February 28, 2011

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg

According to Bloomberg, Morgan’s Stanley’s network experienced a cyber break-in. The culprits were hackers based in China that broke into Google Inc.’s computers over a year ago. The break-in is documented in e-mails stolen from HBGary Inc, a cyber-security company that works for the investment bank.

Known as the Operation Aurora attacks, the break-ins took place in June 2009 and lasted for about six months. More than 20 companies were hit.

The HBGary emails don’t detail what data might have been stolen from Morgan Stanley or which of its multinational operations were hit. The broker-dealer reportedly considers the details of the cyber attacks confidential. Hacker activist group Anonymous stole the emails.

Morgan Stanley hired HBGary last year because of suspected hacker-linked network breaches that resulted in break-ins into the financial firm’s Internet security system. These attacks were not related to Operation Aurora. Per HBGary emails, the hackers that made those breaches were able to implant software for stealing confidential files and communications.

According to FBI Deputy Assistant Director Steven Chabinsky, hackers have stepped up efforts to obtain information involving mergers and acquisitions. The China-based hacker attacks did not help the growing tensions between China and the United States. Calls were even made for Secretary of State Hillary Clinton to look at Google’s claims about the raids and make her findings available to the public.

Following the cyber attacks, Google stopped censoring search results from Google.cn, its Chinese search engine. Google started shuttering its site following lengthy negotiations with officials in China.

Related Web Resources:
Morgan Stanley Attacked by China-Based Hackers Who Hit Google, Bloomberg, February 28, 2011

Operation Aurora, Techie Buzz, January 15, 2010

HBGary


More Blog Posts:
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011

Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards, Stockbroker Fraud Blog, January 10, 2011


Continue reading "China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg" »

February 27, 2011

Ex-Wextrust Capital COO Pleads Guilty to Role in $255M Affinity Fraud Scam

Joseph Shereshevsky, the ex-COO of Wextrust Capital LLC (Wextrust), has pled guilty to securities fraud, conspiracy and mail fraud charges over his involvement in a $255 million dollar affinity fraud scam. Shereshevsky entered his guilty plea in the U.S. District Court for the Southern District of New York.

He and codefendant Steven Byers, the private equity concern’s ex-CEO and president, diverted millions in investor funds in a Ponzi scam that took place between 2003 and 2008. Many of the approximately 1,200 investment fraud victims belong to the Orthodox Jewish Community.

Shereshevsky and Byers allegedly made misrepresentations by making it appear as if the investors’ money would go toward the purchase and operation of several commercial properties that the federal government had leased. In fact, the properties were never bought and investors’ funds were put to other uses. Byers and Shereshevsky, who are accused of using about $3 million and $9 million raised in a private placement for purposes that weren’t articulated to investors, also allegedly conspired together to “fabricate a story” about why the deal failed.

Byers pleaded guilty to the securities fraud and conspiracy charges against him last year. The two men, Wextrust, and a number of Wextrust entities, including Wextrust Development Group, LLC (WDG), Wextrust Equity Partners, LLC (WEP), Axela Hospitality, LLC (Axela), and Wextrust Securities, LLC (Wextrust Securities), face SEC civil charges over their alleged misconduct related to the affinity fraud scam.

Related Web Resources:
Ex-WexTrust Exec Shereshevsky Pleads Guilty to Fraud, Conspiracy, The Wall Street Journal, February 3, 2011

Financier Admits He Stole From Investors, Courthouse News Services, February 4, 2011


More Stockbroker Fraud Blog Posts:
Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud, Stockbroker Fraud Blog, February 17, 2011

Even as Ponzi Schemers Serve Time Behind Bars, Investors Are Left Coping with Millions in Financial Losses, Stockbroker Fraud Blog, January 25, 2011

CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011

Continue reading "Ex-Wextrust Capital COO Pleads Guilty to Role in $255M Affinity Fraud Scam " »

February 23, 2011

FINRA Fines Bank of America Corp.'s Merrill Lynch $500,000 Over Alleged Oversight Failures of 529 Plans

The Financial Industry Regulatory Authority is ordering Merrill Lynch, a Bank of America Corp. unit, to pay a $500,000 fine over alleged oversight failures involving 529 plans, a college-savings product. Merrill Lynch has also been censured by FINRA in a disciplinary action.

