December 29, 2011

SEC Modifies Definition of Net Worth Standard for “Accredited Investors” with Final Rule

The SEC has adopted a final rule that revises the net worth standard for “accredited investors.” Although the modified definition went into effect once the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, the SEC still had to adjust its rules to this modification. Per the Dodd-Frank Act’s Section 413(a), the Securities Act of 1933's definition of “accredited investors” cannot include the value of a primary person’s residence for purposes of determining whether he/she qualifies as one based on possessing a net worth of over $1 million.

The Securities Act states that all sales and offers of securities in the US must be registered unless they are exempt from the criteria. The point of the concept of “accredited investors” is to be able to ID people that can stand the economic risk of investing in a security that is unregistered for an indefinite time frame and, should it come to it, be able to afford losing their entire investment. Because “accredited investors” are usually the only ones that are given the opportunity to invest in private offerings, the opportunity for certain people to invest and the pool of available investors is influenced by whether an investor can be considered an accredited investor.

Before Dodd-Frank, one’s main residence and its fair market value, as well as the indebtedness obtained by the residence, were factored in when calculating net worth to figure out whether or not the individual fulfilled the $1 million threshold. The Act’s Section 413(a), however, took this property out of the equation but only up to the residence’s fair market value when the securities’ sale takes place. This means that if one’s primary residence is “underwater,” it will lower the individual’s net worth according to the amount of indebtedness that goes beyond the fair market value of that person’s primary residence for purposes of determining whether or not that person is an accredited investor. The final rules also include a limited grandfathering provision letting investors that no longer qualify as “accredited investors” because of changes put into effect by Dodd-Frank to be treated as accredited for certain “follow-on” investments.

The final rule will go into effect 60 days after it is published in the Federal register.

Throughout the US, Shepherd, Smith, Edwards, and Kantas, LTD, LLP represents investors who are victims of securities fraud in recovering their losses.

Read the final rule (PDF)

SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act, SEC, December 21, 2011


More Blog Posts:
FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investor Securities Blog, April 8, 2011

Continue reading "SEC Modifies Definition of Net Worth Standard for “Accredited Investors” with Final Rule" »

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Posted In: SEC

Tags: Dodd-Frank Act

December 8, 2011

SEC’s Office of the Whistleblower Received 334 Tips During FY 2011

The Securities and Exchange Commission's Office of the Whistleblower says it has already received 334 tips since becoming operational in August 12. The office issued its fiscal year 2011 report last month.

Per the report, between August 12 and September 30, which was when FYI 2011 ended, most of the complaints received by the office involved the areas of:
• Market manipulation
• Offering fraud
• Corporate disclosures and financial statements

The SEC’s whistleblower office received complaints from 37 states—the most, at 34, came from California—and a number of foreign countries, with the majority from China and the United Kingdom. Officials say that the quality of the tips they’ve been receiving has gotten better.

The SEC’s Office of the Whistleblower has not given out any awards yet. One reason for this is that the 90-day reward application period for applicable cases is not yet over. Eligible tipsters are those that provided information that led to securities cases resulting in monetary sanctions of over $1 million.

According to a survey conducted by one employment and labor law firm, S & P 500 senior executives and top officers at other organizations are worried about this bounty program and its monetary incentive that could convince the more reluctant whistleblowers to come forward. 73% of respondents said that they considered retaliation and whistleblowing to be emerging risk areas. Many said that even as the number of whistleblower tips will likely go up, their companies are only moderately prepared to deal with these claims.

Under Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 922, if the following circumstances apply, the SEC must pay 10-30% of any money the government to the whistleblower:

• The whistleblower voluntarily gave the insider information
• The information is original, comes from the tipster’s independent analysis or knowledge, and didn’t come to the Commission from any other source
• The information allows the SEC to bring a successful enforcement action
• Monetary sanctions are more than $1 million. Penalties, interest, disgorgement and any other monies are part of this consideration.

Meantime, the Government Accountability Office says in its new report that it found that the financial statements belonging to the SEC's Investor Protection Fund for FY 2010 and 2011 were materially fair. Whistleblower bounties are paid from that fund.

The GAO also said that in FY 2011 the SEC made significant steps forward in terms of remediating material weaknesses in its internal control for financial reporting, information systems, and account processing. Although these issues are not material anymore, the GAO felt that they should still be addressed in its report. The four areas where the significant deficiencies existed were:

• Budgetary resources
• Information security
• Accounting processes and financial reporting
• Filing fees and registrant deposits

The Securities and Exchange Commission's Office of the Whistleblower FYI 2011 Report

Companies Anticipate Rise in Whistleblower Claims According to Littler Survey, 96 Percent of Senior Executives Reveal Growing Concern, Littler, November 14, 2011

Securities and Exchange Commission’s Financial Statements for Fiscal Years 2011 and 2010, GAO (PDF)


More Blog Posts:
Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

SEC Looking at Other Ways to Communicate with Whistleblowers, Institutional Investor Securities Blog, September 14, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011


Continue reading "SEC’s Office of the Whistleblower Received 334 Tips During FY 2011" »

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Posted In: SEC , Whistleblower Lawsuits

November 28, 2011

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff

U.S. District Judge Jed S. Rakoff has turned down the proposed $285M settlement between the SEC and Citigroup Global Markets Inc. However, unlike with the SEC’s tentative $33M settlement with Bank of America that he rejected, eventually approving a $150 million settlement between both parties—this time, Rakoff is ordering the SEC and Citigroup to trial.

