June 29, 2009

Evergreen to Pay Over $40 Million to Settle SEC and Massachusetts Securities Division Charges that Funds were Overvalued

Evergreen Investment Management Co., which distributes Evergreen mutual funds and related entities, has settled Securities and Exchange Commission charges that the Ultra Short Opportunities Fund was overvalued and that the problem was only disclosed (in a selective manner) to certain shareholders.

To settle the allegations, the distributor will pay over $40 million.The SEC says the settlement amount is a reflection of the respondents cooperation and “remedial acts.” $33 million will compensate fund shareholders, $3 million is for the disgorgement of ill-gotten gains, and $4 million is for penalties.

Also, Evergreen Investment Services, a broker-dealer and distributor, and Evergreen Investment Management Co. LLC, an investment adviser, say they will pay $1 million to settle similar charges made by the Massachusetts Securities Division. The state of Massachusetts is mandating that the firms hire an independent compliance consultant to evaluate internal procedures for valuing portfolio securities and preventing the misuse of nonpublic, material data. The consultant will present these findings to the Massachusetts Securities Division and the Evergreen funds’ board of trustees. William Galvin, who is the Massachusetts Secretary of the Commonwealth, says the orders should remind the mutual fund industry that proper fund supervision is necessary.

For 2007 and 2008, Ultra Short Fun was regularly regarded as a high performer among its peers. The defendants are accused of inflating the fund’s value by up to 17%, in part due to a failure to factor in information about MBS. The fund’s portfolio management team is also accused of holding back negative data from the Evergreen committee in charge of the valuations. The SEC says the fund would have fallen closer to the bottom if it had been ranked correctly.

In an attempt to deal with the valuation issues, the respondents repriced certain holdings and told only certain shareholders about the repricings and of the possibility that more were likely to come. This gave the parties that were informed of the repricings an advantage over the shareholders that did not know there was an issue. The shareholders that were given this information were able to redeem their investments to avoid more losses. This was "to the detriment" of those that were uninformed of the repricings and stayed invested. Also, new purchasers ended up paying more than the shares actual value.

After the repricings occurred, the fund experienced significant redemptions and closed in June 2008.

Related Web Resources:
SEC Charges Evergreen for Overvaluing Holdings in Mortgage-Backed Securities and Making Selective Disclosures to Investors, SEC.gov, June 8, 2009

Regulators: Fund firm hid losses, Boston.com, June 9, 2009

Continue reading "Evergreen to Pay Over $40 Million to Settle SEC and Massachusetts Securities Division Charges that Funds were Overvalued" »

June 25, 2009

Former Stifel Nicolaus and A.G. Edwards Stockbroker Pleads Guilty to Mail Fraud

A former stockbroker that used to work for A.G. Edwards and Stifel Nicolaus has pleaded guilty to mail fraud. Neil R. Harrison, could spend up to 27 months behind bars—although his agreement to repay $85,739, cooperate with police, and lack of a criminal record could help him receive less than the 21-month minimum sentence. Harrison is accused of defrauding clients at two Illinois firms. He solicited investors to place their money in commodities futures and the gold market but instead used their funds for gambling. The mail fraud charge is based on a wire transfer confirmation mailed to a Stifel client.

While this may be Harrison’s first official brush with the law, he was let go from A.G. Edwards in 2005 for failing to cooperate with a probe regarding his efforts to get a loan from a client. A.G. Edwards filed the necessary securities documents regarding his firing. Even though Stifel Nicolaus was aware of Harrison’s background, the broker-dealer still hired him—with a special supervised agreement—just 10 days after A.G. Edwards terminated him.

Stifel would eventually fire the stockbroker in 2008 for “unethical and professional misconduct.” The broker-dealer accused Harrison of soliciting and getting money and personal loans from clients for fraudulent investments.

Per Harrison’s plea agreement: The ex-stockbroker persuaded clients to sign paperwork to open margin accounts without making sure that they had a good understanding of what these accounts were or the interest rates associated with them. He would then direct his broker-dealer to issue wire transfers to the investors’ checking accounts to replace money that was issued to him for the bogus investments. He also made material misrepresentations to clients and prospective investors. He told them they could make a lot of money but they would have to go outside the traditional brokerage account for diversity when making investments.

At least five investors were defrauded.