According to the SRO, Merrill Lynch lacked the adequate supervisory procedures necessary to make sure representatives were taking into account clients’ state income-tax benefits when determining whether they should invest in a 529 plan within their state of residence or in one outside the state. Merrill Lynch sold more than $3 billion in 529 plans between June 2002 and February 2007.

With 529 plans, which are considered municipal securities, money can be withdrawn to pay for college expenses without the imposition of federal taxes. Many states offer credits or state tax deductions for residents that invest in a 529 plans in the state. That said, depending on where the investor resides, investing in a plan outside the state can be more beneficial than the benefits received from a 529 plan in the investor’s home state.

However, FINRA contends that the only 529 plan that the financial firm offered and sold nationally was Maine's NextGen College Investing Plan. Merrill Lynch must now send letters to clients who lived in states that offered 529-related tax benefits but ended up opening accounts with Maine's NextGen College Investing Plan through Merrill Lynch. These customers will be given instructions on how to contact the financial firm. If they want to move their funds to a home-state 529 plan, Merrill Lynch has to help, as well as waive a number of fees.

By agreeing to settle with FINRA, Merrill Lynch is not denying or admitting to the SRO’s findings.

Related Web Resources:
Merrill fined $500,000 over college-savings plans, Bloomberg, January 19, 2011

FINRA Censures, Fines Merrill Over Colleges Saving Plans, OnWallStreet, January 19, 2011


More Blog Posts:

Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010

SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses, Stockbroker Fraud Blog, December 3, 2009

Continue reading "FINRA Fines Bank of America Corp.'s Merrill Lynch $500,000 Over Alleged Oversight Failures of 529 Plans " »

February 22, 2011

Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted

In what Investment News is describing as a legal victory for Securities America, a federal judge in Dallas has placed a restraining order on three upcoming FINRA arbitration claims against the broker-dealer and its brokers. The cases will be combined with two class action. This will likely limit Securities’ America’s liability. Ameriprise Financial Inc. owns this brokerage firm.

In the U.S. District Court for the Northern District of Texas, Judge W. Royal Furgeson, Jr. ordered the broker-dealer to set up a $21 million settlement fund for investors. The Texas securities fraud claims involve the allegedly bogus sale of private placement notes from Provident Royalties LLC and Medical Capital Holdings Inc.

A number of plaintiff’s attorneys have expressed dismay at Furgeson’s decision because they are worried that their clients won’t get as much from a class action case. Furgeson, however, says that combining the cases protects the financial recovery for all investors and not just those with FINRA arbitration claims.

Per court documents, Securities America sold approximately $18 million of Provident shares and $700 million of Medical Capital notes. Some 20,000 investors purchased the Medical Capital notes from independent broker-dealers and approximately $2.2 billion was raised from the private placements. Unfortunately, many of the medical receivables believed to be underlying the notes never existed.

Dozens of claimants, including the securities divisions of Massachusetts and Montana, have filed securities claims against Securities America. The financial firm, however, maintains that it did not engage in any wrongdoing when it sold the MediCap notes.

Related Web Resources:
Securities America scores huge victory in Reg D case, Investment News, February 18, 2011

More Stockbroker Fraud Blog Posts:
Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes, Stockbroker Fraud Blog, January 6, 2011

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN), Stockbroker Fraud Blog, February 17, 2010

Securities America & Ameriprise Financial Inc. Sued For Selling Allegedly Faulty Private Settlements, Stockbroker Fraud Blog, November 10, 2009

Continue reading "Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted" »

February 21, 2011

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC

The SEC has obtained an order to freeze the assets of investment adviser Michael Kenwood Capital Management LLC and firm principal Francisco Illarramendi, who is accused of taking at least $53M from a hedge fund and fraudulently transferring investor money from several funds to bank accounts he controlled. Illarramendi then allegedly took that money and placed it in private-equity investments.

