September 13, 2014

FINRA Fines Minneapolis Broker-Dealer $1M for Inadequate Supervision of Penny Stocks

The Financial Industry Regulatory Authority has issued an enforcement action charging Feltl & Company for not notifying certain customers of the suitability and risks involving certain penny-stock transactions, as well as for failing to issue customer account statements showing each penny stock’s market value. The brokerage firm is based in Minneapolis, Minnesota.

FINRA claims that the firm failed to properly document transactions for securities that temporarily may not have fulfilled the definition of a penny stock and did not properly track penny-stock transactions involving securities that didn’t make a market.

Feltl made a market in nearly twenty penny stocks. The brokerage firm made $2.1 million from at least 2,450 customer transactions that were solicited in 15 penny stocks between 2008 and 2012. The SRO says it isn’t clear how much the firm made from selling penny stocks that it didn’t keep track of but that revenue from this would have been substantial.

Felt is settling the securities charges without denying or admitting to the claims. It said that after February 2012 it stopped recommending penny stocks and now doesn’t make a market in any penny stock. Customers, however, can trade in penny stocks if they are the ones that initiate the transaction.

Penny Stocks
These securities trade under $5 a share. Small companies that have low revenue are the ones that usually put them out. Penny stocks may be high risk because it can be hard to track the companies’ future value and business potential and these stocks don’t trade as often as liquid stocks that are traded on exchanges. Penny stocks are not a suitable investment for everyone.

Our penny stock fraud lawyers represent investors wanting to recoup their losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Finra Fines Brokerage $1M Over Penny-Stock Deals, WSJ, September 3, 2014

Penny Stock Rules, SEC.gov


More Blog Posts:
SEC Files Charges in Penny Stock Scams, Stockbroker Fraud Blog, May 27, 2014

SEC Files Charges in $4.5M Houston-Based Pump-and-Dump Scam, Stockbroker Fraud Blog, August 18, 2014

Securities Lawsuit Accuses Deutsche Bank, JPMorgan Chase, Credit Suisse, and Other Banks of Manipulating ISDAfix, Institutional Investor Securities Blog, September 4, 2014

September 4, 2014

SEC Charges Immigration Attorneys with Securities Fraud Involving EB-5 Immigration investor Program

The SEC is charging a Los Angeles-based immigration lawyer, his wife, and his law firm partner with securities fraud that targeted investors who wanted to gain U.S. residency through the EB-5 Immigration investor program. The program lets immigrants apply for U.S. residency if they invest in a project that helps create jobs for workers in this country.

According to the Commission, Justin, his spouse Rebecca Lee, and Thomas Kent raised close to $11.5 million from more than twenty investors that wanted to join the program. They told investors that they would qualify to join if they invested in an ethanol plant that was going to be constructed in Kansas.

The three of them are accused of taking the money and misappropriating it for other uses. Meantime, the plant was never constructed and no jobs were created. Yet Justin, Rebecca, and Thomas allegedly continued to deceive investors so that they kept believing that the construction project was in the works.

In 2006, Thomas and Justin applied to the U.S. Citizenship and Immigration Services seeking designation as a center under the EB-5 program. But by 2008, states the SEC complaint, it became clear that building an ethanol plant at the site they had designated in Kansas was not economically possible. Still, the Lees and Thomas concealed from the USCIS that the jobs the project was supposed to generate were never created.

The SEC says that when Justin was having financial problems, he misappropriated investor funds. He and his wife allegedly ended up misusing millions of dollars to pay for purposes that were not disclosed, including paying back other investors in unrelated offerings. The majority of those who were defrauded in the securities scam were of Korean and Chinese descent.

The U.S. Attorney’s Office for the Central District of California has filed a parallel action against Attorney Justin Moongyu Lee.

EB-5 Program Securities Scams
Unfortunately, there are investment scams out there seeking to exploit the EB-5 Program. Last year, regulators filed charges against a couple in a Texas-based securities scheme that raised at least $5 million from customers who thought their money was going into the EB-5 program. Investors from Nigeria, Mexico, and Egypt were targeted. None of these investors even received conditional visas.

In another fraud, investors were bilked of $150 million after they agreed to invest in the construction of a hotel and a conference center. They too had hoped to become U.S. residents.

The SEC has put out an alert notifying investors that it is working to stop fraudulent securities offerings made through the immigration program. The regulator wants investors who are thinking about getting involved in an EB-5 program to do their due diligence to make sure the venture is a legitimate one and they are not being scammed.

SEC Charges L.A.-Based Immigration Attorneys With Defrauding Investors Seeking U.S. Residency, SEC, September 3, 2014

Read the SEC Complaint (PDF)

Investor Alert: Investment Scams Exploit Immigrant Investor Program, SEC

EB-5 Immigrant Investor, U.S. Citizenship and Immigration Services


More Blog Posts:
$5M Texas-Based Securities Fraud Scam Pursued Foreign Investors Wanting US Residency Via EB-5 Program, Stockbroker Fraud Blog, October 1, 2013

SEC Files Securities Charges Against Massachusetts Company Over Pyramid Scam that Primarily Targeted Immigrants, Stockbroker Fraud Blog, April 17, 2014

Texas-Based Halliburton Settles Oil Spill Lawsuit for $1.1B, Institutional Investor Securities Blog, September 2, 2014

August 19, 2014

FINRA Investor Alert Warns About Scams Touting Ebola Cure and Other Viral Disease Stock Schemes

The Financial Industry Regulatory Authority has put out an investor alert warning against buying stocks in companies claiming to combat viral diseases. The self-regulatory organization says it knows of several possible schemes involving stock promotions employing tactics such as pump-and-dump scams to inflate share prices. The scammers will then sell their shares at a profit while leaving investors with shares that have lost their value.

Intensified news coverage of the recent Ebola and Middle East Respiratory Syndrome outbreak will likely have attracted the attention of stock scammers wanting to take advantage of people’s fears. To avoid falling victim to a viral disease stock scam, FINRA is offering several tips, including:

• Be wary of promotional materials, correspondence, and press releases from senders you don’t know. Watch out for communications that say little about the risks involved while only touting the positives. Getting a barrage of information about the same stock opportunities can also be a red flag.

• Make sure to know who is behind a company you are thinking of investing in. Do your research. Think twice if company officials have past criminal records or you hear anything negative in the news. Be on the look out for fake business addresses and phone numbers.

• A lot of stock pump-and-dump scams don’t trade on the NYSE or other registered national securities exchanges. Instead, you can find them on OTC quotations platforms or alternative trading systems.

• Find out whether the company submitted an SEC filing. Compare the information there with what’s provided in promotional materials and other communications you’ve received. Watch out for solicitations to get you to invest in products that are still being developed or if there are losses on balance sheets.

• Watch out if a company keeps changing its name or business focus.

