Operating Alternative Trading System, SEC, July 25, 2014

Read the SEC Order (PDF)

Barclays Files to Dismiss New York Attorney General's Dark-Pool Complaint, The Wall Street Journal, July 24, 2014


More Blog Posts:
Second Circuit Overturns Judge's Decision to Block Citigroup's $285M Settlement With the SEC, Stockbroker Fraud Blog, June 4, 2014

$11M Award Against Citi is Vacated by the New York Supreme Court, Stockbroker Fraud Blog, January 30, 2014

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion, Institutional Investor Securities Blog, July 14, 2014

July 23, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds

The Financial Industry Regulatory Authority is reporting that roughly 400 claims have already been filed against UBS Financial Services Inc. of Puerto Rico (UBS) and other brokerage firms over the fallout of municipal bonds and bond funds related to the Commonwealth of Puerto Rico. As the U.S. territory’s bonds continue to drop in price, more investors are likely to file cases.

According to Securities Attorney Sam Edwards, one of the partners at Shepherd, Smith, Edwards & Kantas currently representing dozens of investors who lost money in these investments, ““The recent drop in Puerto Rico bond prices have resulted in Puerto Rico bonds, and the bond funds holding Puerto Rico bonds, to give back most, if not all, of the gains of the last nine months. Bond prices have largely returned to the lows suffered in the Fall of 2013.” Mr. Edwards continues, “This is likely to result in new groups of clients coming forward as the rally in Puerto Rico debt appears to have been short-lived.”

Investors, many of them locals, took huge financial losses when two dozen Puerto Rico bond funds sponsored by UBS and Popular Securities, Inc. (Banco Popular) declined in value last year. Many of the investors are retirees and other senior investors that have now lost their life savings. However, they are not the only ones impacted.

Even investors who did not directly invest in Puerto Rico bonds are feeling the effects. That is because there are many single-state and nationally marketed municipal bond funds in the U.S. that also got involved in the island’s debt. Many of the bond funds that were constructed for residents of different states hold Puerto Rico bond funds because of their advantageous tax status. However, with that tax advantage came significant risks.

Franklin Templeton Investments (BEN) and Oppenheimer Funds offer the 10 bond mutual funds with the most exposure to Puerto Rico bonds. Recently, these two fund managers filed a lawsuit seeking to have a new Puerto Rico law, known as the Public Corporation Debt Enforcement and Recovery Act, struck down.

The law, which lets parts of the U.S. territory restructure its debt, is causing investors to worry about significant losses to principle. The funds are arguing that the law violates the U.S. Constitution because it lets the territory impair certain contracts. They contend that the federal government is the only entity allowed to make bankruptcy law.

Puerto Rico is now asking a federal court to throw out the lawsuit, arguing that states are only barred from making bankruptcy law if this conflicts with federal law. It says that contracts are allowed to be impaired if this means fulfilling an “important government purpose.” Puerto Rico also noted that existing bankruptcy laws are not applicable to the island.

Additionally, the U.S. territory argues, the lawsuit was not timely because the specific local bonds at issue are from the Puerto Rico Electric Power Authority (PREPA) and the electric authority has not yet attempted to restructure its debt. The fund managers collectively hold around $1.7 billion in PREPA debt.

At Shepherd Smith Edwards and Kantas, LTD LLP, our Puerto Rico bond fraud law attorneys are representing many Puerto Rico residents. We have already filed more than 20 case against UBS and others, with dozens more pending. We represent investors in the U.S. and in the Commonwealth.

The first securities arbitration hearings will likely happen sometime this year. FINRA arbitrators will hear most of the muni bond fraud cases in Puerto Rico.

If you are an investor who has suffered losses from investing in these Puerto Rico bonds or bond funds holding Puerto Rico debt, please contact us today. There is still time to try to get your money back.


