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March 10, 2010

"America's Prophet" Psychic Accused of Multimillion-Dollar Investment Fraud

According to the US Securities and Exchange Commission, Sean David Morton has bilked more than 100 investors of over six million dollars as the mastermind of an alleged offering fraud scheme. The man who calls himself “America’s Prophet” never professed to have a financial background. However, he is accused of promising prospective investors that he would use his psychic gifts to predict the movements of the stock market and advise his investing team.

The SEC claims Morton told investors he would use their funds to trade in foreign currencies and that profits would be distributed pro rata among them. The federal agency says that Morton, who describes himself as an intuitive consultant and trained Remote Viewer, lied to these investors about having a successful track record for being able to predict when the market will rise and crash. He also allegedly lied about how their money would be used, fund liquidity, and that profits were audited and certified.

Morton allegedly invested only half of the investors’ money in foreign currency trading firms. He is accused of diverting the rest, including at least $240,000 into his Prophecy Research Institute, a nonprofit religious group. Morton also allegedly commingled investors’ funds among the different entity accounts. The SEC contends that the defendant did not seek accreditation status from Delphi Investment Group investors.

Morton, Vajra Productions LLC, Magic Eight Ball Distributing, Inc., 27 Investments LLC, and Delphi Investment Group are the defendants in the SEC’s investment fraud lawsuit. Morton’s wife, Melissa, and Prophecy Research Institute are named relief defendants. The Mortons controls the entity defendants.

Federal regulators continue to warn investors that they must make sure that anyone they entrust with investing their funds is properly licensed. Unfortunately, many people are misled into investing in securities scams that end up costing them their hard-earned money and financial security.

Related Web Resources:
Investment 'Psychic' Accused of Financial Fraud, ABC News, March 8, 2010

Read the SEC Complaint, SEC.gov

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Posted In: Investor Fraud , SEC Enforcement

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January 26, 2010

Former Southwest Securities Broker’s Lifetime Industry Bar for Texas Securities Fraud is Affirmed, Says Appeals Court

The U.S. Court of Appeals for the Fifth Circuit has affirmed the Securities and Exchange Commission’s lifetime bar against a former Southwest Securities Inc. stockbroker. Scott Gann, who allegedly committed Texas securities fraud, is no longer allowed to associate with dealers, investment advisers, and brokers.

The SEC imposed the permanent bar against Gann because of his alleged involvement in a mutual fund market timing scheme. The appeals court says that the SEC’s ruling is not an abuse of discretion and is supported by the record.

Gann and George Fasciano, also a former Southwest Securities broker, are accused of engaging in market timing trades for Haidar Capital Management and Capital Advisor. They allegedly got around the rules of some of the mutual funds that prohibit market timing by using multiple representative and account numbers. Despite receiving 69 block notices from 34 mutual funds, their strategy allowed them to continue executing market timing trades.

The SEC filed an enforcement action in federal district court accusing the two men of violating the 1934 Securities Exchange Act Section 10(b). Fasciano settled before the case went to trial.

The district court held that Gann was in violation of Section 10(b). An SEC administrative law judge then entered a permanent associational bar against the ex-Southwest Securities broker. The SEC affirmed the bar, as did the appeals court.

The appeals court also noted that as Gann is convinced he did not engage in any wrongdoing—even though the SEC and two courts found that Gann acted wrongfully—there is no guarantee he won't commit future violations.

Related Web Resources:
Gann v. SEC, SEC.gov (PDF)

1934 Securities Exchange Act, Cornell University Law School

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Posted In: Financial Firms , Market Timing , SEC Enforcement , Southwest Securities , Texas Securities Fraud

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December 28, 2009

SEC Accuses Austin Advisor, Triton Financial, and Triton Insurance of Texas Securities Fraud Scam Involving Former NFL Football Players

The Securities and Exchange Commission has filed charges accusing Austin investment adviser Kurt B. Barton and his two firms, Triton Insurance and Triton Financial, of committing Texas securities fraud and raising over $8.4 million from about 90 investors. Former football stars were used as bait to target former NFL players as potential investment fraud victim.

The SEC claims the defendants used salespersons, stockbrokers, and former football players, including previous Heisman trophy winners and ex-NFL players, to sell Triton securities to potential clients. The agency says that the use of ex-football stars allowed Barton and Triton to appear legitimate and gain investors' trust.

Potential investors were allegedly told that their money would be used to buy an insurance firm. The SEC claims such representation were bogus. Instead, the agency claims that investors' funds were used to pay for daily expenses at the two companies.