• Make sure you read the fine print and be wary when name-dropping is used to gain investor confidence or boost legitimacy.

Shepherd Smith Edwards and Kantas, LTD LLP is a securities fraud law firm. Contact our fraud lawyers today to request your free case consultation.

Viral Disease Stock Scams: Don’t Let Them Infect Your Portfolio, FINRA

Investment scammers busy pumping Ebola stocks amid panic, NY Post, August 14, 2014


More Blog Posts:
SEC Files Charges in $4.5M Houston-Based Pump-and-Dump Scam, Stockbroker Fraud Blog, August 18, 2014

SEC Charges Linkbrokers Derivatives in $18M Securities Fraud, Institutional Investor Securities Blog, August 18, 2014

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds, Stockbroker Fraud Blog, August 15, 2014

August 14, 2014

Former MIT Professor and His Son Plead Guilty to $140M Hedge Fund Fraud

Gabriel Bitran, an ex- Massachusetts Institute of Technology professor, and his son Marco Bitran have pled guilty to securities fraud charges accusing them of bilking investors of $140 million. Through their company, GMP Capital Management, the father and son placed investor money in hedge funds linked to Bernard Madoff, who ran the Ponzi scam that defrauded clients of billions of dollars.

According to prosecutors, from 2005 to 2011 Bitran and Marco collected $500 million from investors by promising to invest their funds using an original complex mathematical trading model. The money was supposed to go into exchange-traded funds and other securities but were instead placed in hedge funds.

When the financial crisis of 2008 happened, a number of the hedge funds got into trouble. Some of their investors lost up to 75% of their principal.

The Bitrans allegedly took out around $12 million of their own money from the hedge funds but made customers wait to redeem their funds from GMP Capital Management. (In 2011, the firm name was changed to Clearstream Investments LLC.) The two of them paid themselves millions of dollars in management fees.

The father and son are accused of lying to investors by telling them that they had delivered average yearly returns of 16-23% over eight years. The U.S. Attorney said that e-mails between the Britans show evidence of this. They also purportedly made false statements to the U.S. Securities and Exchange Commission during its related investigation.

In that civil probe, the Bitrans consented to settle the hedge fund fraud charges by paying $4.8 million. The two did not deny or admit wrongdoing. They did, however, agree to an industry bar.

If the judge accepts their plea deal in the criminal securities case, the Britans are facing up to five years behind bars and then supervised release. They would have to pay back $10 million in profits.

Ex-MIT official and son plead guilty to securities fraud, Boston.com, August 12, 2014

Ex-MIT dean, son plead guilty to hedge fund scam, CNN, August 12, 2014


More Blog Posts:

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges, Stockbroker Fraud Blog, August 13, 2014

SEC Tells J.S. Oliver Capital to Pay $15M for Alleged Cherry-Picking Scam, Stockbroker Fraud Blog, August 11, 2014

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million, Stockbroker Fraud Blog, August 11, 2014

August 11, 2014

SEC Tells J.S. Oliver Capital to Pay $15M for Alleged Cherry-Picking Scam

SEC Chief Administrative law judge Brenda Murray has fined J.S. Oliver Capital Management $15 million for securities violations and breach of fiduciary duty related to an alleged cherry-picking scam that bilked clients of approximately $10.9 million. The registered investment adviser must also pay $1.4 million in disgorgement.

According to the regulator, the RIA awarded profitable trades to hedge funds associated with the firm, while other clients, including a charitable foundation and a widow, were given the less profitable trades that resulted in major losses. These hedge funds that benefited were those in which J.S. Oliver founder Ian Oliver Mausner was an investor. Mausner is also accused of using soft-dollar commissions inappropriately.

Mausner continues to deny the SEC charges. He claims that the profitable trades were disproportionately allocated because of market volatility and that clients’ investment goals played a part.

Murray, however, found that the firm made over 4,000 potential cherry-picking transactions between ’08 and ’09. During that time, several favored accounts made substantial gains while three that were “disfavored” suffered a 99.7% loss. The Commission put out its cease-and desist order against J.S. Oliver last year.

During the purported scheme, the firm would wait until after trading closed for the day or the following day to allocate the trades. This let Mausner determine which securities had declined or appreciated in their value. He is said to have made over $200,000 in fees from just one of the hedge funds that benefited from winning trades. Mausner is also accused of marketing that very hedge fund to investors by bragging about its positive returns when really those results were because of his scam.

J.S. Oliver Capital is accused of misappropriating $1.1 million of client funds via the inappropriate use of soft-dollar funds. Soft dollars are rebates that brokerages pay investment advisers and customers for commission because the broker-dealers’ accounts were involved in transactions. Advisers are allowed to keep the money but they must disclose this and only use the funds in ways that could enhance clients’ investments.

The SEC claims that from ’09 through most of ‘11, J.S. Oliver and Mausner did not tell clients that soft dollars were used to pay his ex-wife money he owed from their divorce, cover J.S. Oliver’s “rent” at Mausner's home, pay portfolio manager Douglas Drennan, and take care of maintenance and other expenses at Mausner’s New York timeshare.

The SEC claims Drennan turned in false data to support the inappropriate use of the soft dollar credits and approved some of the payments to his company.

In addition to the $15 million fine against the firm, Mausner must pay a $3 million penalty and he is permanently barred from the industry. Drennan is also barred and must pay a $410,000 fine.

RIA slapped with $15 million fine; founder barred, Investment News, August 7, 2014

Read the SEC Order (PDF) (PDF)


More Blog Posts:

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud, Institutional Investor Securities Blog, June 11, 2014
Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager, Stockbroker Fraud Blog, December 18, 2012

Securities Headlines: UBS to Pay $4.5M Over Unregistered Assistants, $6M Ponzi Scam Allegedly Funded Reality Show, & Cherry Picking Allegations Lead to SEC Charges, Stockbroker Fraud Blog, August 30, 2013

August 5, 2014

SEC Gets Nearly $70M Judgment Against Richmond, VA Firms, CEO Find Liable for Securities Fraud

AIC Inc., Community Bankers Securities LLC, and CEO Nicholas D. Skaltsounis must pay a nearly $70 million judgment for securities fraud, in the wake of an earlier trial that found them liable. The Securities and Exchange Commission had accused them of conducting an offering fraud while selling millions of dollars in AIC promissory notes and stocks to investors in different states, including unsophisticated investors and elderly customers.

The regulator accused them of omissions and misrepresentations of material information about the investments, their risks, the return rates, and how the money would be used by AIC, which is a financial services holding company, and Community Bankers Securities, its subsidiary brokerage firm. The SEC argued that the companies were not profitable and new investors’ money was used in Ponzi scam fashion to repay returns and principal to earlier investors.

