August 16, 2016

UBS to Pay $250K For Not Waiving Mutual Fund Fees

The Financial Industry Regulatory Authority said that a UBS Group AG (UBS) unit will pay $250K to resolve charges accusing it of not waiving certain fees for mutual fund customers that were eligible for the reduction. FINRA said that the broker-dealer overcharged customers $277,636 to invest in mutual funds. The failure to wave these fees purportedly took place from 9/09 to 6/13.

The self-regulatory organization cited alleged supervisory failures. According to the settlement notice, UBS depended largely on its registered representatives to identify when sales charge waivers were warranted and identifying them. These waivers were linked to the reinstatement rights that let investors get around having to pay front-end sales charges.

Under these rights, individual investors are generally allowed to reinvest money made from selling class A mutual fund shares in the same fund family or the same fund without having to pay fees at the front end. They are given 90-120 days to reinvest for the waiver to be applicable.

Continue reading " UBS to Pay $250K For Not Waiving Mutual Fund Fees" »

April 15, 2016

Broker Violations & FINRA: PNC Investments to Pay $225K for Overcharging for Mutual Funds and Stifel Nicolaus is Fined $750K For Not Following Reserve Requirements

The Financial Industry Regulatory Authority has announced that PNC Investments will pay nearly $225K in restitution for charging retirement clients too much for mutual fund investments. According to the regulator, the brokerage firm did not apply waivers for investors in certain Class A share mutual funds even though there was a waiver for front-end charges for eligible customers.

Instead, said FINRA, PNC Investments sold Class A shares customers with a front-end load or other shares that had a back-end load and higher fees and expenses, some of which were charged on an ongoing basis. Because of this, certain customers were charged excessive fees and paid them.

FINRA said that PNC Investments charged 121 customer accounts in excess of $191,740 for mutual funds—although the actual amount, with interest, was closer to $224,750. PNC will pay restitution to eligible investors.

The brokerage firm self-reported the overcharges after reviewing its own conduct last year to assess whether it was issuing the sales waiver to those that were eligible. FINRA said that the broker-dealer experienced lapses in supervision, did not keep up written policies and procedures that were adequate, and failed to help advisers assess when to waive the sales charges.

Continue reading "Broker Violations & FINRA: PNC Investments to Pay $225K for Overcharging for Mutual Funds and Stifel Nicolaus is Fined $750K For Not Following Reserve Requirements " »

April 6, 2016

Securities Fraud: Ex-SWS Financial Services Broker Faces Improper Trading Charges, Ex-Fox Commentator Settles Penny Stock Scam Case, and Former Investment Adviser Gets 7-Years in Prison

FINRA Accuses Ex-Broker of Unsuitable Trading Involving Mutual Funds
David Randall Lockey, a former broker, is facing Financial Industry Regulatory Authority charges for allegedly engaging in improper trading of customer accounts while associated with SWS Financial Services Inc. He is no longer with that firm, now called the Hilltop Securities Independent Network. According to the regulator, Lockey took part in “unsuitable short-term trading and switching” involving unit investment trusts and mutual funds in four accounts between ’12 and ’14.

Lockey purportedly made about $75,730 for himself and the firm while engaging in improper trading. Meantime, three of the four customers whose accounts he used sustained losses of $15,699. The fourth customer made a gain of almost $5,000.

FINRA said Lockey has not been registered with any broker-dealer since 2014.


Ex-TV Commentator Settles Penny Stock Fraud Charges with the SEC
The U.S. Securities and Exchange Commission is charging former FOX commentator Tobin Smith with fraud. According to the regulator, Smith, who is also a market analyst, and his NBT Group fraudulently promoted a penny stock to investors.

The SEC said that both Smith and his firm received payments to prepare and distribute e-mails, articles, blogs, and other communication promoting IceWEB Inc. stock. They purportedly failed to fully disclose they were receiving the compensation.

The investors were not made aware of that part of what Smith and NBT were paid was linked to a sustained rise in the data storage company’s share price. The Commission said that marketing materials the investors received included misleading and false statements put there to artificially up the share price and trading volume of IceWEB stock. For example, payment for promotional efforts was $300K and IceWEB stock. NBT could also make over $250K if marketing campaigns proved successful.

Continue reading "Securities Fraud: Ex-SWS Financial Services Broker Faces Improper Trading Charges, Ex-Fox Commentator Settles Penny Stock Scam Case, and Former Investment Adviser Gets 7-Years in Prison" »

January 8, 2016

SEC Cautions Mutual Funds That They May be Misdirecting “Sub-Accounting Fees” And Impacting Investor Returns

The Securities and Exchange Commission’s Division of Investment Management has put out a guidance on its website cautioning mutual fund directors to more closely scrutinize the money that is paid to brokers and certain other intermediaries. The warning comes following a sweep exam, which found that fees that should be going toward record-keeping and other administrative services are instead being directed toward encouraging fund sales. A number of mutual funds, brokerage firms, investment advisers, and transfer agents were examined prior to the issuance of this guidance.