The SEC claimed Citigroup sold Class V Funding III right as the housing market fell apart in 2007 and then bet against the $1 billion mortgage-linked collateralized debt obligation. Meantime, the financial firm allegedly failed to tell clients about this conflict of interest. Investors would go on to lose nearly $700 million over the CDO, while Citigroup ended up making about $160 million.

To many observers, Rakoff’s decision doesn’t come as a surprise. He has expressed concern with the SEC’s handling of securities cases for some time. In his ruling today, Rakoff was very clear in stating that he didn’t believe the tentative agreement was “fair… reasonable… adequate, nor in the public interest.” He also called for the “underlying facts” and made it clear that the SEC’s typical boilerplate settlement, which usually involves the other party agreeing to the terms but not admitting to or denying wrongdoing, was not going to suffice.

Until now, the SEC’s settlement policy has allowed the Commission to declare a victory while letting defendants get away with not acknowledging any wrongdoing so that private plaintiffs cannot use such an outcome in litigation against them. Now, however, Rakoff wants the court and the public to actually learn whether or not Citigroup acted improperly.

Also in his opinion, Rakoff spoke about how the current settlement doesn’t do anything for the investors that Citigroup allegedly defrauded of hundreds of millions of dollars. Not only that but the SEC isn't promising to compensate the alleged securities fraud victims.

For now, the trial between Citigroup and the SEC is scheduled for July 2012. However, the Commission could decide to appeal Rakoff’s ruling and ask an appellate court to either make him accept the $285 million settlement or appoint a new judge to the case. According to the New York Times, however, this could prove challenging because a writ of mandamus would be required.

Our securities fraud law firm has had it with financial firms defrauding investors and then getting away with this type of misconduct. It is our job to help our clients recoup their losses whether via arbitration or in court.

Behind Rakoff’s Rejection of Citigroup Settlement, NY Times, November 28, 2011

Judge to SEC: Stop settling, start really suing, OC Register, November 28, 2011

Read Judge Rakoff's Opinion


More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

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

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

Continue reading "Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff" »

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Posted In: Citigroup , Collateral Debt Obligation , Financial Firms , SEC

August 5, 2011

SEC’s Proxy Access Rule is Rejected by Appeals Court

The U.S. Court of Appeals for the District of Columbia Circuit has struck down a Securities and Exchange Commission rule that would have let company shareholders nominate one or two director nominees to their boards. The proxy access rule would have allowed groups with possession of a minimum 3% voting power of a company’s stock for a minimum of three years to nominate board candidates. Companies would have had to include information about these shareholder-nominated director candidates in their proxy materials.

The SEC had approved the regulation last year. It would have gone into effect in November, but the Commission stayed it after the US Chamber of Commerce and the Business Roundtable filed their legal challenge asking for the stay. The Business groups had said the rule was in violation of the Administrative Procedure Act and would “handcuff directors and boards,” exclude the majority of retail shareholders, and worsen the “short-term focus” considered among the main causes of the economic crisis. There were also concerns that the proxy access rule would let hedge funds, union-connected pension funds, corporate raiders, and hedge funds elect directors who would do as they directed.

The Chamber of Commerce and Business Roundtable also accused the SEC of disregarding studies and evidence that revealed the” adverse consequences of proxy access,” attempting to restrict the ability of shareholders to stop special interest groups from starting up expensive election contests, and not giving full consideration to state laws about access to principles about and related to proxy that already exist.

In its July 22 ruling the appeals court agreed with the two parties’ claim that the SEC behaved “arbitrarily and capriciously” when it failed to “adequately consider” how the rule would impact “efficiency, competition, and capital formation.” The court also said that the SEC did not “supported its predictive judgments,” failed to address the problems brought up by commenters, and “contradicted itself.”

Following the court’s decision, US Chamber of Commerce CEO and president Tom Donahue said: praised the court’s ruling, which refused to let “special interest politics” to be infused “into the boardroom.” Shepherd Smith Edwards & Kantas LTD LLP and stockbroker fraud lawyer William Shepherd, however, had this to say about Donahue’s statement: “This is an outrageous statement for the Kings of special interest politics to make! In fact, this story is really about special interest politics in the courtroom.”

While businesses that opposed the proxy access rule feared it would give environmental and labor union groups more power at corporations and that shareholder value would suffer, its supporters had argued that giving shareholders a bigger hand in who got to sit on corporate boards could have prevented the financial crisis.

According to Investment News, there is evidence that unions could use any additional voting influence to advance their interests. It was just several years ago that the California Public Employees’ Retirement System used its shareholder power in Safeway Inc. to try to vote out chief executive Steven Burd. It also pressured the company to resolve a strike under conditions that favored unions. CalPERS's efforts failed both times.

Our securities fraud lawyers are dedicated to protecting investors and helping their recover their losses sustained because of broker misconduct. Contact our stockbroker fraud law firm to request your free consultation.