Last year, a jury ruled in the SEC’s favor against AIC, Community Bankers Securities and Skaltsounis. Now, AIC must disgorge over $6.6 million, over $969,00 in prejudgment interest, and a $27.95 million penalty. Community Bankers Securities disgorgement is $2.8 million, over $400,000 in prejudgment interest, and a $27.95 million penalty. Skaltsounis is to pay over $2.5 million dollars in total.

SEC enforcement division director Andrew Ceresney said that these penalties should reinforce that the regulator is determined to aggressively go after companies and individuals to hold them accountable when they are not truthful with investors, even taking them to trial when necessary.

Just last month, the SEC filed administrative proceedings against a Seattle, WA investment advisor for misusing over $8 million in client moneys and making loans to himself. Dennis H. Daugs and his Lakeside Capital Management are accused of borrowing $3.1 million from one client without her consent.

The SEC also claims that Daugs and Lakeside Capital improperly directing an investment fund that the firm managed to make over $4.5 million in investments and loans. The money was used to facilitate personal real estate deals, purchase a luxury vacation home, refinance a vintage auto, and fend off claims of over $500,000 from firm clients.

Daugs and Lakeside Capital have repaid the diverted monies. They also consented to settle SEC charges and pay over $340,000 in disgorgement and interest to the investment funds and the one client. They also agreed to pay a $250,000 penalty. Daugs agreed to a 5-year minimum industry bar.

Our investment advisor fraud lawyers help investors recoup their money. Working with a securities attorney dramatically increases your chances of getting back all or most of your losses. You want to work with a securities fraud law firm that has the resources and experience to help you recover your money. Your case consultation with us is free. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

SEC Obtains Nearly $70 Million Judgment Against Richmond, Va.-Based Firms and CEO Found Liable for Defrauding Investors, SEC, August 1, 2014

Adviser misused $8 million in client funds: SEC, Investment News, July 17, 2014


More Blog Posts:
SEC Charges Ex-UBS Broker With $730K Elder Financial Fraud Ponzi Scam, SEC, August 4, 2014

Deutsche Bank, UBS Being Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays, Institutional Investor Securities Blog, July 30, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds, Stockbroker Fraud Blog, July 23, 2014

July 1, 2014

Broker Fraud: Ex-Investors Capital Rep. is Indicted in Ponzi Scheme, Credit Suisse Sues Two Ex-Brokers Over Client Data Theft, and SEC Files More Insider Trading in IBM-SPSS Acquisition

Ex-Investors Capital Rep. Charged in $2.5M Ponzi Scam
Patricia S. Miller, a former Investors Capital Corp. representative, has been indicted on charges that she ran a $2.5 million investment fraud. She is accused of promising clients high yields for placing funds in “investment clubs.” Miller allegedly took this money and either gambled it away or used it to pay for her own spending.

According to prosecutors in Massachusetts, alleged fraud took place from 2002 through May 2014. Investors Capital fired Miller last month. Her BrokerCheck Report notes that the independent broker-dealer let her go because she allegedly misappropriated funds, borrowed client money, generated false documents, and engaged in “fraudulent investment activity.” Miller is charged with five counts of wire fraud.

Credit Suisse Sues Former Advisers For Allegedly Stealing Client Data
Credit Suisse Securities (CS) is suing John Delehanty and David Starker for violating their non-solicitation agreements when leaving the firm. The firm is accusing the men of taking client lists and sending confidential information to their personal accounts before going to work with J.P. Morgan Securities (JPM). The firm has also filed a claim with FINRA seeking damages.

In dispute was a contact list consisting of about 3,00 names that Starker sent from his Credit Suisse work e-mail account to his personal one. The list included notes about prospective clients. Delehanty is also accused of sending confidential client information to his personal e-mail account.

Under the Protocol for Broker Recruiting, which has been signed by about 1,100 brokerage firms, a broker is not subject to litigation when recruited to another firm as long as they bring just a spreadsheet that contains only certain client data, such as phone numbers and names. Anything more is considered a violation. However, this can be undone if the broker gives back the information when resigning. Credit Suisse said that Delehanty and Starker did not answer request by the firm to follow this protocol.

SEC Files More Insider Trading Charges in IBM-SPSS Acquisition
The Securities and Exchange Commission is charging two more brokers with insider trading prior to IBM’s acquisition of SPSS Inc. in 2009. Ex-representatives Daryl M. Payton and Benjamin Durant III allegedly traded illegally on the information that the deal was going to happen. They got the tip from another broker, Thomas C. Conrad.

Now, the regulator wants ill-gotten gains of about $300,000 returned, along with financial penalties, interest, and permanent injunctions. The U.S. Attorney’s Office for the Southern District of New York has filed a parallel action against the two men.

The SEC had previously filed insider trading charges against Conradt and David J. Weishaus, also a broker and tippee. They got the information from Conradt’s roommate, research analyst Trent Martin, who received the data from an attorney who worked on the deal. The three men have settled with the SEC. They entered guilty pleas in their criminal cases.

SEC Charges Former Brokers with Trading Ahead of IBM-SPSS Acquisition, SEC, June 25, 2014

Ex-Credit Suisse brokers sued over alleged theft of client data, InvestmentNews, June 30, 2014

Advisor Indicted In Long-Running Ponzi Scheme, FA-Mag, June 30, 2014


More Blog Posts:
Ponzi Scams: FINRA Bars Ex-Raymond James Broker Over $3M Ponzi Scam, Expels Success Trade Securities, Inc. for Bilking NFL and NBA Players, Stockbroker Fraud Blog, June 27, 2014

BNP Pleads Guilty to Criminal Charges Over Sanctions Violations, Pays $8.8B Fine, Institutional Investor Securities Blog, June 30, 2014

Credit Suisse Admits Wrongdoing and Will Pay $196M to Settle SEC Charges That It Provided Unregistered Services to US Customers, Stockbroker Fraud, February 22, 2014

May 6, 2014

Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales

Morgan Stanley Smith Barney LLC (MS) will pay a $5 million fine for supervisory failures involving its advisors soliciting shares in 83 IPOs to retail investors. The Financial Industry Regulatory Authority says that the firm lacked the proper training and procedures to make sure that salespersons knew the difference between “conditional offers” and “indications of interest."

By settling, Morgan Stanley is not denying or admitting to the securities charges. It is, however, consenting to the entry of findings by FINRA.

FINRA believes these issues are related to Morgan Stanley’s acquisition of Smith Barney from Citigroup (C) a couple of years ago. In addition to inheriting more high net worth clients, the SRO contends that Morgan Stanley ended up with financial advisers who might not have gotten the needed training.

Firms are allowed to solicit for “indications of interest” in an initial public offering before the registration statement becomes effective. These are not binding and may only lead to the purchase of shares if the investor reconfirms the intent to buy after the date that the statement went into effect. As for “conditional offers to buy,” these can result in a binding deal after the date that the statement becomes effective as long as the investor doesn’t do anything to rescind it before the firm accepts.