A Deluge of Legal Claims Hit UBS’ Puerto Rico Unit Over Closed End Bond Funds, The Wall Street Journal, July 21, 2014

Puerto Rico seeks dismissal of U.S. bond funds' lawsuit, Reuters, July 21, 2014

Puerto Rico Electric Power Authority


More Blog Posts:

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law, Stockbroker Fraud Blog, July 2, 2014

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales, Stockbroker Fraud Blog, June 21, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

July 22, 2014

Net Asset Value of Tony Thompson's Former Nontraded REIT Strategic Realty Trust Plunges

Investors in Strategic Realty Trust Inc. have been notified that the NAV of the nontraded real estate investment trust has dropped almost 30% from $10/share to $7.11/share. The REIT, previously known as TNP Strategic Realty Trust Inc., has a portfolio that includes over a dozen shopping centers.

Shareholders received a letter telling them that while the REIT has experienced significant property appreciation, different transaction costs have offset gains. This includes transaction costs at $1.54/share, organization and offering expenses at $1.23/share, capital returned to investors via distributions at $1.04/share, and other expenses.

Tony Thompson was the REIT’s head until last year when he was forced to step down as president and co-chief executive officer by the board. Several months ago, he relinquished his director position and stopped a proxy battle against the board. The real estate investment trust consented to purchase his more than 130,000 shares at $8/share.

The latest $7.11 valuation brings attention to Tony Thompson’s claim early last year that the REIT’s estimated NAV had risen to $10.60/share from $10/share. He then hawked the nontraded REIT to brokerage firms. He told them that sales were about to shut but that they still had time to sell the real estate investment trust to investors for $10/share.

2013 was also when Thompson shut down his brokerage firm. He no longer has a securities license. The self-regulatory organization still has a securities complaint pending against him. FINRA is accusing Thomson of defrauding investors who had purchased Thompson National Properties-sponsored high-yield promissory notes.

If you suspect you were the victim of nontraded REIT fraud, contact our real estate investment fraud law firm today. Shepherd Smith Edwards and Kantas, LTD LLP can help you explore your legal options.

Thompson's former nontraded REIT drops nearly 30%, Investment News, July 21, 2014

TNP Strategic Retail Trust Replaces Advisor and Announces Other Changes, Yahoo Finance, August 12, 2013


More Blog Posts:
California Regulators Probe Inland American Real Estate Trust REIT, Stockbroker Fraud Blog, May 15, 2014

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules, Institutional Investor Securities Blog, March 19, 2014

FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

July 17, 2014

FINRA Wants To Delay Implementing Rule Impacting Nontraded REIT Customers' Statements

The Financial Industry Regulatory Authority wants the Securities and Exchange Commission to grant a delay in the implementation of proposed changes to rule 2340, which impacts customer account statements. The self-regulatory organization had originally asked for the modifications to go into effect six months after the SEC approves the rule change. Now, FINRA wants to give nontraded REIT sponsors and brokerage firms 18 months to adjust to the revised guidelines.

Nontraded REITs are currently not required to show an estimated per-share valuation until 18 months after the sponsors cease to raise funds. Under the proposed rule change, broker-dealer client account statements would eliminate the existing practice of listing at $10 the value, for every share, of a nontraded REIT. This is usually the price that registered representatives sell them at.

The rule change would factor the different commissions and fees that dealer managers and brokers get. It would lower the price per share for every private placement or nontraded REIT found on the account statement of a customer.

Also, trusts would have to show what the valuation is per-share within three to six months. At that point investors would see a below $10/share valuation.

Also, broker-dealer and representative commissions would be able to subtract 12% for the original investment, as well as offering and organizational costs, off a client’s original investment so that an REIT’s estimated sold value would be reduced to $8.80/share price.

The rule that FINRA wants to implement provides two methodologies for broker-dealers to apply after an estimated value is considered reliable: The first method is the independent valuation and can be used at any time. The net investment methodology may be applied for up to two years under certain conditions.

Investors of non-traded real estate investment trusts often find their original investment eroded when the real estate investment trusts give back capital as distributions and dividends to investors. The proposed rule would give investors a better understanding of the costs in buying nontraded REITS shares.

Our non-traded REIT lawyers represent investors who have suffered losses in real estate investment trusts and non-traded REITs that were caused by securities fraud, including the inappropriate solicitation and marketing of these investments. Maybe your broker did not apprise you of the risks or costs involved. Or, perhaps they promoted REITs or Nontraded REITs to you as suitable for your investment goals even though your portfolio was never going to be able to handle the risks.