SEC rules stipulate that sub-accounting fees cannot go toward finance distribution. These fees should only go toward record-keeping and shareholder services. However, there is an issue with mutual fund-maintained omnibus accounts in which all the fees can be placed together. In such instances, payments made to brokers for selling certain funds may get buried in these administrative fees.

Now, the Commission wants fund directors to watch out for fees that intermediaries selling the funds are getting for account services. It wants these directors to establish processes to assess whether a sub-accounting fee is being harnessed to increase sales. It also is calling on fund service providers and advisers to explain distribution and servicing specifics to fund directors.

Continue reading "SEC Cautions Mutual Funds That They May be Misdirecting “Sub-Accounting Fees” And Impacting Investor Returns " »

December 30, 2015

As Redemption Requests Go Up, Whitebox Advisors to Liquidate Three Mutual Funds

Whitebox Advisors says it intends to liquidate its mutual funds next month following a slew of redemptions and losses this year. A spokesperson for the investment firm said that with so many people asking for their money back, the concentration risks to investors had become too high.
The three mutual funds that are closing are:

· Whitebox Tactical Opportunities Fund, which oversees $112.8M

· Whitebox Market Neutral Equity Fund, which oversees $40.25M

· Whitebox Tactical Advantage Fund, which oversees 20.3M

The news comes just weeks after Third Avenue Management shook up the equity and credit markets when it announced that it was liquidating its Focused Credit Fund (TFCVX), which is a $788.5M corporate debt mutual fund, but that distributions to investors would be delayed so as to prevent even bigger losses. Stone Lion Capital Partners has also suspended redemptions in its $400M of credit hedge funds following many redemption requests.

Continue reading "As Redemption Requests Go Up, Whitebox Advisors to Liquidate Three Mutual Funds " »

December 29, 2015

Securities Fraud News: Barclays to Pay $13.5M For Unsuitable Fraud Transactions, Appeals Court Upholds Asset Freeze of Wyly Brothers’ Relatives, Ex-NBA Player to Get Sentence for Ponzi Scam Conviction

Barclays Capital Gets FINRA Fine for Unsuitable Mutual Fund Transactions

The Financial Industry Regulatory Authority said that Barclays Capital, Inc. (BARC) must pay over $10M in restitution plus interest to customers that were impacted by violations related to unsuitable mutual fund transactions. The self-regulatory organization said that the firm did not give certain customers the breakpoint discounts that applied. Aside from the restitution, Barclays must pay a $3.75M fine.

According to the SRO, from 1/10 through 6/15, the firm’s supervisory systems were not adequate enough to make sure that unsuitable transactions didn’t happen or that the firm’s duties related to mutual fund sales to retail brokerage clients were met. FINRA said that Barclays supervisory procedures wrongly defined a mutual fund switch as warranting three transactions within a specific period of frame. Because of this erroneous definition, the firm did not act on thousands of automated alerts warning of transactions that might be unsuitable, failed to include certain transactions for suitability review, and neglected to make sure that customesr got disclosure letters about transaction costs. Over 6,100 unsuitable mutual fund switches occurred, causing r about $8.63M in customer harm.

FINRA said that the Barclays did not give its supervisors enough guidance so that they could make sure that brokerage customers were engaging in mutual fund transactions that were suitable for their investment goals, holdings, and ability to tolerate risks. The SRO, which evaluated activities over a six-month period of time, said that 39% of mutual fund transactions were found unsuitable and customers suffered financial harm, including realized losses, of over $800K.

Also, during these five years, the firm’s supervisory system did not succeed in making sure that purchases were properly aggregated so eligible customers could get breakpoint discounts, including those involved in 100 Class A share mutual fund transactions.

By settling, Barclays is not denying or admitting to FINRA’s charges. It is, however, consenting to the entry of findings.

Continue reading "Securities Fraud News: Barclays to Pay $13.5M For Unsuitable Fraud Transactions, Appeals Court Upholds Asset Freeze of Wyly Brothers’ Relatives, Ex-NBA Player to Get Sentence for Ponzi Scam Conviction" »

July 24, 2015

SEC Probes Whether Mutual Fund Managers Are Charging Investors Undisclosed Fees

The Securities and Exchange Commission is looking into whether Franklin Templeton, Oppenheimer Funds (OPY), J.P. Morgan Chase & Co. (JPM), and other mutual fund managers are charging investors for fund fees that have not been fully disclosed. While money managers are allowed to use some of investors’ money to pay compensation to the brokers who sell a fund's shares, as well as for certain marketing purposes, the regulator wants to know whether firms are exceeding the allowed limits.