Related Web Resources:
Ex-stockbroker pleads guilty to mail fraud, The Telegraph, June 23, 2009

Former broker accused of mail fraud, The Telegraph, May 21, 2009

Illinois Securities Department

Continue reading "Former Stifel Nicolaus and A.G. Edwards Stockbroker Pleads Guilty to Mail Fraud" »

June 24, 2009

SEC Securities Fraud Lawsuit Accuses Beverly Hills Money Manager Stanley Chais of Leading Investors Into Madoff Ponzi Scam

The Securities and Exchange Commission is suing Beverly Hills money manager Stanley Chais for securities fraud related to his alleged involvement in the Bernard Madoff Ponzi scam. The SEC alleges that Chais and four others worked collectively to raise billions of dollars from investors to fund the $65 billion scheme—the largest Ponzi scam in US history.

Chais investors’ accounts were worth almost $1 billion when the Ponzi scam finally collapsed. Chais, 82, is accused of collecting almost $270 million in investor fees. The Beverly Hills money manager, his family members, and associated entities are also accused of withdrawing almost $546 million in ill-gotten profits. The SEC is seeking financial penalties and the return of ill-gotten gains to investors.

The SEC complaint contends that Chais portrayed himself to his clients as an “investing wizard” and did not let them know that Madoff was actually in charge. The SEC says that Chais either knew that Madoff was running a Ponzi scam or was reckless for not knowing about the scheme. For example, Madoff never reported even one loss on thousands of “purported” stock trades on Chase’ accounts from 1999 to 2008. This alone should have been an indicator that Madoff’s reports were bogus.

Many of Chais’s investors have suffered as a result of the money manager’s alleged misconduct. For instance, the Los Angeles Times reports that Mark Peel, who is part owner and executive chef of Campanile, claims he lost $6 million from investments that Chais is accused of secretly making with Madoff. Peel had to sell his Hancock Park home because of the investment losses he sustained and almost all of his children lost their college funds.

Chais’s attorney denies that his client did anything wrong, did not know that Madoff was bilking investors, and was also a victim of the Madoff scam. Chais, 82, had over 40 accounts with Madoff for himself, family members, and other entities.

In another Madoff-related securities fraud case, the SEC has also filed a lawsuit against Cohmad Securities Corp, Chairman Maurice J. Cohn, executive Robert M. Jaffe, and COO Marcia B. Cohn over allegations that they ignored evidence that Madoff was engaged in a Ponzi scam and actively marketing opportunities with him.

Related Web Resources:
Beverly Hills money manager Stanley Chais accused of fraud, Los Angeles Times, June 23, 2009

Stanley Chais Accused Of Fraud - Raised Billions For The Bernie Madoff Ponzi Scheme, The Post Chronicle, June 22, 2009

Read the SEC Complaint (PDF)

Continue reading "SEC Securities Fraud Lawsuit Accuses Beverly Hills Money Manager Stanley Chais of Leading Investors Into Madoff Ponzi Scam " »

June 22, 2009

Raymond James and RBC Capital Markets Fined $1.4 Million in Total Over Improper Stock Lending Activities

The Financial Industry Regulatory Authority says that RBC Capital Markets Corp., Raymond James & Associates, Inc., and an RBCCMC head trader have settled charges over alleged broker misconduct connected to stock loan improprieties. RJF is to pay a $1 million fine, while RBC Capital Markets will pay $400,000.

Meantime, RBCCMC Stock Loan Department head trader Benedict Patrick Tommasino has agreed to a $30,000 fine, a 20-month suspension from working for a securities firm, and another two-month suspension from acting in a principal role.

According to FINRA, RJF allegedly executed payments that were improper and unjustified to finder firms even though the companies didn’t provide services to locate the securities and they weren’t involved in the stock loan transactions for which they were receiving payments. For example, in March and 2004, Raymond James paid two finder firms for 11 transactions even though they didn’t perform a service. A Raymond James loan trader’s son was employed at one of the finder firms.

FINRA is also accusing the two broker-dealers of allegedly letting Dennis Palmeri, Sr. perform stock loan functions. Only registered individuals are allowed to perform this role.

Palmeri is a non-registered person that had been barred from the securities industry. He was previously convicted of federal securities law violations in 1994. Following his conviction, the SEC barred him from working for an investment advisor, a broker dealer, or an investment company. While Palmeri can act as a non-registered finder, he cannot perform roles requiring that the individual be registered.

