April 28, 2013

Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action

According to Securities and Exchange Commissioner Luis Aguilar, the growing number of registered investment advisers, the increasing complexity of the financial instruments they use, and the recent trends in securities examinations show that there is a need for the regulator to up the vigorousness of its investment adviser examinations and enforcement activities. He noted that even as the SEC is working to give the regulated community best practices and guidance to enhance compliance, it also intends to increase its scrutiny of advisers, including more exams (especially for private fund advisers). Alternative investment managers will also get more attention.

Aguilar pointed out that with the number SEC registered investment advisers having gone up about 50% to over 10,000 last year, the value of the assets that they manage also increasing from about $22 trillion in 2002 to approximately $44 trillion in 2011, as well as a rise in the number of complex financial instruments that advisers use, there are more chances for “mischief” to happen. Hence, there is the need for more robust enforcement.

Also, as our securities fraud law firm mentioned in a previous blog post, the SEC commissioner wants there to be an end to mandatory arbitration agreements. Per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC now can prohibit or limit pre-dispute arbitration agreements, which have become standard fare for brokerage firms. Aguilar is concerned that they are also becoming routine for investment advisory firms. He wants the government to ponder the possibility of adopting rules that would stop or limit broker-dealers and investment advisers from mandating that customers sign clauses in their agreements with one another that prevents them from filing securities fraud lawsuits and instead only resolve their disputes via arbitration.

Regarding retail investors, Commissioner Aguilar doesn’t believe they are getting the same degree of protections in both the corporate bond and municipal securities markets. While corporate bonds that the investing public can buy have to be registered with the SEC, no statutory authority exists that requires the same of municipal securities. Also, before municipal securities offering documents are made available to the public, the SEC does not get or even look at these documents. Aguilar says investor protections in this arena are mainly through the regulation of municipal securities dealers and brokerage firms.

Further scrutinizing the SEC, Commissioner Aguilar recently said that the regulator is still missing the mark on certain important initiatives involving investor protection, including the lack of regard he says it exhibited for regulators and investor’ suggestions about the lifting of the ban on private offering-related general advertising. Per the Jumpstart Our Business Startups Act, the Commission has to amend the 1933 Securities Act’s Rule 506 to get rid of the existing ban on general advertising in specific situations. However, the ban’s removal has led to fear that offerings that are mass-marketed under the rule will place investors at even more risk of abuse and financial fraud.

Aguilar Says SEC Will Ramp Up Examinations To Deal With Increases in Violative Behavior, Bloomberg/BNA, April 19, 2013

Aguilar Speech: Outmanned and Outgunned: Fighting on Behalf of Investors Despite Efforts to Weaken Investor Protections, SEC, April 16, 2013

Aguilar Speech: Keeping a Retail Investor Focus in Overseeing the Fixed Income Market, SEC, April 16, 2013


More Blog Posts:
SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements, Stockbroker Fraud Blog, April 21, 2013

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

US Supreme Court Once Again Upholds Enforcement of Arbitration Agreements, Institutional Investor Securities Blog, February 17, 2013

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Posted In: Arbitration , Investment Advisers , SEC Enforcement , Securities Fraud

April 3, 2013

SEC OCIE Finds Custody-Related Deficiencies Involving Investment Advisers

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations, it discovered “significant deficiencies” related to custody issues with a third of the investment advisers that it examined, including:

• Failure of an investment adviser to recognize when it has custody
• Failure to satisfy the rule’s surprise exam requirements
• Failure to fulfill the rule’s qualified custodian requirements

Custody by investment advisers refers either to the holding of securities or client funds or the authority to possess them, including the power of attorney to get securities or funds from client accounts. The 1940 Investment Advisers Act’s Rule 206(4)-2 regarding custody prescribes specific requirements for client asset safety.

According to SEC Chairman Elisse B. Walter, it is important for investment advisers to follow this rule, which pertains to the custody of client funds and is supposed to protect investors. Per the custody rule, which is supposed to strengthen safeguard for client assets, SEC-registered investment advisers must:

• Use “qualified custodians” to hold the assets of clients. These custodians can be registered brokerage firms, banks, futures commissions merchants, or specific foreign entities.

• Provide written notice to clients providing details of who is holding their assets and how they are being held.

• Send clients accounts statements that provide details of their holdings at least every quarter. This lets clients oversee their investments and look at their holdings.

• Agree in writing to an annual surprise exam by an independent public accountant each year.

• Provide additional protections when a related qualified custodian is involved.


Investor Due Diligence
If you are an investor setting up an investment account with an adviser, you should:

• Inquire about custody arrangements and make sure you understand how everything works.

• Make sure you get account statements from your qualified custodian at least once a quarter.

• Contact the custodian and the investment adviser if you notice a discrepancy between the account statements that you received from each of them.

If you believe you were the victim of investment fraud, contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

Read the SEC Alert (PDF)

Read the SEC's Bulletin to Investors


More Blog Posts:
Deutsche Bank Settles Massachusetts CDO Case for $17.5 Million, Stockbroker Fraud Blog, April 1, 2013

Galleon Group Founder’s Brother Pleads Not Guilty to Insider Trading, Institutional Investment Fraud Blog, April 2, 2013

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Posted In: Investment Advisers , SEC , SEC Enforcement

March 19, 2013

Securities Law and Congress Roundup: SEC Plans to Look at Corporate Political Spending Has Some Republicans Asking Why, Regulator Wants Lawmakers To Set Up Independent Auditor for Advisory Firms, & DOJ Stands by Its Record on Prosecuting Financial Firms

SEC Plans to Look at Corporate Political Spending Has Some Republicans Asking Why
In a letter to Securities and Exchange Commission Chairman Elisse Walter, a number of House Republicans, including Oversight Committee Chairman Darrell Issa (R-Calif.) and House Financial Services Committee Chairman Jeb Hensarling (R-Texas), asked why the agency plans to consider making corporate political spending disclosures a requirement when this matter seems “unrelated to its mandate” that it protect investors, maintain the markets, and “facilitate capital formation.” The lawmakers expressed concern that such a move by the SEC would be “especially problematic” seeing as it has no experience in this matter and the writing of such a rule would likely require much in terms of resources and staff.

The Congressional lawmakers said that the Commission should concentrate not on a “discretionary rule” but on a rulemaking that is mandatory. They pointed to the agency’s delays in getting the Jumpstart Our Business Startups Act efected in time for the mandated statutory deadline. They are asking why resources should be allocated to non-essential rulemaking that brings up serious concerns.

Regulator Wants Lawmakers To Set Up Independent Auditor for Advisory Firms
Recently, Ex- Securities and Exchange Commission Chairman Harvey Pitt recently said that setting up an independent entity to perform regulatory audits and compliance of investment advisors is the best way to make sure that these firms are properly examined. Pitt suggested that this entity would report to the SEC’s Office of Compliance Inspections and Examinations and help to detect certain types of fraud that might otherwise be missed.

Giving the keynote speech at the Investment Adviser Association's compliance conference on March 7, Pitt said that the Dodd-Frank Wall Street Reform and Consumer Protection Act is among recent developments that have changed the landscape for investment advisers. He suggested that the latter will have to flexible in dealing with the added regulatory requirements and challenges.