The Texas State Securities Board began investigating Triton’s business following an article that was published earlier this year in Sports Illustrated describing the defendants’ alleged actions, which included having an ex-NFL quarterback send a mass-email to a number of former NFL players. The SEC contends that during the probe, the defendants gave the TSSB bogus and altered documents.

The defendants have agreed to an asset freeze. The SEC wants to obtain financial penalties and disgorgement of ill-gotten gains from them.

Barton and Triton are not admitting to or denying the SEC allegations. However, in addition to agreeing to permanent injunctions from future securities fraud violations, they will not destroy documents and will provide an accounting.

Texas securities fraud law firm Shepherd Smith Edwards and Kantas is working with investors that were victimized by this scam. “We are exploring additional avenues of recovery of funds for our clients, in addition to those that are made available through the efforts of regulators,” says Texas securities fraud attorney William Shepherd. “Victims should contact me personally regarding this situation.”

Related Web Resources:
Read the SEC Complaint (PDF)

Texas State Securities Board

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December 23, 2009

Texas Securities Fraud: SEC Freezes Assets of Fourth Person Involved in Alleged $485 Million Ponzi Scheme

Earlier this month, the US Securities and Exchange Commission was able to get a temporary restraining order to the freeze the assets of Joseph Blimline, the fourth person accused of masterminding a $485 million Ponzi scheme involving Provident Royalties LLC. The SEC charged three other individuals, Brendan Coughlin, Paul Melbye, and Henry Harrison, in July. Their assets were also frozen.

In its amended complaint, the SEC alleged that Provident, owned by the four defendants, advanced approximately $93 million of investor funds to Blimline and entities that he controlled for the purchase of gas and oil interests. The fund repayments and the title, however, frequently did not go to Provident. The SEC also accuses Blimline of failing to disclose that he received the funds, was involved with Provident management, and had been sanctioned in the past by Michigan securities authorities.

The SEC’s amendment complaint charges the four men with violating the Securities Act of 1933 (Section 17a) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC is seeking preliminary and permanent injunctions, financial penalties, disgorgement of ill-gotten gains, and prejudgment interest.

Director and officer bars are also being sought against the four defendants for allegedly committing Texas securities fraud. 36 affiliated entities are named as relief defendants for disgorgement purposes.

SEC Accuses Provident Royalties in $485 Million Ponzi Scheme, Bloomberg, July 7, 2009

Securities Act of 1933 (PDF)

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December 5, 2009

Texas Securities Commissioner Not Convinced SEC Has Reformed Itself Since Madoff Ponzi Scam

Denise Voigt Crawford, the Texas securities commissioner and current North American Securities Administrators Association president, says it isn’t evident that the US Securities and Exchange Commission has implemented key reforms to the issues that allowed the agency to fail to detect Bernard Madoff’s $50 billion ponzi scheme for almost 20 years. Speaking at the National Press Club on Friday, she accused the SEC of not doing enough to support legislation intended to increase investor protection.

Crawford claims staffers that work for the SEC hardly interact with investment fraud victims. Because many SEC employees would like to work on Wall Street, she contends that this makes it difficult for agency members to properly oversee a securities firm that could potentially become a future employer.

Seeking to make a number of changes to the financial-overhaul bill currently moving through Congress, NASAA wants states securities regulators to have jurisdiction over securities firms that manage up to $100 million in assets. It also wants broker/dealers, and not just investment advisers, to be subject to a fiduciary standard when giving investment advice. NASAA wants to terminate mandatory pre-dispute arbitration clauses that make investors to pursue their securities fraud claims in arbitration proceedings run by Financial Industry Regulatory Authority.

Responding to Crawford’s comments, SEC spokesperson John Nestor called her statements “uninformed” and cited the agency's proposal of the Investor Protection Act, its hiring of senior management, reforms made to internal operations, new rulemaking that is focused on investors, and an increase in investigations and penalties as among the numerous “dramatic” changes that the SEC has implemented since Madoff’s massive ponzi scam was discovered.

Related Web Resources:
State regulator: Jury still out on SEC post-Madoff, AP/Yahoo! News, December 4, 2009

2nd UPDATE:Texas Securities Regulator:'Jury Is Still Out' On SEC Reform, Wall Street Journal, December 4, 2009

Texas State Securities Board

North American Securities Administrators Association

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Posted In: Madoff Ponzi Scheme , SEC Enforcement , Securities Fraud , Texas Securities Fraud

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December 3, 2009

SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses

The US Securities and Exchange Commission’s amended complaint regarding the acquisition of Merrill Lynch by Bank of America Corp. last January includes one new assertion. In addition to the SEC’s original allegations against Bank of America, the agency now says that the investment bank was in violation of proxy regulations when it did not provide a merger agreement schedule, as well as a list identifying what would have been included in the schedule.