Susan Merrill, the FINRA enforcement chief, says the two firms exposed the market to an individual that was non-registered, unqualified, unsupervised, and was not allowed to work in the securities industry. FINRA also claims that the two broker-dealers failed to reasonably supervise their Stock Loan Departments. By agreeing to settle, Tommasino and the two broker-dealers are not denying or admitting misconduct.

Related Web Resources:
FINRA Fines Raymond James, RBC Capital Markets Corporation, Stock Loan Trader for Improper Stock Loan Practices, FINRA, June 17, 2009

FINRA fines Raymond James, RBC Capital Markets, Forbes, June 17, 2009

Continue reading "Raymond James and RBC Capital Markets Fined $1.4 Million in Total Over Improper Stock Lending Activities" »

June 18, 2009

JP Turner & Co., Legent Clearing, LLC, Park Financial Group Inc. & Four Individuals to Pay More than $1.25 Million in FINRA Fines for Alleged Penny Stock Violations

The Financial Industry Regulatory Authority is accusing Park Financial Group Inc., JP Turner & Co., and Legent Clearing LLC of inadequate anti-money laundering procedures. The broker-dealers and four persons connected to them have consented to pay more than $1.25 million for failing to detect and report suspect penny-stock transactions.

JP Turner & Co. will pay $525,000, Park Financial will pay $400,000, and Legent Clearing will pay $350,000. By agreeing to pay the fines, the broker-dealers are not admitting or denying wrongdoing. Also:

• Park Financial equity trader David Farber received a $30,000 fine and a 30-day suspension.
• JP Turner’s ex-AML compliance officer S. Cheryl Bauman received a $30,000 fine and a suspension barring her for 18 months from acting as a securities firm principal.
• Former JP Turner branch manager Robert Meyer received a 1-month suspension from acting as a principal. He also must pay a $5,000 fine.
• JP Turner equity trader John McFarland and former Park Financial CEO and AML compliance officer Gordon Charles Cantley have agreed to be permanently barred from the industry.

According to Susan Merrill, FINRA’s enforcement chief, the firms allowed suspicious trades to be processed even though there were notable red flags. Suspect trades included the liquidations and deposits of penny stocks connected to parties with histories of stock manipulation or securities fraud.

FINRA claims the broker-dealers neglected to set up and put into action proper procedures to identify and report suspect trading involving low-priced securities and that this failure resulted in the risk that the securities could be used by “unscrupulous” parties,” including those involved in securities fraud, money laundering, or market manipulation.

For example, FINRA says although Park Financial had clients with histories of securities-related violations, the broker-dealer failed to note the “red flags” that might indicate the customers could be involved in risky activities, including depositing millions of low-priced securities shares and making millions of dollars by liquidating the shares and sending the proceeds to bank accounts in the US and offshore.

FINRA is accusing JP Turner of neglecting to identify, probe, and file Suspicious Activity Reports over a number of possibly suspect transactions, such as those involving numerous accounts under one name or clients using multiple names for no business-related reason. FINRA contends that Legent Clearing has an AML program that doesn’t consider the company’s business risks and fails to properly consider money laundering risks presented by some of its correspondent firms that had extensive disciplinary histories and were engaged in penny stock liquidations and other high-risk business activities.

Related Web Resources:
FINRA Fines Three Firms Over $1.25 Million for Failing to Detect, Investigate and Report Suspicious Transactions in Penny Stocks, FINRA, June 4, 2009

Penny Stocks, SOS.Mos.gov

Continue reading "JP Turner & Co., Legent Clearing, LLC, Park Financial Group Inc. & Four Individuals to Pay More than $1.25 Million in FINRA Fines for Alleged Penny Stock Violations" »

June 15, 2009

Ex-Morgan Keegan Adviser Pleads Guilty to Stealing from Senior Investor

A former Morgan Keegan adviser has pleaded guilty to charges that he stole from an elderly investor. Charges included investment adviser fraud and making and subscribing a bogus tax return. Now, Harold “Hal” Blondeau could be facing up to eight years in prison. He also may have to pay restitution to his victim. Martha B. Capps is now 83.

Blondeau received power of attorney over the senior investor’s accounts as she was experiencing the beginning stages of Alzheimer’s. She wanted him to keep her inheritance away from her husband. Large sums were taken out of Capps’ accounts.