US Justice Department Stands by Its Record on Prosecuting Financial Firms
Responding to US Senators Sherrod Brown (D-Ohio) and Charles Grassley (R-Iowa) in a letter, the US Department of Justice said that while it is ready to file criminal cases against financial corporations when there is sufficient evidence, it considers deferred prosecutions and non-prosecution agreements as the essential “middle ground” between not acting at all and filing criminal cases where innocent parties would likely get hurt. Earlier this year, Grassley and Brown had asked the DOJ whether it thought some financial institutions were too important “to jail.” Noting that the department uses the U.S. Attorney's Manual to determine whether to prosecute entities, Principal Deputy Assistant Attorney General Judith Applebaum noted that, per the manual, no corporate entity that has prosecutorial immunity.

Securities Fraud
At Shepherd Smith Edwards and Kantas, LTD, LLP, our securities attorneys help investors with civil claims and lawsuits try to recoup their investment losses.

Read the letter to SEC Chairman Walter (PDF)

Congress Should Create Independent Entity To Audit Advisory Firms, Ex-SEC Chair Says, Bloomberg/BNA, March 8, 2013

Grassley Statement at Oversight Hearing of the Department of Justice, Grassley.Senate.gov, March 6, 2013


More Blog Posts:
US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions, Institutional Investor Securities Blog, February 29, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

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Posted In: SEC , SEC Enforcement , Securities Fraud

February 12, 2013

Securities Fraud Litigation Roundup: Former Hedge Fund Exec Admits to $1M Investment Fraud, SEC Files Penny Stock Scam Case& Class Action Claims Against Contact Lens Maker are Dismissed

Ex-Hedge Fund Exec Pleads Guilty to $1M Investment Fraud
In the U.S. District Court for the Southern District of New York, ex-hedge fund principal Berton Hochfeld pleaded guilty to wire fraud and securities charges over his alleged role in an investment scam that bilked investors of over $1M. He had been the organizer of limited liability Hochfield Capital, the general partner of Heppelwhite Fund LLP, which was set up to invest in publicly traded securities.

According to prosecutors, Hochfeld issued false representations to investors about the investments they made while misappropriating their money. He also is accused of taking money from Heppelwhite. Hochfeld will pay restitution and forfeit illegal profits. He will be sentenced this summer.

Securities and Exchange Commission Files Penny Stock Scam Case
The SEC is suing 12 entities and four individuals for allegedly running a penny stock scam that involved the acquisition of unregistered microcap company shares at discounted rates and then selling them while making false claims of registration exemptions per federal securities laws. Per the Commission, from 2007 to 2010 the defendants obtained unregistered shares in microcap companies at a discount of 30-60% by telling the companies that they wouldn’t resell the shares right away and instead keep them for investments when, actually, they did sell them immediately while making fraudulent claims that the shares were exempt from registration under the 1933 Securities Act’s Regulation D.

Actions allegedly taken included setting up virtual corporate presences in Texas and other states to make it appear as if compliance with claimed exemption was taking place and getting lawyer opinion letters that talked about the defendants’ intention to keep the shares for investment purposes. They also are also accused of using these letters to get stock certificates sans restrictive legends so they could resell the shares right away.

Class Action Securities Claims Against Contact Lens Maker are Dismissed
The U.S. District Court for the Northern District of California has dismissed a securities fraud class action lawsuit against Cooper Cos. Inc. (COO) and some of its former and current executives. The complaint had accused them of making false and misleading statements about “Avaira” contact lenses, which were defective, to raise the company’s share price. The executives also allegedly sold their company shares, making more than $14.2 million in illicit benefits. The plaintiffs are claiming 1934 Securities Exchange Act violations.

Noting that the lawsuit did not satisfy the Private Securities Litigation Reform Act’s pleading requirements and did not allege facts supporting that there was a “strong inference of scienter” or that the share price had become inflated due to omission or representation, the district court granted the defendants’ motion to dismiss.

Greenberg v. Cooper Cos. Inc. (PDF)

Securities and Exchange Commission v. Garber et al, Justia

United States v. Hochfeld (pdf)


More Blog Posts:
Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit, Stockbroker Fraud Blog, February 6, 2013

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials, Institutional Investor Securities Fraud, December 22, 2012

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials, Institutional Investor Securities Fraud, December 22, 2012

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

Posted In: Hedge Funds , SEC , SEC Enforcement

January 5, 2013

SEC Roundup: Massachusetts Investment Adviser Gets $1.78M Judgment and Allianz to Pay $12.3M to Settle Foreign Corrupt Practices Act Lawsuit

Massachusetts Investment Adviser Gets $1.78M Judgment
In a final judgment, the U.S. District Court for the District of Massachusetts says that EagleEye Asset Management LLC and its principal Jeffrey A. Liskov must pay a $1.78M judgment for using a foreign currency exchange trading scam to defraud clients. The Securities and Exchange Commission contends that Liskov fraudulently got several of his investment advisory clients to liquidate securities investments and place the money in forex trading. While EagleEye and Liskov made about $300,000 in performance fees, their clients allegedly lost $4M.

Liskov is accused of perpetuating the investment adviser fraud by issuing material misrepresentations about forex investments, their risks, and his track record. Also per the SEC’s complaint, Liskov more than once took old forms that advisory clients had signed and changed the dates, asset transfer amounts, and other information, and, without their knowledge, opened forex trading accounts.


Allianz to Pay $12.3M to Settle Foreign Corrupt Practices Act Lawsuit
Allianz SE, a German insurance firm, has consented to pay $12.3M to settle SEC administrative allegations that committed Foreign Corrupt Practices Act violations by issuing improper payments to Indonesian officials. Allianz is settling the case without denying or admitting to the allegations.

The Commission contends that over a seven-year period the insurer’s Indonesian subsidiary paid about $650,000 to employees of entities that were owned by the state and received approximately 295 insurance contracts—eventually leading to $5.3M in profits—as a result. The agency says that even after Allianz received two complaints about possible FCPA violations and discovered that company employees had a special fund for making bribes, the allegedly illicit payments continued, and in some instances, were disguised so as not to be detected.

Stockbroker Fraud
If you suspect that you lost money because of securities fraud, please contact Shepherd Smith Edwards and Kantas, LTD, LLP today. Our stockbroker fraud lawyers have successfully represented thousands of institutional and individual investors.


SEC Charges Allianz SE With FCPA Violations, InsuranceNetNews, December 17, 2012

Court Enters Final Judgment Against Massachusetts Investment Adviser and its Principal, Orders Payment of Over $1.7 Million in Illicit Gains and Penalties, SEC, December 14, 2012

Spotlight on Foreign Corrupt Practices Act


More Blog Posts:
SEC Intends to Examine 25% of Investment Advisers That Had To Register, Per Dodd-Frank Act, by End of 2014, Stockbroker Fraud Blog, December 26, 2012

Clearing House Association Wants Greater Protections for Clearing Members, Institutional Investor Securities Blog, December 31, 2012

SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries, Stockbroker Fraud Blog, June 11, 2010

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Posted In: Foreign Currency Scam , Investment Advisers , SEC Enforcement

Tags: FCPA Violations

December 18, 2012

Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager

Investment advisory firm Aletheia Research and Management, Inc. and its owner hedge fund manager Peter J. Eichler, Jr. are facing Securities and Exchange Commission charges over their alleged involvement in a cherry-picking scam. They are accused of directing winning trades to their trading acocunts, giving preferences to some clients at cost to certain investors, and not revealing in a timely fashion that the firm was in a precarious financial state.

