September 13, 2014

FINRA Fines Minneapolis Broker-Dealer $1M for Inadequate Supervision of Penny Stocks

The Financial Industry Regulatory Authority has issued an enforcement action charging Feltl & Company for not notifying certain customers of the suitability and risks involving certain penny-stock transactions, as well as for failing to issue customer account statements showing each penny stock’s market value. The brokerage firm is based in Minneapolis, Minnesota.

FINRA claims that the firm failed to properly document transactions for securities that temporarily may not have fulfilled the definition of a penny stock and did not properly track penny-stock transactions involving securities that didn’t make a market.

Feltl made a market in nearly twenty penny stocks. The brokerage firm made $2.1 million from at least 2,450 customer transactions that were solicited in 15 penny stocks between 2008 and 2012. The SRO says it isn’t clear how much the firm made from selling penny stocks that it didn’t keep track of but that revenue from this would have been substantial.

Felt is settling the securities charges without denying or admitting to the claims. It said that after February 2012 it stopped recommending penny stocks and now doesn’t make a market in any penny stock. Customers, however, can trade in penny stocks if they are the ones that initiate the transaction.

Penny Stocks
These securities trade under $5 a share. Small companies that have low revenue are the ones that usually put them out. Penny stocks may be high risk because it can be hard to track the companies’ future value and business potential and these stocks don’t trade as often as liquid stocks that are traded on exchanges. Penny stocks are not a suitable investment for everyone.

Our penny stock fraud lawyers represent investors wanting to recoup their losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Finra Fines Brokerage $1M Over Penny-Stock Deals, WSJ, September 3, 2014

Penny Stock Rules, SEC.gov


More Blog Posts:
SEC Files Charges in Penny Stock Scams, Stockbroker Fraud Blog, May 27, 2014

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

Securities Lawsuit Accuses Deutsche Bank, JPMorgan Chase, Credit Suisse, and Other Banks of Manipulating ISDAfix, Institutional Investor Securities Blog, September 4, 2014

September 11, 2014

SEC to Dismiss Lawsuit Against SIPC Over Payments to Stanford Ponzi Scam Victims

The Securities and Exchange Commission has said that it no longer intends to continue trying to get the Securities Investor Protection Corporation to pay back investors the losses they sustained in R. Allen Stanford’s $7 billion Ponzi scam. The decision comes after the U.S. Court of Appeals for the District of Columbia Circuit ruled that the regulator failed to prove that the scheme’s victims were “customers” eligible for compensation by the SIPC. That decision upheld an earlier ruling by a district court in 2012.

Even though the SEC is no longer seeking to compel the brokerage industry insurance fund to pay the investors, the agency says it is committed to the victims and will keep working with the U.S. Department of Justice, the Stanford Receiver, and others in an effort to maximize investor recovery.

SIPC keeps a special fund to pay back investors if their securities and cash were lost when a brokerage failed. The agency, however, said it couldn’t compensate the Stanford Ponzi scam victims because their losses were not a result of a broker-dealer failing but due to their purchase of CDs from a foreign bank—assets that they are still holding and now have no value.

Prior to the SEC lawsuit, SIPC had offered to pay each Stanford Ponzi scam victim up to $250,000. The regulator said this was not enough.

R. Allen Stanford is currently serving more than 110 years behind bars for his Ponzi scam. Authorities say that he sold investors fake CDs through his Stanford International Bank in Antigua. He would use their money to pay back earlier customers while also taking money to back his own enterprises. Thousands of customers were bilked in the scheme.

U.S. SEC won't appeal ruling against Stanford's Ponzi victims, Reuters, September 5, 2014

Court denies payout to Ponzi scheme victims, CNBC, July 18, 2014

Securities Investor Protection Corporation

More Blog Posts:
US Supreme Court Considers Hearing Stanford Ponzi Lawsuits, Stockbroker Fraud Blog, October 3, 2012

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

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Blog, February 10, 2014

September 7, 2014

Mortgage Transfers to Nonbanks Get Closer Regulator Scrutiny

In the last two years, millions of borrowers with mortgages have been moved from banks to nonbanks. This can result in problems for home loan borrowers.