The Commission is trying to find out whether mutual fund companies have come up with ways to make extra payments to brokers by using investor assets to cover certain services, such as the consolidation of client trading records. The agency is worried that proper disclosure of these added fees are not being made to investors. The SEC is also wondering if brokers are more inclined to recommend funds that provide such additional payments, compelling them to prioritize profit over funds.

Fund companies have said that they do properly disclose fees for marketing. Oppenheimer, which is one of the companies that the SEC has investigated over this issue, has said that it doesn't bill mutual fund clients for recordkeeping costs but that the money comes from the firm.

Continue reading "SEC Probes Whether Mutual Fund Managers Are Charging Investors Undisclosed Fees" »

July 17, 2015

Massachusetts Regulator Probes Alternative Mutual Funds Sold by JPMorgan Chase, Wells Fargo, BlackRock, and Other Financial Advisers

William Galvin, the Massachusetts Secretary of the Commonwealth, is investigating the sale of 25 alternative mutual funds, including those created by Wells Fargo (WFC), JPMorgan (JPM), Eaton Vance (EV), and BlackRock (BLK). The state’s securities division sent subpoenas to registered investment advisers that deal with the funds. It noted, however, that receiving a subpoena is “not an indication of wrongdoing at this time.”

A full list of the funds under investigation can be found here. Galvin’s office wants to see documents related to the recommendations the firms made make to retail investors. The Massachusetts regulator’s spokesperson, Brian McNiff, said that the funds were selected because of their size, investment strategies, and sales volumes.

Alternative funds, also called liquid alts, are often marketed as tools that involve hedge-fund-style investment strategies to mitigate risks found in bonds, stocks, and other traditional investments. Alternative funds are not like typical mutual funds. Liquid alts usually hold more investments that are non-traditional. They typically employ trading strategies that are more complex.

Alt funds may invest in global real estate, leveraged loans, commodities, unlisted securities, and start-up companies. Strategies used may include short selling, hedging and leveraging via derivatives, opportunistic tactics that change with market conditions, or even single strategy tactics. There are risks involved.

Continue reading "Massachusetts Regulator Probes Alternative Mutual Funds Sold by JPMorgan Chase, Wells Fargo, BlackRock, and Other Financial Advisers" »

July 2, 2015

SEC Appeals Its In-House Agency Judge’s Decision to Throw Out Charges Against Financial Advisers Paid by Fidelity to Push Specific Mutual Funds

Securities and Exchange Commission employees are appealing a ruling by an administrative law judge dismissing charges against two financial advisers accused of not notifying clients that Fidelity Investments (FNF) had paid them to sell specific mutual funds. In the Texas securities case, SEC Administrative Law Judge James E. Grimes rejected claims that The Robare Group and two of its owners violated the law by failing to adequately disclose that they had a financial relationship with the brokerage firm. Grimes said that from listening to Mark L. Robare and his son-in-law Jack L. Jones Jr. testify, he was hard pressed to imagine them attempting to bilk anyone. This is one of the few cases presided over by one of its judges that the SEC has lost.

Fidelity is The Robare Group's custodian. For the last 11 years, the registered investment advisor has been part of a program in which Fidelity pays it a portion of the revenue earned from the sale of certain third-party mutual funds. The payment goes to the adviser who made the mutual fund sale happen.

Advisors are given access to the funds without any transaction fees. As the custodian, Fidelity refers to payments made to advisers not as commission but as compensation for shareholder administrative fees.

In their appeal, the SEC staffers said that they feared Grimes’ ruling in this case establishes a troubling precedent that shifts the burden of full disclosure of a conflict interest from an investment adviser to a compliance consultant. They said this could allow an investment adviser to be excused from certain securities violations as long as he has a compliance consultant that has not “affirmatively” objected to a “particular disclosure.”

Continue reading "SEC Appeals Its In-House Agency Judge’s Decision to Throw Out Charges Against Financial Advisers Paid by Fidelity to Push Specific Mutual Funds" »

February 14, 2015

SEC Cases: Insider Trading Charges Filed Against Georgia Resident, Mutual Fund Adviser Accused of Improper Asset Handling, & Two-Ex CFOs Agree to Give Back Bonuses Because of Accounting Fraud

Atlanta, GA Man Accused of Making $740,000 for Insider Trading
The Securities and Exchange Commission is filing charges against a Georgia man who is accused of insider trading and making about $740,000 in illicit profits. Charles L. Hill allegedly traded in Radiant Systems stock based on the confidential insider data a friend gave him about an upcoming tender offer to purchase the company. The friend was a friend of a Radiant Systems executive.

In 2011, Hill bought about 100,000 shares valued at close to $2.2 million on the final day of trading prior to the public announcement of the acquisition. That was his first time buying stock of Radiant Systems, and before that it had been years since he’d purchased equity securities.

