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" »

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

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January 31, 2010

SEC is working on issues related to asset-backed securities, credit ratings, and money market mutual funds, says Schapiro

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is dealing with a number of credit crisis-related issues associated with money market mutual funds, asset-backed securities, and credit ratings. She also said that the SEC is working on ABS rule proposals that would allow the interests of investors and sellers to align.

The proposals, and other measures, would seek to give investors easier access to loan level data, allow them more time to review products before they invest, create a mechanism to allow for continuous disclosure, and modify “shelf” offerings eligibility standards. Schapiro says that the proposals are meant to be preemptive and would tackle certain areas where issues similar to the ones that surfaced during the current financial crisis might arise in the future.

American and European regulators have been closely examining collateralized debt obligations, mortgage-backed securities, and other ABS because of the large parts they played during the financial collapse. The SEC is reviewing ABS regulations and ABS-related disclosures and reporting. The agency is also seeking to impose more stringent credit quality and maturity requirements for market mutual funds, as well as put into place substantial liquidity standards. Members will be voting on proposed rule amendments meant to strengthen the money market mutual funds’ framework. The SEC is in the process of taking out credit rating references in a number of its regulations and rules.

Schapiro warned that products are going to start appearing faster and will be sold at “lightning speed” to “sometimes devastating” results. She said the SEC also intends to deal with issues related to municipal securities markets, advisory firm roles, proxy voting mechanics, and the relationships between broker-dealers and investment advisers and their retail clients. .Schapiro made her statements on January 20 during an update regarding the agency’s efforts to deal with credit crisis.

The financial crisis has led to investment losses by numerous individuals and entities throughout the US. Our securities fraud lawyers have been working diligently to help stockbroker fraud victims recoup their losses that were caused by investment adviser and broker misconduct.

Related Web Resource:
Speech by SEC Chairman: Embracing the Change, SEC.gov, January 20, 2010

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Posted In: Asset-Backed Securities , Credit Ratings , Money Market Funds , SEC

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October 8, 2009

SEC Office of Administrative Services' Office of Acquisitions Has Shortfalls that Could Impede Operation, Says Audit

According to an external audit of the SEC Office of Administrative Services' Office of Acquisitions (OA), there exists “significant risk areas” that could affect operation and lead to improper accounting of federal resources. OA is responsible for the SEC’s contracting and procurement functions.

Shortfalls revealed included:

• Failure to submit accurate information in the Federal Procurement Data System
• Failure to keep accurate information and records about contracting and procurement
• Failure to engage in contract close-out procedures that are in accordance with Federal Acquisition Regulation and SEC regulations.
• Failure to properly manage and supervise personnel training and contract activities at regional offices

Per the report, shortfalls appear to have occurred due to a number of issues, including insufficient data for properly managing operations, poorly trained employees, and operational procedures that are not consistent.

Also, after checking the SEC's Office of Financial Management records, the Audit found $13 million in contracts that were not identified in OA’s consolidated spreadsheet. In certain cases, OA had marked certain contracts as closed when OFM still noted them as open.

Following the audit, 10 recommendations were issued, including establishing new internal review processes, revising recordkeeping procedures, modifying operational processes, and coming up with a training plan for contracting obligations and personnel performing procurement duties.

SEC Inspector General H. David Kotz also issued a separate audit which found problems within the SEC's Office of Freedom of Information. His audit found that the SEC had compliance issues with the Freedom of Information Act, which outlines procedures that have to by abided by when members of the public ask the federal agency for information.

Deficiencies included a lack of written procedures and policies for handling such requests, improper or inadequate procedures for disclosing documents that are not in compliance, failing to properly manage certain information, discriminating against certain entities asking for data, the improper processing of certain request, and failure to comply by rules requiring that an information request receives a response within 20 days.

Related Web Resources:
Watchdog:Flaws In SEC Acquisitions,Freedom Of Information Offices, Dow Jones, September 25, 2009

SEC Office of Administrative Services' Office of Acquisitions

SEC FOIA/PA Program, The Freedom of Information & Privacy Act Office, SEC.gov

Continue reading "SEC Office of Administrative Services' Office of Acquisitions Has Shortfalls that Could Impede Operation, Says Audit " »

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Posted In: SEC

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September 10, 2009

SEC Warns Broker-Dealers to be Mindful of Their Recruiting Bonuses

Securities and Exchange Commission Head Mary Shapiro is warning broker-dealers to be careful of the recruiting tactics they employ—especially those involving recruiting bonuses. She cautioned that attractive compensation packages can compel registered representatives to watch out for their own self-interests over the interests of investors, resulting in acts of securities fraud. For example, Shapiro cautioned that a broker who knows that she or he will be given a larger compensation for meeting certain commission goals might make unsuitable investment recommendations, churn customer accounts, or take part in other commission-revenue focused actions that aren’t necessarily in the clients' benefit.

Shapiro is also asking broker-dealer heads to watch over big up-front bonuses. Brokerage firms continue to offer large recruiting bonuses to top registered representatives at rival investment banks. Recruiting packages at wirehouses Merrill Lynch, UBS, Morgan Stanley, and Wells Fargo Advisers are between 200-250% of trailing 12-month production. In many instances, an investment adviser who satisfies production targets and brings in a certain percentage of assets is frequently rewarded.

Shapiro’s letter to the firm’s CEOs reminded them that it is the broker-dealer’s responsibility to “police such conflicts” and supervise broker-dealer activities, especially those related to sales practices. She reminded the broker-dealers that when a sales group expands, it is the investment bank's responsibility to not just supervise advisers but to make sure the compliance structure maintains the adequate capacity. She noted that investor interests must always be of prime importance when investment products, such as securities, are sold.