The former Morgan Keegan adviser is accused of using some of the stolen funds to pay for personal expenses, including a beach house and $24,000 in wine. The beach house, purchased in Capps’ name, would have gone to Blondeau upon her death.

Almost $3 million was taken from the account of Martha B Capps. In 2007, attorneys for the elderly woman filed a lawsuit against Blondeau, his son Neal Knight, and Knight’s two daughters. The complaint contends that the group stole money from Capps. Blondeau and Knight are accused of establishing a non-profit foundation in the name of Capps’ father and donating the money to different organizations to enhance their own images. Capps’ money was also used for the college education of the two men’s children.

In 2007, Blondeau was let go from Morgan Keegan because he failed to disclose a loan that was obtained from a client. To date, Blondeau is the only one out of the four civil lawsuit defendants that is facing criminal charges in federal court.

Taking advantage of an elderly investor is a crime and can be grounds for an investor fraud lawsuit. Unfortunately, senior investors—especially those that have inherited money or have retirement savings—are easy targets of investor fraud.

Related Web Resources:
Raleigh investment adviser pleads guilty to fraud, Triangle Business Journal, June 11, 2009

Financial advisor admits to stealing from client, News & Observer, June 11, 2009

Elderly heir claims fraud by advisers, News & Observer, October 13, 2007

Fraud Target: Senior Citizens, FBI

Senior Investment Fraud News & Alerts, NASAA

Continue reading "Ex-Morgan Keegan Adviser Pleads Guilty to Stealing from Senior Investor" »

June 14, 2009

Texas Securities Fraud: A Houston Attorney and a Texas A & M Professor Charged with Investment Fraud

The US Securities and Exchange Commission and the Commodity Futures Trading Commission are accusing Houston attorney and accountant Daniel Petroski and Texas A & M Professor Robert Watson of using forged bank records to engage in investor fraud. On May 21, the US District Court for the Southern District of Texas froze the assets of the two men and of two firms associated with the alleged misconduct.

According to the two agencies, Petroski and Watson raised over $19 million from about 65 investors, while claiming they would use a foreign-currency trading software, “Alpha One,” that they said belonged to their company, Private FX Global One Ltd. Watson’s “deal clearing company, “36 Holdings,” was also to participate in the investing.

The SEC and the CFTC contend that the two men engaged in misrepresentation when they made it appear as if their foreign exchange trading business never had a losing month, achieved a yearly return of over 23%, and that their venture had millions of dollars in Swiss and US bank accounts. The two agencies are also accusing the two men of generating bogus records for investigators, including records indicating that 36 Holdings had an account with Deutsche Bank where Global One earned over $2 million this year by trading foreign currencies. In fact, 36 Holdings does not have a Deutsche Bank account.

In addition, the SEC’s complaint accuses the two men of putting, at maximum, 33% of their proceeds in a Swiss bank before transferring some $5 million to a Houston bank—even though they told investors that the amount of foreign currency and other assets was closer to 80%. The defendants are also accused of giving their own employees bogus Swiss bank statements and making false claims that 36 Holdings had nearly $70 million deposited there.

The SEC accuses the defendants of violating the Securities and Exchange Act of 1934’s Section 10(b), Rule 10b-5 thereunder, and the Securities and Exchange Commission Act of 1933’s Section 17(a). The CFTC and the SEC are seeking a preliminary injunction, final judgment from permanent enjoinment of future violations, disgorgement with interest, and fines.

Related Web Resources:

Read the SEC Complaint (PDF)

Continue reading "Texas Securities Fraud: A Houston Attorney and a Texas A & M Professor Charged with Investment Fraud" »

June 12, 2009

Brokers Renew Push for Investors to Buy Structured Products

Brokers are once again getting behind structured products, hoping that investors will bite. While sales of structured products during 2008’s 4th quarter—at $5.8 billion—was down 75% from the year’s 1st quarter, sales are starting to go up. One reason for this is that certain structured products, such as return-enhanced notes and principal protected notes, are considered safer than reverse convertibles, which led to some of the worst losses for investor.

Ideally, structured products are supposed to provide sturdy profits, while limiting losses, and brokers like them because the commissions are high. However, representatives must still account for why these products haven’t delivered the way investors were told they would. Many investors that bought structured products from Lehman Brothers, such as the Lehman principal-protected notes, incurred some large losses. Some of these notes were bought through a UBS Financial Services office in Houston, Texas.