Per the SEC charges, Aletheia and Eichler did a disproportionate job of allocating losing trades to accounts in two of the hedge funds that they managed. This led to investors losing money. Meantime, winning trades were allegedly sent to accounts belonging to company employees, Eichler, and preferred clients.

It was Eichler that allegedly used Aletheia’s discretionary authority over Trading Options accounts to make about “4,891 options trades for an aggregate investment of $238.9M” for these accounts between at least the middle of August 2009 through November 2011. Because most of these trades didn’t happen until over one hour after a trade was made or after the closing of the options positions, Eichler could cherry-pick the losers and winners. Favored accounts then got a disproportionate amount of profitable trades that had been allocated while the disfavored clients received a disproportionate amount of the unprofitable trades.

By participating in this alleged securities scam, contends the Commission, Eichler and his investment advisory firm did not fulfill their fiduciary obligations to certain advisory clients. Aletheia also allegedly failed to put in place procedures, policies or an ethics code that could have stopped the cherry-picking scam from happening and breached federal law and its fiduciary duties when it waited until right before filing for bankruptcy to let its clients know that it was in financial trouble.

Even though Aletheia already was allegedly in financial trouble as early as July of this year, when the state of California filed an over $2M tax lien against it for taxes it hadn’t paid and then on October 1 suspended the company’s corporate status for failing to pay (at this point the investment advisory firm was not legally allowed to be in business), it wasn’t until two days before seeking Chapter 11 protection on November 9that clients were notifies about the firm’s financial woes.

The SEC is accusing Aletheia of violating the Securities Exchange Act of 1934, Section 10(b) and Rules 10b-5(a) and (c) thereunder, as well as numerous sections of the Investment Advisers Act of 1940 and numerous rules thereunder. The regulator wants disgorgement of ill-gotten gains, permanent injunctions, penalties, and prejudgment interest.

Under federal securities laws, an investment advisor has to immediately and completely reveal any financial conditions that might reasonably likely hurt its ability to fulfill its contractual obligations to clients. Unfortunately, this is not always what happens.

SEC CHARGES SANTA MONICA-BASED HEDGE FUND MANAGER IN CHERRY-PICKING SCHEME, SEC, December 14, 2012

S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients, NY Times, December 16, 2012


More Blog Posts:
District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor, Stockbroker Fraud Blog, December 15, 2012

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Fraud Blog, February 10, 2012

K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam, Stockbroker Fraud Blog, January 21, 2008

Continue reading "Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager" »

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Posted In: SEC Enforcement

Tags: Cherry-picking scam

November 26, 2012

Securities Fraud Roundup: FINRA Examiners See Rise in Brokers Engaging in Improper Activities, SEC Chairman Backs Stronger Enforcement of Civil Penalties Act, & About 800 Investor Fraud Scam Defendants Accounted for Since 2011

According to Financial Industry Regulatory Authority EVP Susan Axelrod, the SRO’s examiners are reporting an increase in how many brokers appear to be taking part in questionable actions outside their firms or improperly selling securities. Speaking at the Securities Industry and Financial Markets Association's complex products forum, she pressed brokerage firms to make sure its compliance programs will sniff out such violations.

Axelrod also said that FINRA examiners are noticing issues with the firms’ complex product sales, including those involving reverse convertibles and non-traded real estate investment trusts. For example, several firms did not conduct reasonable due diligence before selling non-traded REITs or make sure they were suitable for the investors. As for the reverse convertibles, examiners reportedly discovered an overconcentration of products in certain investor portfolios primarily due to poor recommendations. Failure to detect such problems appeared to have played a factor in this happening. Other problems discovered included inadequate training regarding products, product misrepresentation via sales and advertising, and failure to notify investors well in advance that products’ per-share estimated values had been repriced at figures significantly lower than the offering price.

In other securities news, Securities and Exchange Commission Chairman Mary Schapiro wants Congress to grant the SEC the power to impose penalties that are more reflective of the losses sustained by investors. Right now, the agency can only pursue ill-gotten gains’ disgorgement and impose per-violation penalties. Schapiro said that the Stronger Enforcement of Civil Penalties Act of 2012, which was introduced by Senators Jack Reed and Charles Grassley, would give the Commission the authority it needs to make violators “think twice” about abusing investors’ funds while allowing the regulator to recover significantly more for victims. She expressed her views at the New England Securities Conference last month.

The bill, also known as S. 3416, would significantly enhance what penalties the SEC can seek, including higher caps for tier three violations—$10 million /violation for companies, $1 million/violation for individuals (up from $725/violation for entities and $150,000 violation for individuals.) It would also give the agency the power to impose sanctions that are the equivalent of an investor’s losses in securities cases in which deliberate wrong intent played a role.

To give you an idea of how rampant securities fraud can be, recently, 85 US Attorney’s offices and the US Justice’s Criminal Division reported an unprecedented increase in investment schemes. Since 2011 about 800 investor fraud defendants have been charged, tried, pled guilty, or were sentenced in about 500 federal prosecutions. Victims’ losses during this time period exceeding over $20 billion. Losses per investor ranged from the thousands to even billions of dollars in the form of life savings, retirement, survivor benefits, money for mortgages, and college tuition.

“Eight hundred appears to be a large number of potential financial fraudsters, but more than 1,000 times that are engaged in investing others’ money,” said Securities Lawyer William Shepherd. “For additional insight: How many of those charged were actually convicted, how much jail time was assessed, how many cases were reversed on appeal, how many had sentences reduced, and, how many were pardoned? One last question: What kinds of accommodations were afforded to those who actually served any time? The answers may shock you.”

Also since 2011, the SEC has taken 359 actions directed at retail investor fraud, charging 887 entities and individuals. More than 1.2 million investors lost close to $9.7 billion.

Susan Axelrod's Remarks at SIFMA Complex Products Forum, FINRA, September 27, 2012

SEC Chairman Schapiro's Remarks at 2012 New England Securities Conference, SEC, October 11, 2012

Since 2011 About 800 Defendants Have been Charged Investor Fraud Schemes, LoanSafe.org, October 1, 2012


More Blog Posts:
SEC Clawback Lawsuit Against Two Former Arthrocare Corp. Executives Over Fraud Scheme Can Proceed, Says District Court in Texas, Stockbroker Fraud Blog, November 24, 2012

FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse, Institutional Investor Securities Blog, November 20, 2012

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

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Posted In: Broker Fraud , FINRA , Investor Fraud , REITs , Reverse Convertibles , SEC Enforcement , Securities Fraud

November 24, 2012

SEC Clawback Lawsuit Against Two Former Arthrocare Corp. Executives Over Fraud Scheme Can Proceed, Says District Court in Texas

The U.S. District Court for the Western District of Texas says that the Securities and Exchange Commission’s clawback lawsuit against two Arthrocare Corp. (ARTC) executives who received bonuses and compensation following accounting irregularities made by two other company officials can move forward. The defendants, ex-CEO Michael A. Baker and ex-CFO Michael Gluck, have not been charged with misconduct, and the district court said they do not need to have done anything wrong to be sued under the Sarbanes-Oxley Act’s Section 304.

This Texas securities case is one of many resulting from an alleged revenue recognition scam at the medical device manufacturer that was executed by two of its senior executives. (Arthrocare has since restated its financials for 2006 through 2008’s first quarter.) The SEC had argued that even though Baker and Gluck weren’t the charged with wrongdoing, under SOX’s Section 304, they must pay ArthroCare back their stock profits and bonuses that they received during the period of the accounting fraud.

