January 27, 2015

White House Looking At Whether Brokers Are Costing Workers Billions in Retirement Funds

Bloomberg News is reporting that according to a memo drafted by President Obama's Council of Economic Advisers Chair Jason Furman, the White House may be pushing for tighter oversight over brokers who deal with retirement accounts. Furman noted that research shows that excessive trading, increased commissions, and other broker practices may be costing investors up to $17 billion a year—and that even this estimate may be conservative. His memo said that investors might be losing up to 10% of their long-term savings because they receive conflicted investment advice.

This could lead to a Labor Department regulation that would establish a fiduciary obligation requiring these brokers to act in the best interests of their clients. Right now, brokers are merely obligated to make sure that they reasonably believe they are making the right recommendation to a client.

Such a fiduciary duty rule is one that Bank of America Corp (BAC), Morgan Stanley (MS), and other firms have lobbied against. They contend that this type of regulation would not only be more expensive but also it would leave smaller investors with fewer investment choices.

Brokers typically charge commissions, which are determined by trading fees. The financial industry has said that if there were a fiduciary standard it would be hard to maintain accounts that are commission-based. Investors would have to go into accounts with a flat fee charge while savers with less than $50,000 in assets might have to be dropped.

Furman however, has said that any DOL proposal of a draft rule wouldn’t ban commission sales. Instead, it would find a “middle ground.”

The current Labor Department rules related to broker obligations were instituted in 1975, when employers primarily controlled workers’ pensions and there were no 401(K)s. Now, millions of Americans have individual retirement accounts and 401(K)s.

Making sure that your retirement funds are invested safely and properly is important regardless of when you start saving. According to new research from the Center for American Progress, over half of all U.S. households don’t have enough retirement funds. One reason for this is that a lot of people aren’t able to access private-sector retirement plans.

If you are working with a broker who is handling your retirement money, it is important that your money and investments are being dealt with in a manner benefitting you rather than the financial representative or the firm. Unfortunately, there are investors who sustain huge losses because of broker fraud. Some of these investors are seniors who have lost their retirement and no longer have other sources of income.

At Shepherd Smith Edwards and Kantas, LTD LLP we help investors recoup their stockbroker fraud losses.

Billions in Lost 401(k) Savings, Abusive Brokers Under White House Scrutiny, Bloomberg, January 22, 2015

Retirement crisis is real and getting worse: Study, Investment News, January 27, 2015

Council of Economic Advisors, The White House

Center for American Progress


More Blog Posts:
Insider Trading News: SEC Sues Ex-Capital One Data Analysts, U.S. Attorney Bharara Wants Rehearing in Case Involving Overturned Convictions, and Judge Vacates Four Men’s Guilty Pleas, Stockbroker Fraud Blog, January 23, 2015

Former Canadian Broker’s Securities Fraud Conviction Involving U.S. Transactions is Upheld, Institutional Investor Securities Blog, January 23, 2015

MetLife Sues Regulators Over Systemic-Risk Designation, Institutional Investor Securities Blog, January 16, 2015

January 23, 2015

Insider Trading News: SEC Sues Ex-Capital One Data Analysts, U.S. Attorney Bharara Wants Rehearing in Case Involving Overturned Convictions, and Judge Vacates Four Men’s Guilty Pleas

Ex-Capital Data One Analysts Are Defendants in SEC Insider Trading Lawsuit
The U.S. Securities and Exchange Commission is suing Nan Huang and Bonan Huang, two former Capital One data analysts, for insider trading. The regulator contends that the two of them used nonpublic data to trade in consumer retail companies’ shares before earnings and sales reports were issued. They allegedly used sales information that the credit card company had collected from millions of customers.

According to the SEC lawsuit, from 11/13 to 1/15 the two analysts made hundreds, perhaps thousands of keyword searches for sales information on at least 170 companies that are publicly traded. They had access to this data because part of their job was to serve as fraud investigators.

The Commission says that the two men knew how to examine the information to figure out whether a company’s sales were going up or down. From 1/12 to 1/15 Huang and Huang purportedly made $2.83 million via share trades, in some instances using call options and put options to make the trades. Stocks that they traded included those belonging to Apple. Capital One fired the two men earlier this month.