Until the bear market struck, structured products did incredibly well, and sales almost doubled to $105 billion in 2007 before dropping to $70 billion last year when structured products, collateralized debt loans, and credit default swaps played a huge role in the global financial collapse.

Reverse convertibles are considered the most high-risk structured product—short-term bonds with a large interest that can seriously hurt investors if the underlying stock drops dramatically. Investors can end up with shares with a value far below the principal. For example, 78-year-old Dominic Annino says he invested $300,000 in IndyMac shares and JetBlue shares and lost money after the stocks fell. He filed an arbitration complaint with FINRA and claims that the broker that sold him the Wells Fargo reverse convertibles never fully explained to him what he was getting himself into. Still, brokers are hoping that last year’s stock market fiasco won’t discourage investors from trying structured products again.

Twice Shy On Structured Products? Wall Street Journal Online, May 28, 2009

Understanding Structured Products, Investopedia

Continue reading "Brokers Renew Push for Investors to Buy Structured Products" »

June 11, 2009

To The SEC: Why It Is Necessary to Change Public Reporting Requirements on Stockbrokers

Recently, Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd wrote a letter to the Securities and Exchange Commission voicing his support for needed changes to the public reporting requirements on stockbrokers. His letter was published on the SEC's Web site and included a number of key facts and statistics, including:
·      The # of registered US brokers: Over 500,000 brokers
· The # of investors: More than 50 million, and nearly all of them have recently lost money on their investments
· The # of US securities fraud claims filed in arbitration: About 5,000 claims
·      The # of investors that file for recovery: 1 out of every 10,000 investors
·      The # of investors that contact Shepherd Smith Edwards & Kantas LTD LLP each year about a possible stockbroker fraud case: About 5,000 investors
·      The # of stockbroker fraud cases our securities fraud law firm takes on each year: About 150 cases
Why public reporting requirements on stockbrokers must change:
 ·      Currently, investors with complaints must write a letter to the investment firm.
·      Yet these investors often prejudice their potential case without speaking to a securities fraud lawyer first while dealing with the firm’s attorney on their own.
·      Many investment firms take months to respond to these letters. In the meantime, the time that an investor has to file a securities fraud lawsuit or an arbitration claim is running out.
·      When fulfilling reporting requirements, investment firms rely on skilled wordplay to avoid reporting about certain details, such as the identity of the broker involved in the potential case.
·      Firms have been known to disregard reporting requirements, and in many instances, regulators allow them to do so without imposing consequences.
Attorney Shepherd notes that while securities industry spokespersons often point to “rogue brokers” —and not the securities firms—as prime culprits of stockbroker fraud, the industry seems bent on preventing the public and regulators from identifying these “few bad apples.” He is also astounded at how much in “angst” the securities industry is in about allowing the public a “look under the curtain.”
Mr. Shepherd says that the truth is that investor complaints to investment firms are seldom reported. Rather, these complaints are “noted,” while the firms get to publish the “spin” that they believe will exonerate them in the readers’ eyes.
Attorney Shepherd is calling on the SEC to do its job, which is to protect investors.

Related Web Resources:
Read Mr. Shepherd's letter to the SEC

US Securities and Exchange Commission

Shepherd Smith Edwards & Kantas, LLP

June 9, 2009

Morgan Keegan, Charles Schwab and Others Fight as Wells Fargo Unit Settles Claims of Misrepresented Securities in Short Term Bond Funds

Evergreen Investment Management Company, a Wells Fargo unit, has agreed to a $40 million settlement with federal and state regulators over allegations that it misrepresented securities in short-term bond funds. The settlement could be a sign that other fund providers, including Morgan Keegan, Charles Schwab Corp., and Fidelity Investments, may face similar lawsuits. Already bond providers are facing securities fraud lawsuits and arbitration claims from clients that experienced heavy losses from investing in debts that were either high risk or became illiquid.

The Massachusetts Securities Division and the Securities and Exchange Commission had accused Evergreen and one of its affiliates of inflating the value of its Ultra Short Opportunities Fund by up to 17%. The SEC says that this inflated value allowed the fund in 2007 and 2008 to be ranked high compared to other peer funds, when its true value should have placed it closer to the bottom of its class. At the time of the alleged violations, Evergreen was a Wachovia Corp. subsidiary.