The two men had filed a dismissal motion contending that the statute cannot be interpreted to make CFOs and CEOs with no scienter elements liable. They also claimed that statute’s vagueness not only makes it void but also it has other constitutional deficiencies. Now, however, the district court has denied their motion, finding that no separate misconduct or scienter by the defendants was necessary.

The court said that without ambiguity, the statute’s words “are dispositive” and Section 304 is unambiguous in mandating that CFOs and CEOs pay back the issuer for compensation that qualifies within a year of a filing that the issuer must restate because of misconduct by it or its agents. The district court also rejected the constitutional challenges made by the defendants and disagreed that the statute is constitutionally vague because it doesn’t clarify whose misconduct compels reimbursement. Referring to the statutory language, the court said that the ‘misconduct’ at issue in this case is misconduct by the issuer, and, since issuers include business entities and corporations, their agents, acting within the scope and course of their jobs, are also included within the definition of issuer.

The district court also disagreed with the two men’s contention that Section 304 is unconstitutionally vague. It said that the requirements for CFOs and CEOs are “crystal clear” when read along with the rest of SOX. It also noted that Section 302 tells executives exactly what they have to do to avoid reimbursement liability under Section 304, which is to ensure that the issuer submits financial statements that are accurate.

SEC v. Baker (PDF)

Sarbanes-Oxley Act of 2002


More Blog Posts:
Texas Securities RoundUp: Provident Royalties CEO Pleads Guilty in $485M Ponzi Scam and District Court Upholds $100K Arbitration Award in Adviser Fee Dispute, Stockbroker Fraud Blog, November 10, 2012

Texas Securities Fraud: Investors Bilked in $68M Dallas Ponzi Scam Hope To Recover Some Funds Via Rare Guitar Auction, Stockbroker Fraud Blog, October 25, 2012

Govt. Not Prepared for Next Inevitable Financial Crisis, Says Ex-SEC Chair, Institutional Investor Securities Blog, July 30, 2012

Continue reading "SEC Clawback Lawsuit Against Two Former Arthrocare Corp. Executives Over Fraud Scheme Can Proceed, Says District Court in Texas " »

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Posted In: SEC Enforcement , Texas Securities Fraud

November 22, 2012

Securities Roundup: BP Settles for $525M SEC Lawsuit Over Deepwater Horizon Spill Disclosures, Ex-OIG Official Says He Was Fired for Exposing Misconduct, Ex-Merrill Lynch Advisor Accused of Defrauding Elderly Client, & Trader Pleads Guilty to $28M Fraud

BP Plc. has consented to settle for $525 million Securities and Exchange Commission allegations that it gave the agency and investors misleading information about the 2010 Deepwater Horizon oil spill. If approved, this would be the third biggest penalty in SEC history.

According to the Commission, during the crisis the oil giant issued fraudulent statements about how much oil was flowing on a daily basis from the Deepwater Horizon rig into the Gulf of Mexico, including underestimating this rate by up to 5,000 oil barrels a day even though it allegedly had internal data noting that possible flow rates could be up to 146,000 barrels daily. Even after a government task force later determined that 52,700 to 62,200 oil barrels were flowing out a day, BP allegedly never modified the omissions or misrepresentations it made in SEC filings.

In other SEC news, David Weber, one of its ex-Office of Inspector General officials, is suing the agency and Chairman Mary Schapiro for allegedly getting back at him for disclosing misconduct that had been taking place at the Commission. Weber contends that SEC staff spoke about him to the media in a “malicious and defamatory” manner and leaked his personal information because he not only disclosed that ex-SEC Inspector General H. David Kotz had engaged in misconduct that placed several OIG investigations at peril, but also he revealed that there were cyber security breaches at the agency.

Weber claims that the disclosures he made are the reason he was first put on administrative leave and later fired. The Commission says that he intends to respond to the allegations through its court filing.

Meantime, an ex-Merrill Lynch (MER) financial advisor is facing Massachusetts criminal securities fraud charges for allegedly bilking an elderly client. According to prosecutors, Jane E. O’Brien told the woman to invest in thousands of AC Corp. shares but was actually taking the funds to pay for her mortgage and legal fees related to another disagreement involving another client.

In 2009, O’Brien allegedly persuaded the investor to sign a fake promissory note for $500,000 and payments the latter made for this included those in the amounts of $50,000 and $190,000. If convicted, O’Brien could have to pay back $240,000.

In a different criminal securities fraud case, New Jersey stock trader Mark Allen Lefkowitz is facing up to 25 years behind bars and a $250,000 fine for defrauding a company’s shareholders of over $28 million. Per court documents, Lefkowitz and the California-based company’s CEO manipulated the company share price and volume so that insiders would reap the financial rewards while the shareholders suffered. (The company and the CEO have not at this time been charged with committing a crime related to this case.)

Because of the securities fraud, the company issued over 9 billion shares of stock that it failed to register with the SEC. The shares diluted existing shares’ value, which dropped by up to $7 million. Also, contends the SEC, Lefkowitz obtained free-trading shares valued at over $28 million from the company. Prosecutors claim that Lefkowitz and the CEO exploited a provision in securities laws that lets companies put out these unregistered stock shares in order to settle “bona fide” debts.

On the Company’ s behalf, the CEO would get into “purported” loan agreements with different companies under Lefkowitz's ownership. However, the Company would allegedly intentionally default on the loan agreements and then at least one of Lefkowitz’s companies would file a fake lawsuit against it. The CEO and Lefkowitz would then put together a settlement deal where the Company’s debt would be settled with new, unregistered stock shares worth up to five times (or more) than what was actually owed. The shares were sold to investors who didn’t know that the Company A’s stock was being diluted. Part of the sale proceeds from the new shares would then be kick backed to a Lefkowitz owned-company.

SEC v. BP p.l.c. (PDF)

Weber v. SEC (PDF)

Former Merrill Lynch financial advisor faces securities fraud charge, Boston.com, November 20, 2012

Stock trader guilty of fraud involving San Diego firm, Fox5 San Diego, November 19, 2012


More Blog Posts:
MassMutual Settles for $1.625M SEC Charges Over Failure to Disclose Allegations Related to Complex Investments' "Cap," Stockbroker Fraud Blog, November 20, 2012

California Securities Lawsuit Claiming Negligent Misrepresentation Over Allegedly Flawed Bond Offering Documents May Proceed, Says District Court, Stockbroker Fraud Blog, November 13, 2012

FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse, Institutional Investor Securities Blog, November 20, 2012

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Posted In: Financial Firms , Merrill Lynch , SEC Enforcement , Securities Fraud

September 24, 2012

Securities Roundup: FINRA Heightens Focus on Options Industry & Wants More Investors to Use BrokerCheck, Lawmaker Hopes SEC is Taking Closer Look at National Exchanges, and US Senator Calls For Reform of Money Market Mutual Fund Industry

At the Security Traders Association’s yearly market conference in DC, Richard Ketchum, Financial Industry Regulatory Authority’s chief executive officer and chairman, said that due to growing problems the SRO is heightening its surveillance and exam focus on the options industry. He noted that there has been an increase in complaints about the use of algorithmic activities to perform possible manipulations to “move underlying equity” and that this could cause a financial firm to “take advantage” of options positions that were pre-established.