Unfortunately, there are brokers who choose to place their own financial gain over the interests of their clients. This can result in securities fraud losses for investors. A few examples of broker misconduct include churning, misrepresentation, negligence, breach of fiduciary duty, and unauthorized trading.

Related Web Resources:
Read Shapiro's Letter (PDF)

Schapiro Message to B-D CEOs: Watch Your Recruiting Tactics, Research Mag, September 1, 2009

Chairman Mary Schapiro, SEC

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Posted In: Broker Fraud , Broker-Dealers , SEC , SEC Enforcement

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September 3, 2009

SEC, NASD, FINRA & SIPC: New SEC Report Card on Madoff Catastrophy Further Reveals How Investor Protection Is Severely Flawed!

A new report by the Inspector General at the Securities Exchange Commission recounts 16-years of failures at the SEC which led to the financial crime of the century perpetrated by Bernard Madoff and his firm. The report states that the agency “never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.”

The IG confirms that the SEC failed to heed direct warnings and warning signs as early as 1992 which “could have uncovered the Ponzi scheme well before Madoff confessed” to the $50 billion fraud, leading to his 150 year prison sentence.

Critics of cecurities regulators and the securities regulatory system have for years complained that the system is not only inept but perhaps corrupt. Accusations have included that regulators overlook wrongdoing by Wall Street insiders while “rounding up the usual suspects" to appear as if they are doing their jobs. Madoff may be the poster child for this theory.

In the 1930’s, after the crash of 1929, securities laws were passed to protect investors which had recently grown from mostly east coast financial types to a broader group of wealthier Americans nationwide who invested through “wire houses.” In the second half of the 20th century, as more and more of us were drawn into the securities market, many claim that investor protection became more diluted allowing fraud to proliferate. SInce 2000 securities fraud has exploded.

The system of securities regulation works (or not) as follows: Congress delegated oversight of the industry to the SEC. The SEC then delegates day to day regulation of securities firms to “Self-Regulatory Organizations, or “SRO’s.” The largest of the SRO’s was the National Association of Securities Dealers, or NASD, which last year took over the regulatory authority of the second largest SRO, the New York Stock Exchange, and became the Financial Industry Regulatory Authority, or FINRA.

Yet, FINRA is neither the regulator of the entire financial industry, nor an “Authority.” It continues to be a non-profit corporation owned by securities firms, with a charter similar to that of a country club. FINRA makes rules and reports to the SEC regarding its rule changes and enforcement, but it is run by none other than the securities firms it purports to regulate. The NASD, now FINRA, then delegates regulation of each firm’s activities to the firm itself. Each firm designs its own regulatory system then submits this to FINRA for approval. “At least annually” a firm is supposed to be audited by NASD/ FINRA, with further action taken as complaints arise.

Thus, while the SEC is properly feeling heat over the Madoff mess, it was the NASD which had primary power to regulate its member, the Madoff Securities firm – “at least annually.” Here is some interesting info: Bernie Madoff was not only a prominent member of the securities industry, but served as vice chairman of the NASD, a member of its board of governors and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee. Anyone else thinking about foxes and henhouses?

For almost a decade, the head of NASD enforcement, which had responsibility to audit Madoff Securities “at least annually, was Mary Shapiro. Ms. Shapiro left that job just this year when appointed by President Obama as Chairman of the SEC. Does this not comfort you as an investor?

If a brokerage firm fails, investors are protected by something called SIPC insurance. Protection by the Securities Industry Protection Corporation merely means that “what you see is what you get” in a securities account. If a brokerage firm goes out of business coverage for investors is $100,000 of cash in their account and up to $500,000 total, including securities. One problem is that investors are not covered for being defrauded into buying worthless securities. If the firm closes you get your securities, even if these have become worthless.

Yet, in the Madoff mess SIPC did not even want to pay for what was listed in accounts, saying these were just false entries. Perhaps because of the great notoriety, SIPC was forced to pay up. Thirty years ago, SIPC was set up to pay the above limits, which have not been raised with inflation. Instead, premiums paid by brokerage firms had been reduced from a small percentage of their revenues to only $150 annually by each firm. Thus, SIPC barely had the funds to even pay the difference in that recovered from Madoff and the tiny fraction covered by SIPC (less than 5% of the total lost!)

In a previous installment we covered the “race to the bottom” in securities regulation. Wall Street decries that if regulations are not further relaxed it can not compete with other countries. We feel this is a sham and further insult to an already beleaguered investing public.

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

Posted In: FINRA , Madoff Ponzi Scheme , NASD Enforcement , SEC

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August 15, 2009

SEC Seeks Legislation Allowing It to Pursue Securities Regulators After Their Resignation

On July 29, the House voted by voice to approve a bill that clears away any confusion regarding the Security and Exchange Commission’s authority to go after individuals accused of violating federal securities laws while working for a self-regulatory organization (New York Stock Exchange, Financial Industry Regulatory Authority, etc.) even if they are now employed elsewhere.

Rep. Kevin McCarthy (R-Calif) had introduced H.R. 2623 last May. McCarthy says that the bill doesn’t broaden the SEC’s authority, but it does eliminate any questions about whether the agency can pursue “formerly associated persons” that are no long working for the SRO. McCarthy noted that there are “loopholes” in the 1934 Securities Act that let employees at certain organizations get out of being held accountable just by resigning.