Related Web Resources:
Striking a blow to SEC, court voids investor rule, Investors.com, July 22, 2011

U.S. Chamber Joins Business Roundtable in Lawsuit Challenging Securities and Exchange Commission, US Chamber of Commerce, September 29, 2010

Read the legal challenge filed by the Business Roundtable and the US Chamber of Commerce (PDF)

Read SEC's Proxy Access Rule (PDF)


More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011

SEC Examines Proxy Advisory Firms, Institutional Investors Securities Blog, October 14, 2010

SEC Proposes New Rule to Verify Swap Transactions, Institutional Investors Securities Blog, January 27, 2011

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Posted In: Miscellaneous , SEC

July 30, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC

The Securities and Exchange Commission has issued an order raising the threshold for determining whether an investment adviser can charge performance fees to clients. The increase is because of inflation. It also executes a Dodd-Frank Wall Street Reform and Consumer Protection Act requirement.

Under the Investment Adviser Act’s Rule 205-3, investment advisers are allowed to charge performance fees if the client meets certain criteria. Two tests with dollar amount threshold are among these requirements.

Per the SEC order, an investment adviser can charge performance fees if it is managing at least $1 million for the client, or if the latter’s net worth is over $2 million. Either test has to have been satisfied at the time that the advisory contract is entered. Prior to this order, since 1998 the thresholds have been $750,000 and $1.5 million, respectively.

Under the Dodd-Frank Act, the Commission was required to set forth an order to take into account inflation by July 21, 2011. The new order will go into effect on September 19, 2011

The SEC has proposed amendments to Rule 205-3, including:
• Using the PCE Index as the inflation index to calculate the inflation adjustment rates to this rule, which would be updated every five years.

• Excluding the value of that person’s main residence and debt that the property securities when determining if someone is a “qualified client”.

• Letting an investment adviser and its clients keep existing performance fee arrangements that were set up when they entered into the advisory contract.

Investment Adviser Fraud
Unfortunately, there are investors who end up losing money because of investment advisor fraud. Our securities fraud lawyers can help you determine whether you have a case.

SEC Issues Order Raising Performance Fee Rule Dollar Limit to Adjust for Inflation, SEC, July 12, 2011

Read the SEC Rule (PDF)


Read the SEC's Final Rule on this Matter from 1998

Rules Under the Investment Advisers Act of 1940

More Blog Posts:
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011

Continue reading "Advisory Performance Fee Rule Limit Adjusted by the SEC " »

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Posted In: Investment Advisers , SEC

July 28, 2011

Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC

According to the Securities and Exchange Commission, the sales practices that broker-dealers engage in when structured securities are hurting investors. The SEC released this recent finding in a report this week. Structured securities products are derivatives whose value is determined from baskets of indexes, other securities, options, debt issuances, commodities, and foreign securities.

The SEC reached its conclusion after conducting a sweep examination of 11 broker-dealers. The Commission says that the financial firms may have guided clients toward complex products even though they were unsuitable for these investors. In certain instances, they also appear to have:

• Charged too high of prices
• Failed to adequately reveal all risks involved
• Traded at prices that were not to the benefit of retail investors
• Committed possible supervisory deficiencies

At the heart of the SEC sweep examination were reverse convertible notes, which is a security that has an embedded put option. RCN are considered among the riskiest structured products. According to the SEC report, there were clients who purchased RCN’ even though these financial products not in line with their investor profiles or stated goals. Many of these RCN investors sustained significant financial losses.

The SEC report is recommending that broker-dealers:
• Implement procedures and controls to detect and stop structured securities-related abuses
• Reveal material facts about the structured product notes when offering them to investors
• Make sure that supervisors and registered representatives undergo specialized training before they sell structured securities
• Properly list structured securities products on client statements

It was just recently that the Financial Industry Regulatory Authority Inc. warned investors to exercise caution when evaluating whether to buy complex investment products.

Our securities fraud lawyers represent investors that have suffered financial losses because they were encouraged to purchase financial instruments that were inappropriate for them.

SEC blasts B-Ds over sales of reverse convertibles, Investment News, July 27, 2011

Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors, SEC, July 27, 2011 (PDF)


More Blog Posts:
RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA, Stockbroker Fraud Blog, October 23, 2010

Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010

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

Continue reading "Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC" »

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Posted In: Broker-Dealers , Reverse Convertibles , SEC , Structured Products

July 11, 2011

GSA Expected to Take Over SEC Leasing System Following Flawed $551M Deal, Says Chairman Schapiro

According to US Securities and Exchange Commission chairman Mary Schapiro, the General Securities Administration will likely take over the SEC’s leasing space system following the agency’s $550 million deal for 900,000 square feet of office space that it ended up not needing. Schapiro made her statements during testimony before a House subcommittee that oversees public buildings. The subcommittee has been looking at the deal.

The SEC made a 10-year deal to rent space at the Constitution Center in DC. The agreement was reached after the 2010 Dodd-Frank Act suggested that the SEC would need to hire hundreds of new employees because of its new tasks. However, the SEC never received the entire $1.3 billion that the reform bill had authorized for this year and the agency had to tell the property owner that it didn’t need the leased space.