At Shepherd Smith Edwards and Kantas, LTD LLP, we help investors recoup their REIT fraud losses. Contact our real estate investment trust firm today and ask for you free case consultation. We have helped thousands of investors get their money back.

Finra asks for delay in implementing rule affecting nontraded REIT customer statements, Investment News, July 15, 2015

FINRA Rules


More Blog Posts:
Natural Blue Resources Inc. & Microcap Stock Scammers Accused of Hiding Previous Violations, Stockbroker Fraud Blog, July 16, 2014

FINRA May Expel Ex-Broker For $6M Hedge Fund, Stockbroker Fraud Blog, July 15, 2014

Barclays and Deutsche Bank Under Scrutiny Over Barrier Options Transactions, Institutional Investor Securities Blog, July 17, 2014

July 16, 2014

Natural Blue Resources Inc. & Microcap Stock Scammers Accused of Hiding Previous Violations

The Securities and Exchange Commission has filed charges against microcap company Natural Blue Resources Inc. and four persons for purportedly hiding from investors that two of them had previously broken the law. The regulator has suspended trading in Natural Blue stock.

Natural Blue’s mission was to acquire, establish, or invest in companies that are environmentally friendly. However, investors weren’t told that Joseph Corazzi and James E. Cohen were running the operations.

Cohen had previously served time for financial fraud and Corazzi was charged with federal securities law violations. He is permanently barred from acting as a director or officer of a public company.

The two men referred to themselves as outside consultants when really they were in charge. This allowed Cohen and Corazzi to serve as de facto officers of the company and profit from it without having o disclose their past violations.

The SEC is charging Cohen, Corazzi, and Natural Blue with numerous violations, including those involving certain sections of the Securities Act of 193,3 the Securities Exchange Act of 1934, and Rules 10b-5(a) and (c).

Also charged are ex-Natural Blue CEOs Erik Perry and Toney Anaya. The regulator believes that when both were running the company, they still let Corazzi and Cohen make the management decisions, which led to no revenue made.

Now, Anaya, who is cooperating with the SEC, has agreed to the cease-and-desist order’s entry without denying or admitting to the charges. He also has to serve a five-year bar from taking part in any penny stock offering.

Perry also settled. He is permanently barred from serving as director or officer of a public company or from taking part in any penny stock offerings. Perry must pay a $150,000 penalty.

Our securities fraud lawyers are here to help investors get back their losses. We have helped thousands of clients recoup their money over the years. We represent individual investors and institutional clients in arbitration and litigation. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

SEC Announces Charges in Scheme to Secretly Enable Lawbreakers to Run Microcap Company, SEC, July 16, 2014

SEC order against Natural Blue, Cohen, and Corazzi

SEC Order Against Anaya (PDF)

SEC Order Against Perry (PDF)


More Blog Posts:
SEC Suspends 225 Dormant Shell Companies to Prevent Pump-and-Dump Scams, Stockbroker Fraud Blog, February 4, 2014

Trading in Securities of 379 Microcap Companies Suspended in SEC’s Fraud Crackdown,
Stockbroker Fraud Blog, May 14, 2012

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion, Institutional Investor Securities Blog, July 14, 2014

July 15, 2014

FINRA May Expel Ex-Broker For $6M Hedge Fund

Dean Mustaphalli, an ex-Sterne Agee Financial Services Inc. broker, could be barred from the industry over allegations that he ran a $6 million hedge fund on the side. According to the Financial Industry Regulatory Authority Inc., Mustaphalli founded and got commissions from Mustaphalli Capital Partners in 2011 but did not tell his brokerage-firm.

Already, Mustaphalli has been named in at least two arbitration claims. He ran the hedge fund through Mustaphalli Advisory Group. It is not known time whether any of the 25 investors he solicited were Sterne Agee clients. Over a four-month period, he was paid about $41,800 in management fees.

Mustaphalli was fired from Sterne Agee in 2011. After he was let go, he purportedly kept soliciting clients for his hedge fund through the investment adviser.