U.S. Attorney Preet Bharara Seeks Rehearing Regarding Ruling Overturning Hedge Fund Fraud Convictions
Manhattan U.S. Attorney Preet Bharara will ask for a rehearing of an insider trading case in which convictions were overturned. In the case, United States v. Newman, A United States Court of Appeals for the Third Circuit panel overturned the convictions of Level Global Investors hedge fund portfolio manager Anthony Chiasson and Diamondback Capital hedge fund portfolio manager Todd Newman. The panel cited a 1983 Supreme Court precedent that said remote tippees could only be held liable if they knew the original tipper and received “personal benefit” from said tippee. This could not be proven against the two men so the court dismissed the cases against them.

“Remote tippees” in insider trading cases are people that find out about material nonpublic data via an intermediary and not straight from the insider that was the original source of the information.

Judge Vacates Insider Trading Guilty Pleas
Just this week, a federal judge vacated guilty pleadings by Thomas Conradt, Daryl Payton, Trent Martin, and David Weishaus. The four men pleaded guilty to trading on non-public data ahead of IBM’s agreement to purchase SPSS for $1.2 billion in 2009. A lawyer working on the deal gave them the information. He passed on the data to Martin but did not think that he would share the information with anyone else or use it for trading.

The men requested that their guilty pleas be withdrawn after the Second Circuit panel overturned the convictions of Chiasson and Newman. U.S. District Judge Andrew L. Carter Jr. granted their request.

Now, ex-Galleon Group trader Zvi Goffer is also saying that he will try to get his insider trading conviction, which came with a ten-year prison term, dismissed. Nicknamed the “Octopussy” while at that firm, Goffer is accused of having direct knowledge that tippers were benefiting and personally directing cash payments to them for giving over the material, non-public data.

U.S. regulators sue former Capital One employees for insider trading, Reuters, January 22, 2015

Insider trading convictions vacated, USA Today, January 22, 2015

Insider-Trading Defendants Allowed to Retract Guilty Pleas, The Wall Street Journal, January 22, 2015


More Blog Posts:
SEC Wants $602M Fund Set Up for Victims of SAC Capital’s Insider Trading, Stockbroker Fraud Blog, November 17, 2014

Ex-Ameriprise Manager Who Helped with SAC Capital Insider Trading Case Settles Charges Against Her, Institutional Investor Securities Blog, December 9, 2014

Texas State Securities Board Was Special Prosecutor in $1M Securities Fraud Case
, Stockbroker Fraud Blog, January 22, 2015

January 22, 2015

Texas State Securities Board Was Special Prosecutor in $1M Securities Fraud Case

Alberto Alba Villareal was sentenced to five years behind bars for defrauding investors in a $1 million Texas securities fraud. Villareal was convicted of theft of property for stealing money. The funds he procured were supposed to go toward funding a new insurance company. The Texas State Securities Board was a special prosecutor in the case. Villareal is from South Texas.

As part of his sentence, Villarreal must pay complete restitution to the investor who purchased a $1 million investment contract in Nafta Holdings LLC, which was the new insurer’s controlling company. Villareal must also serve ten years probation.

According to court testimony and his indictment, Villareal took part in a number of financial deceptions to raise funds for the controlling company, even telling the investor that the Texas Insurance Code mandated that there be $4 million in capital and additional cash to open a new insurance company—even though the amount he quoted was about twice what the law actually stipulated.

Villareal allegedly made it seem as if he had raised half of the money and that investors' funds would go into escrow until the threshold was established. Instead, he used some of their money for his personal expenses, including yacht payments and mortgage payments, which were past due. Investor funds also went toward insurance claims to policyholders with other insurers that he controlled.

The state’s Department of Insurance also gave evidence in the Texas securities case.

Shepherd Smith Edwards Kantas, LTD LLP is a Texas securities fraud law firm.