Mutual Fund Adviser Settles SEC Case with $50K Penalty
In another SEC case, Walter Island Capital LLC will pay $50,000 as a penalty to resolve charges accusing the firm of improperly handling fund assets. The mutual fund adviser, which works with several alternative mutual funds, purportedly maintained millions of dollars of the funds’ cash collateral at brokerage firm counterparties instead of at a custodial bank.

The Commission said that an investment company that maintains securities in a qualified bank’s custody has to do the same with other cash assets. The SEC said that Walter Island Company failed to make sure that about $247 million in cash collateral was maintained at such a bank. The mutual fund adviser is settling without denying or admitting to the charges.

Two-Ex CFOs Return Stock Sale Profits, Bonuses In the Wake of Accounting Fraud
On Tuesday, the SEC announced that two ex-Saba Software CFOs have agreed to return close to $500K in stock sale profits and bonuses that they were given while the company was committing accounting fraud.

The William Slater and Peter E. Williams III are not charged with the company’s misconduct. However, the Sarbanes-Oxley Act requires that they reimburse the company for both the stock sale profits and bonuses.

From December 2008 to January 2012, Slater was CFO until October 2011, when Williams was in the position until January. During that time Saba Software overstated pre-tax earnings and issued material misstatements about revenue recognition practices. In 2014, the software company and two ex-executives were charged with accounting fraud involving falsified timesheets so that quarterly financial targets were hit. Slater made over $333K in stock sale profits and bonuses, while Williams made close to $142K.

Our securities fraud lawyers at Shepherd, Smith, Edwards, and Kantas, LTD LLP are here to help investors get their money back.

The Insider Trading Case against Hill (PDF)

The SEC Order Against Walter Island Capital
(PDF)

The SEC Order Against Slater, Williams (PDF)


More Blog Posts:
SEC Claims Investment Adviser Paid for Fraud Settlement With Client Monies, Stockbroker Fraud Blog, February 10, 2015

Sun Antonio Spurs Star Tim Duncan Files Texas Investment Adviser Fraud Case
, Stockbroker Fraud Case, January 31, 2015

Investment Adviser, Ameriprise Financial Services Sued by Hanson McClain Over Client Information, Institutional Investor Fraud Blog, January 12, 2015

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

October 30, 2013

Are Alternative Investments Good for Investors?

Even as alternative mutual funds have become very popular among financial advisers and investors These investments employee a variety of complex investment strategies and opportunities to create portfolio diversification that are supposed to protect clients from steep market drops. Already, billions of dollars have gone into these funds in recent years. Their total assets, at around $234 billion right now, are a 33% increase from last year. However, just because so many people are interested in alternative mutual funds doesn’t mean they are good for the average investor.

According to The New York Times, there are some financial advisers who are cautioning customers to exercise great care for the same reason that a lot of investors decide not to go with traditional mutual funds that are actively managed—because it is tough to identify which alternative investment managers are talented/skilled enough to do the job right and which ones could end up getting lucky.

Also, it can be hard enough comprehending any fund prospectus. Multi-alternative funds have hedge-fund-like strategies and managed futures. Then, there are the nontraditional bond funds, which trade on anticipating what bonds will do next and hedging risks linked to rates. Seeing as it is important for investors to be able to comprehend what they are getting into, alternative mutual funds might not be the best choice for the average investor.

These complex investments also can be expensive. Morningstar, an independent investment research firm, says that they cost on average approximately 1.77% of assets.

"Wall Street burns the midnight oil putting together 'products' to sell to Mr., Miss and Mrs. America,” said Shepherd Smith Edwards and Kantas, LTD LLP Founder and Stockbroker Lawyer William Shepherd. The goal is not to serve the best interest of the investor but simply to make a sale. The perfect product is one that sounds great to untrained ears (including the untrained ears of salespersons) and generates a fat hidden commission. Some call such 'products' innovative, others correctly call them gimmicks."

In 2013 alone, 55 new alternative funds have been ushered in, which means that there are now 400 such funds. Blackstone Group, AQR Capital Management and other big hedge fund players are beginning to offer alternative mutual funds to “regular” investors—something that isn’t possible with hedge funds, because individual investors have to be accredited with an income of at least $200,000 and over $1 million in assets.

Meantime, Forbes just reported on two studies on retail investment alternatives. Both found that the growth trend with these investmentss is likely continued. Strategic Insights and Cerulli Associates conducted the studies.

Our alternative mutual fund lawyers represent investors that have sustained losses due to financial adviser fraud. Contact Shepherd Smith Edwards and Kantas, LTD LLP today. Your case consultation with our securities lawyers is free.