FINRA rule 3040 lets brokers run hedge funds but this must be completely disclosed, approved by, and overseen by the member firm. If a FINRA hearing panel discovers that Mustaphalli withheld information he could also be subject to action for not making sure the hedge fund was properly disclosed.

The self-regulatory organization says that Mustaphalli failed to provide the documents it asked for that would let the regulator know the identities of the hedge fund clients, as well as bank account statements documenting the funds moving in and out of the hedge fund.

Mustaphalli is also under investigation by FINRA for allegedly making variable annuities transactions that were not suitable when he worked at Citigroup Global Markets Inc. (C) He denies those claims.

If you suspect your losses are because of hedge fund fraud, contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Former Sterne Agee broker accused of running $6M hedge fund side business, July 14, 2014

Ex-Sterne Agee broker faces expulsion over $6 million hedge fund, Investment News, July 11, 2014

Conduct Rules, FINRA

More Blog Posts:
SEC Accuses California School District of Misleading Municipal Bond Investors, Stockbroker Blog Fraud, July 11, 2014

SEC Stops Fraudulent Bond Offering by Chicago Suburb, Institutional Investor Securities Blog, June 25, 2014

NY Hedge Fund Adviser Faces SEC Charges Over Conflicted Transactions and Whistleblower Retaliation, Institutional Investor Securities Blog, June 16, 2014

July 11, 2014

SEC Accuses California School District of Misleading Municipal Bond Investors

The Securities and Exchange Commission is accusing Kings Canyon Joint Unified School District of not giving municipal bond investors the financial data and notices to which they were entitled. The California school district settled the SEC’s findings without denying or admitting to the charges. Kings Canyon has consented to an order to cease and desist from future violations of the Securities Act’s Section 17(a).

During a 2010 bond offering, Kings Canyon affirmed to investors that the school district was in compliance with previous continuing disclosure duties. In three bond offerings totally more than $30 million between ’06 and ’07—of 419 million, $4.5 million, and $6.7 million, respectively—Kings Canyon had a contractual duty to disclose specific yearly financial data and notices about certain bond-related events.

For example, says the SEC, when Kings Canyon performed a $6.8 million bond offering in 2010, the school district was obligated to describe whenever it hadn’t materially complied with previous disclosure duties. With its 2010 offering documents in a fourth, muni bond offering—this one of $6.8 million—the school district made statements that were inaccurate when it affirmed that in the last five years it had always complied materially with past ongoing disclosure duties. She SEC said that since Kings Canyon did not turn in certain contractually mandated disclosures related to the 2006 and 2007 bond offerings, the bond offering document in November 2010 had a statement about a material fact that wasn’t true.

Under the Securities Act’s Section 17(a)(2), it is illegal when selling or offering securities to get property or money through the use any false statement or mission to state a material fact. To establish there is a cause of action under this section, the SEC has to show that the omission/misrepresentations were material and in the sale or offer of the securities.

The Municipalities Continuing Disclosure Cooperation initiative is one under which the SEC’s Enforcement Division consented to recommend standardized settlement terms for underwriters and issuers that self report or were already probed for disclose duty-related violations. The initiative, which went into effect in March, expires on September 10.

The MCDC program lets issuers under investigation have the chance to accept the terms and settle any enforcement issues fairly and efficiently. King’s Canyon availed of this program to resolve the claims against it.

The case against King’s Canyon was resolved almost a year after a muni bond case was settled between the SEC and another school district. The regulator charged West Clark Community Schools and its municipal bond writer, City Securities Corporations, with making false statements to bond investors that made it seem as if the Indiana school district correctly provided all of the required yearly financial data and notices in earlier bond offerings.

In truth, says the Commission, the school district didn’t turn in any of the required comments for a 2005 bond offering. Meantime, the underwriter failed to perform the proper due diligence to detect the false statement during the 2007 bond offering.

City Securities consented to pay close to $580,00 to resolve the SEC charges. City Securities’ public finance & municipal bond department head Randy G. Ruhl and West Clark Community Schools also settled.

Contact our municipal bond fraud lawyers if you suspect you were the victim of securities fraud.