South Texas man sentenced to five years for $1 million securities fraud, theft, inForney, January 20, 2015


More Blog Posts:
Orders Dallas Man to Pay Over $1.4M in Restitution, Penalty Over Texas Securities Scam Involving Forex Commodity Pool, Stockbroker Fraud Blog, January 12, 2015

NASAA Wants Life Partners Held Accountable for Texas Securities Act Violations, Stockbroker Fraud Blog, December 28, 2014

Standard & Poor’s to Pay Almost $80 Million to Resolve SEC Charges Over Ratings Fraud Involving CMBSs, Institutional Investor Securities Blog, January 21, 2015

January 21, 2015

Investment Adviser Fraud Cases Lead to Civil Charges, Criminal Convictions, and Investor Losses

SEC Accuses Elm Tree Investment Advisors, its Founder, of $17M Securities Fraud
The Securities and Exchange Commission has filed fraud charges against Elm Tree Investment Advisors LLC and its founder Frederic Elm for running a Florida-based securities scam that raised over $17 million in a little over a year. The regulator contends that Elm, his firm, and the funds Elm Tree Motion Opportunity LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Investment Fund LP misled investors and used the bulk of the funds to issue Ponzi-like payments. Elm also is accused of using the money to purchase expensive homes, jewelry, and autos, as well as cover his daily living expenses.

According to the SEC, Elm, his unregistered advisory firm, and the three funds violated the regulator’s anti-fraud rules as well as federal securities laws. The Commission wants relief for investors as well as the restoration of the purportedly ill-gotten gains and financial penalties.

A judge granted the regulator’s request for a temporary asset freeze and issued restraining orders against all those named. Elm’s wife, Amanda Elm, is a relief defendant.

District Court Issues 40 Month Sentence for Cherry Picking Scam
In other investment adviser fraud news, a district court has sentenced Noah Myers to 40 months behind bars for running a cherry picking securities scheme. Myers pleaded guilty last year to one count of securities fraud, which the government says cost investors around $470,000. Myers owns MiddleCove Capital LLC.

Between 4/09 and 11/10, Myers bought a number of securities, including the leveraged exchange-traded fund (ETF) ProShares UltraShort Financials. He then disproportionately allocated the trades that went up in value to his own accounts. In 2013, the SEC took back MiddleCove’s investment adviser license. Myers is now barred from the securities industry.

Ohio Man Accused of $5.5M Ponzi Scam
In an unrelated Ponzi scam, an Ohio man has been charged with running a $5.5 million scheme that bilked at least 19 investors. Geoffrey Nehrenz is accused of promoting and selling investments contracts to clients via Keystone Capital Management. The investment adviser firm is not registered with the SEC.

Nehrenz allegedly falsely represented to prospective clients that their money would be pooled, invested in mid- and large-capitalization, publicly traded U.S. securities by day, and changed into cash at night. He is accused of instead using the funds to cover his personal and business spending and, without client permission, make side pocket investments involving speculative, high-risk trades in overseas and domestic private placement vehicles.

SEC ALJ Finds Harding Advisory Firm Liable for CDO Fraud
An SEC Administrative Law Judge has found Wing Chau and his Harding Advisory LLC liable for fraud. The regulator accused Chau of letting a hedge fund control which assets would back a collateralized debt obligation, the Octans I CDO Ltd., without notifying investors.

The firm must pay $1.7 million as a penalty. Chau has to pay $340,000. They also must disgorge $1 million in profits plus interest.

Uniontown man accused of defrauding investors $5.5M, WKYC, January 16, 2015

Connecticut investment adviser sentenced to 40 months in prison for fraud, Reuters, January 12, 2015

An Investment Adviser Who Sued Michael Lewis For Defamation Has Been Found Liable For Fraud, Business Insider, January 13, 2015

SEC Charges Investment Adviser and Manager in South Florida-Based Fraud, SEC, January 21, 2015


More Blog Posts:
Investment Adviser News: Barred Representative is Now a Finance Coach, Bellingham Man Gets Prison Term for Bilking Seniors, Stockbroker Fraud Blog, January 13, 2015

Standard & Poor’s to Pay Almost $80 Million to Resolve SEC Charges Over Ratings Fraud Involving CMBSs, Institutional Investor Securities Blog, January 21, 2015

UBS Settles SEC Dark Pool Case for $14M, Stockbroker Fraud Blog, January 16, 2015

January 20, 2015

FINRA Fines Fidelity $350K for Overcharging More than 20,000 Clients $2.4M

The Financial Industry Regulatory Authority says that Fidelity Investments must pay $350,000 for overcharging thousands of clients $2.4 million for transactions involving fee-based accounts in its Institutional Wealth Services Group. The overcharges are said to have occurred from 1/06 to 9/13. The group offers brokerage and trading services to investment advisers and their clients.