Schapiro said she leased the space after she was notified that there were no other leasing options and that the price was right. It was just weeks later that she realized that the SEC couldn’t afford that degree of expansion. Last fall, the agency backed out of about 600,000 of the square feet it had leased. Two other agencies ended up taking most of that space. Meantime, the rest of the space has not been subleased and the landlord is now claiming the agency owes it almost $94 million in damages.

Last May, SEC Inspector General H. David Kotz made available the findings of his offices's probe into the deal. According to Investment News, Kotz said the agency’s analysis had been “deeply flawed and unsound" and that he wants to ensure that SEC officials who were responsible are held “appropriately accountable.” Schapiro and the SEC recently told Kotz about how they intend to fix the system.

Our securities fraud law firm represent clients throughout the US and abroad. We represent individual investors and larger investors with losses up to hundreds of millions of dollars.

Related Web Resources:
Schapiro says GSA will take over SEC leasing after $557M mistake, Investment News, July 6, 2011

UPDATE: Lawmakers Criticize SEC For Lease On Space Never Used, The Wall Street Journal, June 16, 2011

SEC Office of Inspector General

General Securities Administration


More Blog Posts:
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SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore "Red Flags" Indicating Massive Fraud, Institutional Investors Securities Blog, December 11, 2010

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investors Securities Blog, October 27, 2010


Continue reading "GSA Expected to Take Over SEC Leasing System Following Flawed $551M Deal, Says Chairman Schapiro" »

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Posted In: SEC

June 24, 2011

Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee

The House Appropriations Committee has voted to approve an appropriations bill to bill fund the Securities and Exchange Commission for fiscal year 2012 at $1.185 billion. The appropriations level is equivalent to what the SEC was given for FY 2011. However, it is $222 million less than what the White House requested for the next fiscal year. The bill also would bar the funding of the SEC’s “reserve fund,” which the committee believes would work as a “slush fund” for the SEC for programs that Congress has not approved.

According to committee chairman Rep. Hal Rogers (R-Ky.), the House Appropriations Committee has taken steps to funding for programs that are “ineffective and unproven” and stop taxpayer money from going toward waste and redundancy. The committee, however, also reports that it continues to be troubled by the way the SEC handles its funds and is “reticent” to give the commission more funding until it deals with the efficiencies noted in the Boston Consulting Group's (BCG) report, which recommends important structural and operational improvements at the Commission. It remains worried about the SEC’s ability to successfully handle Ponzi scams and has concerns that a proposed rulemaking to register municipal advisors may be too broad.

Says Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd, “At one time, the SEC was one of the few agencies that actually produced revenues for our government (along with the IRS and the Interior Department, which leases federal minerals, etc.). It seems to me that this agency could be self-funding again if it simply imposed heavy fines for actions such as short-selling rule violations. An interesting statement by the committee is ‘we have cut funding for ineffective and unproven programs.’ Judging by the SEC’s recent performances, why would this not include virtually all the Commission's programs”?

Appropriations Committee Approves Fiscal Year 2012 Financial Services Appropriations Bill, US House of Representatives Committee on Appropriations, June 23, 2011


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Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investors Securities Blog, February 21, 2011


Continue reading "Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee" »

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Posted In: SEC

May 29, 2011

Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama

According to House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala.), the Securities and Exchange Commission will proceed with a field hearing in Birmingham, Alabama. The hearing is to let the SEC more fully comprehend Jefferson County, Alabama’s experience as it comes up with policies to enhance disclosure and transparency in municipal finance markets.

Currently, Birmingham, which is the largest city in Jefferson County, is still trying to avoid filing a $4 billion sewer bonds bankruptcy stemming from county officials’ alleged corruption and fraud. The SEC hopes that the hearing will help it in the development of policies to improve disclosure and transparency in municipal finance markets.

Already, the SEC and the Justice Department have filed fraud charges against Jefferson County officials, including ex-mayor Larry Langford, who was convicted in 2009 for taking kickbacks involving the refinancing of county bonds that were for the funding of the reconstruction of the aged sewer system. Charged with alleged involvement in the pay-to-play scam are ex-J.P. Morgan Chase (JPM) managing directors Charles LeCroy and Douglas MacFaddin. JP Morgan Chase has already settled the SEC’s securities charges over the financial fraud, which allowed the financial firm to obtain the rights to some of the sewer bond offerings. It paid Jefferson County $50 million and dropped a $647 million termination fee claim.

Bachus has said that he doesn’t believe that any taxpayer, locality, or ratepayer should have to undergo the same experience as the sewer financing fiasco and the impact it has had. If Jefferson County were to file for bankruptcy, it would be the largest municipal bankruptcy in history.

Related Web Resources:
Congressman Bachus: SEC to Hold Field Hearing on Municipal Debt Reform , Bachus House

Bond Debacle Sinks Jefferson County, Bloomberg Businessweek, November 8, 2009


More Blog Posts:
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investors Securities Blog, May 16, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011


Continue reading "Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama " »

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Posted In: Municipal Bonds , SEC

May 24, 2011

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees

The Securities and Exchange Commission says it will raise the dollar thresholds that would need to be met before an investment adviser can charge a client a performance fee. The monetary thresholds are related to two tests under the 1940 Investment Advisers Act that let investment advisers charge performance-based fees to “qualified clients.”