At the center of the SEC lawsuit is Bank of America’s proxy disclosure to shareholders that it wouldn’t pay year-end bonuses to Merrill executives. Yet, even as Merrill posted a record $27.8 billion loss last year, its executives were paid $3.6 billion.

BofA and the SEC initially attempted to settle the allegations for $33 million. Federal Judge Rakoff, however, wouldn’t sign off on what he considered both a swift resolution to an embarrassing situation for the bank and an attempt to make it appear as if the SEC was engaged in enforcement.

Rakoff accused SEC of not being hard enough on Bank of America, which it is supposed to regulate, even as shareholders suffered. He also accused the defendant of neglecting to take responsibility for its actions, which forced taxpayers to bail out the investment bank. A trial is scheduled to begin on March 1.

The US Congress and New York Attorney General Andrew Cuomo are also investigating the merger between Bank of America and Merrill Lynch.

Throughout the US, our securities fraud law firm represents investors who have suffered financial losses because of broker-dealer misconduct.

Related Web Resources:
SEC's Amended BofA Complaint: New Claims, but No New Defendants, Law.com, October 23, 2009

Judge Rejects Settlement Over Merrill Bonuses, NY Times, September 15, 2009

SEC Fines Bank Of America $33 Million Over Bonuses, Consumer Affairs, August 3, 2009

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Posted In: Bank of America , Financial Firms , Merrill Lynch , SEC Enforcement

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November 16, 2009

JP Morgan Chase to Pay $75 Million in Penalties and Forfeit $647 Million to Settle SEC Charges Over Alleged Municipal Bond Payment Scam

JP Morgan Chase has settled Securities and Exchange Commission charges that the securities firm was allegedly involved in an illegal payment scam to get municipal securities business from Jefferson County, Alabama. As part of its settlement with the SEC, JP Morgan Chase agreed to pay penalties of $75 million and forfeit $647 million in termination fees that it says the county owes. JP Morgan Securities will also pay Jefferson County $50 million, as well as a $25 million penalty. By agreeing to settle, the securities firm is not admitting to or denying the commission’s charges.

The SEC had accused JP Morgan Securities and former managing directors Douglas MacFaddin and Charles LeCroy of making over $8 million in undisclosed payments to friends of certain Jefferson County commissioners. These friends either worked for or owned broker-dealers in the area. The SEC says that these payments led to the commissioners voting for JP Morgan Securities as its managing underwriter of bond offerings. They also voted for JP Morgan Securities’s affiliated bank as the transactions’ swap provider.

The SEC claims JP Morgan Securities charged Jefferson County higher interest rates on swap transactions. This allowed it to pass on the unlawful payments’ costs. According to Robert Khuzami, SEC Enforcement Director, senior bankers with JP Morgan made illegal payments to earn fees and garner business.

The SEC has filed a civil lawsuit against LeCroy and Macfaddin. The SEC is accusing the two men of committing securities fraud for allegedly directing the illegal payments to the Jefferson County commissioners’ associates.

The commission claims the two men knew that the transactions, which occurred between October 2002 and November 2003, were “sham transactions.” The SEC says the men’s failure to disclose these payments or related “conflicts of interest” to either Jefferson County or bond offering investors or the county in the challenged swap agreements deprived those involved of swap agreement negotiations and bond underwriting processes that were impartial and objective. The SEC is seeking disgorgement plus prejudgment interest and permanent injunctions against the two men.

Related Web Resources:
JPMorgan to Pay $75 Million in Alabama Case, NY Times, November 4, 2009

Read the civil complaint (PDF)

Read the administrative complaint (PDF)

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Posted In: Financial Firms , J P Morgan - Chase , SEC Enforcement , Securities Fraud

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November 9, 2009

SEC to Continue Fight Against Senior Investment Fraud in 2010

The Securities and Exchange Commission is stepping up its efforts to combat senior investment fraud. In 2010, the SEC plans to focus on issues related to retirement investments, including product development, disclosures, and marketing issues.

The need to better regulate the retirement products arena and actively take action against securities fraud that targets elderly people has increased now that some 55 million senior investors are involved in defined contribution plans. The SEC is currently taking a closer look at life settlements (also called viatical settlements) and target date funds.