The SEC’s securities fraud complaint charges the investment adviser and Illarramendi with violating the 1940 Investment Advisers Act. Rather than using the money to benefit investors, Illarramendi allegedly used the money to his benefit and for the benefit of the entities under his control. The SEC says that it sought emergency relief because it was afraid that Illarramendi was going to make additional, unauthorized investments.

The largest private equity investment Illarramendi made was in an unnamed West Coast nuclear energy company. The SEC says he used $23 million in investor funds. A foreign company pension fund that was his biggest investor contributed 90% of the money in his funds.

In December 2009, Illarramendi allegedly authorized for $3.5 million to be transferred from an account to a Spanish company that makes rolled steel. In May 2010, he approved the transfer of $20 million from the financial firm’s $540 million Short Term Liquidity Fund to pay for shares in a clean-tech manufacturing company. He transferred another $4 million from the short-term fund to purchase shares in a development stage energy company. Another $3.1 million was transferred from different funds to the Spanish steel company.

The SEC is accusing Illarramendi of using clients’ money as if they were his and diverting millions of the investors’ funds. The commission says he breached his responsibilities as an investment adviser and abused clients’ trust. The SEC is seeking disgorgement of ill-gotten gains, permanent injunction, plus prejudgment interest.

Named as relief defendants that received investor money that they weren’t entitled are Michael Kenwood Asset Management LLC, MKEI Solar LP., and Kenwood Energy and Infrastructure LLC. Illarramendi, who is the majority owner of Michael Kenwood Group LLC, managed several hedge funds. One of the hedge funds has held up to $540 million in assets.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager for Fraudulent Misuse of Investor Assets, SEC, January 28, 2011

Read the SEC Complaint (PDF)

1940 Investment Advisers Act

Related Blog Posts:
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3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010

$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling, Stockbroker Fraud Blog, October 5, 2010


Continue reading "Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC" »

February 19, 2011

Ex-Gilford Securities Broker Indicted in International Stock Fraud Scam Involving Pump and Dump of Israeli and Chinese Securities

Gregg M. Berger, an ex-Gilford Securities broker, has been indicted for conspiracy over his alleged involvement in a global pump and dump stock fraud scheme involving thinly traded Israeli and Chinese securities. He is charged with wire fraud and securities fraud. The SEC has also filed related civil securities fraud charges against Berger, a number of other individuals, and three companies. The commission is seeking permanent injunctions, civil penalties, disgorgement, and a penny stock bar against Berger. Federal investors discovered the pump and dump scam following a multi-year probe.

According to prosecutors, between January 2005 and December 2007, Berger allegedly conspired with How Wai Hui, Francis A. Tribble, Scott Bradley, Alan Ralsky, and others to execute a stock scam that resulted in the sale of about 30 million shares of stock. Berger made over $600,000 in commissions and his co-conspirators generated about $30 million.

Defendants are accused of using spam emails to manipulate the thinly traded stocks. The recipients who bought the stock would drive the share price up and that is when Berger and co-conspirators would sell their shares at the new prices.

The indictment says that Berger was the stockbroker for the scam. He set up the brokerage accounts, arranged it so that stocks could be transferred to the accounts, executed the stock trades, transferred proceeds to specific bank accounts, provided confidential account information details to co-conspirators that were not supposed to receive this data, and did not obtain account holders’ consent. Stocks sold in the pump and dump scheme included those from Pingchuan Pharmaceutical Inc., China World Trade Corporation, World Wide Biotech and Pharmaceutical Co., China Digital Media Corporation, m-Wise, and China Mobility Solutions.