According to the self-regulatory organization, the inappropriate charges happened because of a supervisory oversight involving the way that Fidelity applies fees under its asset-based pricing model. The model typically charges according to assets, not transactions.

FINRA says that until 2013, the financial firm did not have a designated supervisory principal to oversee the group’s asset-based pricing program. As a result, a number of clients may have been charged excess commissions beyond the asset-based management fee or were double billed.

Fidelity was the one that identified the issue in 2012 and notified FINRA. The firm also paid back all of the clients who were affected. According to a firm spokesperson, about 1.5% of brokerage accounts held for investment advisers were impacted, with most getting a reimbursement of under $100.

Fidelity settled FINRA’s claims without denying or admitting to the SRO’s findings.

In other Fidelity Investment news, the fund manager and eight others are getting ready to launch a dark pool. While Fidelity is leading the effort to set up the private trading venue that would benefit mutual fund shareholders, other money mangers involved include J. P. Morgan Chase & Co. (JPM), BlackRock Inc. (BLK), T-Rowe Price Group Inc. (TROW), and Bank of New York Mellon Corp. (BNK).

The market—called Luminex—would allow in asset managers wanting to trade big share volumes at once.

Fidelity-backed group unveils ‘dark pool’ for big stock trades, The Boston Globe, January 20, 2015

Fidelity, other major fund managers to launch stocks dark pool, Reuters, January 19, 2015

Fidelity fined $350,000 in billing snafu, InvestmentNews, January 20, 2015


More Blog Posts:
Fidelity Investments Settles Class Action Lawsuits Over 401(K) Plan for $12 million, Stockbroker Fraud Blog, September 5, 2014

Investor Files Securities Case Against Fidelity Over Float Income Investments Involving 401(K)s, Institutional Investor Securities Blog, May 6, 2013

FINRA Orders Pershing to Pay $3M Fine for Customer Protection Rule Violations, Stockbroker Fraud Blog, January 7, 2015

January 16, 2015

UBS Settles SEC Dark Pool Case for $14M

A UBS AG (UBS) subsidiary has consented to pay $14.4 million to resolve Securities and Exchange Commission claims that the firm committed violations involving the marketing and operation of its dark pool. The subsidiary, UBS Securities LLC, is accused of placing some players at an advantage in its alternative trading system the UBS ATS, which is the second largest dark pool in the United States.

According to the regulator, the Swiss bank failed to adequately disclose the way the dark pool worked to all of its clients, which allowed only some investors to know all of its rules. The SEC said that beginning in 2008 and into 2012, UBS let customers turn in orders at prices with denominations under a penny even though market rules dictate that all orders cannot be in any denomination below one cent.

UBS pitched the PrimaryPegPlus (PPP) order type, which let traders sell and purchase securities at the under the one cent increment prices, primarily to market makers and high-frequency trading firms. This let them get in front of orders that were made at the legal, whole-penny prices.

The SEC also said that UBS did not tell all subscribers about the “natural-only crossing restriction,” which was supposed to ensure that certain orders would not execute against orders made by the high-frequency trading firms and market makers. The shield only benefitted orders made using UBS algorithms, which are automated trading strategies. It wasn't until 2 1/2 years after this feature's launch that every subscriber was notified of its existence.

The SEC is accusing UBS of other violations, including the submission of incomplete and inconsistent statements about sub-penny orders and its natural-only crossing restriction in Form ATSs. The firm also purportedly did not set up written standards for giving subscribers access to the natural-only crossing restriction.

The Commission says that from August 2008 to March 2009, and for a certain period in 2010, UBS failed to preserve certain order data for the UBS ATS. It is accused of violating confidentiality requirements when it gave employees that shouldn't have had access the private trading data of subscribers.