Viatical settlements involve transactions made by chronically ill or older people who sell their life insurance policy benefits to investors. In turn, these investors pay the premiums and collect the payout upon the seller’s death. According to the Senate Special Committee on Aging, the life settlement industry has doubled in value in the last 3 years and will likely exceed $150 billion in a few decades.

At this time, the SEC has limited authority over life settlement securities, which fall under its purview when they are solid in capital markets but also are sold in private offerings. On October 22, SEC Chairperson Mary Shapiro spoke at an American Association of Retired Persons forum. She called the life settlement market one of “emerging interest” and said its products could become Wall Street’s “next big securitized products.” The SEC has established a task force to determine whether this area of the market is regulated enough.

Shapiro expressed concern that many seniors may not comprehend the consequences of selling their life insurance policies to investors. She noted that tax benefits and the ability to get life insurance later on can be lost.

Shapiro says the commission is looking at target date funds and a target date’s use in the fund’s name. Target date funds are vehicles for college savings and retirement plans that move toward more conservative holdings as a specific date approaches. The SEC is taking a closer look at marketing and advertising collaterals to figure out if investors are getting accurate information about these products. Shapiro noted that some target-date funds lost up to 40% of their value when the economy collapsed last year.

Related Web Resources:
Schapiro: Settlements Need Watching

AARP

SEC

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Posted In: SEC Enforcement , Senior Investors , Viaticals

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November 2, 2009

SEC to Probe Whether Former Ferris, Baker Watts Inc. General Counsel Failed to Properly Supervise Broker Convicted of Securities Fraud

The US Securities and Exchange Commission says it will investigate allegations that former Ferris, Baker Watts Inc. general counsel Theodore W. Urban did not properly supervise Stephen Glantz. In 2007, Glantz, who was employed by Ferris for almost thee years, pleaded guilty to lying to law enforcement officials and securities fraud.

The SEC says Urban ignored a number of warnings he received connecting Glantz to questionable activities and unauthorized trades. Urban also allegedly knew that numerous complaints had already been made against Glantz even before he came to work at Ferris. Not only did Glantz’s Form U-4 registration application show 10 customer complaints, but others had warned about his questionable reputation. Yet Urban still gave the broker more freedom than he did other brokers at the firm.

Urban is a former SEC staffer who was an Assistant Director in the Division of Market Regulation. In 2004, he recommended that Ferris, Baker Watts fire Glantz over unsuitable trades involving customer accounts. Urban later backed down from his stance. Instead, he and vice chairman Louis Akers were in agreement that Glantz be put under "special supervision."

Glantz, another registered representative at another broker-dealer, and Glantz’ client David Dadante, were accused of manipulating the market for Innotrac Corp. Glantz also made unsuitable and unauthorized trades in a number of securities in his customers’ accounts.

Urban, according to his attorney, will contest the allegations.

Royal Bank of Canada subsidiary RBC Wealth Management acquired Ferris for $230 million in 2008.

While financial losses do occur when investing in the market, investor losses that are a result of broker fraud are unacceptable. You shouldn’t have to suffer because a broker or broker-dealer was negligent or engaged in misconduct.

Read the SEC's order to institute administrative proceedings, SEC (PDF)

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October 17, 2009

Market Timing Violations Against AG Edwards & Sons Inc. Supervisors and Broker Upheld by the SEC

The US Securities and Exchange Commission is upholding the market timing violations against two AG Edwards and Sons Inc. supervisors and one of its stockbrokers. Billions of dollars were involved in the mutual fund market timing transactions.

While market timing, which involves the buying and selling of mutual fund shares in a manner that takes advantage of price inefficiencies, is not illegal, a violation of 1934 Securities Exchange Act Section 10(b) and Rule 10b-5. can arise when there is intent to deceive.

Last year, the ALJ found that AG Edwards and Sons brokers Charles Sacco and Thomas Bridge intentionally violated antifraud provisions when they engaged in market timing activities even though they had been restricted from doing so. The ALJ also found that supervisors Jeffrey Robles and James Edge failed to properly supervise the stockbrokers.

The antifraud charges filed against Bridge by the SEC Enforcement Division involved 1,352 trades (representing $1.126 billion) he executed over a two-year period for companies belonging to client Martin Oliner. The Enforcement Division accused Sacco of entering 25,533 market timing trades (representing $4.036 billion) for two hedge fund clients between 5/02 – 9/03.

The SEC determined that Edge, who was Bridge’s supervisor, knew and was complicit in the latter’s actions. Although Robles was not considered to have been complicit in Sacco’s alleged broker fraud, the commission said he should have noticed there were problems.