The change also would make it obvious that the SEC can pursue former employees of registered clearing agencies, government securities broker-dealers, and the Municipal Securities Rulemaking Board.

In the past, Congress has attempted to grant the SEC this authority. Although the Securities Act of 2008 contained an identical provision that the House passed by voice vote on suspension, this did not make it through the Senate Banking Commission. That bill also suggested that the SEC be given the authority to issue monetary fines in cease-and-desist proceedings, as well as during litigation.

Rep. Barney Frank (D-Mass), who also chairs the House Financial Services Committee, made a motion to pass H.R. 2623 on suspension of the rules.

McCarthy says that Congress needs to codify the scope of the SEC’s authority of “formerly associated persons” of various entitites, including SRO’s, so that the courts can hear these cases rather than dismissing them because there is no statutory authority. McCarthy says it became clear that this kind of legislation was necessary in 2007 when the SEC accused Sal Sodano of failing to enforce compliance with the 1934 Securities Act. Sodano had been the CEO and chairman of the American Stock Exchange at the time the allegations were said to have taken place but by 2005 he had resigned from the Amex post. According to an administrative law judge, the law allowed the SEC to sanction former employers that had worked for different entities, but not an ex- SRO director or officer.

Related Web Resources:
House Passes Legislation Allowing SEC to Sanction Former SRO Officials, Financial Crisis Update, July 31, 2009

HR 2623, Washington Watch

Continue reading "SEC Seeks Legislation Allowing It to Pursue Securities Regulators After Their Resignation" »

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Posted In: SEC , SEC Enforcement

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June 24, 2009

SEC Securities Fraud Lawsuit Accuses Beverly Hills Money Manager Stanley Chais of Leading Investors Into Madoff Ponzi Scam

The Securities and Exchange Commission is suing Beverly Hills money manager Stanley Chais for securities fraud related to his alleged involvement in the Bernard Madoff Ponzi scam. The SEC alleges that Chais and four others worked collectively to raise billions of dollars from investors to fund the $65 billion scheme—the largest Ponzi scam in US history.

Chais investors’ accounts were worth almost $1 billion when the Ponzi scam finally collapsed. Chais, 82, is accused of collecting almost $270 million in investor fees. The Beverly Hills money manager, his family members, and associated entities are also accused of withdrawing almost $546 million in ill-gotten profits. The SEC is seeking financial penalties and the return of ill-gotten gains to investors.

The SEC complaint contends that Chais portrayed himself to his clients as an “investing wizard” and did not let them know that Madoff was actually in charge. The SEC says that Chais either knew that Madoff was running a Ponzi scam or was reckless for not knowing about the scheme. For example, Madoff never reported even one loss on thousands of “purported” stock trades on Chase’ accounts from 1999 to 2008. This alone should have been an indicator that Madoff’s reports were bogus.

Many of Chais’s investors have suffered as a result of the money manager’s alleged misconduct. For instance, the Los Angeles Times reports that Mark Peel, who is part owner and executive chef of Campanile, claims he lost $6 million from investments that Chais is accused of secretly making with Madoff. Peel had to sell his Hancock Park home because of the investment losses he sustained and almost all of his children lost their college funds.

Chais’s attorney denies that his client did anything wrong, did not know that Madoff was bilking investors, and was also a victim of the Madoff scam. Chais, 82, had over 40 accounts with Madoff for himself, family members, and other entities.

In another Madoff-related securities fraud case, the SEC has also filed a lawsuit against Cohmad Securities Corp, Chairman Maurice J. Cohn, executive Robert M. Jaffe, and COO Marcia B. Cohn over allegations that they ignored evidence that Madoff was engaged in a Ponzi scam and actively marketing opportunities with him.

Related Web Resources:
Beverly Hills money manager Stanley Chais accused of fraud, Los Angeles Times, June 23, 2009

Stanley Chais Accused Of Fraud - Raised Billions For The Bernie Madoff Ponzi Scheme, The Post Chronicle, June 22, 2009

Read the SEC Complaint (PDF)

Continue reading "SEC Securities Fraud Lawsuit Accuses Beverly Hills Money Manager Stanley Chais of Leading Investors Into Madoff Ponzi Scam " »

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Posted In: Madoff Ponzi Scheme , SEC , Securities Fraud

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May 19, 2009

More Problems at the SEC: Who Regulates the Regulator?

The Securities and Exchange Commission has come under fire once more over its ability to regulate the parties under its watch. This time, the accusations are over possible incidents involving its own employees engaging in misconduct and abuse. These allegations don’t come at a good time for the SEC, which has already been accused of failing to effectively regulate investment firms, failing to prevent Bernard Madoff’s $50 billion ponzi scam, and failing to stop the some of Wall Street’s biggest investment banks from failing.

One allegation, reported in the Washington Post, accuses SEC Deputy Secretary Florence Harmon of using her position at the agency to “intimidate and influence” a Morgan Stanley broker because she disagreed with the way the firm was handling her mother’s account. She allegedly told a bank executive that the broker should have “Googled her” before talking to her. The broker reported Harmon’s behavior to Morgan Stanley and to investigators.

Harmon has reportedly told the SEC that the only reason she identified herself as an SEC employee is because she felt that the broker was making incriminating statements. The SEC’s inspector general has called Harmon’s alleged misconduct a potential violation of agency rules. While the inspector general didn’t name Harmon, another official confirmed that she was the regulator involved in the incident. The inspector general recommended disciplinary action and possible dismissal. Harmon continues her work as a regulator for the SEC.