A reason for this is that a lot of banks are getting rid of their mortgage servicing rights. 14 of the leading bank servicers, including JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), and Bank of America (BAC) have sold off over $1 trillion of these rights in the last two years. The primary buyers are nonbank servicers, which now handle one in every seven mortgages.

The Consumer Financial Protection Bureau, which is engaged in the oversight of nonbanks, enacted regulations earlier this year that extended rules for banks to nonbank servicers that collect mortgage payments and deal with foreclosures and modifications. Last month, the bureau also put out guidance on new regulations that specifies the way loan transfers to nonbanks should be dealt with, including a provision mandating that buyers and sellers conduct meetings in at timely manner to talk about the continuity of service before a mortgage is handed off. Sales contracts also must stipulate that mortgage documents need to be given to the new servicer. However, a recently released CFPB statement reported that some nonbank services are billing customers incorrectly, not honoring approved modifications, and losing paperwork.

Bloomberg, in a recent article, wrote about the Chhibber family. They lost their Virginia home after a $1.3 billion mortgage deal was reached between Nationstar Mortgage Holdings Inc. (NSM) and Bank of America. After losing their business and a portion of their income, the family started working with the bank to modify their loan. However, before the loan was complete, Bank of America sold the Chhibbers' mortgage to Nationstar.

The Chhibbers reapplied to the nonbank servicer for a remodification, which it initially approved but then recanted. They say the reason given to them was that the value of the property had gone up beyond the mortgage balance during the modification process.

Nationstar claims there was no modification when it got the loan and that the process had to be restarted. (One of the rules that the CFPB has extended to nonbank servicers is that they are not allowed to make applicants begin the process again following a loan transfer.)

In other mortgage-servicing news, the U.S. Securities and Exchange Commission issued a subpoena to Ocwen Financial (OCN), a mortgage-servicing company, asking for documents involving a group of companies that it conducts business with. Benjamin M. Lawsky, the top banking regulator in New York State, had expressed concern that the firm and another company, Altisource Portfolio Solutions (ASPS), had hired the same risk officer.

Some investors reportedly don’t know whether companies are charging too much for their services and if the mortgage bond investors are the ones having to pay for the added costs. Earlier this summer, the Federal Housing Finance Agency voiced concern about how nonbank financial firms that process delinquent mortgages may not have sufficient funding.

Family Loses Virginia Home as Regulators Target Nonbanks, Bloomberg, September 4, 2014

Nonbank servicers further muddy the mortgage mess, Philly.com, September 7, 2014

FHFA Inspector General Cites Risks on Nonbank Mortgage Servicers, The Wall Street Journal, July 1, 2014


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

Securities Lawsuit Accuses Deutsche Bank, JPMorgan Chase, Credit Suisse, and Other Banks of Manipulating ISDAfix, Institutional Investor Securities Blog, September 2, 2014

Texas-Based Halliburton Settles Oil Spill Lawsuit for $1.1B, Institutional Investor Securities Blog, September 2, 2014

September 5, 2014

Fidelity Investments Settles Class Action Lawsuits Over 401(K) Plan for $12 million

Fidelity Investments has consented to pay $12 million two settle two class action employee lawsuits. The plaintiffs contend that the retirement plan provider was self-dealing in the FMR LLC Profit Sharing Plan and making money at their expense by offering employees high-cost fund options and making them pay excessive fees.

Over 50,000 ex- and present employees are eligible to receive from the settlement. Fidelity is accused of providing just its own funds in the retirement plan for its workers, with certain investment options having little (if any) track record, while failing to use an impartial process when choosing the investment options.

As part of the agreement, Fidelity will now give employees a choice of non-Fidelity and Fidelity mutual funds, increase auto-enrollment to 7%, and allow participants of non-Fidelity mutual funds to benefit from revenue sharing, just like the participants of Fidelity mutual funds and collective trusts. The company also will keep offering a default investment alternative, the Fidelity Freedom Funds-Class. The Portfolio Advisory Services at Work program will be provided for free.

Despite settling, the company is denying the allegations. A company spokesman said that Fidelity chose to resolve the case to avoid the burden of litigation costs.