The SEC ordered Bridge to cease and desist from future violations. He is also barred from associating with any dealers or brokers for five years. Sacco has already settled his broker-fraud case.

Edge is barred from acting in a supervisory role over any dealer or broker for five years. Robles received a similar bar lasting three years. All three men were ordered to pay penalties, while Bridge was ordered to disgorge almost $39,000 plus $16,665.57 in prejudgment interest.

Related Web Resources:
Read the SEC's Opinion regarding this matter

Commission Sanctions Thomas C. Bridge for Violations of the Antifraud Provisions of the Securities Laws and James D. Edge and Jeffrey K. Robles for Failing to Supervise Reasonably, Trading Markets, September 29, 2009

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Posted In: A G Edwards , Financial Firms , Market Timing , Mutual Funds , SEC Enforcement , Securities Fraud

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October 15, 2009

SEC Warns Charles Schwab Corp. of Possible Civil Charges Over Two Bond Funds

Charles Schwab Corp. has received a Wells notice from the Securities and Exchange Commission about possible civil charges related to the discount brokerage’s Schwab Total Bond Market Fund and Schwab YieldPlus Fund. Schwab has been the target of regulatory investigations over the two funds and is a defendant in a number of civil lawsuits.

SEC staff members plan on recommending civil charges against a number of Schwab affiliates over possible securities violations. The Wells notice is not a finding of wrongdoing or a formal allegation. It does, however, give Schwab an opportunity to respond before the SEC makes a decision on whether to move forward with an enforcement action. The discount brokerage says the possible charges are unwarranted.

In San Francisco, Schwab is defending itself against a class-action fraud lawsuit in federal district court. YieldPlus fund investors are accusing the brokerage firm of failing to fully disclose the risks connected with some securities in the Schwab funds.

The brokerage firm says that during the first half of 2009, it paid $21 million to settle arbitration claims and lawsuits related to these investments. According to Investment News, between September 1 and October 1, 2009, Schwab lost 7 out of 10 YieldPlus Finra arbitration cases. FINRA says awards against the brokerage firm totaled $772,000.

FBR Capital Markets analyst Matt Snowling says the Wells notice could directly impact current and upcoming arbitration claims and litigation from investors who sustained losses from Schwab's two fixed-income mutual funds. Snowling says that the Wells notice and ongoing FINRA arbitration over the bonds funds increases the chances Schwab will likely have to settle the class-action fraud lawsuit.

Our securities fraud lawyers represent investors with FINRA arbitration claims against Charles Schwab. Please contact our stockbroker fraud law firm for a free case evaluation.

Please also refer to the ugent notice our securities fraud lawyers posted on our Blog site this week about what a Schwab YieldPlus investor must do to file a private claim.

Related Web Resources:
Schwab slapped with SEC warning; YieldPlus settlement may be on the horizon, Investment News, October 15, 2009

Charles Schwab Receives Wells Notice From SEC - Filing, WSJ, October 14, 2009

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Posted In: Charles Schwab , Financial Firms , SEC Enforcement

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September 29, 2009

Texas Securities Fraud: Investment Firm Employee Accused of Making $8.6 Million from Dell Insider Trading

The Securities and Exchange Commission is charging trader Reza Saleh with Texas securities fraud. The agency is accusing the Perot Systems employee of buying call options contracts just two weeks before Dell announced it was acquiring the services company. The SEC says that as a result of insider trading, Saleh made $8.6 million in illegal profits.

Call options allow a buyer to purchase stock at a certain price on a specific day in the future. Right after Dell announced the tender offer on September 21, Reza sold his call options. By this time, Perot Systems’s stock price had gone up by about 65%.

Soon after, the Options Regulatory Surveillance Authority identified Saleh as a suspicious trader. He also allegedly told a Perot Systems director that he bought the options because he knew Dell was going to make the announcement.

Filed in federal court in Dallas, the SEC complaint alleges that Saleh bought 9,332 Perot Systems call options contracts between September 4 and 18, 2009. The call options contracts would expire in October 2009 and January 2010.

The SEC is accusing Saleh of violating the Securities Exchange Act of 1934’s anti-fraud provisions. The SEC wants to place an emergency freeze on Saleh’s assets. It also is seeking a preliminary injunction and a final judgment enjoining the trader from violating relevant provisions of federal securities laws in the future. The agency wants Saleh to pay financial penalties in addition to disgorgement of ill-gotten gains.

