August 28, 2014

SEC Subjects Credit Rating Agencies, Asset-Backed Securities Issuers to Tighter Rules

The SEC has approved rules granting the agency more control over credit rating agencies and obligates asset-backed securities issuers to reveal additional information about underlying loans. S.E.C. Chairwoman Mary Jo White says that the reforms will give investors crucial protections while making the securities market stronger.

The rules target the activities, products, and practices that were key factors in the 2008 financial crisis. They would apply to more than $600 billion of the asset-backed securities market, over which the SEC presides. The rules, however, won’t apply to bonds guaranteed by Fannie Mae (FNMA) and Freddie Mac (FMCC). Both entities are exempt from SEC rules.)Also, the new disclosure requirements won’t apply to private placements that are only sold to sophisticated investors.

Leading up to the economic crisis, Wall Street had packaged mortgages into investments that were given high ratings even though they didn’t necessary contain the highest quality subprime loans. Investors sustained huge losses when the securities plunged in value.

Under the new rules, banks and other firms will have to give investors more information about mortgages and asset-backed securities, including credit card receivables, residential-mortgage loans, student loans, and commercial loans. Investors will be given more time to assess disclosure before the bonds’ first sale.

Firms that issue securities will have to submit reports on the underlying loan data to the Commission, which will make the data available online. SEC Commissioner Luis A. Aguilar, however, has noted that the rules do not include the enactment of the risk-retention rule, which would allow securitizers’ incentives to match up with those of investors.

As for the new credit rating agencies rules, they will require Standard & Poor's (S & P), Moody's Investor Services (MCO), and others to put into place internal procedures for setting and modifying ratings, as well as provide greater disclosure regarding their accuracy. The credit raters will have to implement procedures to make sure that the incentive to win business doesn’t hurt their ability to provide fair and accurate analysis.

Credit raters will also have to let market participants comment on whether a firm’s methodology for ratings should be updated. Agency employees involved in the marketing or sales of a service or product will not be allowed to monitor or decide its credit rating or take part in establishing the methodology to establish the ratings.

Credit rating agencies also will be required to perform a “look-back” review to see if a credit rating analysis was influenced by a conflict of interest. In addition, agencies must providing information about initial credit ratings and any changes that follow to the public so that investors can determine the accuracy of the ratings and compare the credit rating performances issued by the different agencies.

Securities Fraud Lawyers
Contact our securities law firm today. Your initial assessment with one of our securities fraud attorneys is free. Shepherd Smith Edwards and Kantas, LTD LLP represents investors seeking to recoup their losses.

August 27, 2014

Citigroup Global Markets Fined $1.85M By FINRA, Must Pay $638K Restitution Over Non-Convertible Preferred Securities Transaction Valuations

The Financial Industry Regulatory Authority says that Citigroup Global Markets Inc. (C) will pay a fine of $1.85 million for not providing best execution in about 22,000 customer transactions of non-convertible preferred securities, as well as for supervisory deficiencies that went on for over three years. Affected customers are to get over $638,000 plus interest.

A firm and its registered persons have to exercise reasonable diligence to make sure that the sale/buying price the customer pays is the most favorable one under market conditions at that time. FINRA says that instead a Citigroup trading desk used a pricing methodology for the securities that failed to properly factor in the securities’ National Best Bid and Offer. Because of this, contends the self-regulatory organization, over 14,800 customer transactions were priced inferior to the NBBO. The SRO also claims that because Citigroup’s BondsDirect system for order execution used a faulty pricing logic, over 7,200 customers transactions were priced at less than NBBO.

FINRA says that Citigroup’s written supervisory procedures and supervisory system related to best execution in these securities were lacking. It claims that the firm did not review customer transactions for the securities at issue, which were either executed manually by the trading desk or on BondsDirect. Such an assessment could have ensured compliance with Citigroup’s best execution duties. (FINRA noted that it had sent the firm inquiry letters about the reviews.)