FINRA says that beginning in February 2012, Morgan Stanley put into place a policy in which these two terms were used interchangeably and without appropriate consideration for whether the customer needed to confirm its interest prior to the execution of a sale. The SRO claims that the financial advisers did not get the training or materials they needed to make sure the policy was clear to them. Because of these violations, customers and staff may not have properly comprehended which commitment was solicited.

The SRO is accusing Morgan Stanley of failing to properly monitor compliance and not installing procedures to ensure that conditional offers were solicited in a way that met FINRA rules and federal securities law requirements. The supervisory failures purportedly continued through May 1, 2013. Some of the shares were even sold via social media, including Yelp and Facebook.

Read FINRA's Action to Morgan Stanley (PDF)

Finra Fines Morgan Stanley $5 Million Over IPO Rules, The Wall Street Journal, May 6, 2014


More Blog Posts:
Former Morgan Stanley Broker and Two Others Allegedly Ran $5.6M Insider Trading Scam, Swallowed The Information, Stockbroker Fraud Blog, March 19, 2014

Merrill Lynch, Morgan Stanley Call A Broker Recruiting Truce
, Stockbroker Fraud Blog, October 26, 2013

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”, Institutional Investor Securities Blog, April 3, 2014

April 30, 2014

SEC Files Fraud Charges Against American Pension Services and Its Founder Over $22M Investor Losses

The Securities and Exchange Commission has filed charges against American Pension Services Inc., a third-party administrator of retirement plans based in Utah and its founder Curtis L. DeYoung. The regulator says that they caused clients to lose about $22 million in risky investments involving certain business ventures. American Pension Services is now under receivership.

The securities scam allegedly goes back at least to 2005. Customers with retirement accounts containing non-traditional assets usually not found via IRA custodians, such as traditional (401)K retirement plans, were targeted. The Commission says that APS and DeYoung solicited customers to set up self-directed IRA accounts with third party administrator. DeYoung purportedly said this was “genuine self-direction” for investors seeking other options besides stocks, mutual funds, and bonds.

These clients had to fill out IRS Form 5305-A, which say that a third-party administrator doesn’t have discretionary authority over assets and it is up to the depositor to direct the assets’ investments. Although clients’ funds were kept at a bank in two master trust accounts, the complaint claims that APS controlled the money and mixed clients’ money together.

Even though APS was not allowed to direct client trades, DeYoung is said to have used letters with forged signatures that gave him permission to invest for clients. The SEC believes that clients were sent inaccurate account statements in 2012 and 2013, and some were told that at the end of 2012 master trust accounts contained $45.9 million when really that balance was at around $23.8 million. (In 2013, account statements noted that these accounts held $57.3 million when really they contained $22.7 million.) Client fees were calculated according to the inflated figures in customer account statements.

Meantime, customer funds were placed in risky business ventures involving friends of DeYoung. Even after a friend defaulted on promissory notes that DeYoung is said to have recommended to investors, he allegedly kept referring APS clients and their money to that person until a year ago. He also caused customers to think that their investments were profitable. DeYoung is accused of giving his friend the cash, which was issued to clients as bogus principal payments and interest.

Some of these business ventures failed or went bankrupt, allegedly causing APS clients to suffer losses. Among the investments are entities that are currently subject of SEC enforcement cases. SEC Salt Lake Regional Office director Karen Martinez, because of the alleged misconduct, the retirement security for thousands of investors was “jeopardized.”

If you are a senior investor, a retiree, or another customer who sustained losses because of the negligence of your investment representative, contact our securities lawyers today. Your initial case assessment is free.

Read the SEC Complaint (PDF)

SEC hits American Pension Services and its founder with fraud charges, Investment News, April 30, 2014


More Blog Posts:
Charles Schwab’s Barring of Customers from Joining Class Actions Violated FINRA Rules, Says Board of Governors, Stockbroker Fraud Blog, April 25, 2014

Ex-Sentinel CEO is Convicted of $500M Fraud, Stockbroker Fraud Blog, April 25, 2014

Institutional Investors Sue BP for Securities Fraud
, Stockbroker Fraud Blog, April 21, 2014

April 24, 2014

Ex-Sentinel CEO is Convicted of $500M Fraud

Eric Bloom, the CEO of Sentinel Management Group, Inc., the now bankrupt hedge fund, has been convicted of bilking over 70 customers of more than $500 million prior to the firm’s collapse. According to the U.S. Department of Justice, Bloom misappropriated securities that belonged to customers when he used the financial instruments as collateral to get a loan for Sentinel from Bank of New York Mellon Corp. (BK). The loan was partially used to buy risky illiquid securities for a trading portfolio to benefit Bloom, other Sentinel officers, corporations controlled by his family, and his relatives.

Also, says the DOJ, even though Bloom knew that Sentinel was at risk of defaulting on the loan from the bank, he caused the hedge fund to take over $100 million from customers while hiding its true financial state. A federal jury returned guilty verdicts against him on one count of investment adviser fraud and 18 counts of wire fraud.

The guilty verdict comes six months after Charles K. Mosley, Sentinel’s former head trader, pleaded guilty to two counts of investment adviser fraud related to the charges filed against Bloom. Mosely admitted to covering up their actions. In his plea agreement, he said that customers were sent statements according to interest income rates that he and Bloom had calculated rather than the performance of investment portfolios.

The SEC sued Sentinel in 2007, accusing the firm of transferring at least $460 million in securities from client funds and using the holdings of customers to get a $321 million credit line. Rather than disclosing that Sentinel was moving, comingling, and misappropriating assets, says the SEC, the firm issued regular account statements that showed no indication of the improper activities. As a result customers of Sentinel suffered undisclosed losses for months until they got a letter from the firm saying that the assets would have to be sold at discount and at a loss, supposedly because of the liquidity crisis.

In August, an appeals court judge Chicago said that BNY Mellon would have to face a lawsuit challenging its $312 million lien on assets of Sentinel. This reversed a district judge’s decision to uphold the lien. (The liquidation trustee had sued BNY Mellon to subordinate or disallow its lien claiming bank employees were aware that Sentinel was wrongly using the assets of investors as collateral as part of the hedge fund’s credit line.) In January, U.S. Bankruptcy Judge Jacqueline P. Cox said that BNY Mellon would have to give back the $337 million it received from Frederick Grede, the trustee liquidating Sentinel.

If you suspect your investment losses are a result of negligence or misconduct at the financial firm representing you, please contact our securities fraud lawyers today.