Another probe accuses a number of SEC enforcement attorneys of trading United Health Group and Citigroup stocks, as well as other companies’ stocks, at about the same time that the SEC began investigating the firms. The SEC employees involved did not properly report the trades, which they are required to do, per agency rules. Still another investigation accuses a leading SEC official of committed perjury, in court and in writing, when talking about attempts to stop short-selling.

The issue of whether the SEC is able to properly deal with possible violations by its own employees—let alone those committed by the members of Wall Street that it regulates—has been under debate for months. US Senator Charles Grassley says the SEC needs a better compliance system to discourage employee misconduct and allow the public to feel confident that incidents of misbehavior aren’t systemic issues.

Meantime, SEC Inspector General H. David Kotz is also recommending new protections to prevent such abuses. In a report he wrote about the suspicious stock trades by SEC employees, which the Washington Post obtained through the Freedom of Information Act, Kotz noted that the agency’s lack of a proper compliance system makes it hard to make sure that staff members don’t also engage in insider trading.

The SEC says it is working on improving its current compliance policies. New changes are to include the hiring of a chief compliance officer, the installation of a computer system that will report trades made by SEC employees, and the clarification of its rules.

Related Web Resources:
Watchdog Digs Into Conduct At SEC, Washington Post, May 17, 2009

Florence Harmon Named Deputy Secretary, SEC, November 7, 2006

H. David Kotz Named New Inspector General at SEC, SEC, December 5, 2007

Continue reading "More Problems at the SEC: Who Regulates the Regulator? " »

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Posted In: SEC

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April 30, 2009

SEC Sues Broker-Dealer Morgan Peabody Inc Owner For Investment Fraud

The Securities and Exchange Commission is suing Morgan Peabody Inc. owner and chief executive officer Davis Williams for allegedly misappropriating investor funds that were raised in three public offerings. Also named in the complaint were Williams Financial Group, Sherwood, and WFG Holdings. The defendants are accused of violating federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, and Rule 10b-5 thereunder.

The SEC says that from January 2007 – September 2008, Williams notified Morgan Peabody registered representatives that they should sell and offer LLC promissory notes and debentures from WFG Holdings Inc. and Sherwood Secured Income Fund. He then allegedly used millions of dollars (he’d raised $9 million from investors) for personal purposes, including rent at his residence that cost almost $50,000 a month, at least $175,000 in personal travel, and over $200,000 in entertainment and food.

The SEC claims that WFG Holdings investors thought that their money was being invested in Morgan Peabody. Meantime, Sherwood investors were notified that most of their money would go into real estate. Instead, the SEC contends that Williams moved the investors’ money into bank accounts that he oversaw and used the money for personal purposes.

More than 100 investors in nine states purchased the securities. The SEC is seeking disgorgement, injunctive relief, and civil penalties.

Obtaining Financial Recovery from Securities Fraud
Investors that are the victims of securities fraud may be entitled to financial recovery. An experienced stockbroker fraud law firmcan help you successfully get through arbitration or court proceedings so that you recover your lost funds.

Related Web Resources:
SEC sues L.A. broker for fraud, Dailybreeze.com, April 21, 2009

SEC Charges Owner of California Broker-Dealer with Misappropriating Millions in Investor Funds, TradingMarkets.com, April 21, 2009

Continue reading "SEC Sues Broker-Dealer Morgan Peabody Inc Owner For Investment Fraud" »

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Posted In: Broker Fraud , Broker-Dealers , Financial Firms , SEC

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April 15, 2009

US Lawmakers Want SEC and Treasury Department to Answer Questions About Merrill Lynch Executive Bonuses and TARP Funds

US lawmakers are asking government regulators some tough questions about executive compensation at investment banks. Last week, Rep Dennis Kucinich, who heads the House Oversight Committee's Domestic Policy Subcommittee, asked the Securities and Exchange Commission to determine whether Bank of America Corp. violated federal securities laws when it did not tell shareholders that Merrill Lynch was going to pay executives $3.62 billion in bonuses. Kucinich noted that these bonuses were 22 times larger than what AIG executives were offered—equivalent to 36.2% of the Troubled Asset Relief Program (TARP) funds that Merrill received.

A March filing by New York Attorney General Andrew Cuomo (whose office is also pursuing this matter) claims that even though the firm had already made the decision to accelerate bonus payments, Merrill told Cuomo and the House Oversight Committee that it planned to make incentive compensation decisions at the end of the year. Cuomo claims that Bank of America neglected to tell shareholders that Merrill was going to offer executives big bonuses before the BofA merger was final.

When BofA was questioned about Cuomo’s claims, the bank said it revealed everything it was required to before the shareholders voted on the merger. Kucinich says that this makes him wonder about the SEC’s interpretation of fiduciary duty when it comes to revealing all “material” data to shareholders when asking for shareholder action and what is considers “material” information for proxy rules meant to protect investors under the Securities Exchange Act of 1934.

He asked the SEC whether it thinks that B of A’s omission is a material one and, if so, what it would do to redress it. The House Oversight Committee is trying to determine whether officials from Bank of America and Merrill misled Congress about the executive bonuses and their timing.

Meantime, Rep. Edolphus Towns, who oversees the House Committee and Oversight Reform, told Treasury Secretary Tim Geithner that he was worried about media reports that the Treasury Department was trying to “circumvent” statutory restrictions regarding executive pay for companies availing of TARP funds. Towns wants Geithner to respond to news reports that the Treasury Department established special entities to receive federal bailout funds that could then be channeled toward corporate recipients so as to avoid executive pay restrictions and requirements that the US get an ownership interest in the bailout firms. Towns cautioned that it would not be wise for the Treasury Department to allow excessive pay practices to continue at firms that taxpayers had bailed out.