Retail Alternative Investments - The Good, Bad And Ugly, Forbes, October 25, 2013

An Intriguing Product That’s Too Complex for Many, New York Times, October 26, 2013


More Blog Posts:

J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles, Stockbroker Fraud Blog, October 28, 2013

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle, Institutional Investor Securities Blog, October 28, 2013

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision, Institutional Investor Securities Blog, October 24, 2013

October 31, 2012

Securities Roundup: Study Recommends Against Additional Money Fund Reforms, Lawmakers Disagree on Whether Dodd-Frank Wiped Out “Too Big to Fail” & An SEC Committee Approves Recommendations to Proposed General Solicitation Ban

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.

Dodd-Frank has sough to terminate “too big to fail,” which is the description for financial firms that are so big and interlinked that should they fail the consequences for the economy would be catastrophic. The government would therefore need to intervene should these entities get into trouble. While the analysis issued from Frank said that the law sets up a “framework” that lets big financial institutions fail without causing economic disaster, the report from Frank found that not only are the country’s largest banks still too big to fail—even bigger than during the recent financial crisis—but also, rather than ending bailouts, it institutionalized them and made them permanent via the act’s ‘Orderly Liquidation Authority in its Title II.

Meantime, the SEC’s Investor Advisory Committee voted in favor of adopting recommendations made by its Investor as Purchaser subcommittee to modify the Commission’s proposed amendments to the general solicitation ban for certain private placements. Per the proposal, the Jumpstart Our Business Startups Act’s Title II would let issuers generally solicit investors for/advertise offerings under Regulation D Rule 506 and 1933 Securities Act Rule 144A as long as only qualified institutional buyers and accredited investors are the ones doing the buying.

Among the recommendations; adopting a new Form GS for issuers planning to depend on the new provisions, mandating that issuers provide materials that they use general solicitation to the SEC (which will in turn make it available to the public), making Form D a requirement to issuers depending on a Reg D exemption, taking action to make sure that performance claims found in materials for general solicitations are grounded in proper performance reporting standards, amending the “accredited investor” definition’s natural persons prong, including non-exclusive safe harbors for how issuers can confirm that the buyers of their generally solicited Rule 506 offerings are this type of investor, and making sure felons and bad actors are disqualified and unable to take part in the Rule 506 offerings.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities law firm that represents victims of investment fraud throughout the US.

Money Market Funds Since the 2010 Regulatory Reforms: More Transparency, Increased Liquidity, and Lower Credit Risk, US Chamber of Commerce

Find the analyses on Dodd-Frank and "Too big to fail" here, The Committee on Financial Services

Investor Committee OKs Recommendations For SEC's Proposal on General Solicitation, BNA/Bloomberg, October 15, 2012


More Blog Posts:
Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Are Likely, Institutional Investor Securities Blog, October 27, 2012

October 8, 2012

Securities Roundup: SLUSA Bars Investors’ State Securities Case Alleging Trust Account Management Negligence, Blocks Investors From Remanding Fraud Case to Puerto Rico & FINRA Enhances Proposed Rules' Cost-Benefit Analysis, Looks at Non-Traded REIT Ads

According to the U.S. Court of Appeals for the Sixth Circuit, the Securities Litigation Uniform Standards Act bars state law breach of contract and negligence claims related to the way the plaintiffs’ trust accounts were managed. The appeals court’s ruling affirms the district court’s decision that the claims “amounted to allegations” that the defendants did not properly represent the way investments would be determined and left out a material fact about the latters’ conflicts of interest that let them invest in in-house funds.

SLUSA shuts a loophole in the Private Securities Litigation Reform Act that allows plaintiffs to sue in state court without having to deal with the latter’s more stringent pleading requirements. In Daniels v. Morgan Asset Management Inc., the plaintiffs sued Regions Trust, Morgan Asset Management, and affiliated entities and individuals in Tennessee state court. Per the court, Regions Trust, the record owner of shares in a number of Regions Morgan Keegan mutual funds, had entered into two advisory service agreements with Morgan Asset Management, with MAM agreeing to recommend investments to be sold or bought from clients’ trust accounts. The plaintiffs are claiming that MAM was therefore under obligation to continuously assess whether continued investing in the RMK fund, which were disproportionately invested in illiquid mortgage-backed securities that they say resulted in their losses, was appropriate.

The defendants were able to remove the action to federal district court, which, invoking SLUSA, threw out the lawsuit. The appeals court affirms this dismissal.

SLUSA also blocks other fund investors from being able to remand their proposed classed action case over alleged fraudulent omissions and disclosures in fund offering materials to a Puerto Rican court.

In Hidalgo-Velez v. San Juan Asset Management Inc., the plaintiffs sued officers and directors of San Juan Asset Management Inc., Puerto Rico Global Income Target Maturity Fund Inc., BBVA Securities Puerto Rico Inc., the fund’s investment adviser, outside auditor PricewaterhouseCoopers LLP, and a number of John Does. The plaintiffs contended that fraudulent omissions and disclosures were made in the prospectus that they referred to when buying fund shares and that these defective offering materials that are a violation of Puerto Rico law.