US Justice Department Convicts Hedge Fund CEO Of $500 Million Fraud, HedgeCo.Net, March 26, 2014

BNY Mellon Must Face Challenge to $312 Mln Sentinel Lien, Bloomberg, August 26, 2013

Sentinel trustee wants Bank of NY Mellon to return $337 million, Reuters, December 18, 2013


More Blog Posts:
Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012

Barclays Settles Two Libor-Related Securities Cases, Institutional Investor Securities Blog, April 16, 2014

Bank of America, JPMorgan Chase Among Banks Sued by Danish Pension Funds in Credit Default Swaps Lawsuit, Institutional Investor Securities Blog, August 15, 2013

April 18, 2014

SEC Charges Total Wealth Management With Securities Fraud, Receiving Undisclosed Kickbacks

The Securities and Exchange Commission has filed a financial fraud case against Total Wealth Management Inc., an investment advisory firm based in Southern California. The regulator is accusing the firm of getting undisclosed kickbacks over investments recommended to clients. It is also alleging breach of fiduciary duty.

According to the SEC’s complaint, Total Wealth placed about 75% of 481 client accounts into Altus Funds, which is a family of proprietary funds. The investment advisory firm has a revenue-sharing deal that allows them to get kickbacks. The regulator says this was a conflict of interest because customers did not know about the agreement.

The Wall Street Journal reports that according to the SEC, Altus invested 92% of all its investments—$32 million—in funds that had revenue sharing deals with Total Wealth. The agency says that clients likely wouldn’t have put their money with Total Wealth if they had known that the majority of the Altus funds were paying the firm.

The Commission is accusing Total Wealth Management CEO Jacob Cooper, co-founder David Shoemaker, and chief compliance officer Nathan McNamee with setting up business entities to hide the undisclosed payments. While revenue sharing isn’t necessary illegal, they become a problem if they are concealed on purpose. Cooper is also accused of misleading investors about just how much due diligence it conducted on Altus Funds’ investments.

The SEC contends that Cooper and Total Wealth violated federal securities laws’ antifraud provisions, while Shoemaker and McNamee purportedly aided and abetted or violated the provisions. Other charges include custody rule and Form ADV disclosure rule violations. The Commission wants the allegedly ill-gotten gains given back, the imposition of a financial penalty, interest, and remedial relief.

Investment advisers have a duty to act in the best interests of a client. Failure to do that may result in losses for an investor and in some cases intentional gains for the adviser or his firm. If you think your investment losses are a result of your financial adviser breaching its duty to you, please contact our investment fraud law firm today.

Read the SEC Order (PDF)


More Blog Posts:
SEC Says Investment Advisors Can Publish Third-Party Endorsements Online, Stockbroker Fraud Blog, April 1, 2014

SEC Reveals Plans to Examine Never-Before-Inspected RIAs, Stockbroker Fraud Blog, February 24, 2014

SEC Sanctions Three Investment Advisory Firms for Custody Rule Violations, Institutional Investor Securities Blog, October 30, 2013

April 17, 2014

SEC Files Securities Charges Against Massachusetts Company Over Pyramid Scam that Primarily Targeted Immigrants

The US Securities and Exchange Commission has filed fraud charges against TelexFree Inc. and TelexFree LLC over an alleged Pyramid scam that targeted immigrants—those from Brazil and the Dominican Republic, in particular. The agency sought and was able to obtain an asset freeze, securing millions of dollars.

Also facing charges are a number of TelexFree officers and promoters and several other entities as relief defendants. The Investors involved are located in Massachusetts and 20 other US states.

According to the SEC, the two entities made it appear as if they were operating a multilevel marketing company that sold phone service using VoIP technology when in fact this was a Pyramid scheme. The defendants sold securities as “memberships” along with the promise of 200% or greater yearly returns to people who promoted TelexFree via ad placements and participated in new member recruitment. $300 million was raised.

The Commission notes that the actual Internet phone services revenue for TelexFree was $1.3 million. Meantime, investors were promised $1.1 billion.

Earlier investors were paid “revenue” that was actually the money from newer investors. Meantime, at least $30 million in investor funds was moved from TelexFree operating accounts to accounts under the control of affiliates of Telexfree or individuals who are now defendants.


Pyramid Scam
In this type of fraud, participants make their money from getting new joiners to sign up. The premise is easy money for doing nothing besides getting others to also put in money.

Fraudsters will work to make their scam appear legitimate, pretending they have real products that they are selling and that this they are running a real multi-level marketing program. These schemes ultimately collapse when the promoter can’t bring in any more money or new investors.

Signs that the MLM program you are thinking of joining is a pyramid scam (From the SEC website):

• There is no actual product or service.
• The promise of high returns within a short time frame.
• Compensation or passive income is offered for doing hardly anything.
• There is no proven revenue from retail sales.
There is a buy-in fee
• The commission structure is a complex one
• Member recruitment is a primary focus of the business.

Contact our securities lawyers if you suspect that you were the victim of a Pyramid scam, a Ponzi scheme, Affinity fraud, or some other type of securities fraud.

Read the SEC Complaint (PDF)

Pyramid Schemes, SEC


More Blog Posts:
Ex-Merrill Lynch Adviser, Already Jailed for Massachusetts Securities Fraud, Now Indicted Over Ponzi Scam, Stockbroker Fraud Blog, March 4, 2014

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Fraud, Institutional Investor Securities Blog, October 17, 2013

SEC Stops Former Marine’s Hedge Fund Fraud That Targeted Military Folk, Stockbroker Fraud Blog, August 12, 2013

April 9, 2014

SEC Files Charges Over Securities Fraud Scams that Used YouTube, Facebook, Twitter, & Other Social Media

The US Securities and Exchange Commission has filed securities fraud charges against Joseph Signore, Paul L. Schumack II, and their respective companies for their Florida-based Ponzi scam that purportedly used YouTube videos to target hundreds of US investors to get them to invest in virtual concierge machines that were supposed to garner 300-500% returns in four years. The two companies are T.B.T.I. Inc. and JCS Enterprises Inc.

According to the SEC, the two men and their companies falsely promised investors that their money would go toward the purchase of these ATM-like machines, which businesses would then use to promote services and products via touch screen, coupons, or printable tickets. The machines were to be placed at airports, hotels, and stadiums.

Instead, contends the regulator, Schumack, Signore, and their companies used investors' funds in Ponzi scam-fashion, taking new investors money to pay the “returns” of earlier investors and paying for their personal expenses (including credit card bills, restaurants, unrelated business ventures, and family spending).

The men and their companies raised about $40 million in their scam, which they also marketed via e-mail and during investor seminars. The Ponzi scheme failed when investor money ran out.

Meantime, the U.S. Attorney’s Office for the Southern District of Florida has filed a parallel action announcing criminal charges.

Prosecutors are calling the scam an alleged $70 million investment fraud. Investors who put in $3,500 were supposedly guaranteed $300/month over three years from advertising revenue sold on the machines.

Also this month, the SEC is suing a Honolulu woman for pretending to be an expert in hedge funds investments and pursuing investors via Facebook, Twitter, and other forms of social media. Keiko Kawamura allegedly ran two separate scams. She purportedly was able to collect about $700,000 money from subscribers and investors of her self-described hedge fund.