Kucinich Asks If Merrill Bonuses Broke Laws, NY Times, April 7, 2009

Read Representative Towns' Letter to Treasury Secretary Geithner (PDF)

Continue reading "US Lawmakers Want SEC and Treasury Department to Answer Questions About Merrill Lynch Executive Bonuses and TARP Funds" »

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Posted In: Financial Firms , Merrill Lynch , SEC

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February 4, 2009

Securities and Exchange Commission Now Calling for Comments on FINRA Proposal Regarding New Financial Responsibility Rules

The Securities and Exchange Commission wants feedback about the Financial Industry Regulatory Authority's proposal on new financial responsibility rules. Critics have expressed concern that the rules give FINRA wide discretion but without certain safeguards.

The Financial responsibility rules let FINRA make sure that some 5,000 brokerage firms have enough liquidity available so that they can take care of customer claims in a timely manner. FINRA recently submitted a filing with the SEC explaining how the proposed rules would give the self-regulatory organization the authority it needs to act quickly during an emergency or another unforeseen event. FINRA says the necessary safeguards already are in place and vowed to be judicious when exercising this authority.

The proposed rules are based on existing requirements in NYSE and NASD rules. FINRA says that a large number of provisions will only apply to firms that carry or clear customer accounts and would prevent such members from withdrawing equity capital for up to one year without the SRO’s consent. Members would also have to let FINRA know no later than 24 hours after when certain financial triggers are hit.

FINRA has been trying to develop a consolidated rulebook since its formation in July 2007 when the New York Stock Exchange and NASD were merged together. Last May, FINRA requested comments about the rule proposals.

The SRO says a few commenters were worried about how much authority FINRA had under rule 4110(a). Other commenters asked for more specific about the kinds of actions the SRO would have the authority to implement. Another commenter expressed concern that FINRA’s authority to ask for an audit might be too broad. Still others expressed concern over how one proposed rule that prevented members from withdrawing capital for 12 months was even stricter than the SEC’s own requirements.

Related Web Resources:
FINRA Seeks Comment on Proposals for Consolidated Rules Governing Financial Responsibility, Supervision, Books & Records, Investor Education, FINRA, May 14, 2008

Financial Industry Regulatory Authority (FINRA) Rulemaking, SEC.gov

Continue reading "Securities and Exchange Commission Now Calling for Comments on FINRA Proposal Regarding New Financial Responsibility Rules" »

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Posted In: FINRA , SEC

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December 22, 2008

UBS and Citigroup to Pay Nearly $30 Billion to Tens of Thousands of ARS Investors

UBS Financial Services, Inc., UBS Securities, LLC, and Citigroup have reached finalized settlements with the Securities and Exchange Commission to pay tens of thousands of ARS investors almost $30 billion. The settlements will resolve SEC charges that the companies misled investors about the risks involved with auction rate securities.

The SEC’s complaint accused UBS and Citigroup of misleading customers by telling them ARS were liquid, safe investments and failing to warn them of the growing dangers when the market started to fail. When the ARS market froze in February, the SEC says both firms left tens of thousands of clients holding billions of dollars in illiquid ARS.

These finalized settlements will restore about $22.7 billion in liquidity to UBS clients who invested in ARS and some $7 billion to Citigroup investors. SEC Chairman Christopher Cox says investors will get back “100 cents on the dollar on their ARS investments.” Both firms will buy ARS from affected customers at PAR. Customers that sold their ARS under the par difference will be paid between par and the ARS sale price. This is the largest settlement in SEC history.

UBS and Citigroup are not admitting to or denying the SEC’s allegations by agreeing to settle. Both investment firms, however, have agreed to enjoinment from future violations.

The U.S. District Court for the Southern District of New York still needs to approve the settlements, and additional SEC penalties could still arise for UBS and Citi. The SEC is also waiting to finalize the settlements-in-principle it reached with Merrill Lynch, Bank of America, Wachovia, and RBC Capital Markets.

Related Web Resources:
SEC Finalizes ARS Settlements With Citigroup And UBS, Providing Nearly $30 Billion in Liquidity to Investors, SEC, December 11, 2008

SEC Complaint Against UBS (PDF)

SEC Complaint Against Citigroup (PDF)

Continue reading "UBS and Citigroup to Pay Nearly $30 Billion to Tens of Thousands of ARS Investors" »

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Posted In: Auction-Rate Securities , Citigroup , Financial Firms , SEC , UBS

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December 4, 2008

SEC Proposes Road Map For The Mandatory Adoption Of International Financial Reporting Standards

A few weeks ago, the Securities and Exchange Commission formally proposed a road map that could result in the mandatory adoption of international financial reporting standards by US domestic financial report filers. For the largest filers, this could start as soon as 2014.

Beginning November 14, the SEC has opened up a 90-day period for comment on the road map. The SEC’s 165-page report says that making IFRS mandatory should improve the comparability of financial data prepared by foreign companies and US public companies.

Seven “Milestones” Must Be Met in order to Allow IFRS use in the US, including:

• Improved quality of accounting standards at the IASB and Financial Accounting Standards Board.
• Progress toward a funding mechanism for the International Accounting Standards Committee Foundation that is safe, steady, and independent.
• Improved interactive data capabilities for IFRS reporting.
• Early, voluntary IFRS use to show how it will improve financial reporting comparability.
• Proper IFRS education and training for investors, accountants, and auditors.
• SEC rule making fits that with domestic IFRS use.
• Determining whether it makes sense to adopt mandatory IFRS use and figuring out the best ways to sequence it.