Dell announced it was purchasing Perot Systems for $3.9 billion or $30/share in cash. Dell’s tender offer is asking for outstanding Perot Class A common shares. The deal will likely close by the end of January 2010.

Related Web Resources:
SEC: Insider trading charges in Dell deal, CNN, September 24, 2009

SEC Charges Perot Company Employee in $8.6 Million Insider Trading Scheme, SEC.gov, September 23, 2009

Securities Exchange Act of 1934

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

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September 24, 2009

Regions Bank Settles SEC Charges Over Latin American Investment Fraud Scam

Regions Bank has agreed to a $1 million fine to settle SEC allegations that it helped defraud some 14,000 investors. Most of the affected investors are based in Latin America.

According to the SEC, Regions Bank helped two unregistered broker-dealers, U.S. College Trust Corp. and U.S. Pension Trust Corp., commit securities fraud against Latin American investors.

Beginning October 2001, Regions Bank played the role of “trustee” to the broker-dealers’ investment plans. It continued to accept USPT clients until January 2008. The SEC contends that this affiliation with a US bank gave the securities fraud scheme an aura of “legitimacy” and became a big draw for Latin American investors.

The SEC says that by taking on the role of trustee, Regions Bank formed individual trust relationships with investors, processed client contributions, and bought mutual funds on their behalf.

Investor had the option of paying one lump sum or making yearly contributions. Investors were not notified until March 2006 that USPT deducted substantial chunks of investors’ contributions—up to 85% of initial contributions made by investors who took part in an annual plan and up to 18% of single contributions—and used the money to pay for commissions and other fees.

The SEC says that Regions Bank either knew or should have known about USPT’s deceptive sales practices. The Commission is accusing Regions Bank of dispatching representatives to Latin America to meet prospective investors and allowing USPT to use the bank’s name in marketing and promotional materials.

The $1 million penalty will be placed in a Fair Fund to compensate investment fraud victims. Regions bank has also agreed to a cease-and-desist order.

SEC charges Regions Bank for role in Latin American fraud scheme, Investment News, September 21, 2009

Read the SEC Complaint (PDF)

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Posted In: Broker Fraud , Financial Advisers , Regions Bank , SEC Enforcement , Securities Fraud

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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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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

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June 14, 2009

Texas Securities Fraud: A Houston Attorney and a Texas A & M Professor Charged with Investment Fraud

The US Securities and Exchange Commission and the Commodity Futures Trading Commission are accusing Houston attorney and accountant Daniel Petroski and Texas A & M Professor Robert Watson of using forged bank records to engage in investor fraud. On May 21, the US District Court for the Southern District of Texas froze the assets of the two men and of two firms associated with the alleged misconduct.

According to the two agencies, Petroski and Watson raised over $19 million from about 65 investors, while claiming they would use a foreign-currency trading software, “Alpha One,” that they said belonged to their company, Private FX Global One Ltd. Watson’s “deal clearing company, “36 Holdings,” was also to participate in the investing.

The SEC and the CFTC contend that the two men engaged in misrepresentation when they made it appear as if their foreign exchange trading business never had a losing month, achieved a yearly return of over 23%, and that their venture had millions of dollars in Swiss and US bank accounts. The two agencies are also accusing the two men of generating bogus records for investigators, including records indicating that 36 Holdings had an account with Deutsche Bank where Global One earned over $2 million this year by trading foreign currencies. In fact, 36 Holdings does not have a Deutsche Bank account.

In addition, the SEC’s complaint accuses the two men of putting, at maximum, 33% of their proceeds in a Swiss bank before transferring some $5 million to a Houston bank—even though they told investors that the amount of foreign currency and other assets was closer to 80%. The defendants are also accused of giving their own employees bogus Swiss bank statements and making false claims that 36 Holdings had nearly $70 million deposited there.

The SEC accuses the defendants of violating the Securities and Exchange Act of 1934’s Section 10(b), Rule 10b-5 thereunder, and the Securities and Exchange Commission Act of 1933’s Section 17(a). The CFTC and the SEC are seeking a preliminary injunction, final judgment from permanent enjoinment of future violations, disgorgement with interest, and fines.