In another 401(K) lawsuit, this one alleging fiduciary breach, the U.S. Supreme Court has agreed to weigh in. The complaint revolves around whether an employer violated its fiduciary obligation when selecting retail funds, rather than less costly institutional share classes. The lawsuit, Glenn Tibble v. Edison International, was filed seven years ago. It is one of the first group employee complaints against an employer alleging unreasonable 401(k) fees.

Edison is accused of offering approximately 40 mutual funds, including retail share class funds, even though the less costly institutional ones were available. The plaintiffs said the funds employed revenue sharing, which lets Edison pay less to its record keeper.

In 2010, the plaintiffs were granted $370,732 in damages over excessive fees in three of the funds. Both parties, however, have continued to fight over fees, with their dispute making its way to the 9th U.S. Circuit Court of Appeals and now to the nation’s highest court.

Now, the Supreme Court is asking U.S. Solicitor General Donald B. Verrilli Jr. to look at the fiduciary breach claim accusing Edison of selecting the more expensive retail share class mutual funds instead of the less costly options. Verrilli has said that even though the statute of limitations requires that a breach of fiduciary duty claim be brought within six years of the alleged breach, plan fiduciaries have a continuing duty beyond that time period to assess plan investments and get rid of the ones that are “imprudent.” The Supreme Court will decide whether to take the case.

Contact our 401K Fraud Attorneys at Shepherd Smith Edwards and Kantas, LTD LLP today.


Fidelity quietly settles employee lawsuits, Investment News, August 12, 2014

It Pays to Fight High 401(k) Fees: Lawsuits Result in $12 Million Settlement, MainStreet.com, August 18, 2014

Glenn Tibble v. Edison International


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

Supreme Court to Rule on Whether Employee Can Sue for 401K Losses, Stockbroker Fraud Lawyer, November 30, 2007

U.S. Supreme Court Decides That 401(k) Retirement Participants Can Sue for Losses Under ERISA, Stockbroker Fraud Lawyer, February 20, 2008

September 4, 2014

SEC Charges Immigration Attorneys with Securities Fraud Involving EB-5 Immigration investor Program

The SEC is charging a Los Angeles-based immigration lawyer, his wife, and his law firm partner with securities fraud that targeted investors who wanted to gain U.S. residency through the EB-5 Immigration investor program. The program lets immigrants apply for U.S. residency if they invest in a project that helps create jobs for workers in this country.

According to the Commission, Justin, his spouse Rebecca Lee, and Thomas Kent raised close to $11.5 million from more than twenty investors that wanted to join the program. They told investors that they would qualify to join if they invested in an ethanol plant that was going to be constructed in Kansas.

The three of them are accused of taking the money and misappropriating it for other uses. Meantime, the plant was never constructed and no jobs were created. Yet Justin, Rebecca, and Thomas allegedly continued to deceive investors so that they kept believing that the construction project was in the works.

In 2006, Thomas and Justin applied to the U.S. Citizenship and Immigration Services seeking designation as a center under the EB-5 program. But by 2008, states the SEC complaint, it became clear that building an ethanol plant at the site they had designated in Kansas was not economically possible. Still, the Lees and Thomas concealed from the USCIS that the jobs the project was supposed to generate were never created.

The SEC says that when Justin was having financial problems, he misappropriated investor funds. He and his wife allegedly ended up misusing millions of dollars to pay for purposes that were not disclosed, including paying back other investors in unrelated offerings. The majority of those who were defrauded in the securities scam were of Korean and Chinese descent.

The U.S. Attorney’s Office for the Central District of California has filed a parallel action against Attorney Justin Moongyu Lee.

EB-5 Program Securities Scams
Unfortunately, there are investment scams out there seeking to exploit the EB-5 Program. Last year, regulators filed charges against a couple in a Texas-based securities scheme that raised at least $5 million from customers who thought their money was going into the EB-5 program. Investors from Nigeria, Mexico, and Egypt were targeted. None of these investors even received conditional visas.

In another fraud, investors were bilked of $150 million after they agreed to invest in the construction of a hotel and a conference center. They too had hoped to become U.S. residents.