Related Web Resources:
SEC v. Berger, United States District Court, E.D. Michigan

Securities and Exchange Commission v. Gregg M.S. Berger, et al., Case No., 2:11-CV-10403 (RHC-PJK) (E.D. Mich.), SEC, February 1, 2011


More Blog Posts:
Dallas Securities Attorney and Former SEC Litigator Convicted of Fraud in Pump and Dump Stock Scam, Stockbroker Fraud Blog, February 11, 2010
Pump and Dump Scheme Involving Prime Time Stores Inc. Sends Global Spam Levels Up 30%, Stockbroker Fraud Blog, September 5, 2007

“Pump and Dump”, Annuities, Real Estate, Affinity Fraud and "Free Lunch Seminars" Are Top Scams in 2007 Say State Securities Regulators, Stockbroker Fraud Blog, May 21, 2007

Continue reading "Ex-Gilford Securities Broker Indicted in International Stock Fraud Scam Involving Pump and Dump of Israeli and Chinese Securities " »

February 17, 2011

Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud

Kurt Branham Barton, the former CEO of Triton Financial, a financial firm based in Austin, Texas, has been indicted on 33 counts, including Texas securities fraud, money laundering, and wire fraud. Barton allegedly used ex-NFL stars and church contacts in a $50 million Ponzi scam.

The American-Statesman reports that beginning in 2002, Barton accumulated a number of partnerships and companies based around Triton Financial. He even hired ex-NFL stars Chris Weinke and Ty Detmer to persuade clients to invest. Many investors belonged to the Church of Jesus Christ of Latter-day Saints (Barton is also a member).

Court documents contend that Barton got investors to give him over $50 million and that he used the funds to live a lavish lifestyle that included expensive vehicles, flying in private planes, and a luxury box for watching University of Texas football games. He also made money in political campaign contributions.

By 2009, however, several securities fraud complaints had been filed. Investors accused Barton of misleading them about where their money would go. The Securities and Exchange Commission would go on to file a securities fraud lawsuit against Triton Financial and Barton, and the Texas State Securities Board has stripped him of his investment adviser license.

The indictment accuses Barton of lying about his investments to investors regulators and of creating “false, fictitious, and fraudulent limited partnerships. He also allegedly used an E-Trade statement that showed his holdings had a balance of over $3 million even though the actual balance was $3,161.17. Barton is accused of giving regulators “altered and fabricated documents" about his business dealings.

A judge has placed Triton Financial in receivership. Per the receiver’ statement on January 31, 2011, over 600 investors have made $63.3 million in securities fraud claims against the financial firm and its ex-CEO.

Related Web Resources:
Former Triton chief indicted on charges of money laundering and fraud, Statesman, February 15, 2011

Broker indicted in fraud with NFL stars, KXAN, February 16, 2011

Read the Indictment (PDF)

More Stockbroker Fraud Blog Posts:
Texas Securities Act Control Person Claims against Merrill Lynch Pierce Fenner & Smith Inc. is Revived by Appeals Court, Stockbroker Fraud Blog Posts, January 20, 2011

R. Allen Stanford’s Criminal Trial Over $7 Billion Ponzi Scam Delayed So He Can Detoxify from Medication Addiction, Stockbroker Fraud Blog Posts, January 11, 2011

ALJ to Determine Whether to Revoke Registration of STS-Advisors Ltd. and Investment Adviser Representative Richard Lewis Bruce Over Alleged Texas Securities Fraud, Stockbroker Fraud Blog Posts, January 7, 2011


Continue reading "Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud" »

February 16, 2011

Money Market Fund Portfolio and “Shadow NAV" Information Now Available to the Public, Says SEC

The Securities and Exchange Commission says that investors can now access detailed data about money market funds, including their portfolio’s market-based price, called its "shadow NAV" (net asset value). The public can now access this information, which will be updated regularly, on the SEC’s website through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

It was just last year that the SEC adopted a rule that requires money market funds to submit information about their portfolio valuations and holdings. SEC Chairman Mary L. Schapiro says that the Commission believes that the public disclosure of this data will help market analysts and investors in evaluating mutual funds.