PricewaterhouseCoopers (PRICWP) removed the action to the U.S. District Court for the District of Puerto Rico, asserting that the case falls within SLUSA’s removal provision. The plaintiffs then made a motion to remand the lawsuit to the Commonwealth court. The district court, however, chose to deny the plaintiffs’ motion, noting that SLUSA precludes lawsuits over a “covered class action” in state court claiming fraud involving the sale or purchase of a “covered security” and that removal is appropriate under the act when the complaint is a covered class action grounded in common law or state statutory and alleges omissions or misrepresentations of material fact or the employ of any manipulative device related to the sale or purchase of a covered security. Also, per the judge, the Fund’s common stock is a “covered security” and therefore does fall within the removal provision of the act.

In other securities news, Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard G. Ketchum told BNA that the SRO plans to more thoroughly examine the benefits and costs of proposed rules before turning them over to the Securities and Exchange Commission for approval. FINRA Chief Legal Officer Robert Colby will spearhead these efforts.

FINRA will also be taking a closer look at ad data for non-traded real estate investment trusts. The SRO sent targeted exam letters titled “Spot-Check of Non-Traded REIT Communications” to certain broker-dealer members. Per FINRA rules, the sales literature and ads of member firms may have to contend with periodic spot checks. Also, the firms that received the letters have been asked to turn in a list of their communications related to their non-traded REITs. FINRA is also seeking proof that the ads were given written approval.

Daniels v. Morgan Asset Management Inc.

Securities Litigation Uniform Standards Act

Hidalgo-Velez v. San Juan Asset Management Inc.

FINRA Will Enhance Cost-Benefit Analysis Of Proposed Rules, Chairman Ketchum Says, BNA/Bloomberg, October 1, 2012

Targeted Examination Letters: Spot-Check of Non-Traded REIT Communications


More Blog Posts:
Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA, Stockbroker Fraud Blog, March 28, 2012

Annuity Investors Should Not Rely on Class Actions to Recover Their Losses, Stockbroker Fraud Blog, February 14, 2009

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

October 2, 2012

Securities Lawsuit Over Excessive AXA Mutual Fund Management Fees in Variable Annuity Program Can Proceed, Says NJ District Court

According to the U.S. District Court for the District of New Jersey, plaintiff Mary Ann Sovolella can sue AXA Equitable Life Insurance Co. on behalf of eight mutual funds that belong to a variable annuity program for excessive management fees. Per Judge Peter Sheridan, the economic realities and a broad interpretation the 1940 Investment Company Act Section 36(b) gives her standing. The defendants are AXA Equitable Funds Management Group LLC (collectively AXA) and AXA Equitable Life Insurance Company (AXA Equitable).

Sovolella is suing on behalf of the AXA Funds, EQ Advisors Trust and those that paid investment management fees. She alleges that charging the funds management fees that were excessive violates ICA’s Section 36(b). The defendants’ sought to have the securities lawsuit dismissed on the grounds of lack of statutory standing.

The plaintiff joined the EQUI-VEST Deferred Variable Annuity Program after the opportunity was offered to her by her employer, Newark School System (due to a group annuity contract involving AXA Equitable). The eight AXA Funds in the EQ Trust are part of the portfolios that were made available to Sovolella through the program. AXA charges the funds an investment management fee that is taken out of the fund balance, which lowers the “value of the Plaintiff’s investment.”

While ICA’s Section 36(b) includes the provision that investment advisers have a fiduciary obligation regarding the “receipt of compensation for services” that they give to mutual funds, there are limits as to who can pursue a claim. An action can only be brought by the Securities and Exchange Commission or a security holder for a mutual fund that is allegedly charging fees that are excessive. However, per the court, ICA doesn’t provide a definition for the term “security holder.” While the defendants argued that Sovolella is not a “security holder” the plaintiff, maintains that she is one as this pertains to the funds.

Denying the defendants’ motion to dismiss, the court said that while it doesn’t make “sense to limit standing” in in order to enforce Section 36(b) to AXA or any entity that didn’t pay the fees that were allegedly excessive, Sovolella and other investors that are similarly situated are accountable for and did pay all challenged fees while bearing the complete risk of “poor investment performance,” entitled to direct AXA on how to vote their shares, and when the plaintiff opts to take out her investment in the fund it will be her responsibility to pay the investment taxes. Plaintiff, therefore, possesses an “economic stake" in these transactions.