Citigroup is consenting to the entry of the SRO’s findings. It isn’t, however, denying or agreeing with FINRA’s claims.

FINRA Fines Citigroup Global Markets Inc. $1.85 Million and Orders Restitution of $638,000 for Best Execution and Supervisory Violations in Non-Convertible Preferred Securities Transactions, FINRA, August 26, 2014

Citigroup to Pay $2.5 Million for Pricing Flaws of Markets Unit, The Wall Street Journal, August 26, 2014


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

Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC, Institutional Investor Securities Blog, August 5, 2014

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

August 26, 2014

Goldman to Buy Back $3.15B in RMBS to Resolve FHFA Claims

Goldman Sachs Group Inc. (GS) will pay $3.15 billion to buy back residential mortgage-backed securities related to bonds that were sold to Freddie Mac and Fannie Mae. The repurchase represents an approximately $1. 2billion premium and makes the mortgage companies whole on the securities. The RMBS case was brought by the Federal Housing Finance Agency.

It was in 2011 that FHFA sued 18 firms to get back taxpayer money from when the U.S. took control of Freddie and Fannie after the economy tanked in 2008. Goldman is the fifteenth bank to settle.

The firm will pay Fannie May $1 billion and $2.15 billion to Freddie Mac for the securities. The two had purchased $11.1 billion from Goldman Sachs. A few of the other banks that have settled with the FHFA include Morgan Stanley (MS), JPMorgan Chase (JPM), and Bank of America Corp. (BAC). The agency’s remaining RMBS fraud cases still pending are those against RBS Securities Inc. (RBS), HSBC North America Holdings Inc., (HSBC), and Nomura Holding America Inc. (NMR).

In June, Goldman and a couple of the now remaining defendants asked U.S. District Judge Denise Cote to reconsider her earlier ruling that FHFA did not wait too long to sue the banks over the RMBS. They've wanted the cases against them dismissed.

Their latest attempt to have the claims tossed out was a result of a recent U.S. Supreme Court ruling. In that decision, the court determined that a federal law did not preempt a state-law statute that put time restrictions on filing an applicable complaint even if a plaintiff was unaware it had a claim. Earlier this month FHFA pointed to a ruling by an appeals court that let the National Credit Union Administration push securities cases against banks even though there were potential issues regarding time limits.

Goldman Sachs Settles FHFA Lawsuit for About $1.2 Billion, The Wall Street Journal, August 22, 2014

Goldman to Buy $3.15 Billion of Debt to End FHFA Claims, Bloomberg, August 22, 2014


More Blog Posts:
Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B, Institutional Investor Securities Blog, March 29, 2014

Massachusetts Files Lawsuit Against Fannie Mae, Freddie Mac, and FHFA, Stockbroker Fraud Blog, June 2, 2014

JPMorgan Will Pay $614M to US Government Over Mortgage Fraud Lawsuit, Stockbroker Fraud Blog, February 8, 2014

August 22, 2014

Securities Regulations News: SEC Looks to Delay Principal Trading Rules, FINRA Adds More Time to REIT Price Changes and 2nd Circuit Says Dodd-Frank’s Whistleblower Protections Don’t Apply Overseas

SEC Wants To Extend Temporary Rule Letting Dually-Registered Advisers Get Principal Trading Consent

For the third time in four years, The Securities and Exchange Commission wants to extend a temporary rule that makes it easier for investment advisers that are also registered as brokers to sell from the proprietary accounts of their firms. The regulator issued for comment its proposal that would move the interim’s rule expiration date to the end of 2016 instead of the end of 2014.

Under the temporary rule, dually registered advisers can either get verbal consent for principal trades on a transaction basis or give written prospective disclosure and authorization, in addition to yearly reports to the clients. With principal trades, a brokerage firm uses its own securities in the transaction.

The Investment Advisers Act of 1940 mandates that advisers get written disclosure and consent prior to every principal trade. This is supposed to prevent possible conflicts of interest when a firm trades from its proprietary account. By extending the interim rule, the regulator wants more time to think about whether there should be a separate rule that would enhance the standards of brokers when it comes to offering investment advice.