Under the Act’s Rule 205-3, advisers can charge performance fees in certain circumstances: The investment adviser needs to be managing at least $750,000 for the client or the advisers must reasonably believe that the client’s net worth is over $1.5 million. Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd says, “Sharing in performance is dangerous because the advisors can afford to take large risks with ‘other people’s money’ - risks that the investor may not be able to afford. A combined life savings of $750,000 is not a large sum for retirees, and what does it even mean to ‘reasonably believe’ someone has a net worth of $1.5 million?”

The SEC says that now it will issue an order to revise rule 205-3’s dollar amount tests to $1 million for assets under management and $2 million for net worth. It also proposed amendments to the rule, including:

• Excluding the individual’s primary residence when determining net worth.
• Providing a method to figure out future inflation adjustments of the dollar amount tests.
• Modifying the rule’s transition provisions to factor in account performance fee arrangements that were allowed when the client and the adviser entered into their contract.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has until July 21, 2011 to adjust for inflation the dollar amount tests under Rule 205-3 of this year and after every five years from then on. The act has also directed the SEC to adjust under 1933 Securities Act the net worth standard of an “accredited investor” so that it doesn’t include that individual’s primary residence.

Related Web Resources:
SEC Issues Notice of Plan to Adjust Adviser Performance Fee Dollar Thresholds, BNA Securities Law Daily, May 13, 2011

SEC Publishes Notice Regarding Inflation Indexing of Performance Fee Rule, SEC.gov, May 10, 2011

1940 Investment Advisers Act

More Blog Posts:
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No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Fraud Blog, January 13, 2011


Continue reading "SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees" »

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Posted In: Investment Advisers , SEC

April 21, 2011

Auction-Rate Securities Investigations by SEC and NY Attorney General Are Ongoing

The Securities and Exchange Commission and the New York Attorney General’s office are still investigating whether auction-rate securities market participants knew they were misleading investors about the complexity and liquidity of debt instruments leading up to the market collapse in 2008. Officials for both agencies told BNA about the ongoing probes last month.

It was these misrepresentations to investors that prompted the Financial Industry Regulatory Authority to issue a concept proposal that, should it become a rule, would hold research analysis and reports that analyze debt securities accountable to FINRA requirements. A federal regulator told BNA that the SRO is concerned about misrepresentations that may have been made to retail investors as early as in late 2007 when, even as institutional investors were buying less ARS—causing the market to lose liquidity—ARS sellers were being pushed by underwriters to get retail clients to buy the securities under the guise that the bonds were very liquid and like cash. Also, underwriters and others allegedly knew that the market conditions were headed toward illiquidity despite their claims that the instruments were highly liquid.

The New York Attorney General’s office reported that says that as of last month, financial institutions have agreed to repurchase $60 billion of the ARS. The financial firms have also agreed to pay about $597 million in fines. Among the investment banks that the SEC has reached settlement agreements with are Citigroup Inc. (C), Wachovia Securities LLC, Royal Bank of Canada subsidiary RBC Capital Markets Corp., UBS AG, Merrill Lynch & Co., TD Ameritrade Online Holding Corp. (AMTD, Bank of America Corp. (BAC), and Deutsche Bank AG.


Related Web Resources:
SEC, New York Continuing ARS Probes;
Retail ARS Risk Behind FINRA Proposal, BNA, March 23, 2011

Auction Rate Securities, SEC


More Blog Posts:
Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders, Stockbroker Fraud Blog, September 17, 2010

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investor Securities Blog, September 1, 2010

Continue reading "Auction-Rate Securities Investigations by SEC and NY Attorney General Are Ongoing " »

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Posted In: Auction-Rate Securities , SEC

April 20, 2011

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams

Securities and Exchange Commission’s Office of Compliance Inspections and Examinations deputy director Norm Champ says that when preparing to be examined, investment advisers should look at recent SEC enforcement actions stemming from problems found during previous exams at other advisers. Champ made this suggestion last month at an American Law Institute-American Bar Association-organized investment adviser conference in New York. Champ says that his views were his own and that he wasn’t speaking for the SEC.

Two cases that he cited as ideal examples were SEC v. Venetis and In re AXA Rosenberg Group LLC. Champ said that three AXA Rosenberg entities ended up paying over $240 million over SEC administrative proceedings because of a key computing error in the Venetis case, which involved a multi-million dollar fraud scam over the sale of bogus promissory notes. Although senior management discovered the mistake, they decided not to tell the SEC. The commission suspected there was a problem when its examiners were prohibited from entering certain rooms.

Champ is suggesting that before an exam, investment advisers should figure out their risk areas and review compliance and control procedures. He says that the SEC chooses which advisers to examine based on complaints, tips, referrals, prior exam history, third party data (including information from regulators), commission filing data, affiliated business activity, firm size, disciplinary history, pay arrangements, and time between exams. Exam teams study the investment adviser’s control environment, engage with senior management, pay attention to interactions within the financial firm, and look at conflicts of interest, valuations, portfolio management, advertising, trade allocations, and custody of assets.