The SEC has put out an alert notifying investors that it is working to stop fraudulent securities offerings made through the immigration program. The regulator wants investors who are thinking about getting involved in an EB-5 program to do their due diligence to make sure the venture is a legitimate one and they are not being scammed.

SEC Charges L.A.-Based Immigration Attorneys With Defrauding Investors Seeking U.S. Residency, SEC, September 3, 2014

Read the SEC Complaint (PDF)

Investor Alert: Investment Scams Exploit Immigrant Investor Program, SEC

EB-5 Immigrant Investor, U.S. Citizenship and Immigration Services


More Blog Posts:
$5M Texas-Based Securities Fraud Scam Pursued Foreign Investors Wanting US Residency Via EB-5 Program, Stockbroker Fraud Blog, October 1, 2013

SEC Files Securities Charges Against Massachusetts Company Over Pyramid Scam that Primarily Targeted Immigrants, Stockbroker Fraud Blog, April 17, 2014

Texas-Based Halliburton Settles Oil Spill Lawsuit for $1.1B, Institutional Investor Securities Blog, September 2, 2014

September 3, 2014

Study Assesses How Much Investment Advisory Firms Would Pay for SEC Exams

According to a study released by compliance consultant RIA in a Box, some investment advisory firms could end up paying millions of dollars in users fees each year to finance exams conducted by the Securities and Exchange Commission. The study addresses a bill that would let the regulator charge fees to cover exam costs. The agency has said that it needs more money to hire more RIA examiners.

The proposed measure is intended to help the SEC enhance its yearly examination rate. Right now, the exam rate is just 9% of the about 11,500 investment advisers that are registered with the agency.

Under the bill, the SEC would determine user fees according to how much it would cost to increase the amount and frequency of registered investment advisers. A firm’s assets under management, risks characteristics, and the number and kinds of clients would also be factored.

The RIA in a Box came up with its calculations by estimating how much more it would cost for the SEC to hire additional RIA examiners. It then allocated the costs among the different firms according to their assets under management. For example, a firm with $2.5 billion in assets under management would likely pay a $14,121 user fee. A firm with $2.35 trillion in assets under management would have a yearly user fee of over $13.2 million dollars.

RIAs that have under $100 million in assets under management do not have to pay a user fee to the SEC. They are registered in their states.

The compliance consultant says that the cost to RIA firms for exams funded by user fees is estimated to be around $310 million. According to ThinkAdvisor, even though the fees might be substantial for some firms, RIA in a Box’s analysis indicates that most of the 32,000 advisers would not be subject to much of (if any) fee. Only approximately 11,500 firms will likely meet the criteria that would obligate them to pay a user fee.

Our investment adviser fraud lawyer represents investors throughout the U.S. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

SEC User Fees Would Have Little Impact on Most Firms: Study, ThinkAdvisor, September 3, 2014

SEC exams could cost RIAs thousands – or even millions, InvestmentNews, September 3, 2014


More Blog Posts:
Investment Advisory Firm Based in Houston, Texas Charged with Securities Fraud Involving Conflicts of Interest, Stockbroker Fraud Blog, September 2, 2014

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 7, 2014

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud, Institutional Investor Securities Blog, June 4, 2014

September 2, 2014

Investment Advisory Firm Based in Houston, Texas Charged with Securities Fraud Involving Conflicts of Interest

The SEC is charging Robare Group Ltd., an investment advisory firm headquartered in Houston, Texas, with securities fraud. The regulator’s enforcement division says that the firm and co-owners Jack L. Jones Jr. and Mark L. Robare made mutual fund recommendations to clients even though they had a conflict.

According to the SEC, Robare and a broker-dealer purportedly had an undisclosed compensation agreement. The brokerage firm paid Robare Group compensation—a portion of each dollar that every client invested in certain mutual funds—for recommending the investments

The deal gave Robare, Jones, and the firm incentive for favoring these funds over other investments. The firm is accused of making about $440K in compensation over eight years from the agreement.