Per the new rule, the SEC will make available within 60 days the information that the funds file on new Form N-MFP. Money market funds also must now post current portfolio data on their on Web sites within five business days after the month has ended.

According to a study released last month by the Investment Company Institute, money funds’ market value usually adhere to the stable $1 net asset value unless there are unusual market conditions. ICI is the national association for mutual funds.

ICI report says that per securities laws, money funds can offer shares at a stable $1 NAV as long as per-share values remain within one-half cent of $1. Also, between 2000 and 2010, money funds’ average shadow price shifted between $0.998 and $1.002. During this time, the market underwent significant valuations in asset prices and interest rates. For the money fund's market value to fluctuate beyond one-half cent of the $1 NAV, certain market condition changes would have to occur, such as investor net redemptions hitting 80% of a fund’s assets, short-term interest rates going up by over 300 basis points in a day, and a 100 basis point rise in interest rates added to investor redemptions of 70% of a fund’s assets.

Related Web Resources:
SEC Releases Money Market Fund Portfolio and "Shadow NAV" Information to the Public, SEC, January 31, 2011

The ICI Report (PDF)


More Blog Posts on Money Market Funds:
SEC is working on issues related to asset-backed securities, credit ratings, and money market mutual funds, says Schapiro, Stockbroker Fraud Blog, January 31, 2011

US Treasury Department Extends Money Market Fund Guarantee Program Through April 2009, Stockbroker Fraud Blog, December 10, 2008

Continue reading "Money Market Fund Portfolio and “Shadow NAV" Information Now Available to the Public, Says SEC" »

February 14, 2011

TD Ameritrade Inc. Settles SEC Securities Fraud Charges Over Reserve Yield Plus Fund Shares for $10M

TD Ameritrade Inc. (AMTD) has settled Securities and Exchange Commission charges that it failed to reasonably supervise its representatives, some who sold shares of the Reserve Yield Plus Fund to clients. As part of the settlement, TD Ameritrade will pay $10 million to eligible customers who are still fund shareholders.

According to the SEC, TD Ameritrade representatives offered and sold Reserve Yield Plus Fund shares to customers before September 16, 2008. The SEC contends that the representatives “mischaracterized” the fund as a money market fund, making it seem as if the fund had guaranteed liquidity while allegedly failing to discloses the risks involved with this type of investment. In September 2008, the fund “broke the buck” when its assets’ value fell lower than the level required to cover each dollar that had been invested in the fund.

The SEC also claims that TD Ameritrade lacked an adequate supervisory system or policies to stop its representatives’ misconduct that led to investors’ losses. Clients eligible to receive money from the settlement should get receive 1.2 cents per share.

The SEC says that it is essential that customers are given adequate information about investment instruments and that broker-dealers must properly train and supervise their representatives to give clients this important information. The SEC said that thousands of TD Ameritrade customers still hold most of the Yield Plus Funds shares. They got approximately 95% of its original investments after the fund liquidated its assets.

By agreeing to settle, the TD Ameritrade Inc. is not denying or admitting to the misconduct.

Related Web Resources:
SEC announces $10M settlement with TD Ameritrade, AP/Yahoo, February 3, 2011

SEC Charges TD Ameritrade for Failing to Supervise Its Representatives Who Sold Shares of the Reserve Yield Plus Fund, SEC, February 3, 2011

Securities Fraud Attorneys


Related Blog Posts on SEC Settlements:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011

Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011

Continue reading "TD Ameritrade Inc. Settles SEC Securities Fraud Charges Over Reserve Yield Plus Fund Shares for $10M " »

February 12, 2011

SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority's proposal to give investors the choice of having their securities claims against broker-dealers heard by an arbitration panel that doesn’t include any industry members. FINRA says that its Rule 12403, which lets investors choose between a majority-public panel and all-public panel, will go into effect right away. Arbitration cases that began prior to the SEC’s decision to approve the proposal will be notified of this new rule.