In one investment scheme, Kawamura allegedly published screenshots on Twitter of brokerage account statements showing amazing returns—only the account statements did not belong to her. In a second alleged securities scam, Kawamura bragged about her “professional experience,” and made claims that she made 800% returns in her personal account.

Kawamura is accused of using the money she collected to pay for expensive trips and support herself. She did invest some of the funds, which the SEC says she lost by investing the money in risky options trades.

Social Media and Securities Scam
Unfortunately, with investors turning more and more to the Internet and social media for information about investing and investments, this can make them easy and accessible targets for fraudsters. Online, scammers are able to reach lots of people at low cost while using simple technology to make themselves appear legitimate.

If you think you were the victim of an investment scam, contact our securities fraud lawyers today.

The SEC Order Against Kawamura (PDF)

Investor Alert: Social Media and Investing - Avoiding Fraud, Investor.gov

Read the SEC Order in the Ponzi Scam (PDF)


More Blog Posts:
$550M Securities Fraud Case Between Texas’ Wyly Brothers & SEC Goes to Trial, Stockbroker Fraud Blog, April 2, 2014

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”, Institutional Investor Securities Blog, April 3, 2014

SEC Says Investment Advisors Can Publish Third-Party Endorsements Online, Stockbroker Fraud Blog, April 1, 2014

March 31, 2014

Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal

Bank of America Corp. (BAC) and its ex-CEO Kenneth Lewis have consented to pay $25 million to settle the remaining big securities fraud case accusing them of misleading investors about the financial state of Merrill Lynch & Co. during the 2008 financial crisis. The New York securities case accuses the bank of deceiving shareholders by not disclosing Merrill’s increasing losses before the acquisition deal was closed or letting them know that the deal let Merrill give its officials billions of dollars in awards.

As part of the settlement, the bank will pay the state of New York $15 million and it will enhance its oversight. Lewis, meantime, has consented to pay $10 million and he cannot work at or serve as a director of any public company for three years.

Also named as a defendant in the securities lawsuit but who refused to settle is ex-Bank of America CFO Joe Price. NY Attorney General Eric Schneiderman intends to pursue a summary judgment against him, as well as ask a judge to reach a decision without a trial. Schneiderman reportedly wants Price permanently banned from serving as a director or working at a public company.

Previously, Lewis and other Bank of America directors agreed to pay $20 million to settle a securities fraud lawsuit by investors accusing them of not disclosing needed data about Merrill before the takeover was approved. In 2012, the bank consented to pay $2.43 billion to resolve a class-action securities case with investors accusing the institution and its officers of making misleading and false statements about Merrill’s financial health. Just two year before that Bank of America agreed to pay $150 million to settle with the SEC over charges that it did not disclose material data about Merrill.

Bank of America acquired Merrill in a $50 billion deal in September 2008, which is when Lehman Brothers Holdings went into bankruptcy. While the deal was at first considered good news, especially as the rest of Wall Street appeared to be in so much trouble, analysts started to wonder if Lewis paid too much. There was also Merrill’s losses right before the acquisition was finalized.

Because of investors’ fears about the financial crisis, share prices of Bank of America dropped significantly, causing the value of the deal to drop to about $19 billion by the time it actually was finalized in January 2009. Securities fraud lawsuits then followed.

Bank of America’s decisions to purchase Merrill and Countrywide Financial Corp. have since compelled it to put aside over $42 billion to cover lawsuit costs, reserves, and payouts. Many of the securities cases contend that Countrywide, once one of the biggest subprime mortgage lenders, sold faulty mortgage securities to investors leading up to the 2008 economic crisis.

In October, a jury found Bank of America liable for securities fraud over the mortgages that Countrywide originated as home loans that in then sold to Freddie Mac and Fannie Mae.

Please contact our stockbroker fraud lawyers if you suspect your investment losses are because of financial fraud.

Lewis, BofA Reach $25 Million Pact With N.Y. Over Merrill, Bloomberg, March 26, 2014

Bank of America to pay $2.43B in settlement, Yahoo, September 28, 2012

Bank of America liable for Countrywide mortgage fraud, Reuters, October 23, 2008


More Blog Posts:
$500M MBS Settlement Reached Between Countrywide and Investors, Stockbroker Fraud Blog, May 10, 2013

Dismissal of Double Derivative Delaware Securities Lawsuits Over The Bank of America-Merrill Lynch Merger is Affirmed by the Second Circuit, Stockbroker Fraud Blog, December 22, 2012

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B, Institutional Investor Securities Blog, March 29, 2014

March 22, 2014

SEC To Examine Exchange Traded-Fund Regulation Again

The Securities and Exchange Commission is getting ready to revisit a 2008 rule proposal about exchange-traded funds. In the wake of new issues that have cropped up since then, changes to the original proposal are likely.

Speaking at the Investment Company Institute’s Mutual Fund and Investment Management Conference this week, SEC’s Division of Investment Management associate director Diane Blizzard said that a revised rule would likely address the differences between index and active funds, transparency of underlying and direct instruments, inverse leverage, and creative flexibility within the funds.

Currently, there is no specific timeline for a revised proposal roll out. Since no rule is in place at the moment, the Division of Investment Management is in charge of making individual choices about whether to approve new exchange-traded funds. This SEC division is also looking at enhancing disclosure requirements related to variable annuities, including whether senior investors and those seeking to build their retirement funds are being properly and thoroughly notified of the benefits, complexities and costs.

In other ETF news, Financial Advisor is reporting that the number of hedge fund managers getting involved in this investment space is growing. Although ETF investments can grow the managers’ investor roster, they also may compel the firms to cut their investment management fees. Created as a “passive index-tracking investment,” ETFs are more actively handled and employ short selling, arbitrage, and other alternative strategies. They can be traded like common stuck, which makes exchange-traded fund more accessible and easier to market than actively managed mutual funds. Currently, the SEC is looking at a rule that would let ETF managers reveal their holdings less often than they have to now, which is daily.

Also, US asset managers are using ETFs to make their way into China’s stock market. These funds invest in equities that are listed in that country. The ETFs offer investors in the US the opportunity to get into China’s A–shares, which are the renminbi-denominated shares of companies that were incorporated in China. The shares are traded on the Shenzen and Shanghai exchanges. Before, ETFs involved in the A-shares market could only do so via futures contracts, swaps, and other derivatives.


If you are going to invest in an ETF it is important that you know the risks, benefits, and fees involved. You should also have an understanding of its prospectus, which offers information about the instrument’s goal, main investing strategies, costs, risks, and past performance history.


Investing in Exchange-Traded Funds
Consider whether the ETFs goals are in line with your own objectives and long-term plans. You also want to think about if you can handle the risks should the become reality. How much you have to pay in commissions to a brokerage firm is also important because this will cost you when selling and buying ETF shares. It is also essential that you find out what the other costs are in owning an ETF and explore whether other investments are better suited for you.