Our stockbroker fraud attorneys are dedicated to helping investors recoup their financial losses caused by investment adviser fraud.

Related Web Resources:
Securities and Exchange Commission

Office of Compliance Inspections and Examinations


More Blog Posts:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Institutional Investor Securities Blog, December 28, 2010

Continue reading "Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams" »

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Posted In: Investment Advisers , SEC

March 24, 2011

Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro

Securities and Exchange Commission Chairman Schapiro says reducing the agency’s budget to where it was at in 2008 would result in “significant’ staff furloughs. Other likely consequences would be the curtailment of crucial travel, including visits to registered entities, the cessation of technology infrastructure initiatives, and the curtailing of the SEC’s Dodd-Frank enforcement capabilities. House Republicans are the ones pushing for the budget reductions. Schapiro made her case earlier this month while testifying before the Senate Banking Committee’s Securities subcommittee. Our securities fraud law firm will continue to monitor the developments regarding this matter.

Schapiro says that the continuing resolution, which would find the agency at fiscal year 2010 levels, already makes it tough to close deals with top-rank industry experts she has recruited. She also says any steep cuts would impede the SEC's ability to oversee broker-dealers, mutual funds, investment advisers, and other participants in the retail investing market in “anything but the most cursory way.” Schapiro also expressed concern that credit rating agencies would be able to evade serious examination if the SEC’s budget was tightened.

Sen. Michael Crapo (R-Idaho.), a ranking subcommittee member, noted that while underfunding the SEC can make it hard for the agency it to do its job “aggressively” and “effectively,” he believes that in the wake of the financial crisis, it is now more than ever necessary for all levels of government to perform with greater efficiency. Crapo is calling for an “agency-wide examination” of where the SEC’s resources are going and an assessment of whether they can be “better utilized.” For example, is there technology that can compensate for a reduced staff? What about sharing technology costs over Dodd-Frank oversight needs with the Commodity Futures Trading Commission?

Schapiro also said that the SEC has been effectively implementing a 60-day comment period for most Dodd-Frank rulemaking, rather than just 30 days, to allow time for thoughtful feedback. Current SEC rules are also being examined to determine whether any of them are no longer applicable.


Related Web Resources:
Cuts will stifle, SEC chief warns, The Boston Globe, March 11, 2011

Schapiro Says SEC Will Have to Furlough Staff If House Republican Cuts Are Enacted, BNA Securities Daily, March 11, 2011

Continue reading "Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro" »

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Posted In: Miscellaneous , SEC

December 9, 2010

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants' principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn't these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog

Continue reading "The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions " »

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Posted In: Broker-Dealers , Investment Advisers , SEC , SEC Enforcement

October 22, 2010

BP Oil Spill Payouts Recipients May Be Targeted by Investment Scam Fraudsters, Says SEC

The Securities and Exchange Commission is warning small businesses and individuals to watch out for fraudsters out there that may be targeting the recipients of BP oil spill payments with investment opportunities that promise high returns at little or no risk or involve complex or secretive strategies. Because of their tendency to share information with each other and the high level of trust that exists among its members, professional organizations, ethnic communities, religious groups, and other close-knit affinity groups may be likely targets.

The SEC says that one way to avoid becoming involved in this type of investment fraud is to ask lots of questions and then double check the with the agency or an unbiased source. Also. it is important to make sure that the investment is registered and the seller is licensed.

According to SEC Chairman Mary Schapiro, “We are on the lookout for any securities scams in the Gulf area.” Following Hurricane Katrina, the SEC discovered a number of scams targeting individuals that were compensated by their insurance companies. Fraud schemes included promoters claiming that their companies were taking part in clean-up efforts, trading programs that made false promises of high returns, and Ponzi scams.

SEC Warns of Potential Investment Scams Targeting Recipients of BP Oil Spill Payouts, SEC, October 13, 2010

Investor Alert - BP Payout Recipients: Be on the Lookout for Investment Scams

Continue reading "BP Oil Spill Payouts Recipients May Be Targeted by Investment Scam Fraudsters, Says SEC" »

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Posted In: SEC , Texas Securities Fraud

August 29, 2010

Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investors

The Financial Industry Regulatory Authority, the Securities and Exchange Commission, and the North American Securities Administrators Association have updated their 2008 report regarding financial firms’ best practices when serving elderly investors. The security regulators remain committed to making sure that seniors are given a “fair market” with responsible sales practices and suitable products. The 2008 report, called “Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors,” gave investment firms steps they could take to improve their procedures and policies when working with senior clients.

The 2010 addendum concentrates on several categories, including:
• Effective communication.
• Better employee training regarding issues that specifically affect seniors.
• Establishing internal processes to deal with issues that arise.
• Surveillance, supervision, and compliance reviews that focus on seniors.
• Making sure investments offered to elderly investors are appropriate for them.

The SEC is also tackling regulatory measures related to financial products that target retirees and seniors. Last month, the SEC put out a staff report suggesting that Congress define life settlements as securities to make sure that investors receive protection under federal securities law. Also, in an attempt to enhance target date fund disclosures, the SEC recently proposed rule amendments.