By settling, UBS is not denying or admitting to the SEC findings. Of the $14.4 million payment, $12 million is a penalty.

According to Bloomberg, a source said that the SEC is working on rules that will compel dark pools to follow some of the same requirements as exchanges. This would include requirements dealing with disclosure of order types available in the dark pools, as well as pricing data sources.

The regulator is reportedly considering whether to make dark pool operators tell investors who else is trading as opposed to keeping trader identities anonymous. Some critics have expressed concerns that dark pools give computerized trading firms the upper hand. Also, because certain dark pools use aggregated feeds to match traders, critics are worried that investors are getting dated data when considering whether to trade.

SEC Order (PDF)


More Blog Posts:
NY Sues Barclays Over Alleged High Speed Trading Favors in Dark Pool, Stockbroker Fraud Blog, June 26, 2014

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

SEC Working on Mutual Fund Regulations, Conducts Dark Pool Probes, Enacts New Exchange Rules, Institutional Investor Fraud Blog, November 20, 2014

January 15, 2015

SEC Accuses Canadian Man of Fraudulent Trading Scam, Use of “Layering” Strategy

The Securities and Exchange Commission is charging a Canadian citizen with running a market manipulation scam that involved making orders to trick others into selling or purchasing U.S. publicly traded stocks at prices that were depressed or artificially inflated. The strategy is known as “layering.” U.S. Attorney’s Office for the District of New Jersey has filed criminal charges against Aleksandr Milrud in a parallel action.

According to the SEC’s complaint, submitted in a federal court, Milrud started recruiting online traders primarily in Korea and China beginning at least as early 2013 and giving them the cut of the profits made from the scheme. He purportedly gave traders access to trading accounts and told them how to avoid coming under the regulatory scrutiny when layering.

To avoid detection, Milrud would wire funds to an offshore account and have the money delivered to him in a suitcase, as well as use middlemen. He also allegedly had traders use multiple user names, addresses, computers, and Internet protocols (IP).

Traders were instructed to use two accounts. In one account they would employ layering, in the other they would engage in “clean” trades that would be impacted by the layering done in the other account. Layering was to be performed on different kinds of stocks while limiting the amount of price changes and trades.

The commission is charging Milrud with aiding, violating, and abetting federal securities laws’ anti-fraud provisions, as well as violations of the SEC’s antifraud rule. The regulator is also holding Milrud liable for the traders’ conduct.

Securities fraud costs investors every year. At Shepherd Smith Edwards and Kantas, LTD LLP we are here to help our clients get back their investment fraud losses.

Read the Complaint (PDF)


More Blog Posts:
Investment Adviser News: Barred Representative is Now a Finance Coach, Bellingham Man Gets Prison Term for Bilking Seniors, Stockbroker Fraud Blog, January 13, 2015

JPMorgan Suspends Forex Trader for Alleged Disclosures Involving Royal Bank of Scotland-Related Activities, Institutional Investor Securities Blog, January 14, 2015

Beneficiaries of Puerto Rico Trust File Securities Fraud Lawsuit Seeking Over $4.5M From UBS Financial Services, Stockbroker Fraud Blog, January 5, 2015

January 13, 2015

Investment Adviser News: Barred Representative is Now a Finance Coach, Bellingham Man Gets Prison Term for Bilking Seniors

According to the Securities and Exchange Commission, ex-investment adviser Sherwin Brown is continuing to offer financial advice even though the regulator barred him from the industry and ordered him to pay $1.3 million for allegedly diverting client monies. Brown now calls himself a “money coach” and has kept his Jamerica Financial Inc. in operation, receiving compensation for his services. At a certain point, the firm, which has since been ordered inactive, had nearly $30 million in assets under management.

The regulator contends that between 6/11 and 5/14, a Wells Fargo & Co. (WFC) account in Jamerica Financial’s name received over 120 deposits totaling $330,000. The deposits were payable to Brown and his company. Notes in check memo lines indicated that the money was for investment advisory services.

