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In his continued sweep to target broker-dealers who have hired brokers with disciplinary histories,  Massachusetts Secretary of the Commonwealth William Galvin has filed complaints against two New York-based brokerage firms. The cases were brought against Spartan Capital Securities, broker Dean Kajouras, Revere Securities, and broker Jonathan Eric Altman.

Galvin claims that the agents named in both cases already had “numerous” reports of misconduct on their records and then went on to engage in more wrongful conduct involving older investors. The state regulator contends that the firms knew—or if they didn’t, then they should have—that Kajouras and Altman posed a risk to clients because of their histories. Galvin said that Spartan Capital and Revere Securities had a duty to put the two men on “special heightened supervision.”

Responding to the complaint, Spartan Capital said that it had retained 60 reps with previous disciplinary records between 1/2014 and 6/2016  but only felt the need to put six of them on heightened supervision.

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United Development Funding IV, a Texas real estate investment trust,  said that it has received a Wells Notice from the U.S. Securities and Exchange Commission. This is a sign that the regulator’s staff will likely recommend an enforcement action against the mortgage and development REIT.  There are individuals connected to the company and its adviser that also received SEC Wells notices.

The UDF REITs have been in trouble for months now, ever since Harvest Exchange, a hedge fund that had a short position in UDV IV shares, published a report  about how it believes the company has been run like a Ponzi scam for years. Harvest Exchange claimed that the REIT utilized new capital to pay current investors their distributions, while providing earlier UDF companies hefty liquidity in order to pay earlier investors. The hedge fund noted the earlier companies do not appear to be able to stand on their own without this liquidity from the latest UDF REITs.

UDF IV not only denied the hedge fund’s claims, but also it filed a complaint with the SEC claiming it had been the victim of a securities trading scam in which an investor was building a short stock position to illegally manipulate its shares.

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Jens Pinkernell, a Dallas, Texas-based investment adviser, has been suspended for five years. According to the disciplinary action entered by Texas Securities Commissioner John Morgan, Pinkernell and J. Pinkernell Global Wealth LLC charged two clients excessive and unauthorized fees. Both have since been repaid the $46,915 they were collectively overcharged.

The order also suspends the firm’s investment adviser registration. According to the state, J. Pinkernell Global Wealth overcharged the clients for advisory services.

One client agreed to pay the firm 1.35% of the assets it managed. The client also had a separate fee deal with Pinkernell and a third-party custodian. This arrangement allowed Pinkernell to take out $3K/monthly from the client’s account.

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Ex-UBS Broker is Accused of Inflating Customer’s Account 
The Financial Industry Regulatory Authority has barred Jeffrey Hamilton Howell from the broker-dealer industry. The former broker is accused of giving  a customer bogus weekly account statements that overvalued an account by up to $3M. The alleged misconduct is said to have occurred between 9/2008 and 11/2014.
According to FINRA, Howell sent the customer over 300 Stock Tracking Reports that misstated the client’s portfolio in amounts ranging from $289K to approximately $3M. He purportedly used his personal e-mail to send the customer some of the fake reports. This left UBS with records and books that were not accurate.

According to a Securities and Exchange Commission probe, Forcerank LLC will pay a penalty of $50K for illegally offering complex derivatives products to retail investors. The company did this via mobile phone games referred to as “fantasy sports for stocks.” Forcerank is settling the case without deny or admitting to the findings that it violated sections of the Securities Exchange Act and the Securities Act.

The SEC’s order said that Forcerank’s mobile phone games involved players predicting the order that 10 securities performed against one another.. Players earned points and sometimes even money prizes according to how accurately they predicted the outcomes. The New York-based company earned 10% of entry fees, as well as developed a data set regarding market expectations that it intended to sell to investors, including hedge funds.

The SEC said that the agreements between players and Forcerank were security-based swaps since they provided for a payment contingent upon an event linked to a possible commercial, economic, or financial result and were determined by individual securities’ values. The Commission also claims that Forcerank LLC neglected to submit a registration statement for a security-based swap offering and did not sell contracts using a national securities exchange. Both are required to make sure that full transparency about a security-based swap offering is provided to retail investors and transactions are restricted to platforms that are under the highest regulation.