Regulators report that there are nearly 40 million people in the US that belong to the age 65 and older age group. By 2050 that number is expected to hit 89 million.

It is important that the necessary steps are taken protect seniors from elder financial fraud. With their retirement funds, elderly seniors are at risk of becoming the target of securities fraud. As MetLife (MET) Mature Market Institute notes, elder financial abuse “has been called the ‘crime of the 21st century.” She noted for every dollar lost, the victims often suffer related financial losses resulting from health issues and stress.

Related Web Resources:
Protecting the Elderly From Financial Fraud, Minyanville, June 16, 2010

SEC, NASAA, FINRA Update Best Practices for Serving Seniors, Wealth Manager, August 13, 2010

Read the 2008 Report (PDF)

Continue reading "Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investors" »

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Posted In: FINRA , NASAA , SEC , Senior Investors

July 15, 2010

SEC Settles Wrongful Termination Lawsuit with Whistleblower Gary Aguirre for $755,000

The US Securities and Exchange Commission and former SEC attorney Gary Aguirre have settled his wrongful termination lawsuit for $755,000. Aguirre has contended that he was fired in 2005 after accusing his supervisors of mishandling an insider trading probe against hedge fund Pequot Capital Management and trying, without success, to interview John Mack, Morgan Stanley’s then chief executive officer, as part of the probe.

Aguirre claimed that the SEC tried to overlook signs that Pequot had used insider information to trade in Microsoft shares. He also accused the agency of not wanting to interview Mack because of his “political” influence. The SEC had accused Aguirre of insubordination and fired him.

His allegations, however, led to the SEC’s inspector general conducting two internal probes that eventually found that the SEC not only botched its probe of Pequot, but also that it improperly terminated Aguirre from his job. The agency was even accused of strategizing to discredit Aguirre. As for the Pequot investigation, last month the hedge fund and its chief executive Arthur Samberg agreed to settle the SEC’s insider trading case for $28 million.

A Merit Systems Protection Board administrative law judge has finalized the wrongful termination settlement and says it is possibly the largest “of its kind.” Government Accountability Project Legal Director Tom Devine has said that “[u]nfortunately, this large settlement is the exception that proves the rule.” He is calling on Congress to offer “real protections” for regulatory employees. In the meantime, he contends that the existing law will continue to allow “government regulators to turn a blind eye.”

Related Web Resources:
SEC settles with Gary Aguirre over firing during Pequot Capital Management probe, Washington Post, June 29, 2010

SEC Agrees to Pay Aguirre $755,000 Over His Firing, Bloomberg Businessweek, July 15, 2010

Pequot to pay $28 million to settle insider trading case, Reuters, May 27, 2010

Continue reading "SEC Settles Wrongful Termination Lawsuit with Whistleblower Gary Aguirre for $755,000" »

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Posted In: SEC , Whistleblower Lawsuits

May 16, 2010

SEC’s Division of Investment Management to Make 12b-1 Fee and Form ADV Recommendations Soon

According to the director of the Securities and Exchange Commission’s Division of Investment Management Andrew Donohue, its staff is close to recommending that the SEC adopt a proposed rule mandating that mutual funds give clients better information about the uses of Rule 12b-1 distribution fees and their amounts. The fees are automatically taken out of investor mutual fund balances and used as compensation for financial professionals’ expenses, including broker commissions, promotions, and distributions. More than $13 billion in Rule 12b-1 fees were collected in 2008.

Reform of Rule 12b-1 is likely to steer up a lot of controversy between industry participants and consumer interest groups. Adopted under the 1940 Investment Company Act in 1980, 12-b 1 fees’ use has changed significantly since then. At an American Bar Association function last month, Donohue said that the division hopes to recommend a reform proposal that is more investor-oriented, allows clients to have additional knowledge about how much the fees are and how they will be used, and better reflects today’s market environment.

The division is also close to recommending to the SEC that it adopt revisions to Part 2 of Form ADV, which is the main disclosure document that clients get from investment advisors. Under the proposal, registered investment advisers would have to give current and prospective clients a brochure written in plain English that provides important information about the services they are getting and who is representing them.

Donohue noted that the division is also working on a proposal regarding summary prospectus for variable annuities that would also give investors key information in English that is easy to understand, as well access to more information via the Internet. He also noted that because of the increased use of “derivatives (including collateralized debt obligations and credit default swaps) and sophisticated financial products” and the ability of a fund’s manager to put together a portfolio in so many different ways that are not necessary related to how much has been invested or the kinds of instruments in the fund, the division is compelled to examine investment companies derivative activities and what they mean for the “regulatory framework.”