Brown, who was barred from the industry in 2011, operates TheOfficialMoneyCoach.com, which includes a blog on investing. The site also promotes his investment books.

Another barred financial adviser who kept on working after he was caught embezzling money from a client has now been sentenced to 51 months behind bars. Jeffrey Knutsen, a Bellingham financial and tax adviser, was convicted of bilking 26 senior investors, stealing $255,000. Knutsen, who owns Bellweather Wealth Management, has not been allowed to work in the securities industry since 2005.

However, according to the U.S. Attorney’s office, he kept setting up accounts for clients, who gave him access to their money. Knutsen allegedly told them they would have to pay him a fee for managing their accounts. He is accused of writing over 200 checks without their knowledge and using the $250,000 for his own purposes.

Unfortunately, even when someone has been barred from the securities industry for wrongdoing there are those that manage to keep working and defrauding more clients. In such instances, it is the investors who suffer.

Last week a Financial Industry Regulatory Authority hearing panel expelled the firm John Thomas Financial while barring its CEO Anastasios “Tommy” Belesis from the securities industry. The panel said that the two of them committed violations related to the sale and common stock of America West Resources Inc. (AWSRQ), including trading before the customers’ order, giving false testimony, as well violations of principals of trade and recordkeeping. Belesis and JTF were ordered to pay more than $1 million plus interest to customers.

FINRA says that the two of them made a profit after they traded ahead of 14 JTF customers that were attempting to sell their positions in AWSR. Belesis and JTW profited while the customers did not. The panel noted that while JTF did not purposely hold the customer orders its attempts to make the trades failed.

Under FINRA rules, a firm must execute the orders at the same or at a greater price than what the firm got. JTF a, Belesis, and JTF’s Chief Compliance Officer Joseph Castellano are also accused of harassing and intimidating registered representatives.

If you are an investor, it is important that you do your due diligence to make sure that the person who is advising you does not have a history of wrongdoing. Financial fraud and other negligence may lead to serious investor losses.

If you think your financial losses are because you got bad advice or because you were bilked by an investment advise, a broker, or another industry representative, you should contact our investment adviser fraud lawyers today.

Sherwin Brown, former investment adviser turned coach, charged by SEC, Investment News, January 9, 2015

FINRA Hearing Panel Expels John Thomas Financial and Bars CEO Tommy Belesis for Trading Ahead of Customer Orders, Providing False Testimony and Other Violations; Ordered To Pay $1,047,288 to Customers, FINRA, January 9, 2015

Financial adviser sentenced for stealing from elderly, Seattle Times/AP, January 5, 2015


More Blog Posts:
SEC Judge Orders Two Investment Advisers to Pay Over $6.3M Related to Bernard Madoff-Linked Hedge Funds, Stockbroker Fraud Blog, January 9, 2015

Hanson McClain Sues Investment Adviser, Ameriprise Financial Services Over Client Information, Institutional Investor Securities Blog, January 12, 2015

Some Advisers Choose Alternative Investments Using Poorly Suited Benchmarks, Says Morningstar, Institutional Investor Securities Blog, July 8, 2009

January 12, 2015

Orders Dallas Man to Pay Over $1.4M in Restitution, Penalty Over Texas Securities Scam Involving Forex Commodity Pool

The U.S. Commodity Futures Trading Commission says that a federal court has issued a supplemental Consent Order of Permanent Injunction mandating that Steven Lyn Scott pay over $760,000 in restitution, a $700K penalty, as well as post-judgment interest for his involvement in a Forex commodity pool scam. It was the U.S. District Court for the Northern District of Texas that put out the order, which comes after a CFTC enforcement action charged the Dallas resident with customer fund misappropriation, solicitation fraud, and registration violations related to running a commodity pool scam.

According to The Court, from early January 2009 through at least the end of March 2011, Scott fraudulently solicited a minimum of $1,146,000 from over 40 pool participants for their involvement in pool investment vehicles that were to trade in contracts, off-exchange agreements, or transactions in foreign currency on a margined or leveraged basis. Many of the participants lived in Texas and included his friends, relatives, and others.