Under the SEC proposal, large companies that meet specific criteria would be allowed to apply voluntarily for IFRS in the US. The SEC says that the increase in competition between global markets to raise capital is a key reason for letting US companies use IFRS within the country. The SEC also notes the value of adopting a single, widely accepted set of standards that would benefit US investors and the international markets.

According to Stockbroker Fraud Attorney William Shepherd: "In early 2007, we commented on the “race to bottom” regarding de-regulation and the ever-looser accounting standards for global corporations. Since then, we have witnessed a global meltdown of the financial industry. Yet, deregulation champion SEC Chairman Chris Cox, who has apparently never met a white collar criminal he did not adore, is using his last few days in office to relinquish accounting standards to foreign control. This comes on the heels of George Bush granting co-control over U.S troops and contractors to a shaky Iraqi government. What happened to an administration that disdained the UN, for example, even appointing a US ambassador who openly stated the UN should be disbanded and the US should not pay its dues? This is the most hypocritical group of people who ever walked the face of the earth!"

Related Web Resources:

Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, November 14, 2008, (PDF)

Submit Comments on File No. S7-27-08

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November 26, 2008

SEC Adopts Rules to Streamline Mutual Funds Disclosures But Delays Making Decision on Credit Ratings’ Final Rules

In a unanimous vote, the Securities and Exchange Commission agreed to adopt rule amendments to improve mutual fund disclosures. This includes letting investors receive a summary prospectus written in simple English. The SEC also adopted revisions to the mutual funds’ registration form known as form N-1A, including amendments that let exchange-traded funds use summary prospectuses.

Summary Prospectus
The summary prospectuses, which are voluntary, may include important information about investment strategies and goals, past fund performance, risks, and fees. As long as the statutory prospectus, summary prospectus, and other essential data can be accessed online, mutual funds that send investors a summary prospectus will be fulfilling their prospectus delivery requirements. Key data, such as selling and buying procedures, financial intermediary compensation, and tax consequences must also be included. The SEC expects approximately 75% of all mutual funds to use summary prospectuses.

SEC Chairman Christopher Cox is calling the mutual fund amendments a huge step forward for investors. The amendments will go into effect on February 28, 2009. Form N-1A changes won't go into effect until January 2010.

On the same day these amendments were passed, however, the SEC announced that it was delaying making any final rule changes about credit rating firms and the credit ratings they issue. SEC Chairman Cox said the rating rule proposals package will be discussed on December 3. The Commission continues to maintain that credit rating agency rules remain a top priority for 2008.

However, the future of one proposed ratings provision may already be uncertain. The provision involves mandating that nationally recognized statistical ratings organizations reveal the data that they are using to come up with their ratings. The SEC planned to exclude this provision from the November meeting and it may not be included in the December talks.

Commenting on these recent developments, Stockbroker Fraud Attorney William Shepherd had this to say:

The SEC’s handling of mutual fund disclosure amendments and the proposed credit rating provisions demonstrate that despite the incredible damage to investors over the past eight years, the SEC remains the proverbial “fox in charge of the henhouse.” Led by Chairman Christopher Cox, a former Republican Congressman who is a champion of deregulation, the SEC has continued to provide a free reign to Wall Street, while acting in the worst interest of investors.

Making mutual fund information easier to read is not for the public's benefit. Instead, it is designed to put the onus of sales fraud on the investor—yet another example of “blame the victim.” Rather than maintain the requirement that mutual funds send a full prospectus to investors, these companies must now only provide a “summary," with the full disclaimer document available online.

Thus, when an investor complains that he or she was not given an accurate description of what was being purchased, or worse, was lied to about the risks, all the salesperson and firm needs to do is say: “Well, the prospectus was available to you, all you had to do was go online to read it.”

Of course, 99 our 100 investors will likely not do this. Furthermore, it has been a recent common practice for those who sell mutual funds to omit mailing the required prospectus but later say that they did.

As for the decision to delay making a decision on final rules for credit ratings—why take action now, Mr. Cox, when you have stood by as the credit rating agencies have fraudulently sold their ratings to borrowers for years, while you, the SEC, and Wall Street have known that the credit ratings were completely bogus?

Shame on you, Mr. Cox, shame on the Bush Administration for putting you in office, and shame on the greedy folks on Wall Street for using the SEC as a tool to defraud investors. For all Americans, I ask: “Where is the outrage?”

Mr. Shepherd is the cofounder of Shepherd Smith Edwards and Kantas, LLP , a securities fraud law firm that is nationally recognized for its ability to successfully help investors recoup their losses.


Related Web Resources:

SEC Adopts Fund Disclosure, Money Market Rules, CCH Wallstreet.com

US SEC delays action on credit rating agency rules, Reuters.com, November 19, 2008

Securities and Exchange Commission

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Posted In: Credit Ratings Agencies , Mutual Funds , SEC

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September 18, 2008

Hedge Fund Manager Settles SEC Charges He Helped Defraud Investors of Nearly $20 Million

A hedge fund manager has settled Securities and Exchange Commission charges that he misrepresented Pinnacle West, LLC and Sunquest Development, LLC as sound investments and, as a result, defrauded investors of almost $20 million. Mark Joseph Peterson Boucher will pay a $100,000 civil fine and will be barred from giving investment advice for five years. He also agreed to a permanent injunction from antifraud violations in the future.