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A number of hedge funds with Puerto Rico general obligation bonds want a court to stop the U.S. territory from using its sales-tax revenue to pay back other debt. Those hedge funds say that such an action is a violation of the Commonwealth’s constitution. 
To date, the Commonwealth owes nearly $13 billion of general obligation bonds. Under its constitution, Puerto Rico is required to pay back its general obligation bonds before paying off other expenses. According to the plaintiffs, part of the territory’s’ sales tax revenue is supposed to go toward that repayment.
The plaintiffs sued Puerto Rico Governor Alejandro Garcia Padilla to stop the territory from moving money away from bondholders, which they say violates the new federal law concerning Puerto Rico, called PROMESA. The hedge funds submitted their amended complaint last week, in which they added the Puerto Rico Sales Tax Financing Corp., commonly called COFINA, as a defendant. The plaintiffs include entities under the management of Aurelius Capital Management, Covalent Partners, Autonomy Capital, Monarch Alternative Capital, FCO Advisors, and Stone Lion Capital Partners. 

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Texas-Based Brokerage Firm Accused of Inadequate Supervision Involving VA Exchanges
The Financial Industry Regulatory Authority is ordering IMS Securities Inc. to pay a $100K fine. The Texas-based brokerage firm is accused of failures related to its monitoring of variable annuity exchanges. By settling, however, it is not denying or admitting to the allegations. 
According to the self-regulatory authority, the firm exhibited inadequate supervisory procedures for “problematic rates of exchange” in transactions involving variable annuities. FINRA claims that from 7/ 15/13 through 7/8/14, IMS Securities depended on its CFO to review annuity exchanges but did not provide tools or guidance to help look for “problematic rates of exchange.”  The broker-dealer is accused of not probing possibly “problematic patterns” of VA exchanges and not enforcing written supervisory procedures related to consolidated reports. 

A Cetera Financial Group network brokerage firm will pay $1.1M in fines and restitution related to its sale of unit investment trusts. The broker-dealer is Investors Capital Corp.
According to the Financial Industry Regulatory Authority, in 74 clients’ accounts, certain advisers recommended steepener notes, as well as short-term trading of UITs that were not suitable for these investors.  Investors Capital is also accused of not applying discounts when applicable to certain UIT purchases. 
The regulator claims that two representatives at Investors Capital recommended these unsuitable short-term UIT transactions between 6/2010 and 9/2015. 

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 SEC Charges Hawaii-Based Investment Adviser for Misleading Clients and Cherry Picking
The U.S. Securities and Exchange Commission has filed civil charges against Oracle Investment Research, which is based in Hawaii, and its owner Laurence I. Balter. The regulator claims that the investment adviser cherry picked trades that were profitable for his own accounts. He is also accused is  misleading clients, including senior citizens, about the risks involved in the investments he recommended, as well as about the fees they would be charged.
According to the SEC Enforcement Division, Balter and Oracle Investment Research bought options and equities in an omnibus account but waited to distribute the trades until their execution. Then, he would allegedly move the profitable trades into his accounts and the unprofitable ones to the accounts of clients. 

Sethi Petroleum Inc. and its founder Sameer P. Sethi are asking a federal judge to send the U.S. Securities and Exchange Commission’s fraud case against it to trial. Sethi Petroleum is based in Dallas, Texas.  The regulator had sought summary judgment in the Texas lawsuit, which accuses Sethi Petroleum and Sethi of fraudulently selling securities to investors for a drilling project in Montana and the Dakotas.  However, the two of them claim that a jury needs to decide whether the interests that investors are holding are even securities.

The Commission claims that Sethi raised over $4M in a little over a year for the oil venture with the promise of 20 gas and oil wells. 90 investors in nearly 30 states were promised 62.5% net working interest on these wells. They were purportedly told that wells were already making 1 million barrels/month, when Sethi Petroleum actually only held interests in just eight wells—and not all of them were being drilled—in which investors held only .15 to 2.5% interest. These wells produced far less than the 1 million barrels/month touted, claims the regulator. The actual figure was closer to 9,000 to almost 14,000 barrels/month.

The SEC claims that Sethi invested just $950K of investor funds in the wells, while he used $577K to pay himself and his dad. $1.1M of investor funds purportedly went to employees at Sethi Financial Group, with sales employees getting $1.04M. Seth  is accused of lying about his own record of regulatory and criminal violations and his company is accused of lying when it claimed that it was working with Hess Corp. and Mobil Corp.

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