SEC Charges California School District with Misleading Investors, SEC, July 8, 2014

Read the SEC Order (PDF)

In a first, SEC charges muni bond issuer with misleading investors, Investment News, July 29, 2013

Securities Act of 1933, Legal Information Institute


More Blog Posts:
OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law, Stockbroker Fraud Blog, July 2, 2014

SEC Stops Fraudulent Bond Offering by Chicago Suburb
, Institutional Investor Securities Blog, June 25, 2014

SEC Chairman Mary Jo White Wants Reforms Made to Bond Market, Stockbroker Fraud Blog, June 23, 2014

July 7, 2014

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty

The Securities and Exchange Commission is ordering the comptroller and principals of SignalPoint Asset Management to pay $215,000 for breach of fiduciary. The regulator claims that the Missouri-based registered investment adviser breached its fiduciary duty when it did not tell clients about certain conflicts of interest.

The SEC says that SignalPoint principals Dennis R. Walker, Jonathan C. Timson and John W. Handy Jr. failed to disclose that they had control of the RIA when they advised clients to invest in it. This failure to disclose the conflict is a violation of the Advisers Act.

Michael Orzel, SignalPoint’s comptroller, was responsible for filing and drafting the RIA’s Form ADVs that also failed to disclose that Walker, Timson, and Handy were not just the principals of the registered investment adviser but also its control persons.

SignalPoint Asset Management is the investment adviser to over 1,800 accounts. Asset under management is about $526 million.

Breach of Fiduciary Duty
a “fiduciary” has a legal obligation to act in another’s best interests. The duty is typically one that is performed in good faith and the fiduciary makes the clients’ interests the first priority over his/her own. Part of this is disclosing to a customer any conflicts of interest, especially when making an investment recommendation that will benefit the fiduciary. Examples of other duties that should be honored including: providing complete and fair disclosure of important facts, and exercising professional judgment, skill, care, and diligence.

At Shepherd Smith Edwards and Kantas, LTD LLP, our securities lawyers represent securities claims for investors who have lost money because a breach of fiduciary duty occurred. Contact our investment adviser fraud attorneys today.

SEC fines Missouri RIA for breach of fiduciary duty, InvestmentNews, July 3, 2014


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

SEC Charges Total Wealth Management With Securities Fraud, Receiving Undisclosed Kickbacks, Stockbroker Fraud Blog, April 18, 2014

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud, Institutional Investor Securities Blog, June 4, 2014

July 3, 2014

FINRA Official Says Variable Annuity Sales Top Investor Complaint List

According to Financial Industry Regulatory Authority chief risk officer Carlo di Florio, variable annuities continue to among the products named the most in customer complaints. He spoke at the Insured Retirement Institute’s Government Legal & Regulatory conference in D.C. on Monday.

Di Florio, who is also the head of strategy at the self-regulatory agency, said that some variable annuities are taking on features similar to complex structured products. This includes caps that restrict how high returns can reach during market rallies and buffers that place a limit on how much annuities are allowed to fall when the market drops.

Annuities that have caps and buffers are different from the more conventional annuities in that the two make a product even more complex by varying market volatility exposure. FINRA wants to make sure that investors know what they are getting involved in when they purchase any kind of variable annuity.

Complaints by investors have mentioned dissatisfaction with sales practices, disclosures, and surrender rules. When asked by a conference participant why FINRA hasn’t established a rule on when variable annuity weight is too much in a portfolio, di Florio said that “facts-and circumstances {review}” was a factor and a client’s goals also play a role. Di Florio said that it was essential that brokers discuss all of this with a client before placing the customer’s money into a complex variable annuity.

Di Florio said that FINRA is also monitoring other complex products, including exchange-traded funds and interest-rate sensitive products.

Variable Annuities
While variable annuities can be good investments, there are risks and costs involved. Variable annuities may be accompanied with high expenses, including an upfront fee, a surrender charge if you want your initial investment back, an annual rate for mortality and risk, a contract fee, an administration fee, and investment fees. All of this, along with inflation, can cut into income from the annuities.