With the housing crisis getting worse, Evergreen is accused of not using the information it had access to about mortgage-backed securities when engaging in the valuation process. Evergreen dealt with the fund by adjusting the prices on specific holdings, but only notified a select number of investors about the reasons for the re-pricings, as well as the possibility of adjustments in the future.

The investors that were given this information managed to leave the fund before their shares’ value went down even more. However, the other shareholders that did not receive the preferential information were left at a disadvantage. In June 2008, Evergreen closed the Ultra Short Fund, which, at the time, had $403 million in assets.

By agreeing to settle, Evergreen is not admitting to or disagreeing with the SEC’s findings. As part of the agreement, the Wells Fargo unit will pay $33 million to fund shareholders, $3 million in disgorgement of ill-gotten gains, a $4 million SEC penalty, and $1 million to Massachusetts.

Evergreen settles state, US charges for $40 mln, Reuters, June 8, 2009

Settlement in Mutual Fund Case, NY Times, June 8, 2009

Continue reading "Morgan Keegan, Charles Schwab and Others Fight as Wells Fargo Unit Settles Claims of Misrepresented Securities in Short Term Bond Funds " »

June 4, 2009

UBS Financial Services Misled Investors about Lehman Brothers Securities, Says New Hampshire Regulators

According to New Hampshire securities regulators, UBS Financial Services Inc., a unit of UBS AG, misled investors regarding complex securities that were issued by Lehman Brothers before the latter filed for bankruptcy protection in 2008. The Bureau of Securities Regulation says investors were misled when the representatives for the UBS unit told them that the securities were safe, while failing to let them know that Lehman Brothers was in trouble. The state regulators are also accusing UBS of failing to properly supervise the employees that sold the structured products and of engaging in improper sales practices.

Some 42 New Hampshire investors could lose more than $2.5 million from securities underwritten by Lehman Brothers. State regulators have filed a cease-and-desist order against UBS and they are seeking an unspecified sum from the financial firm.

UBS disputes the Bureau of Securities Regulation's allegations. The investment bank claims it didn’t do anything improper when it sold the Lehman products to UBS clients and that its employees engaged in the proper sales practices, followed all regulatory guidelines, abided by client disclosure guidelines, as well as followed firm procedures and industry regulations. The investment bank contends that any losses experienced by investors occurred because Lehman Brothers failed unexpectedly. UBS vows to combat the New Hampshire regulators' allegations.

Already, a number of investors have filed claims against Lehman Brothers. Last year, with $613 billion in debt, Lehman filed the largest bankruptcy in US history. Globally, the collapse of Lehman Brothers resulted in investor losses worth billions of dollars. Many clients have blamed lenders for failing to warn them that Lehman was in trouble.

Meantime, Credit Suisse has offered to pay $140.7 million to compensate more than 3,700 of its retail clients for their Lehman financial products that now have no value.

Securities Fraud Attorney Sam Edwards, partner of the law firm of Shepherd Smith Edwards & Kantas LTD LLP says: "While many smaller investors into Auction Rate Securities have now been paid, our firm is representing a number of larger investors, many of whom have millions of dollars that have been frozen for more than a year. Many of these are business which have been crippled by the loss of liquidity of these funds and are seeking resulting business losses."

Related Web Resources:
UBS says will fight New Hampshire Lehman case, Reuters, June 4, 2009

UBS Sold Unsuitable Lehman Securities, New Hampshire Alleges, Bloomberg.com, June 4, 2009

Bureau of Securities Regulation

Continue reading "UBS Financial Services Misled Investors about Lehman Brothers Securities, Says New Hampshire Regulators" »

June 3, 2009

FINRA Orders RD Capital Group and Its President to Pay $1 Million for Fraudulent STRIPS Markups

The Financial Industry Regulatory Authority says that RD Capital Group, based in Puerto Rico, and its president Ramon Luis Dominguez have agreed to pay $950,000 in restitution plus interest to three clients over fraudulent and excessive markups involving the sale of U.S. Treasury Separate Trading of Registered Interest and Principal Securities, also known as STRIPS. The firm and Dominguez are also to pay a $50,000 fine, while the latter was suspended for 30 days as a principal and in every capacity for 5 business days.