Prior to submitting its proposal to the SEC, FINRA tested the idea as a pilot program for more than two years. FINRA says that while investors regularly chose to have nonpublic arbitrators hear their securities case, it became clear that giving them other options improved their perception that the arbitration process was a fair one.

State securities regulators are praising the SEC’s decision. However, they are calling for even more reform.

Optional All Public Panel Rule 12403(d):
FINRA will send the parties three lists. One list will contain the name of 10 non-public arbitrators. The other list will name 10 chair-qualified public arbitrators. The other list will name 10 public arbitrators. Each party will be able to strike up to four arbitrators from the public and chair-qualified lists. Parties can strike the names of all 10 arbitrators from the non-public arbitrator list.

Majority Public Panel Rule 12403(c):
This panel will include one non-public arbitrator, one public arbitrator, and one chair-qualified public arbitrator. The same three lists as the ones mentioned for the All Public Panel will be sent to the parties. Up to four arbitrators from each list can be struck.



Related Web Resources:

Notice to Parties – New Optional All Public Panel Rules, FINRA

SEC Approves FINRA Proposal to Give Investors Permanent Option of All Public Arbitration Panels, FINRA, February 1, 2011

Related Blog Posts:
FINRA Wants to Make All-Public Arbitration Panel for Investors Permanent, Stockbroker Fraud Blog, October 7, 2010

Number of FINRA Arbitration Claims Rose in 2009 Following Market Crisis, Stockbroker Fraud Blog, January 13, 2010

FINRA Says Number of Stockbroker Fraud Arbitration Claims by Plaintiffs is Rising, Stockbroker Fraud Blog, July 14, 2009

Continue reading "SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option" »

February 10, 2011

AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M

AXA Rosenberg Investment Management LLC (ARIM), AXA Rosenberg Group LLC (ARG), and Barr Rosenberg Research Center LLC (BRRC) have agreed to pay over $240 million to settle administrative securities fraud charges that they hid an important error in the computer code of the quantitative investment model used for managing client assets. The Securities and Exchange Commission says the error resulted in investor losses worth $217 million. As part of the settlement, the three Axa Rosenberg entities will repay the investors who sustained financial losses, as well as a $25 million penalty.

The SEC says that the institutional money manager’s concealment of “material error in its computer code” from investors was a violation of federal securities laws. The commission also claims that the three entities made material misrepresentations, such as failing to disclose the error or its effect and did not properly represent "the model’s ability to control risks.”

Per the charges, the error, which was discovered by ARG and BRRC senior managers in June 2009, disabled a key risk-management component. Instead of fixing the problem right away, senior management told others not to reveal the error, which they did not remedy at the time.

The SEC says that quantitative investment managers have been known to “isolate their complex computer models from the firm's compliance and risk management function” in an attempt to protect trade secrets.” The SEC also claims that BRRC failed to implement and adopt compliance procedures and policies to make sure the model would work as intended. Although the error was eventually remedied, ARG's Global CEO was not notified of it until five months after its discovery.

As of last December, Axa Rosenberg Group LLC said that as “the specialist active global equity investment management firm” managed over $31 billion in assets. ARG is the holding company of investment advisers ARIM, which used the investment model to manage client portfolios, and BRRC, which developed the quantitative investment model’s code.


Related Web Resources:
SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model, SEC, February 3, 2011

Read the corrected SEC order (PDF)


More Blogs on SEC Enforcement:
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011

Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011

Broker Settles SEC Charges He Defrauded Elderly Nuns, Stockbroker Fraud Blog, January 13, 2011


Continue reading "AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M" »

February 9, 2011

SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States

The Securities and Exchange Commission is expecting to accelerate its regulatory and enforcement activity over the $2.8 trillion municipal bond market. The SEC will be holding hearings in a number of US states, including Texas, to go over Muni bond market issues.