A May 5, 2014 Consent Order, issued earlier by this same court, noted that Scott invoked the name of his entity Stewardship Financial Exchange when pursuing pool participants. He is accused of guaranteeing returns of 2-5% a month for participants that signed up for six months.

The Order found that instead of trading the funds of pool participants, Scott misappropriated a chunk of the money into his corporate and personal accounts and then used the cash to cover his own spending. He also took participants’ money to pay supposed interest and principal to participants, much like in a Ponzi scam.

Our Texas securities fraud lawyers represent individual investors and institutional investors in recouping their losses.

Federal Court in Texas Orders Dallas-based Steven Lyn Scott to Pay $766,625.30 in Restitution and a $700,000 Penalty to Settle Charges of Solicitation Fraud, Misappropriation, and Registration Violations in Connection with a Forex Commodity Pool Scheme, CFTC, December 22, 2014


More Blog Posts:

NASAA Wants Life Partners Held Accountable for Texas Securities Act Violations, Stockbroker Fraud Blog, December 28, 2014

Judge Orders Texas-Based Life Partners Holdings Inc., Two Executives to Pay $46.9M Over Securities Filings, Stockbroker Fraud Blog, December 3, 2014

Money Manager Paul Greenwood Gets 10 Years in Prison for $1.3B Investment Fraud, Institutional Investor Securities Blog, December 4, 2014

January 9, 2015

SEC Judge Orders Two Investment Advisers to Pay Over $6.3M Related to Bernard Madoff-Linked Hedge Funds

A Securities and Exchange Commission administrative law judge says that investment advisers Larry Grossman and Gregory Adams must pay over $6.3M in restitution and fines for misleading clients who invested in hedge funds tied to Ponzi fraud mastermind Bernie Madoff. Administrative law judge Brenda Murray issued her ruling last month.

The two investment advisers are Sovereign International Asset Management founder Larry Grossman and Gregory Adams, who agreed to buy Sovereign from Grossman in 2008. The firm filed for bankruptcy four years later.

Per the SEC administrative complaint, Grossman did not know that the two hedge funds that he primarily recommended to clients were linked to Madoff. The Commission contends that Grossman violated his fiduciary duties to his clients when he neglected to conduct due diligence on the funds, which were run by a man named Nickolai Battoo. Grossman also purportedly did not notify clients that he was getting paid $3.4 million in consulting fees and referral money for recommending certain funds. After Grossman sold Sovereign to Adams, the former owner continued working in several capacities at the firm and never actually told clients that the sale even happened.

It was just last October that a federal judge in Illinois ordered Battoo to pay over $358 million for concealing investment losses that were part of Madoff’s Ponzi scam. The SEC accused the hedge fund manager of bilking investors around the world by claiming exceptional returns while hiding huge losses, including those involving leveraged investments in Madoff feeder funds.

Madoff, whose Ponzi scam went on for decades, collectively bilked thousands of wealthy and regular investors, as well as institutional clients, of billions of dollars, He is serving 150 years behind bars after pleading guilty to the criminal charges against him.

Court Imposes Injunctions and Monetary Sanctions of Over $350 Million Against Nikolai Battoo and His Companies
, SEC, October 6, 2014


More Blog Posts:
Madoff Ponzi Scam: Five Ex-Aides Convicted of Securities Fraud, Victims to Recover $349 Million, Stockbroker Fraud Blog, March 26, 2014

Madoff Ponzi Scam Victims Win Right to Appeal for Interest
, Stockbroker Fraud Blog, January 24, 2014

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Blog, October 17, 2013

January 7, 2015

FINRA Orders Pershing to Pay $3M Fine for Customer Protection Rule Violations

The Financial Industry Regulatory Authority Inc. says that Pershing, a Bank of New York Mellon Corp. (BK) unit, must pay $3 million for violations involving the Customer Protection Rule. According to the self-regulatory organization, for about nine months between ’10 and ’11, the clearing firm did not put aside the money needed for a reserve account, per FINRA’s deposit requirements.

The SRO said that deficiencies, from $4 million to $220 million, came from Pershing’s “misinterpretation” of aspects of the rule, as well as inadequate supervision over the way the firm calculated what needed to be put in reserve. Also, over a certain time period, Pershing did not promptly get or keep up physical possession or control of certain customers’ margin securities. This resulted in nearly four dozen new control or possession deficits, while significantly raising the number of existing control or possession deficits.