If you have sustained ETF fraud losses because of the negligence, wrongdoing, or inexperience of a broker or another financial adviser, please contact our ETF investment fraud law firm today.

Exchange-Traded Funds, Investor Bulletin (PDF)

U.S. exchange-traded funds open up China's market, Reuters, March 19, 2014

Hedge Funds Entering ETF Space To Lure More Investors, Financial Advisor, March 20, 2014


More Blog Posts:
Stifel, Nicolaus & Century Securities Must Pay More than $1M Over Inverse and Leveraged ETF Sales, Stockbroker Fraud Blog, January 14, 2014

New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts, Institutional Investor Securities Blog, August 11, 2013

March 14, 2014

1 in 5 Seniors Fall Prey to Financial Fraud

According to the Investor Protection Trust, out of every five senior citizens over age 65, one of them will fall victim to a financial scheme in 2012. The Federal Trade Commission says that citizens over age 60 made up the largest group of people to report elder financial fraud to the Federal Trade Commission in 2013—that’s 27% of those who made such reports. That figure was just 22% in 2011.

At Shepherd Smith Edwards and Kantas, LTD LLP, please contact our senior investor fraud lawyers today if you feel that your losses may be a result of financial fraud or some other elder exploitation case. We work with elderly investors to get their money back.

The reason for the increase in elderly victims can in part be attributed to people living longer lives and the baby boom generation getting older. The Street reports that according to a survey conducted by the Metropolitan Life Foundation in 2010, elder financial abuse victims lost a minimum of $2.9 billion in 2010, which was a 12% increase from the number of senior financial fraud victims in 2008. Aside from negligent financial representatives, other fraudsters can include caregivers, relatives, immediate family, and strangers.

Senior citizens make easy investment fraud targets for numerous reasons. Many of them have money to invest after spending their lives working and saving. Some may suffer from mental impairments that can make it hard for them to understand they are being defrauded. There are also those senior investors, once defrauded, that may be too embarrassed or too afraid to speak out. This can makes it easier for financial scammers to get away with their crimes and the money.

Unfortunately, it is the investors who suffers when securities fraud happens. For some seniors this can mean the loss of the retirement nest egg that they had depended on to get them through the end of their life and cover their medical bills. Please contact our securities lawyers today.

1 in 5 Senior Citizens Fall for Financial Scams, The Street, March 17, 2014

Read the FTC Report (PDF)

Elder Fraud and Financial Exploitation, StopFraud.gov

Investor Protection Trust


More Blog Posts:
Two Ex-JPMorgan Brokers Alleged Bilked Mentally Impaired Elderly Widow of $300,000, Stockbroker Fraud Blog, December 4, 2013

Texas Man gets 40-Year Prison Sentence for Phony Annuity Scam That Targeted Elderly Women, Stockbroker Fraud Blog, September 23, 2013

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor, Institutional Investor Securities Blog, July 31, 2013

March 12, 2014

Jefferies LLC Settles SEC Charges for $25 Million

Broker-dealer and investment bank Jefferies LLC (JEF) has consented to pay $25 million to settle Securities and Exchange Commission charges that it did not properly supervise traders at its mortgage-backed securities desk. These same staffers purportedly lied to investors about pricing.

The regulator contends that Jefferies did not give its supervisors what they needed to properly oversee trading activity on the MBS desk and that these managers neglected to find out what bond traders were telling customers about pricing information in terms of what the bank paid for certain securities. This inaccurate information was misleading to investors, who were not made aware of exactly how much the firm profited from in the trading.

While Jefferies’ policy makes supervisors look at electronic conversations of salespeople and traders so any misleading or false information given to customers would be detected, the SEC says that the policy was not effected in a manner that price misrepresentations were identified. The supervisory failures are said to have taken place between 2009 and 2011.

Jefferies also is accused of not looking over conversations between customers and traders that took place on Bloomberg terminals. The SEC Enforcement Division’s director, Andrew J. Ceresney, says that proper supervision by Jefferies could have caught a lot of the misstatements made by employees.

As part of the securities fraud settlement, Jefferies will pay customers over $11 million (a combination of firm profits and ill-gotten gains). It will also pay a $4.2 million penalty and $9.8 million for its nonprosecution deal reached with the U.S. Attorney's Office for the District of Connecticut over a parallel action.

It was last year that the SEC charged ex-Jefferies Managing Director Jesse Litvak with securities fraud. Litvak is accused of bilking customers that he sold MBS to so he could make additional money for the brokerage firm. Investors lost about $2 billion as a result.

Earlier this month, Litvak was convicted by a federal jury on multiple criminal counts, including securities fraud, and fraud related to the Troubled Asset Relief Program. He is currently the only person charged with fraud involving the Public-Private Investment Program, which used billions of dollars from TARP to get more people to invest in mortgage-backed securities. Meantime, civil and criminal authorities are now investigating whether others Jefferies Group traders also defrauded investors over mortgage-bond prices.

Please contact our MBS fraud lawyers at Shepherd Smith Edwards and Kantas, LTD LLP today. Our securities law firm represents investors with claims against brokerage firms, investment banks, investment advisers, brokers, and other industry members. The best way to maximize the chances of recovering your investment losses is to work with an experienced securities lawyer that knows how to do the job right. Your initial case consultation with us is a free, no obligation session.

The SEC Order (PDF)

SEC Charges Jefferies LLC With Failing to Supervise Its Mortgage-Backed Securities Desk During Financial Crisis, SEC, March 12, 2014

U.S. Probes More Jefferies Traders Over Mortgage Pricing, Bloomberg, March 12, 2014

More Blog Posts:
Ex-Jefferies Trader Found Guilty in Securities Fraud Case Over Bond Prices, Stockbroker Fraud Blog, March 8, 2014

Puerto Rico Senate Votes to Sell $3.5B in Bonds
, Stockbroker Fraud Blog, February 28, 2014

SEC Investigates Whether Currency Traders Distorted ETF and Options Prices, Manipulated Currency Markets, Institutional Investor Securities Blog, March 12, 2014

March 11, 2014

SEC Stops Pyramid Scam That Targeted Investors Via Twitter, Facebook, Skype, and YouTube

The Securities and Exchange Commission has put out an emergency enforcement action to stop a pyramid scam that has already taken $300,000 from about 150 investors in the US. The scheme involves bogus companies pretending to be an international investment firm. Customers were solicited via Twitter, Skype, Facebook, and YouTube.

Now, the SEC has gotten a federal court order freezing the holding the funds that purportedly were stolen from investors by MWF Financial and Fleet Mutual Wealth Limited, known together as Mutual Wealth. The regulator claims that the company used social networking and its website to target investors, making false promises of returns of 2 to 3% a week if they opened accounts with the firm.