FINRA Gives SEC More Time to Act On REIT Price Notification Rule
The Financial Industry Regulatory has extended the deadline for when the SEC must act on its proposed change to Rule 2340, about real estate investment trust price notifications, to until October 17. This is the second extension the self-regulatory organization has given to the Commission over this matter this year.

Last month, FINRA requested that the SEC allow independent brokerage-firms and nontraded real estate investment trust sponsors 18 months to get used to new guidelines that would require them to provide investors with a better idea of the costs involved in buying nontraded REIT shares and other direct placement programs/private placements.

Under the proposed rule change, which would apply to the account statements of brokerage firm clients, the per-share value of a nontraded REIT would not longer be listed at the common price of $10. Instead, the various commissions and fees that dealer mangers and brokers get would have to be factored. This would lower the amount of each private placement’s share price on an account statement. If the SEC decides to follow FINRA’s recommendation, investors with illiquid investments won't see this information on their account statements until April 2016.


Appeals Court Agrees that Dodd-Frank’s Anti-Retaliation Provision Only Apply Domestically
The US Court of Appeals 2nd Circuit held that Dodd-Frank’s anti-retaliation provisions do not apply overseas. The ruling upholds a lower-court decision that granted Siemens' motion to dismiss a lawsuit brought by a former compliance officer at its China offices. The ex-employee, Meng-Lin Liu, said he was retaliated against after reporting alleged wrongdoing at the company.

Under the 2010 Dodd-Frank Act, companies are not allowed to take action against certain whistleblowers. However, the whistleblower provisions don’t stipulate whether these protections extend abroad.

Citing a U.S. Supreme Court ruling, the appeals court affirmed that they only apply in the United States. It noted that Liu, his employer, and the entities involved in any of the alleged acts were foreigners located overseas and that these actions would have occurred outside the country.

Liu turned in a whistleblower tip to the SEC after leaving the company. Like the district court, however, the Second Circuit did not delve into whether or not Liu's failure to qualify for whistleblower protection was because he didn't file this information with the Commission until after he was let go by Siemens China.

Finra tacks on more time to REIT pricing change, Investment News, August 14, 2014

SEC seeks to delay principal trading rule for two years, MorningStar, August 13, 2014

Ruling Leaves Cloud on Whistleblowers, The Wall Street Journal, August 18, 2014

FINRA Rules


More Blog Posts:
SEC Examines Municipal Advisers and Alternative Mutual Funds, Reviews “Wrap-Fee” Accounts, Stockbroker Fraud Blog, August 20, 2014

FINRA Investor Alert Warns About Scams Touting Ebola Cure and Other Viral Disease Stock Schemes
, Stockbroker Fraud Blog, August 19, 2014

Lehman Brothers' Unsecured Creditors to Get $4.6B Payout, Institutional Investor Securities Blog, August 21, 2014

August 20, 2014

SEC Examines Municipal Advisers and Alternative Mutual Funds, Reviews “Wrap-Fee” Accounts

The Securities and Exchange Commission introduced a two-year plan to examine municipal advisers who assist localities and states to raise money in the $3.7 trillion municipal bond market. During this period, regulators plan to look at a significant chunk of the approximately 1,000 SEC-registered municipal advisers.

These advisers are usually small firms with one or two employees. They are not affiliated with banks. Municipal advisers are retained to time, price, and market muni-bond transactions.

The SEC has been clamping down on municipalities for not updating investors about their financial health. The regulator wants the U.S. Congress to give it more authority in the market. Right now, muni issuers are exempt from disclosure requirements that corporations have to make when selling securities. Now the agency wants to know whether municipal advisers are meeting their fiduciary duty and placing clients’ interests before their own.

It was the 2010 Dodd-Frank law that established this obligation. Also under the law, municipal advisers have to register with the SEC and follow the rules that the the Municipal Securities Rulemaking Board is developing.