Sivolella v. AXA Equitable Life Insurance Co., Justia (PDF)

1940 Investment Company Act (PDF)

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Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

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Continue reading "Securities Lawsuit Over Excessive AXA Mutual Fund Management Fees in Variable Annuity Program Can Proceed, Says NJ District Court " »

May 11, 2012

Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam

UBS Financial Services Inc. of Puerto Rico (UBS) has agreed to pay $26.6 million to settle the Securities and Exchange Commission administrative action accusing the financial firm of misleading investors about its control and liquidity over the secondary market for nearly two dozen proprietary closed-end mutual funds. By settling, UBS Puerto Rico is not denying or admitting to the allegations.

Per the SEC, not only did UBS Puerto Rico fail to disclose to clients that it was in control of the secondary market, but also when investor demand became less in 2008, the financial firm bought millions of dollars of the fund shares from shareholders that were exiting to make it appear as if the funds’ market was stable and liquid. The Commission also contends that when UBS Puerto Rico’s parent firm told it to lower the risks by reducing its closed-end fund inventory, the Latin America-based financial firm carried through with a strategy to liquidate its inventory at prices that undercut a number of customer sell orders that were pending. As a result, closed-end fund clients were allegedly denied the liquidity information and price that they are entitled to under the law. UBS Puerto Rico must now pay a $14 million penalty, $11.5 million in disgorgement, and $1.1 million in prejudgment interest.

The SEC has also filed an administrative action against Miguel A. Ferrer, the company’s ex-CEO and vice chairman, and Carlos Ortiz, the firm’s capital markets head. Ferrer allegedly made misrepresentations, did not disclose certain facts about the closed-end funds, and falsely represented the funds’ market price and trading premiums. The Commission is accusing Ortiz of falsely representing the basis of the fund share prices.

In other stockbroker fraud news, the U.S. District Court for the District of Colorado has denied Morgan Keegan & Co. Inc.'s bid to vacate the over $40,000 arbitration award it has been ordered to pay over the way it marketed its RMK Advantage Income Fund (RMA). Judge Richard Matsch instead granted the investors’ motion to have the award confirmed, noting that there were “many factual allegations” in the statement of claim supporting the contention that the firm was liable.

Per the court, Morgan Keegan had argued that the arbitration panel wasn’t authorized to issue a ruling on the claimants’ bid for damages related to the marketing of the fund, which they had invested in through Fidelity Investment. Morgan Keegan contended that seeing as it had no business relationship with the claimants, it couldn’t be held liable for their losses, and therefore, the FINRA arbitration panel had disregarded applicable law and went outside its authority. The district court, however, disagreed with the financial firm.

In other stockbroker fraud news, the SEC has reached a settlement with a Florida attorney accused of being involved in a financial scam run by a viaticals company that defrauded investors of over $1 billion. The securities action, which restrains Michael McNerney from future securities violations, is SEC v. McNerney. He is the ex-outside counsel for now defunct Mutual Benefits Corp.

The MBC sales agent and the company’s marketing materials allegedly falsely claimed that viatical settlements were “secure” and “safe” investments as part of the strategy to get clients to invest. The viaticals company also is accused of improperly obtaining polices that couldn’t be sold or bought, improperly managing escrow premium funds in a Ponzi scam, and pressuring doctors to approve bogus false life expectancy figures.

McNerney, who was sentenced to time in prison for conspiracy to commit securities fraud, must pay $826 million in restitution (jointly and severally with other defendants convicted over the MBC offering fraud).

UBS Puerto Rico unit to pay $26.6 mln in SEC pact
, Reuters, May 1, 2012

Morgan Keegan & Co. Inc. v. Pessel (PDF)

SEC Files Charges Against Former Attorney for Mutual Benefits, SEC, April 30, 2012


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Continue reading "Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam" »

June 16, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court

In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd says, “As Wall Street fraud continues to plague investors, regulator ignore existing rules and legislators bow to lobbyists to dilute new legislation aimed at curtailing the plague. Yet, as an attorney I am most dismayed when “activist” judges - especially Supreme Court Justices – take the side of those who victimize investors. In the 1930’s and 1940’s laws were passed to regulate Wall Street. Our capital markets then became the safe haven for investors worldwide and grew exponentially. Now we seem to be in a ‘race to the bottom,’ with Wall Street more and more resembling Times Square - with a huckster every ten feet.”

Related Web Resources:

Janus Capital Group v. First Derivative Traders, US Supreme Court (PDF)

In 5-4 Vote, Supreme Court Limits Securities Fraud Suits, New York Times, June 14, 2011

Supreme Court Ruling on Janus Funds “Smells”, Business Insider, June 16, 2011


More Blog Posts:
Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

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May 12, 2011

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery

FINRA is fining Wells Fargo Advisors LLC $1 million over the allegations that the financial firm did not deliver mutual fund prospectuses within the three days (as required by federal securities laws) and delays in the updating of material information about former and current representatives. Wells Fargo has agreed to the fine.