According to FINRA, RD Capital and Dominguez sold more than $34 million in US treasury STRIPS to three clients between August and August 2005. They made the sale while charging $1,289,727 in total markups. However, FINRA says that Dominguez neglected to tell the clients how much of a markup they got—from 3.5 – 6.2%—and that these markups were fraudulent and too much because they were more than what the market conditions warranted.

STRIPS are zero-coupon securities created from U.S. Treasury bonds by "stripping" the future interest payment oblitations from the final principle payment obligation on those bonds, then selling each of these separately at a discount. FINRA mandates that firms make sure customers are fairly charged for STRIPS transactions, with the cost for effectuating the sale, profit by the dealer or broker and the expertise provided, the total cost of the transaction, the financial product’s availability, the instrument’s yield or price, and other factors taken into consideration.

By agreeing to the terms of the settlement agreement, RD Capital Group and Dominguez are not admitting to or denying wrongdoing.

More about STRIPS:

• STRIPS can be bought or held via government securities dealers and brokers.
• STRIPS cannot be sold or issued directly to an investor.
• An investor receives payment from STRIPS upon maturity.

Related Web Resources:
RD Capital Group and Firm President Ordered to Pay $1 Million in Fines, Restitution for Fraudulent Markups of U.S. Treasury STRIPS, FINRA, May 11, 2009


Continue reading "FINRA Orders RD Capital Group and Its President to Pay $1 Million for Fraudulent STRIPS Markups" »

June 1, 2009

Auction-Rate Securities Probes Lead to More Enforcement Actions and Final Settlements with Investment Firms

Another state has filed an individual enforcement against brokerage and investment banking firm Stifel, Nicolaus, & Co. Inc. On May 7, Virginia’s State Corporation Commission's 's Division of Securities and Retail Franchising filed its civil lawsuit accusing the broker-dealer of making misrepresentations and false statements related to the sale of auction-rate securities, as well as failing to properly supervise its sales representatives that sold ARS to Virginia residents.

Just this March, Missouri Secretary of State Robin Carnahan had sued Stifel, Nicolaus, accusing the investment firm of making misrepresentations to over 100 ARS clients that were told that the securities were liquid, conservative investments. In May, Carnahan reached an agreement with two Bank of America Corp subsidiaries. Under the agreement, the bank would pay a $1.37 million fine and provide relief to numerous Missouri entities that bought $400 million in ARS.

Meantime, state officials are looking into whether TD Ameritrade Holding Corp., Charles Schwab Corp., and E*Trade Financial Corp also engaged in ARS-related violations. Broker-dealers that have reached preliminary settlements with federal and state regulators over their misrepresentation of ARS to clients include Citigroup Inc., Deutsche Bank AG, Credit Suisse Group, JP Morgan Chase & Co, Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., Royal Bank of Canada, Morgan Stanley, Wachovia Corp, and UBS AG.

Per the agreements, settlement parties would repurchase up to $56 billion in illiquid ARS at par from charities, retail investors, and mid-sized and small businesses, as well as pay $522 million in penalties. The agreements with Bank of America, Wachovia, and Citigroup have been finalized.

Last month, the Financial Industry Regulatory Authority announced final settlements reached with NatCity Investments Inc. of Cleveland (a $300,000 fine), M & T Securities Inc. of Buffalo (a $200,000 fine), M & I Financial Advisors Inc. of Milwaukee (a $150,000 fine), and Janney Montgomery Scott LLC of Philadelphia (a $200,00 fine). FINRA also announced that SunTrust Investment Services Inc. and SunTrust Robinson Humphrey Inc. decided not to finalize their preliminary settlements. FINRA is still investigating both firms’ activities pertaining to ARS.

Related Web Resources:
Virginia sues Stifel, Nicolaus & Co. over auction rate securities, St Louis Business Journal, May 15, 2009

FINRA Announces Agreements with Four Additional Firms to Settle Auction Rate Securities Violations, FINRA, May 7, 2009

Carnahan Finalizes $400 Million Bank of America Auction Rate Securities Settlement, Missouri Secretary of State, May 14, 2009

Carnahan sues Stifel Nicolaus over auction rate securities, St Louis Business Journal, March 12, 2009

Continue reading "Auction-Rate Securities Probes Lead to More Enforcement Actions and Final Settlements with Investment Firms" »