In other SEC news, the regulator is conducting a broad examination of alternative mutual funds. This will include scrutiny of big investment firms, including BlackRock Inc. (BLK) and AQR Capital Management LLC, as well as smaller firms that didn’t use to offer mutual funds as investment products to customers. According to sources that spoke to The Wall Street Journal, the regulator's focus appears to be more on collecting information about the industry rather than coming up with specific related enforcement actions.

Alternative funds, also known as liquid alternative funds, are a category of mutual funds that use hedge fund-like strategies. Fund companies tout them as vehicles for hedging against market risk that are usually less costly for individual investors who want to employ strategies previously reserved for sophisticated investors.

The SEC wants to look at the funds’ liquidity, the way they use leverage, and how much oversight the funds’ boards provide. Previously, the regulator expressed concerned with the risks involved in alternative mutual funds.

Meantime, the agency is also looking to suss out conflicts of interest involving the possible use of flat-fee wrap accounts at registered investment advisers. Customers pay a yearly or quarterly fee for wrap products that manage a portfolio of investments. They do this instead of paying individual commissions for traders.

The market includes mutual fund advisory programs, separately management accounts, unified managed accounts, and certain kinds of brokerage-based managed account. If an adviser is charging fees according to assets under management, money management charges for wrap products are additional.

With wrap accounts, reverse churning can happen. This involves placing a client that doesn’t trade often into an account that is fee-based instead of commission-based. Typically, there is hardly (if any) activity to justify the fee.

The SEC recently won a court case against an adviser that improperly placed clients into wrap programs. The investment adviser, Benjamin Lee Grant, was accused of improperly persuading clients to go with him when he left Wedbush Morgan Securities to establish Sage Advisory Group.

According to the regulator, Grant convinced clients to make the move by claiming they would save on fees. Rather than paying 1% plus commissions for trading like they did at Wedbush, they would just pay Sage a 2% wrap fee.

However, says the SEC, Grant did not tell clients that the brokerage expenses would be much lower at Charles Schwab & Co. (SCWH), which was the discount broker that Sage used. Grant then pocketed the savings.

Contact our securities fraud law firm today.

SEC cracks down on wrap accounts, InvestmentNews, August 14, 2014

SEC Launches Examination of Alternative Mutual Funds, The Wall Street Journal, August 12, 2014

U.S. SEC launches municipal adviser exams, Reuters, August 19, 2014

Federal jury sides with SEC against Boston investment adviser in fraud case
, Business Journals, August 14, 2014


More Blog Posts:
SEC Charges Linkbrokers Derivatives in $18M Securities Fraud, Institutional Investor Securities Blog, August 18, 2014

FINRA Investor Alert Warns About Scams Touting Ebola Cure and Other Viral Disease Stock Schemes, Stockbroker Fraud Blog, August 19, 2014

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds, Stockbroker Fraud Blog, August 15, 2014

August 19, 2014

FINRA Investor Alert Warns About Scams Touting Ebola Cure and Other Viral Disease Stock Schemes

The Financial Industry Regulatory Authority has put out an investor alert warning against buying stocks in companies claiming to combat viral diseases. The self-regulatory organization says it knows of several possible schemes involving stock promotions employing tactics such as pump-and-dump scams to inflate share prices. The scammers will then sell their shares at a profit while leaving investors with shares that have lost their value.

Intensified news coverage of the recent Ebola and Middle East Respiratory Syndrome outbreak will likely have attracted the attention of stock scammers wanting to take advantage of people’s fears. To avoid falling victim to a viral disease stock scam, FINRA is offering several tips, including:

• Be wary of promotional materials, correspondence, and press releases from senders you don’t know. Watch out for communications that say little about the risks involved while only touting the positives. Getting a barrage of information about the same stock opportunities can also be a red flag.

• Make sure to know who is behind a company you are thinking of investing in. Do your research. Think twice if company officials have past criminal records or you hear anything negative in the news. Be on the look out for fake business addresses and phone numbers.

