According to Financial Industry Regulatory Authority EVP Susan Axelrod, the SRO’s examiners are reporting an increase in how many brokers appear to be taking part in questionable actions outside their firms or improperly selling securities. Speaking at the Securities Industry and Financial Markets Association’s complex products forum, she pressed brokerage firms to make sure its compliance programs will sniff out such violations.
Axelrod also said that FINRA examiners are noticing issues with the firms’ complex product sales, including those involving reverse convertibles and non-traded real estate investment trusts. For example, several firms did not conduct reasonable due diligence before selling non-traded REITs or make sure they were suitable for the investors. As for the reverse convertibles, examiners reportedly discovered an overconcentration of products in certain investor portfolios primarily due to poor recommendations. Failure to detect such problems appeared to have played a factor in this happening. Other problems discovered included inadequate training regarding products, product misrepresentation via sales and advertising, and failure to notify investors well in advance that products’ per-share estimated values had been repriced at figures significantly lower than the offering price.
In other securities news, Securities and Exchange Commission Chairman Mary Schapiro wants Congress to grant the SEC the power to impose penalties that are more reflective of the losses sustained by investors. Right now, the agency can only pursue ill-gotten gains’ disgorgement and impose per-violation penalties. Schapiro said that the Stronger Enforcement of Civil Penalties Act of 2012, which was introduced by Senators Jack Reed and Charles Grassley, would give the Commission the authority it needs to make violators “think twice” about abusing investors’ funds while allowing the regulator to recover significantly more for victims. She expressed her views at the New England Securities Conference last month.
The bill, also known as S. 3416, would significantly enhance what penalties the SEC can seek, including higher caps for tier three violations-$10 million /violation for companies, $1 million/violation for individuals (up from $725/violation for entities and $150,000 violation for individuals.) It would also give the agency the power to impose sanctions that are the equivalent of an investor’s losses in securities cases in which deliberate wrong intent played a role.
To give you an idea of how rampant securities fraud can be, recently, 85 US Attorney’s offices and the US Justice’s Criminal Division reported an unprecedented increase in investment schemes. Since 2011 about 800 investor fraud defendants have been charged, tried, pled guilty, or were sentenced in about 500 federal prosecutions. Victims’ losses during this time period exceeding over $20 billion. Losses per investor ranged from the thousands to even billions of dollars in the form of life savings, retirement, survivor benefits, money for mortgages, and college tuition.
“Eight hundred appears to be a large number of potential financial fraudsters, but more than 1,000 times that are engaged in investing others’ money,” said Securities Lawyer William Shepherd. “For additional insight: How many of those charged were actually convicted, how much jail time was assessed, how many cases were reversed on appeal, how many had sentences reduced, and, how many were pardoned? One last question: What kinds of accommodations were afforded to those who actually served any time? The answers may shock you.”
Also since 2011, the SEC has taken 359 actions directed at retail investor fraud, charging 887 entities and individuals. More than 1.2 million investors lost close to $9.7 billion.
Susan Axelrod’s Remarks at SIFMA Complex Products Forum, FINRA, September 27, 2012
SEC Chairman Schapiro’s Remarks at 2012 New England Securities Conference, SEC, October 11, 2012
Since 2011 About 800 Defendants Have been Charged Investor Fraud Schemes, LoanSafe.org, October 1, 2012
More Blog Posts:
SEC Clawback Lawsuit Against Two Former Arthrocare Corp. Executives Over Fraud Scheme Can Proceed, Says District Court in Texas, Stockbroker Fraud Blog, November 24, 2012
FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse, Institutional Investor Securities Blog, November 20, 2012
FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011