Per BNA, Ketchum said that FINRA has set up surveillance alerts to catch too much messaging traffic from algorithms that update quotes at vicious rates when options are involved. It is also looking at firms to make sure they have adequate controls related to algorithms and it will keep checking for options orders that may have possibly inaccurate coding.

The week before, Ketchum reported that the FINRA Board of Governors had given the SRO’s staff the authority to propose to the SEC rule changes to promote greater investors use of BrokerCheck. This free tool allows investors to look up former and current firms and brokers that are registered with the SRO, and representatives and investment advisers, to decide whether the should work with them. (This information would also have to be available on websites that were maintained by/for an individual associated with these firms.) Per amendments that have been proposed to the FINRA Rule 2267, which covers the education and protection of investors, member firms would have to make sure that their company sites provide a direct link to BrokerCheck. Meantime, a change has also been proposed to FINRA Rule 8312 that would give the public permanent access to information available through BrokerCheck about foreign and state cases against associated persons who were let go after a settlement was reached. It would also per the board’s approval, make downloads of BrokerCheck information available.

In other securities fraud news, following the SEC's announcement that the New York Stock Exchange will pay $5 million to settle first-of-its kind charges over compliance failures that allegedly gave some clients an advantage over others in regards to trading information, Senate Banking Securities subcommittee chair Senator Jack Reed (D-RI) said he “hoped” that this now means that the Commission will more closely scrutinize national exchanges’ activities. Reed, who spoke at the same Security Trader Association gathering as Ketchum, said the enforcement action could compel the national exchanges to seriously assess their for-profit model, which did not exist a few years ago.

Also hoping for the SEC to take additional actions is Sen. Bob Corker (R-Tenn.). He wrote a letter to SEC Chairman Mary Schapiro and the commissioners earlier this month urging them to find a “solution” on how to revamp the $2.6 trillion money market mutual fund industry. He is worried that the funds remain a “real risk” to the financial system and should a run of funds occur, Congress would have to make the difficult decision of letting investors sustain losses or rescue a fund or the industry.

His letter arrived weeks after Schapiro said she couldn’t come up with the needed votes to move forward a proposal that would have significantly reformed the money market industry. Schapiro has said that a run of funds situation continues to be a possibility.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our securities fraud lawyers are her to help investors recoup their losses.

Ketchum's remarks at the Security Traders Association Annual Conference, FINRA, September 20, 2012

SEC Signaling Probe of Exchanges Through NYSE Fine, Reed Suggests, Bloomberg/BNA, September 24, 2012

Read Senator Corker's Letter (PDF)

BrokerCheck, FINRA

More Blog Posts:
SEC Enforcement Roundup: Commission to Make Closer Examination of Revenue-Sharing Between Brokers and Investment Advisers, NYSE to Pay $5M For Alleged Compliance Issues, and Enforcement Director Khuzami Praises His Division’s Performance, Institutional Investor Securities Blog, September 18, 2012

SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro's Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal, Institutional Investor Securities Blog, September 7, 2012

Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?, Stockbroker Fraud Blog, September 27, 2012

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Posted In: FINRA , Money Market Funds , NYSER , SEC Enforcement

September 5, 2012

SEC Study Reports that Many Retail Investors Are Financially Illiterate

According to the Study Regarding Financial Literacy Among Investors, which was recently released by the SEC, many US retail investors are confused or don’t know much about making informed financial choices and can be considered financially illiterate. The study, which was created to fulfill the Dodd Frank Act’s section 917, is a representation of information distilled by SEC staff from retail investors, focus groups, public comments, quantitative research, and FLEC, which is comprised of 22 federal entities and was set up under the Fair and Accurate Credit Transactions Act of 2003's Title V to better financial literacy in this country. The Commission also looked to the Library of Congress to review other studies on this subject.

Reportedly, regardless of whether the information came from, the general findings were the same: that many investors lacked an understanding of the most basic financial ideas, including the difference between bonds and stocks, did not know a lot about investment costs or their effect on investment returns, and were challenged when it came to knowing much about liquidity or credit risks. Women, elderly seniors, African-Americans, Hispanics, and the uneducated seemed to generally have less knowledge about investment than did members of the general population.

Also, many investors appeared to have a difficult time reading their portfolio account descriptions and trade confirmations. Many of them appeared confused about fees. One focus group participant even zeroed in on how, when given too much information, the "more that is disclosed” the less likely investors were to pay attention.

Also, per the study:
• Investors would rather get investment disclosures first before buying an investment service or product or getting involved with a financial intermediary.

• Investors do factor disciplinary history, fees, strategy for investments, and conflicts of interest when considering financial intermediaries.

• They prefer summaries with key data about their investments in investment product disclosures. They like disclosures that are concise, clear, easy to understand, and employ tables, bullet points, graphs, or charts.

• They also like “layered” disclosure, where they are given key information and can then access more details online or via e-mail or mail.

You can find out about other study findings by clicking on the link below.

From assessing commenter feedback, SEC staff have now identified which private and public investor educations efforts are the most useful to the audience they are targeting. Also, OIEA and other FLEC participants intend to work together to develop programs that zero in on specific groups, such as military members, young investors, investment trustees, lump sum payout recipients, and underserved populations. They will create programs that emphasize how key it is to perform investment professional background checks, market Investor.gov as the main federal government resource for information about investing, and make sure people become aware of the costs and fees associated with investing.

Securities Fraud
When an investor comes to a financial professional without a lot of investment knowledge of experience, it is the representative’s responsibility to make sure that the client knows about and understands the risks and costs involved before they invest and doesn’t get into anything that would be unsuitable or risky for their goals or finances. Unfortunately, there are brokers and investment advisers that take advantage of investor and their lack of knowledge in order to make a profit. When securities fraud happens it is the investor that suffers.

Study Regarding Financial Literacy Among Investors (PDF)

SEC Says Retail Investors Are Clueless About Stocks, Minyanville's Wall Street, August 31, 2012



More Blog Posts:
SEC Acts to Put into Effect Provision of JOBS Act that Allows General Advertising and Solicitation in Securities Offerings, Stockbroker Fraud Blog, September 4, 2012

District Court in Texas Finds that SEC Improperly Deposed Witness in Lawsuit Over Alleged Life Settlement Scam, Stockbroker Fraud Blog, September 1, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

Continue reading "SEC Study Reports that Many Retail Investors Are Financially Illiterate " »

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Posted In: SEC , SEC Enforcement

September 4, 2012

SEC Acts to Put into Effect Provision of JOBS Act that Allows General Advertising and Solicitation in Securities Offerings

Last week, the SEC proposed rules that would get rid of the ban against general advertising and solicitation of certain securities offerings under Rule 144A and Rule 506 of Regulation D of the Securities Act. The rules are mandated under the Jumpstart Our Business Startups Act.

Currently, companies that want to raise money through securities sales have to depend on an exemption from registration or register the offering with the SEC. The majority of the SEC’s exemptions from registration, including Rule 506, don’t allow companies to take part in general solicitation/advertising related to the securities offering.

However, the newly enacted JOBS Act mandates that the Commission take away the general advertising/solicitation prohibitions on securities offerings related to Rule 506. Section 201(a)(1) of the JOBS Act even directs the SEC to amend Rule 506 to allow general solicitation/advertising as long as the buyers of the securities are investors that are accredited. It also says that the rules shall make sure the issuer exercises reasonable steps to confirm that the buyers are accredited investors and that it is up to the Commission to determine what these methods would be.