• A lot of stock pump-and-dump scams don’t trade on the NYSE or other registered national securities exchanges. Instead, you can find them on OTC quotations platforms or alternative trading systems.

• Find out whether the company submitted an SEC filing. Compare the information there with what’s provided in promotional materials and other communications you’ve received. Watch out for solicitations to get you to invest in products that are still being developed or if there are losses on balance sheets.

• Watch out if a company keeps changing its name or business focus.

• Make sure you read the fine print and be wary when name-dropping is used to gain investor confidence or boost legitimacy.

Shepherd Smith Edwards and Kantas, LTD LLP is a securities fraud law firm. Contact our fraud lawyers today to request your free case consultation.

Viral Disease Stock Scams: Don’t Let Them Infect Your Portfolio, FINRA

Investment scammers busy pumping Ebola stocks amid panic, NY Post, August 14, 2014


More Blog Posts:
SEC Files Charges in $4.5M Houston-Based Pump-and-Dump Scam, Stockbroker Fraud Blog, August 18, 2014

SEC Charges Linkbrokers Derivatives in $18M Securities Fraud, Institutional Investor Securities Blog, August 18, 2014

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds, Stockbroker Fraud Blog, August 15, 2014

August 18, 2014

SEC Files Charges in $4.5M Houston-Based Pump-and-Dump Scam

The SEC has filed charges against Chimera Energy, a Houston-based penny stock scam, and four individuals for their purported involvement in a pump-and-dump scam that made over $4.5 million in illicit proceeds. Investors were led to believe that the company was creating technology that would allow for oil-and-gas production that was environmentally friendly.

The regulator claims that Andrew I. Farmer set up Chimera Energy and secretly got control of all the shares issued in an IPO. He then set up a promotional campaign to hype the stock, touting technology that would extract shale oil without fracking.

In the alleged Texas securities fraud, Chimera Energy claimed that an entity named China Inland gave it an exclusive license to develop and commercialize the non-hydraulic extraction technologies. The SEC says that China Inland is not a real company and that Chimera Energy had no such technology or even a license.

When the stock became inflated due to the false claims made by Chimera Energy, entities under Farmer’s control dumped over 6 million shares on the public markets to generate the illegal gains. In 2012, the SEC suspended Chimera Energy stock and blocked Farmer and others from dumping additional shares or misleading more investors.

Also facing SEC charges are Chimera figurehead CEOs Charles E. Grob Jr. and Baldermar Rios, who are accused of running Chimera Energy at the minimum level and approving press releases that were misleading. Carolyn Austin is charged with helping Farmer make money off his scam when she dumped Chimera Energy stock. The regulator wants permanent injunctions, financial penalties, disgorgement, prejudgment interest, penny stock bars, and officer-and-director bars.

SEC Announces Charges in Houston-Based Scheme Touting Technology to End Fracking, SEC.gov, August 15, 2014

Read the SEC Complaint (PDF)


More Blog Posts:

SEC Wants Texas’ Wyly Brothers to Pay $750M For Securities Fraud, Stockbroker Fraud Blog, August 7, 2014

Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case
, Stockbroker Fraud Blog, July 11, 2014

Christ Church Cathedral Sues JPMorgan Chase Over Proprietary Product Sales, Institutional Investor Securities Blog, August 13, 2014

August 15, 2014

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds

Even though UBS Wealth Management Americas (UBS) has been generating record revenue, the financial firm saw its profits drop upon reporting that had it put aside $44 million for litigation costs primarily related to Puerto Rico bond fraud cases. UBS’s second quarter earnings of $238 million are 3% lower than last year.

Already, UBS clients have filed hundreds of arbitration cases and a number of securities class action lawsuits contending that the brokerage firm put investors’ money in highly leveraged and unsuitable Puerto Rico municipal bond funds that dropped in value last year. These funds begun to lose value again recently.