Per the SEC’s complaint, the San Francisco-based hedge fund manager told clients that the real estate development companies did not have much debt and owned viable real property when, in fact, one of the companies did not own any property and the other company owned one property and had debts that exceeded potential profits. Along with the companies’ owners, Boucher was accused of using the invested funds for personal purposes. He is not agreeing to or denying the allegations by settling.

The SEC says that even though Boucher was not a registered investment adviser, he charged a fee to give clients advice. He is the author of the book The Hedge Fund on investing and the SEC says that he recommended the companies to clients in a newsletter that he owns.

Gary Paul Johnson, who owns 20% of Sunquest Development stock, also settled antifraud allegations. As part of his agreement with the SEC, Johnson will pay a $120,000 civil penalty, disgorge over $1.8 million in ill-gotten gains and about $700,000 in pre-judgment interest. Defendant and primary Pinnacle West owner John Earl Brake has not yet reached a settlement with the SEC.

SEC Charges Bay Area Investment Adviser, Others in Real Estate Investment Scam, SEC, August 27, 2008

Read the SEC Complaint (PDF)

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Posted In: Broker Fraud , Hedge Funds , SEC

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September 9, 2008

SEC’s New IDEA Will Let Investors Easily Access Data About Public Companies and Mutual Funds

Securities and Exchange Commission Head Christopher Cox has introduced IDEA, an interactive system that will let investors more easily access key financial data about mutual funds and public companies. IDEA, which stands for Interactive Data Electronic Applications, Is the successor to the SEC's EDGAR database and will eventually replace the older system.

The majority of SEC filings currently can only be accessed through EDGAR and in government-prescribed forms. Investors that access the information have to sift through each form and re-keyboard the data.

IDEA will let investors collate information from thousands of companies so that they can immediately generate analysis and reports. The new structure will allow both investors and the SEC to be prepared for when information related to financial disclosures are available in interactive form. The SEC has formally proposed that US investment firms provide their financial information in interactive form. A separate proposal has been made to mutual funds about the information related to their public filings.

Interactive data depends on computer “tags” that work like bar codes, which can identify each individually labeled item included in a company’s financial disclosures. Investors, journalists, analysts, and financial intermediaries would be able to take data from thousands of companies and download, reorganize, and analyze the information. The interactive data filings can be accessed through IDEA later this year.

Investors will still be able to access EDGAR while the transition to IDEA takes place, and EDGAR users can avail of IDEA-like features that will be available through the older system. EDGAR will also continue to serve as an archive for older filings. SEC's Office of Interactive Disclosure Director David Blazkowsky called the agency’s decision to cross the ‘data threshold’ exciting.

SEC's big IDEA — put EDGAR out to pasture and modernize, InvestmentNews.com, August 25, 2008

Spotlight On: Interactive Data Electronic Applications (IDEA), SEC

EDGAR, SEC

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September 1, 2008

SEC Reaches Preliminary Settlement with Merrill Lynch, Pierce, Fenner & Smith to Liquidate About $8.5 Billion in Auction Rate Securities

The Securities and Exchange Commission says it has reached a preliminary settlement agreement with Merrill Lynch, Pierce, Fenner & Smith to liquidate about $8.5 billion in auction-rate securities that are still held by the firm’s institutional and retail investors. Small businesses, individual investors, and charities have until January 15, 2010 to accept Merrill’s offer to repurchase at par value some $7.5 billion in ARS. The investment bank will provide liquidity to some $1.5 billion in ARS that were purchased by institutional investors.

Merrill has “agreed in principal” to the terms of the agreement and is not agreeing to or denying the SEC allegations by settling. The SEC has accused Merrill of misleading thousands of clients into thinking that ARS were highly liquid and equivalent to cash or money market instruments even when the investment bank knew that the market was in trouble.

This settlement does not exempt Merrill from being named in civil lawsuits filed by investors seeking restitution for their losses. As part of its agreement with the SEC, Merrill says it will not deny liability for liquidity loss. The SEC is also evaluating whether an additional fine needs to be imposed on Merrill.

Merrill, along with Goldman Sachs Group Inc. and Deutsch Bank AG, also reached an auction-rate securities market settlement with New York Attorney General Andrew Cuomo. As part of its agreement with the NY AG, Merrill will buy back from retail clients, with account balances up to $4 million, up to $12 billion of illiquid ARS at par. It will also pay a $125 million penalty fee.


Related Web Resources:

SEC Enforcement Division Announces Preliminary Settlement With Merrill Lynch to Help Auction Rate Securities Investors, SEC, August 22, 2008

Merrill Lynch to Buy Auction Rate Securities Positions From Its Retail Clients, Merrill Lynch, August 7, 2008

Merrill Lynch settlement with SEC worth up to $7B, Associated Press, August 22, 2008

Investment banks settle bond cases with New York State, International Herald Tribune, August 22, 2008

Description of Merrill Lynch's ARS Practices and Procedures, Merrill Lynch (PDF)

Continue reading "SEC Reaches Preliminary Settlement with Merrill Lynch, Pierce, Fenner & Smith to Liquidate About $8.5 Billion in Auction Rate Securities" »

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Posted In: Auction-Rate Securities , Merrill Lynch , SEC

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July 16, 2008

Scottrade Agrees to $950,000 Civil Penalty To Resolve SEC Charges of Fraudulent Misrepresentation Regarding Nasdaq Pre-Open Order Executions

Scottrade Inc. agreed to pay a $950,000 civil penalty to settle Securities and Exchange Commission charges that it made fraudulent misrepresentations to clients related to the execution of Nasdaq pre-open orders. The brokerage firm is not admitting to or denying wrongdoing by settling the charges. Scottrade is, however, agreeing to cease and desist from committing future violations.