Related Web Resource:
Luncheon Address Before a Meeting of the Business Law Section of the American Bar Association Committee on Federal Regulation of Securities by Andrew J. Donohue, SEC.gov, April 24, 2010

Securities and Exchange Commission’s Division of Investment Management, Securities and Exchange Commission

Continue reading "SEC’s Division of Investment Management to Make 12b-1 Fee and Form ADV Recommendations Soon" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: SEC

May 8, 2010

SEC’s Handling of Credit Rating Agencies Oversight and Failure to Detect Madoff and Stanford Ponzi Scams Questioned at Senate Appropriations Financial Services Subcommittee

At a recent hearing, US Senator Richard Durbin (D-Ill), who is chairman of the Senate Appropriations Financial Services subcommittee, told Securities and Exchange Commission Chairman Mary Schapiro that he was “puzzled” by the SEC’s request for funds to start aggressive oversight of credit ratings agencies in 2011. Earlier this year, the White House asked Congress to fund the SEC $1.234 billion for FY 2011—that’s $123 million more than the actual funding received by SEC during the previous year. Noting that over the past two years Congress had already given the SEC $143 million more than what the White House had recommended, Durbin wanted to know why, if the SEC considers overseeing credit rating agencies such a “huge priority,” the agency hadn’t already devoted some of that extra money to CRA oversight.

Schapiro responded by saying that not only is the SEC extremely committed to “aggressive" CRA oversight (and wants to examine all such agencies regularly) but that the agency had already begun this process. However, Securities Fraud Lawyer William Shepherd considers Shapiro’s statement “strange,” especially as it was “made by someone who, prior to taking over at the SEC, was in charge of the National Association of Securities Dealers, Inc (now called the Financial Industry Regulatory Authority). Under Ms. Shapiro, the NASD had the duty to regulate registered financial firms and was on the front line to govern the actions at the Madoff securities firm, as well as Bear Stearns, Lehman Brothers, and, for that matter, Goldman Sachs." Mr. Shepherd is the founder of Shepherd Smith Edwards & Kantas LTD LLP, a stockbroker fraud law firm.

Durbin and Sen. Susan Collins (R-Maine) also questioned Schapiro about oversights that took place during the investigations into ponzi masterminds Allen Stanford and Bernard Madoff illegal activities, the status of its whistleblower program, the role of the SEC’s new chief compliance officer, and the fates of the staffers who were caught watching porn while on the job.

Schapiro said that 15 of the 20 SEC staffers that were implicated in an inspector general’s report for failing catch Madoff’s ponzi scam are no longer with the agency. The remaining five will be subject to “fair” and “appropriate” disciplinary responses. She also provided details on new efforts that the SEC is implementing to make sure that illegal activities such as those that Stanford and Madoff practiced will most certainly be detected in the future. Schapiro also talked about new, “across the board” leadership and a committee that lets staffers submit tips if it appears that certain colleagues have failed to take specific actions.

Related Web Resources:
Senators Say No to SEC Self-Funding, The Wall Street Journal, April 28, 2010

S.E.C. Employees' Porn Problem, CBS, April 23, 2010

Senate Appropriations Financial Services subcommittee

US Securities and Exchange Commission

Continue reading "SEC’s Handling of Credit Rating Agencies Oversight and Failure to Detect Madoff and Stanford Ponzi Scams Questioned at Senate Appropriations Financial Services Subcommittee " »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Credit Ratings Agencies , SEC

February 3, 2010

SEC Warns that Disclosure of a “Possible Risk” is Misleading When the Event has Already Occurred

According to the US Securities and Exchange Commission, the Private Securities Litigation Reform Act's safe harbor as it applies to certain forward-looking statements isn’t triggered by cautionary remarks made by defendants over the impact of "potential deterioration in the high-yield sector" if, per the plaintiffs’ claim, the defendants knew the deterioration was taking place. The SEC made its comments in an amicus curiae brief to the U.S. Court of Appeals for the Second Circuit.

The case is Slayton v. American Express Co. The class securities fraud action alleges that the defendant engaged in faulty disclosures related to losses in its high-yield investment portfolio. A district court dismissed the complaint over failure to plead scienter. The plaintiffs appealed the case, and the Second Circuit heard oral argument lat October.

The SEC’s statements address the application of the statutory safe harbor to specific statements that Amex made in its May 2001 Form 10-Q’s Management's Discussion and Analysis section. Amex stated that the $182 million in high-yield losses was a reflection of it high-yield portfolio’s ongoing deterioration. Amex also stated that total investment losses for the rest of 2001 were expected to be significantly lower than losses sustained during the first quarter.

The parties disagreed about whether the cautionary language that Amex used was “meaningful” enough for the purposes of safe harbor.

According to the SEC, forward-looking statements in the MD & A, which isn’t part of a financial statement that abides by generally accepted accounting principals, doesn’t fall within the statutory exclusion for these kinds of statements. It also noted that Amex’s statement about the "potential deterioration in the high-yield sector" wasn’t enough for safe-harbor purposes because the defendants were warning about a possible deterioration that they knew was already happening. The SEC says that "It is misleading and therefore insufficient for a company to warn of a 
potentiality that it is aware currently exists.” Also, "If the speaker knows that any of the implied representations is false,
 then the speaker knows that the statement is misleading.”

Misstatements and omissions by an investment adviser, a broker, or an investment firm, can be grounds for a securities fraud claim or lawsuit if financial losses were sustained by others.

Related Web Resources:
Read the SEC'amicus curiae brief (PDF)

Private Securities Litigation Reform Act, Lectlaw

Continue reading "SEC Warns that Disclosure of a “Possible Risk” is Misleading When the Event has Already Occurred" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: American Express Co. , Financial Firms , SEC

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