It is important that investors are apprised of all of the risks and costs involved so that they know what you are getting involved in. If you think you may have been the victim of variable annuity fraud, contact our securities fraud lawyers today.

Variable annuity sales raising concern: Finra official, Investment News, June 30, 2014

Variable Annuities: What You Should Know, SEC

Variable Annuities a Top Source of Customer Complaints: FINRA, Think Advisor, June 30, 2014


More Blog Posts:
Variable Annuities Scam Sought to Profit From Terminally Ill Patients’ Deaths, Says SEC, Stockbroker Fraud Blog, March 15, 2014


More Blog Posts:
Insurance Companies Experiencing Sellers’ Regret Over Variable Annuities, Stockbroker Fraud Blog, July 15, 2013

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

SEC Focuses More Attention On Accounting Fraud, Variable Annuities, & Market-Maker Risk, Stockbroker Fraud Blog, June 26, 2013

July 2, 2014

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law

Investment firms OppenheimerFunds Inc. and Franklin Templeton (BEN) have filed a lawsuit claiming that Puerto Rico’s new law, which lets certain government agencies restructure their debt, violates the constitution. Lawmakers in Puerto Rico approved the bill last month.

Aside from its power agencies, the entities that would be allowed to restructure the debt under the new law include Puerto Rico’s water and transportation agencies. Collectively, all of the agencies have about $19.4 billion in outstanding bonds. The Act does not have provisions for restructuring tax-backed bonds and general-obligation bonds.

The two fund managers together hold about $1.7 billion in Puerto Rico Electric Power Authority debt. They want the legislation, known as the Public Corporations Debt Enforcement and Recovery Act, blocked.

Puerto Rico’s Government Development Bank is backing the new law. The Bank said that the U.S. territory has the right to pass its own debt enforcement legislation over “areas not covered by federal law.” Franklin Templeton and Oppenheimer Funds, however, are contending that the new act is a bankruptcy law, which “treads” on Congress’s sole authority to enact this type of law.

The plaintiffs also claim that the legislation allows for the unconstitutional taking of property, since it would let the Puerto Rico Electric Power Authority, among others, take the collateral securing the bonds. Franklin Templeton and Oppenheimer Funds say they are standing up for bondholder rights and their shareholders with their lawsuit.

After the law was approved short-dated bonds that the Puerto Rican power company issued dropped almost 40% in value. Currently, the Power Authority ‘s outstanding debt is approximately $8.8 billion. These bonds, and the bond debt of other Puerto Rican agencies, are separate from the territory’s’ general obligation debt. In total, the island owes about $73 billion in debt.

Also, in the wake of the bill’s passing, Moody’s Investor Service (“Moody’s”) lowered its rating of $14.4 billion of Puerto Rico’s general-obligation debt. Moody’s reduced these general obligations bonds’ rating by three notches, going from B2 to Ba2. This significant ratings change embeds Puerto Rico’s bonds even further in junk territory.

Moody’s also downgraded bonds that the commonwealth’s sales-tax revenue is backing from Baa1 to Ba3, as well reduced ratings on the Puerto Rico Electric Power Authority, which is now a Caa2 from a Ba3. The credit rating agency said that letting the island restructure bonds put out by public entities could cause the bondholders to lose money.

Following the downgrade, some of the general obligation bond prices dropped. Another ratings agency, Standard & Poor’s Rating Services (“S&P”), has placed Puerto Rico ratings on its CreditWatch. It too is thinking of making a ratings downgraded. However, S&P still rates Puerto Rico’s sales-tax-backed bonds investment grade with an AA+.

Puerto Rico Muni Bond Fraud Lawyers
Our Puerto Rico bond fraud lawyers work with investors who have lost money in either Puerto Rico bonds or bond funds with exposure to Puerto Rico debt (including UBS’s proprietary closed-end bond funds sold only to Puerto Rico residents). Shepherd Smith Edwards and Kantas, LTD LLP currently represents dozens of investors in the U.S. and Puerto Rico. Contact our securities law firm today for a free, no obligation consultation.