Per FINRA, about 934,000 clients who bought mutual funds two years ago were affected when Wells Fargo did not deliver prospectuses within three days of the transactions. Prospectuses were given to clients anywhere from one to 153 days late. The SRO contends that even after a 3rd provider notified the broker-dealer about the delay, Wells Fargo allegedly did not take corrective action to remedy the problem.

FINRA also says that the financial firm did not abide by the SRO’s rules when it wasn’t prompt in reporting required information about its representatives, both past and present. Securities firms must make sure that the information on their representatives' applications for registration on Forms U4 are current in FINRA’s CRD (Central Registration Depository). Termination notices, known as Forms U5, must also be updated. Financial firms have 30 days from finding out about a “significant event” to update the forms. Examples of such events are customer complaints, formal investigations, or an arbitration claim against a representative. FINRA says that Wells Fargo did not update 7.6% of its Forms U5 and about 8% of its Forms U4 between 7/1/08 and 6/30/09. This resulted in almost 190 late amendments.

By agreeing to settle, Wells Fargo is not denying or admitting to the securities charges. The broker-dealer has, however, consented to the entry of FINRA’s findings.

Related Web Resources:
FINRA Fines Wells Fargo Advisors $1 Million for Delays in Delivering Prospectuses to More Than 900,000 Customers, FINRA, May 5, 2011

FINRA fines Wells Fargo $1M for prospectus delays, Forbes/AP, May 5, 2011

CRD, Financial Industry Regulatory Authority


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January 22, 2011

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah

According to the US Securities and Exchange Commission, while working at Aquila Investment Management LLC, ex-portfolio managers Thomas Albright and Kimball Young allegedly defrauded the Tax Free Fund for Utah (TFFU)—a mutual fund that was heavily invested in municipal bonds. Now, the two men have settled the securities fraud charges for over $700,000. However, by agreeing to settle, Young and Albright are not admitting to or denying the allegations.

The SEC claims that without notifying the TFFU’s board of trustees or Aquila management, the two men started making municipal bond issuers pay “credit monitoring fees” on specific private placement and non-rated bond offerings. The fees, which were as high as 1% of each bond's par value, were charged to supposedly compensate Albright and Young for additional, ongoing work that they say was required because the bonds were unrated. The SEC says that credit monitoring was actually part of the two men's built-in job responsibilities and that although deal documents made it appears as if the fees (totaling $520,626 from 2003 to April 2009) had to be paid and would go to TFFU, they actually end up in a company that Young controlled and that Albright owned equal shares in.

The SEC says that after management at Aquila found out in 2009 that Young and Albright were charging these unnecessary fees, the financial firm suspended the two men right away and reported them to the agency. The agency says the two men violated their basic responsibilities as investment advisers of mutual funds when they failed to act in the fund’s best interests.

Related Web Resources:
The SEC Order Against Young (PDF)

The SEC Order Against Albright (PDF)

Tax Free Fund for Utah

Municipal Bonds, Stockbroker Fraud Blog

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August 23, 2010

Investors Seek Recovery of Losses in Oppenheimer Champion Income Fund, Oppenheimer Rochester National Municipal Bond Fund and Nuveen High Yield Municipal Bond Fund

Oppenheimer Champion Income Fund (OPCHX; OCHBX; OCHCX; OCHNX; OCHYX) plummeted 82% overall making it the worst performing taxable high yield bond fund of 2008. The investors believed they were in a conservative high yield fund when in fact they were exposed to illiquid derivatives and high risk mortgage backed securities. The collapse eliminated approximately $2 billion over the course of 15 months.

Investors who purchased this fund were clients of UBS, Citigroup Smith Barney, Wachovia, Linsco Private Ledger LPL, Merrill Lynch, UBS, ING, and Stifel Nichols among others. Many investors who were sold conservative high yield bond funds were shocked to learn that they had losses of 40% to 80% of their principal. With slightly higher risk than a CD, this gave investors a one to two percent higher rate of return. Now, these conservative investors will need nearly 5 years of income just to recover. Meanwhile due to the inverse relationship between interest rates and bonds, high quality bonds have risen in value.

The Oppenheimer Rochester National Municipal Bond Fund (ORNAX; ORNBX; ORNCX) lost approximately 60% of its $4 billion in assets. The fund violated its investment ratio in illiquid securities and failed to disclose risk factors associated with the overconcentration of municipal bonds that could become illiquid quickly.

The Nuveen High Yield Municipal Bond (NHMAX; NHMBX; NHMCX; NHMRX) suffered losses of 40% in 2008. The fund invests around 80% in bonds rated BBB or below and was the reason for the decline.

Continue reading "Investors Seek Recovery of Losses in Oppenheimer Champion Income Fund, Oppenheimer Rochester National Municipal Bond Fund and Nuveen High Yield Municipal Bond Fund" »