OppenheimerFunds Inc. (OPY), which is the biggest mutual fund to hold Puerto Rico debt, has also taken a financial hit. Bloomberg reports that in the past year, the firm has seen a loss of close to a third of its funds’ assets. For example, the Oppenheimer Rochester Maryland Municipal Fund (ORMDX) directed approximately 35% of its holdings to the islands as of the end of June. As of August 4, its assets had dropped to $64.9 million. At this time last year, the fund had $96.1 million in assets.

On Thursday, the Puerto Rico Electric Power Authority (Prepa) and creditors arrived at a deal that will give the public agency time to restructure. Prepa will appoint a chief restructuring officer and must come up with a five-year business plan. The agreement will allow the Puerto Rican power authority to utilize $280 million that was in a construction fund to cover capital improvements and current costs. Prepa had until yesterday to extend its credit line with banks or restructure around $9 billion in debt.

Last month, the power authority arrived at deals with Citigroup (C), Bank of Novia Scotia (BNS) and other banks, which has allowed it to delay about $671 million in payments that it owed them. Standard & Poor’s has lowered the utility bonds’ ratings into junk territory.

Puerto Rico lawmakers recently approved legislation that would let a number of public agencies overhaul their finances. Public utilities can work out deals with bondholders to reduce their debt load. Oppenheimer Funds and Franklin Templeton (BEN) have since gone to court to challenge the constitutionality of the law. Their investment funds hold approximately $1.6 billion in Prepa bonds.

The firms believe that the power authority can fulfill its obligations without having to restructure. Puerto Rico wants the judge to dismiss the lawsuit. BlueMountain Capital Management LLC., which holds over $400 million in Prepa-issued bonds, has also filed a lawsuit.

At Shepherd Smith Edwards and Kantas, LTD LLP, our Puerto Rico Bond fraud lawyers have already filed dozens of securities fraud claims against UBS and other brokerage firms related to Puerto Rico bonds or mutual funds holding Puerto Rico Bonds. We represent investors in the U.S. and in Puerto Rico. Please call us for a fee, no obligation, consultation if you or someone you know has lost money investing in Puerto Rico Bonds or funds tied to the Puerto Rico bond market.

Puerto Rico debt depresses UBS Wealth earnings, InvestmentNews, July 29, 2014

OppenheimerFunds Sees Some Funds Shrink 33% on Puerto Rico Bonds, Bloomberg, August 5, 2014

Puerto Rico PREPA Utility Announces Creditor Agreement, Extension, Barron's, August 14, 2014


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

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

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

August 14, 2014

Former MIT Professor and His Son Plead Guilty to $140M Hedge Fund Fraud

Gabriel Bitran, an ex- Massachusetts Institute of Technology professor, and his son Marco Bitran have pled guilty to securities fraud charges accusing them of bilking investors of $140 million. Through their company, GMP Capital Management, the father and son placed investor money in hedge funds linked to Bernard Madoff, who ran the Ponzi scam that defrauded clients of billions of dollars.

According to prosecutors, from 2005 to 2011 Bitran and Marco collected $500 million from investors by promising to invest their funds using an original complex mathematical trading model. The money was supposed to go into exchange-traded funds and other securities but were instead placed in hedge funds.

When the financial crisis of 2008 happened, a number of the hedge funds got into trouble. Some of their investors lost up to 75% of their principal.

The Bitrans allegedly took out around $12 million of their own money from the hedge funds but made customers wait to redeem their funds from GMP Capital Management. (In 2011, the firm name was changed to Clearstream Investments LLC.) The two of them paid themselves millions of dollars in management fees.

The father and son are accused of lying to investors by telling them that they had delivered average yearly returns of 16-23% over eight years. The U.S. Attorney said that e-mails between the Britans show evidence of this. They also purportedly made false statements to the U.S. Securities and Exchange Commission during its related investigation.

In that civil probe, the Bitrans consented to settle the hedge fund fraud charges by paying $4.8 million. The two did not deny or admit wrongdoing. They did, however, agree to an industry bar.