Moody's Cuts Puerto Rico Rating Three Notches, The Wall Street Journal, July 1, 2014

U.S. bond funds sue Puerto Rico, worried about bankruptcy threat, Reuters, June 30, 2014

Muni bond funds face ongoing Puerto Rican woes, InvestmentNews, June 30, 2014

Public Corporations Debt Enforcement and Recovery Act (PDF)


More Blog Posts:

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales, Stockbroker Fraud Blog, June 21, 2014

FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor, Stockbroker Fraud Blog, April 27, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

July 1, 2014

Broker Fraud: Ex-Investors Capital Rep. is Indicted in Ponzi Scheme, Credit Suisse Sues Two Ex-Brokers Over Client Data Theft, and SEC Files More Insider Trading in IBM-SPSS Acquisition

Ex-Investors Capital Rep. Charged in $2.5M Ponzi Scam
Patricia S. Miller, a former Investors Capital Corp. representative, has been indicted on charges that she ran a $2.5 million investment fraud. She is accused of promising clients high yields for placing funds in “investment clubs.” Miller allegedly took this money and either gambled it away or used it to pay for her own spending.

According to prosecutors in Massachusetts, alleged fraud took place from 2002 through May 2014. Investors Capital fired Miller last month. Her BrokerCheck Report notes that the independent broker-dealer let her go because she allegedly misappropriated funds, borrowed client money, generated false documents, and engaged in “fraudulent investment activity.” Miller is charged with five counts of wire fraud.

Credit Suisse Sues Former Advisers For Allegedly Stealing Client Data
Credit Suisse Securities (CS) is suing John Delehanty and David Starker for violating their non-solicitation agreements when leaving the firm. The firm is accusing the men of taking client lists and sending confidential information to their personal accounts before going to work with J.P. Morgan Securities (JPM). The firm has also filed a claim with FINRA seeking damages.

In dispute was a contact list consisting of about 3,00 names that Starker sent from his Credit Suisse work e-mail account to his personal one. The list included notes about prospective clients. Delehanty is also accused of sending confidential client information to his personal e-mail account.

Under the Protocol for Broker Recruiting, which has been signed by about 1,100 brokerage firms, a broker is not subject to litigation when recruited to another firm as long as they bring just a spreadsheet that contains only certain client data, such as phone numbers and names. Anything more is considered a violation. However, this can be undone if the broker gives back the information when resigning. Credit Suisse said that Delehanty and Starker did not answer request by the firm to follow this protocol.

SEC Files More Insider Trading Charges in IBM-SPSS Acquisition
The Securities and Exchange Commission is charging two more brokers with insider trading prior to IBM’s acquisition of SPSS Inc. in 2009. Ex-representatives Daryl M. Payton and Benjamin Durant III allegedly traded illegally on the information that the deal was going to happen. They got the tip from another broker, Thomas C. Conrad.

Now, the regulator wants ill-gotten gains of about $300,000 returned, along with financial penalties, interest, and permanent injunctions. The U.S. Attorney’s Office for the Southern District of New York has filed a parallel action against the two men.

The SEC had previously filed insider trading charges against Conradt and David J. Weishaus, also a broker and tippee. They got the information from Conradt’s roommate, research analyst Trent Martin, who received the data from an attorney who worked on the deal. The three men have settled with the SEC. They entered guilty pleas in their criminal cases.

SEC Charges Former Brokers with Trading Ahead of IBM-SPSS Acquisition, SEC, June 25, 2014

Ex-Credit Suisse brokers sued over alleged theft of client data, InvestmentNews, June 30, 2014

Advisor Indicted In Long-Running Ponzi Scheme, FA-Mag, June 30, 2014


More Blog Posts:
Ponzi Scams: FINRA Bars Ex-Raymond James Broker Over $3M Ponzi Scam, Expels Success Trade Securities, Inc. for Bilking NFL and NBA Players, Stockbroker Fraud Blog, June 27, 2014

BNP Pleads Guilty to Criminal Charges Over Sanctions Violations, Pays $8.8B Fine, Institutional Investor Securities Blog, June 30, 2014

Credit Suisse Admits Wrongdoing and Will Pay $196M to Settle SEC Charges That It Provided Unregistered Services to US Customers, Stockbroker Fraud, February 22, 2014