Read the SEC Complaint (PDF)

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Posted In: CFTC , SEC Enforcement , Securities Fraud , Texas Securities Fraud

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June 9, 2009

Morgan Keegan, Charles Schwab and Others Fight as Wells Fargo Unit Settles Claims of Misrepresented Securities in Short Term Bond Funds

Evergreen Investment Management Company, a Wells Fargo unit, has agreed to a $40 million settlement with federal and state regulators over allegations that it misrepresented securities in short-term bond funds. The settlement could be a sign that other fund providers, including Morgan Keegan, Charles Schwab Corp., and Fidelity Investments, may face similar lawsuits. Already bond providers are facing securities fraud lawsuits and arbitration claims from clients that experienced heavy losses from investing in debts that were either high risk or became illiquid.

The Massachusetts Securities Division and the Securities and Exchange Commission had accused Evergreen and one of its affiliates of inflating the value of its Ultra Short Opportunities Fund by up to 17%. The SEC says that this inflated value allowed the fund in 2007 and 2008 to be ranked high compared to other peer funds, when its true value should have placed it closer to the bottom of its class. At the time of the alleged violations, Evergreen was a Wachovia Corp. subsidiary.

With the housing crisis getting worse, Evergreen is accused of not using the information it had access to about mortgage-backed securities when engaging in the valuation process. Evergreen dealt with the fund by adjusting the prices on specific holdings, but only notified a select number of investors about the reasons for the re-pricings, as well as the possibility of adjustments in the future.

The investors that were given this information managed to leave the fund before their shares’ value went down even more. However, the other shareholders that did not receive the preferential information were left at a disadvantage. In June 2008, Evergreen closed the Ultra Short Fund, which, at the time, had $403 million in assets.

By agreeing to settle, Evergreen is not admitting to or disagreeing with the SEC’s findings. As part of the agreement, the Wells Fargo unit will pay $33 million to fund shareholders, $3 million in disgorgement of ill-gotten gains, a $4 million SEC penalty, and $1 million to Massachusetts.

Evergreen settles state, US charges for $40 mln, Reuters, June 8, 2009

Settlement in Mutual Fund Case, NY Times, June 8, 2009

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Posted In: Financial Firms , SEC Enforcement , Short-Term Trading , Wells Fargo

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May 1, 2009

SEC Enforcement Action Holding Southwest Securities Broker Accountable for Market Timing is Affirmed by 5th Circuit

The US Court of Appeals for the Fifth Circuit is affirming the Securities Exchange Commission’s enforcement action against Southwest Securities broker Scott Gann who is accused of engaging in market timing activities that violated certain funds’ restrictions. The 5th circuit’s decision affirms a lower court’s ruling in favor of the SEC.

In 2002, Scott Gann and George Fasciano, both employees of Southwest Securities Inc, designed a plan for Haidar Capital Management and Capital Advisor that would allow them to trade mutual funds by engaging in market timing. The two men agreed to share the commissions.

The court says the two men studied the fund companies' rules and requirements regarding market timing and that everyone involved was aware that the trades would have to take place “under the radar” so block notices wouldn’t be sent to them. The two men then opened up 21 accounts for nine HCM affiliates—each one had the same investors.

Trading for HCM started on Feb 10, 2003. SWS was issued a block notice 15 days later. Fasciano and Gun then switched the identifier number that was being used so they could keep trading.

They made 2,500 trades over a seven-month period in 56 companies mutual funds. They were sent 69 block notices.Their trades had an aggregate value of $650 million. Gann made about $56,640.67.

The SEC filed its enforcement action against the two men in 2005 and contended that the trades violated Section 10(b). Without admitting to wrongdoing, Fasciano settled.

The district court found that Gann had made material misstatements with the intent to deceive and had violated Section 10(b) and Rule 10b-5. The court ordered Gann to disgorge his profits from the HCM trades and pay a penalty of $50,000. The court also further enjoined him from future violations. This was affirmed by the appeals court.

In the 5th Circuit Court, Judge Jacques Wiener Jr. said that Gann failed to make a factual showing to show that the district court clearly made a mistake when it ruled in favor of the SEC and found that Gann violated the 1934 Securities Exchange Act Section 10(b).

While the court notes that market timing is not against the law, there are a number of mutual fund companies that do not allow this type of activity. Brokers who engage in market timing will occasionally get “block notices” from funds to let them know that they’ve gone against the fund’s restrictions, as well as bar certain accounts controlled by the broker from future trades.