If the judge accepts their plea deal in the criminal securities case, the Britans are facing up to five years behind bars and then supervised release. They would have to pay back $10 million in profits.

Ex-MIT official and son plead guilty to securities fraud, Boston.com, August 12, 2014

Ex-MIT dean, son plead guilty to hedge fund scam, CNN, August 12, 2014


More Blog Posts:

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges, Stockbroker Fraud Blog, August 13, 2014

SEC Tells J.S. Oliver Capital to Pay $15M for Alleged Cherry-Picking Scam, Stockbroker Fraud Blog, August 11, 2014

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million, Stockbroker Fraud Blog, August 11, 2014

August 13, 2014

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges

In a settlement reached with the Illinois Securities Department, LPL Financial (LPLA) agreed to pay a $2 million fine and $820K in restitution for inadequate books and records maintenance involving 1035 exchanges. According to the firm’s BrokerCheck file, LPL Financial did not enforce “supervisory system and procedures” when certain persons documented variable annuity exchange activities.

Following the settlement, a company spokesperson said that LPL Financial is enhancing its procedures related to surrender charges resulting from variable annuity exchange transactions. This is to make sure these are accurately documented in records, books, and any disclosures that are issued to clients. The brokerage firm is also taking steps so that advisers are properly documenting why variable annuity recommendations were made.

State regulators have been taking a closer look at LPL as they investigate investment product sales. Last year, the broker-dealer settled with the Massachusetts for at least $2 million and a $500,000 fine over nontraded real estate investment trusts. Financial Industry Regulatory Authority fined the firm $7.5 million for 35 e-mail system failures.

In response to the scrutiny, LPL Financial CEO Mark Casady told 3,500 advisers they will need to provide more documentation and background to show regulators. The firm has implemented automated processes to enhance data focus and is looking at other ways to meet regulatory obligations.

According to InvestmentNews.com, a rise in administrative and general costs, primarily because of the regulatory scrutiny, led to flat second-quarter earnings for LPL Financial Holdings Inc. Meantime, UBS Wealth Management (UBS), which also has had to deal with more scrutiny in the wake of the Puerto Rico municipal bonds, debacle, also took an earnings hit. The firm has put aside $44 million for litigation by investors claiming muni bond fraud. Oppenheimer Holdings (OPY), which is under investigation not just by FINRA but also the Securities and Exchange Commission and the U.S. Treasury Department, has reportedly put aside $12 million for possible fines.

LPL Financial hit with $2M fine, ordered to pay $820K in restitution, Investment News, July 30, 2014

LPL Tells Brokers To Expect More Paperwork, The Wall Street Journal, August 13, 2014


More Blog Posts:
LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments, Stockbroker Fraud Blog, March 25, 2014

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

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2013

August 11, 2014

SEC Tells J.S. Oliver Capital to Pay $15M for Alleged Cherry-Picking Scam

SEC Chief Administrative law judge Brenda Murray has fined J.S. Oliver Capital Management $15 million for securities violations and breach of fiduciary duty related to an alleged cherry-picking scam that bilked clients of approximately $10.9 million. The registered investment adviser must also pay $1.4 million in disgorgement.

According to the regulator, the RIA awarded profitable trades to hedge funds associated with the firm, while other clients, including a charitable foundation and a widow, were given the less profitable trades that resulted in major losses. These hedge funds that benefited were those in which J.S. Oliver founder Ian Oliver Mausner was an investor. Mausner is also accused of using soft-dollar commissions inappropriately.

Mausner continues to deny the SEC charges. He claims that the profitable trades were disproportionately allocated because of market volatility and that clients’ investment goals played a part.

Murray, however, found that the firm made over 4,000 potential cherry-picking transactions between ’08 and ’09. During that time, several favored accounts made substantial gains while three that were “disfavored” suffered a 99.7% loss. The Commission put out its cease-and desist order against J.S. Oliver last year.