Pre-open orders are normally placed after the market closes for execution when the market opens next. The SEC alleges that Scottrade made fraudulent misrepresentations when Scottrade told customers it would direct their orders based on a number of factors, including liquidity at market opening.

The SEC says that when a broker-dealer accepts customer orders, the firm is impliedly representing that it will make sure to review the quality of execution on orders. SEC Enforcement Director Linda Thomsen says that Scottrade not only failed to regularly and properly review the execution process but it neglected to consider the way technological advances were impacting the orders.

In 2000, The SEC reported that certain market makers that were trading Nasdaq market securities were offering investors the chance to not have to pay a liquidity premium at the market opening. The SEC told broker-dealers to consider specific pricing options when looking for the best execution for their customers’ orders: 1) Midpoint pricing—a midpoint price between the national best bid and offer (NBBO) used to buy and sell orders and 2) Single Price—one price for buying or selling.

The SEC however, alleges that rather than adhere to this advice, Scottrade misrepresented in customer account opening documents and statements that it would direct customers’ orders based on liquidity at market opening to allow its customers to get executions that were “superior to any one market center.”

The SEC says that Scottrade did not have the policies and procedures to evaluate liquidity at market openings that market centers provided between 2001 and 2004, which is the time period under scrutiny. The broker-dealer consequently failed to consider executions that may have been superior to NBBO, including midpoint and single pricing, when executing Nasdaq pre-open orders.

If you are an investor that has lost money because of the fraudulent actions of a broker-dealer, Shepherd Smith Edwards and Kantas, LLP would like to talk to you. Contact our stockbroker fraud law firm and ask for your free consultation.


Related Web Resources:

Scottrade to Pay $950,000 to Settle SEC Charges, BusinessFirst.com, June 24, 2008

SEC Charges Scottrade for Misrepresentations to Customers, SEC.gov, June 24, 2008


Scottrade

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Posted In: SEC , Securities Fraud

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May 18, 2008

SEC Director Erik Sirri Says Direct Market Access Systems Guidance For Broker-Dealers Is In The Works

At a Security Traders Association conference in Washington DC earlier this month, the Securities and Exchange Commission’s Division of Trading and Markets Director Erik Sirri told broker-dealers to “look for guidance” when using direct access systems when making trades.

The announcement that direct access systems guidance was pending comes after Goldman Sachs Execution and Clearing L.P., a prime broker and clearing affiliate of Goldman Sachs Group Inc., settled SEC charges over its alleged involvement in a customer fraud scheme that involved the use of direct access trading systems.

Also called sponsored access systems, direct access trading systems lets brokers quickly and efficiently handle large quantities of trades for clients. Sirri says that the guidance would help broker-dealers determine what controls need to be implemented to determine when customers are engaging in illegal trades. He says that the SEC and the Financial Industry Regulatory Authority have been in dialogues with direct access systems users.

Following the case involving the Goldman Sachs unit, SEC's Enforcement Division Director Linda Chatman Thomsen says that brokerage firms should be held responsible when their customers engage in illegal activities.

On March 31, the Treasury Department recommended merging the SEC with the Commodity Futures Trading Commission. The recommendation was part of a regulatory reform blueprint. Sirri said the SEC would support this decision if implemented but that the major differences between the equities markets and the Commodities would have to be addressed.

The stockbroker fraud law firm of Shepherd Smith and Edwards represents clients that have lost investments because of the negligence of broker-dealers or others in the securities industry.

Contact Shepherd Smith and Edwards today.

Related Web Resources:

SEC and NYSE Settle Enforcement Actions Against Goldman Sachs Unit for Role in Customers' Illegal Trading Scheme, SEC.gov, March 14, 2007

Direct Access Trading Systems, Investopedia.com

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

Posted In: Direct Access Systems , SEC

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February 22, 2008

SEC Involved in 36 Subprime Mortgage Industry Probes

The Securities and Exchange Commission is conducting three dozen open investigations into misconduct in the subprime mortgage industry. The probe is taking a look at possible misconduct involving:

• The origination process
• Insider trading
• Securitization and sales of mortgage-backed securities

According to SEC Division of Enforcement Associate Director Cheryl Scarboro, the SEC wants to know who may have been involved, who knew about any misconduct, and who acted inappropriately. Scarboro also directs the SEC Subprime Working Group, which coordinates these probes with other SEC divisions.

In SEC v. Doral Financial Corp., Doral settled claims that it overstated income on nonconforming loans for $25 million. The primary issues pertaining to this case included valuation of the future income stream, valuation of interest-only STRP’s, and applying a flat rate to value investments.

These issues are of major significance in pending cases involving the subprime mortgage industry. Other issues of focus in the SEC investigations include ownership transfer and booking the gain on sale.

The SEC has met with the companies it is investigating is helping to streamline the process.

In a recent TIME.com article, Keefe, Bruyette & Woods Inc. Bose George estimated potential losses from the subprime mortgage crisis at around $250 billion. Columbia University professor Charles Calomiris estimates the losses at over $300 billion but under $400 billion. $1 trillion outstanding subprime mortgages currently exist.

Please contact Shepherd Smith and Edwards to discuss your case. We have helped thousands of investors recoup their losses.

Related Web Resources:

How Bad Will the Mortgage Crisis Get?, TIME.com, February 19, 2008

SEC probing three dozen subprime cases, Reuters, December 21, 2007

Why a U.S. Subprime Mortgage Crisis Is Felt Around the World, New York Times, August 21, 2007

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

Posted In: SEC , Subprime Mortgage

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