Market TIming, Investopedia

Isn't market timing illegal?, SteadyClimbing.com

Continue reading "SEC Enforcement Action Holding Southwest Securities Broker Accountable for Market Timing is Affirmed by 5th Circuit" »

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Posted In: Market Timing , SEC Enforcement , Texas Securities Fraud

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March 7, 2009

Outcome of SEC Actions Appear to Favor Larger Broker-Dealers than Smaller Ones, Says Harvard Law School Study

The Securities and Exchange Commission may be “too close” to larger investment firms that they give them preferential treatment in SEC Actions, says a Harvard Law School study. One “tentative” explanation cited by the study is that SEC officials look to the larger broker-dealers—especially those located in New York—for future employment opportunities. The study also noted that the SEC was more likely to order smaller broker-dealers (than larger firms) to court, rather than merely slapping the firm with an administrative proceedings.

The Harvard study took a look at patterns the SEC exhibited when it enforced actions against investment firms in 1998, 2005, 2006, and Jan – April in 2007. Findings included:

• When large investment firms and smaller firms faced the same SEC violations for similar levels of harm, there was a 75% smaller chance that a big broker-dealer would have to go to court than one of its smaller counterparts.
• There was a 44% chance that employees from large broker-dealers would have to go to court to fight an SEC action, compared to a 73% possibility for employees of smaller broker-dealers.
• When facing SEC administrative proceedings, bigger firms were less likely to be banned from the industry. 25% of small firms defendants in such actions received permanent industry bans, compared to just 5% of large firm defendants.
• There did not appear to be a justifiable reason for why there was a disparity between the outcomes of SEC actions involving larger broker-dealers and smaller ones.
• However, both large and small firms were slapped with equivalent fines.

The study did not look at SEC enforcement actions in 1999 and 1920 because of worries the findings might be affected by the burst of the “dot.com bubble,” as well as the outcomes of SEC actions from 2008 that may have been impacted by the financial crisis.

Related Web Resources:
Securities and Exchange Commission
SEC Enforcement Actions

Continue reading "Outcome of SEC Actions Appear to Favor Larger Broker-Dealers than Smaller Ones, Says Harvard Law School Study" »

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Posted In: Broker-Dealers , Miscellaneous , SEC Enforcement

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February 18, 2009

Merrill Lynch, Pierce, Fenner & Smith Inc To Settle SEC Charges of Pension Consulting Business-Related Violations for $1 Million

Merrill Lynch, Pierce, Fenner & Smith Inc has reached a $1 million settlement agreement with the Securities and Exchange Commission over charges that the broker-dealer misled its pension consulting clients by neglecting to disclose conflicts of interest. By agreeing to settle, Merrill Lynch is not denying or admitting wrongdoing. The investment firm will, however, cease and desist from committing future violations.

According to the SEC, Merrill Lynch recommended that clients pay hard dollar fees using directed brokerage. The firm's investment advisers, however, failed to mention that choosing this option—which would direct trades to be executed through Merrill—could allow the company and its investment adviser representatives to receive substantially higher revenues. The SEC also accused Merrill Lynch of neglecting to reveal a similar conflict of interest when it recommended to clients that they utilize the firm’s transition management desk and of making misleading statements about the firm’s process for identifying new money managers.

SEC charges against Merrill Lynch include anti-fraud provision violations, failure to maintain specific records, and failure to supervise its investment advisers in the Ponte Vedra South office in Florida.

Also cited by the SEC for misleading pension consulting clients about the way Merrill identified new money managers is Jeffrey Swanson. The former Merrill adviser agreed to case and desist from violating the 1940 Investment Advisers Act in the future. By agreeing to the censure, however, Swanson is not admitting to or denying wrongdoing.

The SEC also censured former Merrill Lynch adviser Michael Callaway for breach of fiduciary duty when he made misrepresentations about the manager identification process and his compensation related to transition management services. The SEC says Callaway should have made sure that any conflicts of interest should have been revealed to clients. Both Callaway and Swanson were from the Florida office.

The SEC says that the outcome of this case should remind investment adviser representatives that they must disclose all conflicts of interest when offering advice to clients.

Related Web Resources:
SEC Charges Merrill Lynch With Misleading Pension Consulting Clients, SEC, January 30, 2009

Read the SEC Administrative Proceeding Against Merrill Lynch, Pierce, Fenner & Smith, Inc., January 30, 2009 (PDF)

Continue reading "Merrill Lynch, Pierce, Fenner & Smith Inc To Settle SEC Charges of Pension Consulting Business-Related Violations for $1 Million " »

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Posted In: Financial Firms , Merrill Lynch , SEC Enforcement

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Stock Broker Fraud Blog

Published by Houston Securities Fraud Lawyers Shepherd Smith Edwards & Kantas

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Merrill Lynch, Pierce, Fenner & Smith Inc To Settle SEC Charges of Pension Consulting Business-Related Violations for $1 Million

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