During the purported scheme, the firm would wait until after trading closed for the day or the following day to allocate the trades. This let Mausner determine which securities had declined or appreciated in their value. He is said to have made over $200,000 in fees from just one of the hedge funds that benefited from winning trades. Mausner is also accused of marketing that very hedge fund to investors by bragging about its positive returns when really those results were because of his scam.

J.S. Oliver Capital is accused of misappropriating $1.1 million of client funds via the inappropriate use of soft-dollar funds. Soft dollars are rebates that brokerages pay investment advisers and customers for commission because the broker-dealers’ accounts were involved in transactions. Advisers are allowed to keep the money but they must disclose this and only use the funds in ways that could enhance clients’ investments.

The SEC claims that from ’09 through most of ‘11, J.S. Oliver and Mausner did not tell clients that soft dollars were used to pay his ex-wife money he owed from their divorce, cover J.S. Oliver’s “rent” at Mausner's home, pay portfolio manager Douglas Drennan, and take care of maintenance and other expenses at Mausner’s New York timeshare.

The SEC claims Drennan turned in false data to support the inappropriate use of the soft dollar credits and approved some of the payments to his company.

In addition to the $15 million fine against the firm, Mausner must pay a $3 million penalty and he is permanently barred from the industry. Drennan is also barred and must pay a $410,000 fine.

RIA slapped with $15 million fine; founder barred, Investment News, August 7, 2014

Read the SEC Order (PDF) (PDF)


More Blog Posts:

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud, Institutional Investor Securities Blog, June 11, 2014
Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager, Stockbroker Fraud Blog, December 18, 2012

Securities Headlines: UBS to Pay $4.5M Over Unregistered Assistants, $6M Ponzi Scam Allegedly Funded Reality Show, & Cherry Picking Allegations Lead to SEC Charges, Stockbroker Fraud Blog, August 30, 2013

August 9, 2014

Private Equity Firms, Including Blackstone, Settle ‘Club Deals’ Case with $325M Settlement

Blackstone Group (BX) LP, TPG, and KKR (KKR) will collectively pay $325 million to resolve a securities case accusing several private equity firms of working together to keep the prices they paid to acquire companies down during the takeover frenzy right before the financial crisis. The firms settled without denying or admitting to wrongdoing just three months before the lawsuit was scheduled to go to trial.

Their settlements follow those reached with former case defendants Bain Capital LLC and Goldman Sachs Group Inc. (GC) (collectively, the two paid $121 million) and Silver Lake, which paid $29.5 million. Carlyle Group (CG) LP is the only defendant left. It maintains that the investors’ claims have no merit.

The plaintiffs, who filed their securities case in 2007, sold their shares in numerous companies to private-equity firms during the boom-era buyouts. They contend that firms collude together to acquire companies via club deals and agreed not to compete with each other to lower the shareholders were paid. The investors claim that, as a result, they lost billions of dollars.

In one purported club deal, KKR is accused of backing off from acquiring Freescale Semiconductor because Blackstone was also considering making a deal. In another buy, KKR allegedly asked competitors to stand down in hospital chain HCA’s $32.1 billion buyout.

The case also involves buyout deals for TXU Corp. (now Energy Future Holdings) Clear Channel Communications, AMC Entertainment Inc., Harrah’s Entertainment Inc., Aramark Corp, HCA Inc., Sungard Data Systems Inc., Kinder Morgan Inc., Neiman Marcus Group, Freescale Semiconductor Ltd., and HCA Holdings Inc. Plaintiffs of this lawsuit include pension funds and individuals that were shareholders.

In the previous settlements, Goldman, Silverlake, and Bain, also did not have to admit wrongdoing. If any of these private equity firms had chosen to trial instead of settling, they would have risked paying much more in the event of a loss because of the way antitrust laws work.

Buyout Firms Settle Suit Alleging Collusion Over Deals, The Wall Street Journal, August 7, 2014

Goldman Sachs, Bain Pay $121 Million to End Buyout Suit, Bloomberg, June 11, 2014

Silver Lake to pay $29.5 million in LBO collusion settlement, Reuters, July 11, 2014


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