Among the issues likely to receive attention from the SEC:
• “Conduit” financing, which involves bonds sold by municipal entities for third parties, including private companies and colleges.
• The need for practical, applicable guidance for state and local officials that is more specific than the prohibitions provided under Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Securities Exchange Act.

Although municipal securities issuers are exempt from SEC registration, reporting, and disclosure requirements—per the 1934 Act's Tower Amendment—they still have to abide by the commission’s antifraud provisions. The SEC has also sent compliance messages to issuers, improved disclosures, and discouraged bid-rigging, pay-to-play and other bad conduct.

Among its recent enforcement efforts, the SEC is investigating bond issuances in Rhode Island. It is also is looking into disclosures over Illinois’ funding of pension plans.

SEC Commissioner Elisse Walter will lead the hearings in Texas, Florida, Illinois, and Alabama this year. Staff will then put together a report that will include recommendations for legislative and regulatory changes and “best practices.”

Related Web Resources:
Second SEC Municipal Market Hearing Continues to Raise Disclosure, Tower Amendment Issues, NCSHA, December 15, 2010

SEC Sets Field Hearings on State of Municipal Securities Markets, SEC, September 7, 2010


Related Blog Posts:
Yet Another Securities Case Against a Financial Firm Alleged to Have Aided Enron in its Scams is Dismissed Without Liability in Texas!, Stockbroker Fraud Blog, January 29, 2011

Texas Securities Act Control Person Claims against Merrill Lynch Pierce Fenner & Smith Inc. is Revived by Appeals Court, Stockbroker Fraud Blog, January 20, 2011

R. Allen Stanford’s Criminal Trial Over $7 Billion Ponzi Scam Delayed So He Can Detoxify from Medication Addiction, Stockbroker Fraud Blog, January 11, 2011

Continue reading "SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States" »

February 7, 2011

QA3 Financial Corp. Notifies Its Brokers It is Closing Its Doors

QA3 Financial Corp. has announced that it will be closing down its business. In an email sent to its 400 brokers after the market closed on Friday, QA3 owner and CEO Steve Wild says the decision was made following the securities arbitration award that was issued against the independent brokerage firm last month and the fact that its errors and omissions carrier has yet to provide coverage.

Catlin Specialty Insurance Co. is QA3’s insurer. The broker-dealer sued the insurer last year alleging failure to uphold the insurance contract, which QA3 claims is supposed to provide $7.5 million in coverage for legal claims, expenses, and damages related to private placement. Catlin then sued QA3, contending that there was a $1 million cap on QA3 private-placement claims.

Once a leading seller of high-risk private placements, QA3 has been dealing with dozens of arbitration cases and securities lawsuits from clients that purchased private placements, such as Medical Capital Holdings Inc, DBSI Inc., and Provident Royalties LLC.

Recently, a Financial Industry Regulatory Authority Inc. panel ordered QA3 to pay $1.6 million after losing an arbitration claim filed by an elderly couple. The panel found that the brokerage firm failed to adequately supervise broker James R. Files or provide sufficient training regarding the sale of tenant-in-common exchanges (TIC’s). The plaintiffs, Mary-Ann and Arthur Cargill, are in their 70’s, possess limited financial resources, and don’t have a great deal of investment experience. The FINRA panel also says that the brokerage firm appears to have routinely disregarded sales and marketing approval practices.