Also, SEC has to modify Rule 144A. This rule presides over the reselling of securities mostly by qualified institutional buyers, who are the bigger institutional investors. Under the current version of this rule, securities offers can only be made to QIBs. With the new rule, securities offers would be able to be made to investors that aren’t QIBs as long they are only sold to those the sellers have reason to believe are QIBs.

Under the rules being proposed, companies that issue securities could engage in general advertising/solicitation to offer them as long as they have taken steps that are considered reasonable to confirm the buyers are accredited investors because they either fall under the person categories that are considered accredited investors, per Rule 501, or when the securities sale is taking place, the issuer has reasonable grounds for thinking they fulfill one of the categories

The SEC’s proposed rule would preserve parts of Rule 506 that exist as a separate exemption. This would let companies involved in 506 offerings without general advertising/solicitation to not have to abide by the new verification rule. It would also amend Form D, which have to be filed by issuers with the SEC when the securities being sold are under regulation D. The form would have a box that issuers would check when claiming the new Rule 506 exemption would allow for general advertising/solicitation.

If you believe you were the victim of securities fraud, contact our stockbroker fraud lawyers today.

SEC Proposes Rules to Implement JOBS Act Provision About General Solicitation and Advertising in Securities Offerings, SEC.gov, August 29, 2012

SEC Proposed Rule (PDF)


More Blog Posts:
Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive, Stockbroker Fraud Blog, May 12, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets, Institutional Investor Securities Blog, July 6, 2012

Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

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Posted In: JOBS Act , SEC , SEC Enforcement

July 29, 2012

The SEC Penalties Act of 2012 Would Create Tough Financial Punishments for Securities Fraud

The Stronger Enforcement of Civil Penalties Act of 2012, is bipartisan legislation that seeks to enhance the Commission’s power to clamp down on violations of securities law while raising the statutory ceilings on civil monetary penalties by tying a penalty’s size to the degree of harm wrought and amount of investor losses sustained. This bill is S. 3416 and is also known as the SEC Penalties Act. It was introduced by Senators Chuck Grassley (R-Iowa) and Jack Reed (D-RI).

Currently, the SEC is only allowed to fine individuals that violate securities laws no more than $150,000/offense. Institutions can be penalized up to $725,000 maximum. If a case goes to federal court, the Commission has sometimes been able to determine a penalty according to the gross amount of gains that were ill-gotten.

The bill raises the cap per securities law violation offense to $10 million for entities and $1 million for individuals. If how much was made because of the misconduct and the penalty are linked, the Commission could up the penalty times three. Penalties could also be tripled for a recidivist that has had a securities fraud conviction or was the target of administrative relief by the SEC in the last 5 years. The Commission could assess in-house penalties for even cases not heard in federal court.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our securities lawyers have long been outspoken critics about any failures to hold financial firms and representatives liable for the misconduct not just civilly—whether via arbitration or in court—but also through he criminal justice system. We have taken great offense by regulators’ failure to not just catch offenders but also hold them substantially liable for the harm that they have caused. There are just too many individuals and entities on Wall Street paying too little a price for what they’ve done while the investors are the ones that suffer.

With the SEC Penalties Act, for the less serious securities law violations of manipulation, deceit, fraud, or reckless/intentional disregard of a regulatory requirement the maximum penalty for each violation for an entity would be up to $500,000 (or the gross pecuniary gain) and $100,000 or the gross pecuniary gain for an offending individual. For violations not involving these wrongdoings, the maximum penalty for an individual would be gross pecuniary gain or $10,000. For entities, it would be gross pecuniary gain or $100,000.

Senator Reed, who is the Banking Subcommittee on Securities, Insurance, and Investment chairman, said the bill provides the SEC with additional tools to truly hold Wall Street accountable for wrongdoing. He also said that stricter oversight and better anti-fraud laws are necessary to protect investors and taxpayers. Senator Grassley spoke about how a fine imposed against a Wall Street company has to be an actual “deterrent” and not merely “decimal dust.”

Stronger Enforcement of Civil Penalties Act

Reed, Grassley Seek Tougher Penalties for Wall Street Fraud, Senator Jack Reed, July 23, 2012


More Blog Posts:
Trading in Securities of 379 Microcap Companies Suspended in SEC’s Fraud Crackdown, Stockbroker Fraud Blog, May 14, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record,
Stockbroker Fraud Blog, March 15, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

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Posted In: SEC Enforcement , Securities Fraud

May 14, 2012

Trading in Securities of 379 Microcap Companies Suspended in SEC’s Fraud Crackdown

In an effort to crack down on fraud via pump-and-dump scams and reverse mergers, the Securities and Exchange Commission is suspending trading in the securities of 379 Microcap companies that are dormant. This is the most number of companies to have trading in them suspended in one day.

As part of its heightened efforts to combat microcap shell company-related fraud, The SEC’s Microcap Fraud Working Group employed Operation Shell-Expel, which employed different agency resources to pinpoint shell companies in 6 other countries and 32 US states that were dormant and vulnerable to scams. SEC Division Director Robert Khuzami said that “empty shell companies” are to certain financial scammers “what guns are to bank robbers.”

According to the SEC, stock manipulators are willing to pay up to $750,000 to get control of a company so they can pump and dump the stock to make illegal gains while investors suffer. Now, however, because the trading suspension mandates that current financial formation must be provided, these shell companies can no longer be used by fraudsters to perpetuate their scams.

Securities laws let the SEC suspend trading in any stock for 10 days maximum. Barring exemptions and exceptions, a company whose trading privileges have been suspended can’t be quoted again unless it issues update information, including financial statements that are accurate.

The SEC chooses to suspend trading in a stock when it feels that to do so will protect investors. In an Investor Alert, the Commission listed some of the reasons for suspending trading, including:

• Insufficient or not the most up-to-date or accurate information about a company, including no current periodic report filings.

• Existing questions about whether information made available to the public is accurate, including the most current details about a company’s operational status, business transactions, or financial state.

• Potential issues over the trading in the stock, such as possible market manipulation and insider trading.


Because the SEC knows that suspending trading in a stock can cause the security’s price to dramatically go down, it is very discriminating about issuing suspensions.

Microcap companies usually have low-priced stock, which trades in low volumes, and limited assets. A pump-and-dump scam is one of the most common types of securities fraud involving these firms. Scammers will issue misleading and false statements to promote a microcap stock that is lightly traded. After buying low and then inflating the stock price by making it appear as if there is a lot of market activity, fraudsters will dump the stock by selling it into the market at the higher rate and make huge profits in the process.

Investor Bulletins: Trading Suspension, SEC (PDF)

SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant Shell Companies to Protect Investors From Potential Scams, SEC, May 14, 2012


More Blog Posts:
Daniel "Rudy" Ruettiger Faces SEC Charges Over Pump-and-Dump Scam Involving Sports Drink Company, Stockbroker Fraud Blog, December 19, 2011

Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case, Stockbroker Fraud Blog, November 17, 2010

Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie, Institutional Investor Securities Blog, April 13, 2011

Continue reading "Trading in Securities of 379 Microcap Companies Suspended in SEC’s Fraud Crackdown" »

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Posted In: Microcap Market Fraud , SEC Enforcement

May 11, 2012

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

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

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

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

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

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

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

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

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

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

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

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


More Blog Posts:
Stockbroker Fraud Roundup: SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns, Stockbroker Fraud Blog, April 10, 2012

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules, Stockbroker Fraud Blog, April 20, 2012

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Blog, March 29, 2012

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

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Posted In: Arbitration , FINRA , Morgan Keegan , Mutual Funds , SEC Enforcement , UBS , Viaticals

March 15, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record

Batting away criticism that many of the Security and Exchange Commission’s enforcement actions for fiscal year 2011 were actually follow-on administrative proceedings and not new actions, Chairman Mary Schapiro stood by the agency’s record. She also noted that in some instances, follow-ons are key to enforcing federal securities laws. Schapiro made her statements to a House Appropriations panel.