Although in 2011 Robare did modify its Form ADV to disclose the compensation agreement, the SEC claims that the form and later disclosures stated falsely that the investment advisory firm did not benefit financially for giving investment advice about the mutual funds. It wasn’t until last year that Robare disclosed there was a conflict of interest. However, the firm did not reveal that there was incentive to recommend certain mutual funds.

The SEC has been taking a closer look at compensation deals between brokers and asset managers. There is concern that payments to investment advisers for recommending certain investments is impairing their ability to give impartial advice that is in the best interests of clients. Also, investment advisers are required to disclose any conflicts of interest to customers.

Our Texas investment adviser fraud lawyers represent investors in recouping their losses. You shouldn’t have to sustain losses while an adviser, a broker, or anyone else profits at your expenses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Houston-Based Investment Advisory Firm and Co-Owners Charged With Failing to Disclose Conflict of Interest to Clients, SEC, September 2, 2014

Read the SEC Order (PDF)


More Blog Posts:
Texas-Based Halliburton Settles Oil Spill Lawsuit for $1.1B, Institutional Investor Securities Blog, September 2, 2014

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

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


More Blog Posts:

August 29, 2014

Former LPL Financial Broker Must Pay Almost $2 Million For Bilking Clients, Including Elderly Investors

Blake B. Richards, an ex-LPL Financial (LPLA) broker, must pay close to $2 million in penalties and disgorgement over allegations that he defrauded clients of close to $1.7 million. According to the case, submitted in the U.S. District Court of the Northern District of Georgia, Richards told at least seven clients to write checks to entities under his control. The clients thought that the money would be invested in variable annuities, fixed-income investments, or equities. Instead, contends the U.S. Securities and Exchange Commission, the funds were used to pay for his personal spending.

According to the SEC, most of the investors’ money came from life insurance proceeds or retirement savings. Two of the investors involved were widowed and at least two others were elderly customers.

Per the regulator’s complaint, Richards won one investor’s trust by delivering pain meds to her husband during a snowstorm. The spouse was suffering from terminal pancreatic cancer at the time.

Richards has not denied or admitted to the charges. The agency said that his actions indicate “selling away,” which involves brokers defrauding investors through external business activities.

LPL let Richards go last year after another adviser notified the brokerage firm about his alleged wrongful conduct involving non-firm accounts. The broker-dealer then conducted its own probe and notified regulators. Also last year, the Financial Industry Regulatory Authority barred Richards.

Senior Fraud

Elderly investors are a favorite target for fraudsters. According to a survey by the Investor Protection Trust, the American Bar Association, and the Investor Protection Institute, 34% of attorneys who took the poll said they either work with or expect to represent senior clients who have been victims of fraud. 27% reported dealing with the children of older fraud victims who either are trying to help their parents, who’ve been bilked, or the kids are the ones accused of exploiting them.

In an earlier survey, the Investor Protection Trust found that over 7.3 million Americans older than 65 had already sustained fraud losses. Earlier this month, the North American Securities Administrators Association set up the Committee on Senior Issues and Diminished Capacity. The panel, which is comprised of state securities regulators, will look more closely at elder financial abuse and the problems that can occur related to retirement nest eggs and complex financial securities. NASAA-compiled enforcement statistics indicate that 34% of actions in the last six years involved senior victims.

One reason for this is that the retirement population is growing, especially as people are living longer. However, a diminished mental capacity and the growing number of complex financial products can make for a bad combination. Many retirees may not be able to understand what they’re putting the retirement money into, and they can end up suffering huge losses.

The SEC has also expressed concern about how elderly investors continue to be targeted by fraudsters.

Contact our elder financial fraud lawyers today to request your free case consultation. Shepherd Smith Edwards and Kantas, LTD LLP also represents investors based abroad with securities claims against U.S. firms.


Ex-LPL broker ordered to pay $1.9 mln in U.S. SEC fraud suit, August 28, 2014

Senior investor concerns, abuse get more regulator attention, Investment News, April 19, 2014

Investor Protection Trust


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

SEC Charges Ex-UBS Broker in $730K Elder Financial Fraud Ponzi Scam, Stockbroker Fraud Blog, August 4, 2014

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

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