Related Web Resources:
B-D down: QA3 to close up shop next week, Investment News, February 7, 2011

Arbitrator awards Wilton couple nearly $1.6 million for investment, American Chronicle, January 19, 2011

Catlin Specialty Insurance Company v. QA3 Financial Corp., Justia Dockets and Filings, November 23, 2010

Private Placements, Stockbroker Fraud Lawyers


Continue reading "QA3 Financial Corp. Notifies Its Brokers It is Closing Its Doors" »

February 4, 2011

Commodities Industry Fears being held to Regulatory Standards of Securities Industry

The Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, and the Futures Industry Association have told the Commodity Futures Trading Commission that the 1934 Securities Exchange Act’s Rule 10b-5 not be the model for how it polices market manipulation under the Dodd-Frank Wall Street Reform and Consumer Protection Law. In a comment letter, SIFMA, FIA, and ISDA told the CFTC not to impose additional duties of inquiry, disclosure, or diligence during bilateral transactions on sophisticated parties.

The groups were responding to a rule proposal involving the CFTC expanding its authority over manipulative and fraudulent conduct. CFTC says the proposal was patterned on Rule 10b-5 and Section 10(b). They contend that securities law standards, such as Rule 10b-5, are hard to adapt and “largely inapplicable” to the derivatives and future arena because the two market frameworks have key structural differences. They want the CFTC to “adopt an antifraud rule” that takes “into account the nature of material information in these markets and the types of duties that may exist.”

The associations also want the CFTC to give guidance that offers market participants clear principals on how to distinguish between “prohibited manipulative conduct” and “legitimate competitive trading practices.” In addition, they want “extreme recklessness” as the scienter standard and any anti-manipulation rule’s scope clarified in regards to the CFTC’s current anti-manipulation authority. ISDA, FIA, and SIFMA want commercial traders to be allowed to trade using their own, nonpublic data about company-specific assets and liabilities.

Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd has this to say: “Our country has just experienced the worst securities debacle in nearly 90 years, which many experts claim was largely caused by deregulation of the securities industry. Despite the ineffectiveness of watered-down securities regulation, the Commodities Industry fears being held to even this weak standard. First among these fears is that those who market commodities contracts to the public may be held to a similar duty as those selling securities. When smooth-talking phone jockeys call dangling profits and little or no risk they should be held responsible for their actions. In other words ‘there ought to be a law.'”

Commodities Future Trading Association

Financial Markets Association

Securities Industry and Financial Markets Association

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February 2, 2011

Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC

The U.S. Securities and Exchange Commission has charged Forrest Fontana with violating Rule 105 of Regulation M and illegally making more than $1 million. The rule prohibits investors from taking part in public offerings when they have shorted the same securities. Fontana, who allegedly violated the rule three times, helped investors make the unlawful profits.

The SEC contends that in 2008, the ex-hedge fund manager and founder of Fontana Capital LLC, allegedly shorted 60,000 shares of XL Capital (now XL Group) and then shorted 40,000 shares of Bank of America's Merrill Lynch (BAC). On July 29, 2008, regulators claim that Fontana bought 50,000 shares of XL Capital and 200,000 shares of Merrill Lynch in secondary offerings. He made $149,000 off his XL capital bets and $792,000 from Merrill Lynch. Later that year, he allegedly shorted 100,000 Wells Fargo (WFC) shares. Fontana bought the same amount the next day and made a profit of about $160,000.

Under the 1933 Securities Act, Rule 105 of Regulation M is there to prevent short selling that can decrease proceeds for shareholders and companies by artificially depressing a stock’s market price right before a company prices its public offering. Rule 105 of Regulation is there to make sure that offering prices are established through the natural forces of supply and demand. Traders must wait five days after shorting a stock before they can take part in that company's public offering. This prevents investors from using shorting to lower the price that they will pay later in the offering.

There will be a hearing to determine the veracity of the allegations against Fontana and whether sanctions should be issued.

Related Web Resources:
SEC Accuses Fontana Capital of Breaching Short-Sale Restrictions, Bloomberg, January 7, 2011

Hedge fund manager faces SEC allegations, Boston.com, January 8, 2011

Read the SEC's administrative order (PDF)

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