Per recent media findings, over 30% of the SEC’s FY 2011 735 enforcement actions (the agency has never filed this many in a fiscal year before) were follow-on administrative proceedings. Schapiro, who was testifying in front of the House Appropriations Financial Services Subcommittee on the White House’s proposed $1.566 billion FY2013 budget for the SEC, noted that some of the enforcement actions were the most complex to ever occur and included those involving municipal securities market-related bid rigging, misleading sales practices related to structured products, Foreign Corrupt Practices Act-related violations, and insider trading. She also pointed to the number of senior level people that have been the target of many of last year’s SEC enforcements.

Schapiro said that even as the SEC has already proposed or adopted regulations for over three-fourths of the duties it was tasked with under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the most challenging ones, including proposals to enhance disclosures for companies that use conflict minerals or pay governments for access to natural gas, minerals, and oil, are still on the horizon. So is the SEC’s joint proposal with banking regulators on the Volcker rule, which exempts insurance firms from proprietary trading restrictions while preventing financial institutions and affiliated insurers from being able to invest in private equity and hedge funds. She said stated the SEC is “rethinking” how it deals with its Volcker rulemaking.

The SEC Chairman also said that she hoped the Commission could finalize the Dodd-Frank Title VII-related derivatives rules by year’s end. Another rule, over the proposal to enhance disclosure for extraction users, should be completed by midyear, A rule over registering municipal advisors was expected to be adopted also by the year’ end. As for the White House’s proposed budget, Schapiro said that the SEC’s information technology needs, as well as its examinations program ,would be affected if the agency isn’t given the $1.566 billion.

Regarding MF Global Inc., Schapiro said that the failed brokerage firm had only 318 active securities accounts and 40,000 futures accounts. SEC staff is working with Securities Investor Protection Corporation trustee James Giddens to find investors’ missing funds and they plan to work with him to recover the monies.

Our stockbroker fraud law firm represents individual and institutional investors throughout the US. Shepherd Smith Edwards and Kantas, LTD LLP helps our clients recoup losses sustained as a result of broker and investment advisor misconduct and other forms of securities fraud.

Chairman Defends SEC Enforcements In FY 2011, Says Numbers ‘Not Misleading,' Bloomberg/BNA, March 7, 2012

Read SEC Chairman Schapiro's Testimony, SEC, March 6, 2012


More Blog Posts:
SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012
SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro, Stockbroker Fraud Blog, March 24, 2011

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

Posted In: Financial Firms , MF Global , SEC Enforcement

February 27, 2012

SEC Warning to Investors: Watch Out for Fraudsters Posing As Regulators

The Securities and Exchange Commission wants investors to watch out for scammers pretending to be SEC employees who are soliciting investments. The warning is an update of a previous alert. The Commission is issuing it once again in the wake of a rise in the number complaints about this type of fraud.

In its alert, the SEC said that it does not endorse financial solicitation offers, help in the sale or purchase of securities, or take part in money transfers. The agency also noted that it isn’t associated with any drawings, sweepstakes, lotteries, or other events involving prizes, winnings, or money windfalls.

Fraudsters have been known to solicit targets by phone, e-mail, and other means, and they are likely to ask for detailed financial and personal information. The SEC says to watch out for anyone claiming to be affiliated with the federal agency and who claims to be looking for help with a fund transfer, wants to send over an investment offer, offers to provide advise about securities or financial assistance (for an upfront fee), or tells you that you are eligible for disbursements from a class action settlement or an investor claim fund.

Unfortunately, financial fraudsters have also been known to affiliate themselves with nonexistent government agencies and international organizations to make themselves appear legitimate. Scammers will pretend to give you that organization’s phone number. In some cases, when the agency that they “represent” actually does exist, the number will likely lead to their co-fraudsters instead. Some financial may even use a regulator’s seal or make up a fake one.

If you believe that you were the victim of investment fraud, please contact our securities fraud law firm so that we can help you explore your legal options. Over the years, Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of investors recoup their losses.

To avoid becoming the victim of these types of financial scams, the SEC recommends that you:

• Make sure you are in fact dealing with real regulators. You can look online on the SEC’s Division Homepages or the Web sites of the International Organization of Securities Commissions and the North American Securities Administrators Association for their directory lists.

• Be wary any investments that are touted as having government “approval.” The SEC doesn’t assess securities offerings or approve any investment. Remember to check whether the securities being offered to you are registered with the SEC or exempt from registration requirements.

• Don’t let impressive letterheads and seals fool you. Remember, anyone can cut and paste graphics or design their own in this technology age. The same goes for fancy brochures and impressive Web sites.

• Watch out for “Recovery Room” and “Advance Fee” scams.

Investor Alert: SEC Warns of Government Impersonators, SEC (PDF)

International Organization of Securities Commissions

North American Securities Administrators Association


More Blog Posts:
SEC to Concentrate on Financial Firms Where Management is Not Doing Enough to Promote Compliance, Stockbroker Fraud Blog, February 18, 2012

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In, Stockbroker Fraud Blog, January 6, 2012

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012

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Posted In: SEC Enforcement

February 18, 2012

SEC to Concentrate on Financial Firms Where Management is Not Doing Enough to Promote Compliance

According to Securities and Exchange Commission's Office of Compliance Inspections and Examinations director Carlo di Florio, the federal agency will be concentrating “intently” on financial firms with senior management and boards that are failing to set the right tone when it comes to getting behind key control and risk functions to promote compliance. Di Florio addressed his statements to those attending the Compliance Outreach Program for investment companies and investment advisers. Although the gathering was SEC-organized, he noted that the views he was expressing are his own.

The SEC wants boards and management to support compliance—especially as they are responsible for setting a company’s tone and culture. Di Florio said that a chief compliance officer needs the support and involvement of management and the board in order to be effective. He noted that the SEC’s national examination manual has been given to OCIE staff. The manual establishes key standards and policies for the group.

In the last 18 months, the OCIE has undergone restructuring to streamline its processes, set up practices that are being implemented across regional offices, and engaged in greater coordination with other divisions in the SEC. Exams are also now more concentrated on risk.

Other changes include the setting up of a Risk Assessment and Surveillance unit that will identify the financial firms, products, and practices that are the most high-risk. Working groups also have been created in the areas of fixed income products and municipal securities, equity market structure and trading, sales and marketing practices, new and structured products, microcap fraud, and valuation.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, OCIE has been given greater responsibility over municipal advisors, swap market participants, hedge funds, and other firms. For example, while the SEC has been able to examine the average investment adviser every 11 years, the agency hopes to conduct these exams more frequently so that clients are better protected. SEC Commissioner Elisse Walter, who spoke at the same event as Di Florio, said that commission staff are recommending the setting up of at least one self-regulatory body to oversee registered investment advisers (ideally FINRA would be involved) and making the industry pay “user fees” to fund OCIE examinations.