According to the Commission, Mutual Wealth made its fraudulent pitches via social media. Misrepresentations were published on the company’s Facebook page, including data about income yields of up to 8% weekly and HFT portfolios with ROI of a maximum of 25%/annum. Mutual Wealth purportedly touted its use of a high-frequency trading strategy that lets capital be put into securities for just minutes at a time. The company offered a commission or referral fee if investors became “accredited” and brought in new investors.

Now, however, the SEC is saying that everything Mutual Wealth told investors was false. The company doesn’t sell or buy securities for investors. Instead, the money was allegedly diverted into shell company-held offshore accounts. Also, Mutual Wealth’s headquarters, supposedly in Hong Kong, its data center in New York, and the executives listed on its website all do not exist. The SEC says that Mutual Wealth is not registered with the regulator. The SEC is charging Mutual Wealth with violating sections of the Securities Act of 1933, the Securities Exchange Act of 1934, and Rule 10b-5.

If you believe you were scammed via social media or some other social network and have lost money on your investment as a result, please contact our securities fraud law firm so that we can help you explore your legal options.

SEC Halts International Pyramid Scheme Being Promoted Through Facebook and Twitter, SEC.gov, March 5, 2014

Read the SEC Complaint (PDF)


More Blog Posts:
Ex-Merrill Lynch Adviser, Already Jailed for Massachusetts Securities Fraud, Now Indicted Over Ponzi Scam, Stockbroker Fraud Blog, March 4, 2014

North American Securities Administrators Association Releases 2013 List of Top Threats to Investors, Stockbroker Fraud Blog, October 22, 2013

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Blog,

March 8, 2014

Ex-Jefferies Trader Found Guilty in Securities Fraud Case Over Bond Prices

A jury has convicted Ex-Jefferies Group LLC (JEF) trader Jesse Litvak of securities fraud. Litvak was found guilty of 15 criminal counts, including 10 securities fraud counts related to his misrepresenting bond prices to customers so he could make more money for him and his firm. He pleaded not guilty to all the charges. Jefferies Group is a Leucadia National Corp. (LUK) unit.

According to the government, the 39-year-old trader gave clients inaccurate information about the price of residential mortgage-backed bonds and kept the monetary difference. Litvak, who worked at Jefferies from April 2008 through December 2011, is accused of bilking customers of about $2 million, benefiting himself and his employer.

While Litvak's legal team tried to persuade a jury that statements Litvak made no difference to customers or their decision of whether to buy the bonds, and that the tactics his client employed are “expected,” the government argued that Litvak’s statements did affect his clients. Litvak was also found guilty of a criminal charge accusing him of fraud related to the Troubled Asset Relief Program.

The former Jefferies broker has yet to receive his prison sentence for the conviction. Meantime, he also is facing a parallel securities fraud case brought by the Securities and Exchange Commission. The regulator is accusing him of bilking investors of mortgage-backed securities to make more revenue for his firm.

The SEC says Litvak would buy an MBS from one client and sell it to a different client and lie about the price. He would then take the difference in price and give it to Jefferies. He also, on occasion, purportedly created a bogus seller to make it seem as if he was working out an MBS trade between clients when he was just selling the securities out of his firm, but at a higher cost. The SEC says that Litvak was able to make another $2.7 million for Jefferies because of the fraud.

Although Jefferies is not accused of wrongdoing related to the charges against Litvak, the brokerage firm has reached a preliminary deal to pay $25 million to settle US probes related to this former employee. In addition to reaching a nonprosecution deal with the US Attorney’s Office in Connecticut and settling with the SEC, Jefferies will also pay trading clients affected by Litvak’s actions.

The criminal conviction against Litvak could help a government investigation launched after Litvak was arrested as year. The Wall Street Journal reported that investigators are trying to find out if other traders engaged in fraud similar to what Litvak did. That probe is being conducted by the SEC, the US Department of Justice, and the special inspector general for the Troubled Asset Relief Program, and looks at markups and markdowns, such as the markups made by Litvak.

Traders are supposed to prioritize a customer’s best interests and make sure the investment and its price is suitable for the client and his/her objectives and portfolio. Unfortunately, there are financial representatives who commit securities fraud for profit at cost to investors. That’s where Shepherd Smith Edwards and Kantas, LTD LLP steps in. Our securities lawyers have helped thousands of investors get their money back.


Former NY RMBS Trader Convicted by Federal Jury of Defrauding TARP, Loansafe.org, March 11, 2014

Jury Finds Former Jefferies Trader Litvak Guilty of Fraud, The Wall Street Journal, March 7, 2014

TARP Programs, Department of Treasury


More Blog Posts:
Fines for FINRA Sanctions Went Down 27%, Reports New Analysis, Stockbroker Fraud Blog, March 5, 2014

Puerto Rico Senate Votes to Sell $3.5B in Bonds, Stockbroker Fraud Blog, February 28, 2014

SEC Director Warns About Recommending Alternative Mutual Funds To Certain Investors, Institutional Investor Securities Blog, March 7, 2014

February 15, 2014

SEC Charges Two Wall Street Traders With Securities Fraud in “Parking” Scam

The Securities and Exchange Commission is charging Ryan King and Thomas Gonnella with securities fraud over a bogus “parking” scam. According to its Enforcement Division, the two Wall Street traders tried to get a round a firm policy that places a penalty for holding securities too long, and one of them purportedly placed securities in the trading books of the other so such fees wouldn’t be imposed and end up affecting his annual bonus.

The two men worked at different firms. According to the SEC, Gonnella asked King to help him get around his firm’s policy by arranging for the latter to buy securities that he would then later buy from King’s firm at a profit. By parking the securities in King's trading book to reset the holding period, Gonnella was seeking to avoid charges to his trading profits and bonus as a result of inventory.

Per the administrative orders, Gonnella parked about 10 securities with King. The alleged round-up trades purportedly caused Gonnella’s firm to lose about $174,000.

The Commission’s Enforcement Division claims that after Gonnella’s supervisor started asking about the trades, King and Gonnella tried to avoid detection by adding an interdealer broker to subsequent trades and using cell phones so their discussions couldn’t be recorded by their employers. The two men were eventually fired.

While the case against Gonnella is going to an administrative law judge, King is cooperating with the regulator. He is settling by disgorging profits and agreeing to a securities industry bar. Financial penalties will be determined later.

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

The SEC order against Gonnella (PDF)

The SEC order against King (PDF)


More Blog Posts:
OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status, Stockbroker Fraud Blog, February 14, 2014

How Can you Recover Your Loss on UBS Puerto Rico Municipal Bonds?, Stockbroker Fraud Blog, February 7, 2014

FINRA Awards Nearly $1M in Florida Non-traded-REIT Cases, Institutional Investor Securities Blog, February 14, 2014