The Customer Protection Rule mandates that brokerage firms maintain custody of customer cash and securities in order to comply with the following requirements: keep a cash reserve or qualified securities in a bank account that has at least the equivalent value of the net cash the broker-dealer owes customers, as well as obtain and keep up control or physical possession over customers’ excess and fully paid margin securities.

FINRA enforcement chief Brad Bennett said that because of Pershing’s purported failure to set up systems to “vet procedural changes” that could impact certain types of positions, customers’ assets were placed at risk. The SRO discovered the alleged deficiencies while conducting an examination on site in 2011. The firm has since improved its controls. While Pershing agreed to the sanctions it has not denied or admitted to the findings.

Contact our securities lawyers today if you suspect that your investment losses are because of securities fraud or related negligence.

FINRA Fines Pershing LLC $3 Million for Customer Protection Rule Violations and Supervisory Failures, FINRA, December 29, 2014

FINRA Rules, FINRA


More Blog Posts:

NASAA Wants Life Partners Held Accountable for Texas Securities Act Violations, Stockbroker Fraud Blog, December 28, 2014

Standard & Poor’s on the Verge of Civil Settlement Over Real-Estate Bond Ratings, Reports WSJ, Institutional Investor Securities Blog, December 29, 2014

Credit Suisse Ordered to Face $10B Mortgage-Backed Securities Fraud Lawsuit by NY AG, Institutional Investor Securities Blog, December 26, 2014

January 6, 2015

FINRA Releases Priorities for 2015, Gets SEC Approval for Background Check Rule

The Securities and Exchange Commission has approved a Financial Industry Regulatory Authority proposal mandating that broker-dealers conduct more rigorous background checks on new hires. Per the new rule, brokerage firms must implement written procedures for confirming the completeness and accuracy of a broker’s registration data on a Form U4.

Firms will have to search “reasonably available public records” of both new hires and new registrants within 30 days of a U4’s submission to FINRA.

In other FINRA news, the self-regulatory organization has just released its exam and regulatory priorities for 2015. The regulator stated that the majority of compliance problems could be worked out if only broker-dealers always acted in their clients’ best interests. The statement was a significant one, considering that brokers are currently just obligated to make sure that they investments they recommend are suitable for clients.

Among the recurring challenges noted by the SRO:
• Failure to place customers’ interests first, including giving poor advice and recommending inappropriate investments.

• Firm cultures that put short-term profits or rapid growth over establishing the proper controls and creating an environment where high ethical standards are expected. FINRA recommends intolerance for both poor practices that may cause harm, as well as bad actors.

• A lack of strong supervision and inadequate risk management at certain firms

• Product complexity, opaque markets, poor sales training

• Conflicts of interest

FINRA’s Focus Areas in 2015 will include:
Sales practices, including requiring registered representatives and firms to conduct due diligence, make good suitability decisions, and explain products risks so that retail investors can understand them. FINRA is pressing firms to properly train registered representatives about product features, valuation, pricing, and suitability. It is also reminding them to stay abreast of changing market circumstances.

Interest-Rate Sensitive Fixed Income Securities: The SRO remains worried about how unusually low interest rates could possibly harm investors with products that may be easily impacted by said rates.

Variable Annuities: FINRA will evaluate compensation structures to see if there are any improper incentives for generating the sales of these instruments. The regulator is taking a focused interest in L share annuities, which come with higher costs and shorter surrender periods.

Alternative mutual funds: The SRO is worried that both customers and registered representatives do not fully understand how the funds will react to various market conditions.

Non-traded REITS: FINRA continues to be concerned about illiquidity, valuation difficulties, and high fees.
FINRA also will work with examiners and firms to make sure that its new supervision rules are implemented properly. FINRA Rules 3170, 3150, 3120, and 3110 went into effect at the start of December.

You can click here to see what else FINRA and its examiners are focusing on in 2015.

Our securities fraud law firm helps investors get their losses back. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

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