Our stockbroker fraud lawyers have seen way too many investors lose out because the financial firm they entrusted with their money was not in compliance, committed securities fraud, or was negligent in some other way. We are here to help our clients recoup their losses.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors in arbitration and litigation. We work with clients located throughout the US, as well as some investors living abroad who suffered losses because of a US-based financial firm.

We would be happy to offer you a free consultation to help you determine whether you have a securities fraud claim on your hands.

Speech by SEC Staff: Remarks at the Compliance Outreach Program, SEC, January 31, 2012

SEC: Senior Management and Boards That Fail to Support Compliance Face Most Scrutiny, AdvisorOne, January 31, 2012


More Blog Posts:
Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In, Stockbroker Fraud Blog, January 6, 2012

Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud, Institutional Investor Scurities Blog, January 29, 2012

Continue reading "SEC to Concentrate on Financial Firms Where Management is Not Doing Enough to Promote Compliance" »

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

Posted In: SEC Enforcement

January 6, 2012

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In

The SEC has charged investment adviser Anthony Fields with selling bogus securities on LinkedIn and other social networking sites. The alleged financial fraud has prompted the agency to put out two alerts warning of the risks that advisory firms and investors must contend with in the social media era.

According to the SEC, Fields used social media sites to offer over $500 billion in fake securities. He used Platinum Securities Brokers and Anthony Fields & Associates, which are his two proprietorships, to make numerous fraudulent offerings. He also allegedly provided misleading and untruthful information about Anthony Fields & Associates’ clients, assets under management, and operational history on the company’s Web site and in filings submitted to the Commission. The SEC claims that Fields did not maintain the necessary records and books, gave the impression that he was a broker-dealer even though he is not SEC-registered, and failed to implement appropriate compliance procedures and policies.

With retail investors turning to LinkedIn, Facebook, Twitter, YouTube, and other online networks to get information about investing, the risks of becoming exposed to fraud are growing. The SEC’s Office of Investor Education and Advocacy is offering investors a number of tips to avoid financial scams online, including:

• Be careful of unsolicited investment opportunities—especially from someone you don’t know.
• Be wary of any investment opportunity that sounds too good to be true.
• Watch out for “guaranteed returns” – there is no such thing.
• Consider it a “red flag” if you experience any pressure to invest or buy immediately.
• Watch out for affinity scams, which usually target group members.
• Make sure that your privacy is always protected online.
• Ask lots of questions about any investment opportunity.
• Do your due diligence.
• Don’t provide your Social Security number, any account information, or other sensitive data to or on social media Web site.
• Watch out for “friend” requests from financial service providers that you don’t know—remember, once you let them “in,” you are giving them access.
• Pick a solid password and don’t use the same one for multiple accounts.
• Deactivate file sharing.
• Be careful when using public computers or Wi-Fi that is accessible to others.
• Arm your computer with a firewall and antivirus software.
• Log out of your social networking accounts when you are not using them.
• Watch out for unfamiliar links sent to you—especially if you don’t know the sender.
• Make sure your mobile device is secure.

Examples of investment scams that have been known to use the Internet and social media:
• Market manipulation schemes
• Pump-and-dump scams
• Fraud marketed through spam e-mail or online investment newsletters
• High yield investment program scams
• Fraud offerings made online

SEC Charges Illinois-Based Adviser in Social Media Scam Agency Issues Alerts on Social Media Risks for Investors and Firms, SEC, January 4, 2012

Read the SEC's Investor Alert (PDF)

Read the SEC's investor bulletin on understanding your accounts (PDF)


More Blog Posts:
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Stockbroker Fraud, March 23, 2011

Lancer Management Group LLC Hedge Fund Manager Acquitted of Charges He Ran Market Manipulation Scam, Institutional Investor Securities Blog, May 5, 2011

Barclays Capital Ordered by FINRA to Pay $3M Fine For Alleged Subprime Mortgage Securitization-Related Misrepresentations, Institutional Investor Securities Blog, December 23, 2011

Continue reading "Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In " »

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

Posted In: SEC Enforcement , Securities Fraud

Tags: Social Media Fraud

January 4, 2012

Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam

The Securities and Exchange Commission has filed Texas securities fraud charges against Life Partners Holdings Inc. and three of the company’s senior executives over their alleged involvement in a life settlement scam. Life Partners, which is a Nasdaq-traded company, makes nearly all of its revenue from the life settlements it brokers.

According to the SEC, CEO and Chairman Brian Pardo, CFO David Martin, and general counsel and president Scott Peden misled shareholders when they failed to reveal a significant risk, which was that Life Partners was materially underestimating the estimates for life expectancy that it was using to determine how to price transactions. The estimates have a critical effect on company profit margins, revenues, and shareholder profits.

The Commission contends that Life Partners, Pardo, Peden, and Martin took part in improper accounting and disclosure violations, which allowed the company’s books to become overvalued while making it appear as if there was a steady stream of earnings coming from the life settlement transactions that were being brokered.

Peden and Pardo are also charged with insider trading. The SEC claims that the two men sold about $300,000 and $11.5M, respectively, of Life Partners stock at prices that were inflated even though they had material, non-public information disclosing that the company had relied on short life expectancy estimates to make revenue.

In a statement issue by the SEC's Division of Enforcement Director Robert Khuzami, the agency is claiming that Life Partners also deceived shareholders by retaining a medical doctor to designate baseless life expectancy estimates to underlying insurance policies. Dr. Donald T. Cassidy, who lacks actuarial training and had no previous experience in assigning life expectancy estimates, began working with Life Partners in 1999. (The Commission claims that Pardo and Peden neglected to perform substantial due diligence on the doctor’s qualifications to do this job. They also are accused of telling him to use a methodology created by a former underwriter, who is one of the company’s owners.)

Beginning fiscal year 2007 through fiscal year 2011’s third quarter, Life Partners allegedly understated impairment costs related to life settlement investments and prematurely recognized revenue. The company is also accused of improperly accelerating revenue recognition starting from the closing date until when it got a non-binding agreement with the policy owner to sell the life settlement. Because Life Partners used these Dr. Cassidy’s life expectancy estimates in its impairment calculations, millions of dollars in impairment costs were understated.

The SEC wants the repayment of bonuses and profits from stock sales.

Life Settlements
These usually involve the selling and buying of fractional interests of life insurance policies in the secondary market. For a lump sum amount, life insurance policy owners sell investors their policies. The amount that is offered is supposed to factor in the life expectancy of the insured and the policy’s terms and conditions. The longer the insured is expected to life, the more the investor has to pay in premiums. Policies owned by persons expected to not life as long cost more.

SEC fraud case could give new life to life settlements controversy, Bloomberg/Investment News, January 4, 2012

SEC Charges Life Settlements Firm and Three Executives with Disclosure and Accounting Fraud, SEC, January 3, 2012

SEC Complaint


Texas Securities Fraud: Unregistered Adviser Confesses to Selling Almost $400K in Promissory Notes and Investments Despite Cease and Desist Order, Stockbroker Fraud Blog, December 5, 2011

Texas Securities Fraud: Raymond James Financial Services Pays Elderly Senior Investor About $1.8M Following Loss of Appeal, Stockbroker Fraud Blog, December 2, 2011

Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011

Continue reading "Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam" »

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

Posted In: Insider Trading , Life Settlements , SEC Enforcement , Texas Securities Fraud

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