Articles Posted in HSBC Securities

Federal Reserve Imposes First Fine to a Bank Over A Volcker Rule Violation
For violating the Volcker Rule’s ban on making risky market bets, Deutsche Bank (DB) must pay a $157M fine for not making sure its traders didn’t make such bets and for allowing its currency desks to engage in online chats with competitors, during which time they allegedly disclosed positions. It was just last year that the German lender admitted that it did not have sufficient systems in place to keep track of activities that could violate the ban.

Under the Volcker Rule, banks that have federal insured deposits are not allowed to bet their own funds. They also are supposed to makes sure that when their traders help clients sell and buy securities, they aren’t engaging in bet making.

For the system lapses, the Federal Reserve fined Deutsche Bank $19.7M. The remaining $136.9M fine is for the chats and because the bank purportedly did not detect when currency traders were revealing positions or trying to coordinate strategies with competitors.

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Former Wells Fargo and LPL Financial Broker Receives 41-Month Prison Term for Elder Financial Fraud
Robert N. Tricarico, an ex-broker for both Wells Fargo Advisors (WFC) and LPL Financial (LPLA), will serve 41 months behind bars and pay restitution of over $1.2M after he pleaded guilty to elder financial fraud. The Securities and Exchange Commission, which brought a civil case against Tricarico, has barred him from the securities industry.

Court documents note that from 1/2010 to 6/2013, Tricarico was the financial adviser for a sick and elderly investor. He misappropriated over $1.1M from her by writing a number of checks to himself without the client’s consent, misappropriated checks written to her, liquidated her coin collection, and used her funds for his own expenses.

He has also admitted to bilking two other victims of $20K when he falsely represented that their money would go toward a business venture. He kept their money for himself.

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Chicago Hedge Fund Manager Gets Over Four Years in $1.8M Fraud
Clayton Cohn is sentenced to more than four years behind bars and he will pay $1.55M in restitution for targeting military veterans in a $1.8M hedge fund fraud. Cohn is an ex-US Marine. He pleaded guilty to the criminal charges against him.

Cohn is accused of pretending to be a successful hedge fund manager to persuade clients to invest with his Marketaction Capital Management. Of the over $1.8M that was invested,he lost more than $1.5M and spent at least $400K on his luxury lifestyle and business investments.

The US Securities and Exchange Commission had brought civil charges against him in 2013 when they accused Cohn of soliciting investors through his Veterans Financial Education Network. The non-profit was supposed to help veterans handle their money. Instead, he diverted some of their funds toward himself. The regulator stayed its case against him following the federal indictments. Now, the civil fraud charges will proceed.

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A battle of hedge funds, and their competing interests, has erupted in Puerto Rico over the last few weeks.  This week, hedge funds Tilden Park Capital Management LP, Whitebox Advisors LLC, Merced Capital LP, and GoldenTree Asset Management LP filed a motion asking a court to impose a legal stay that would delay the lawsuit filed by general obligation bondholders that want Puerto Rico to stop directing sales-tax revenue away from the general fund. These hedge funds that submitted the motion collectively hold about $2 billion of tax revenue bonds, which are called COFINA bonds, locally.

Meantime, the general obligation bondholders that filed the lawsuit are also hedge funds. They include entities under the management of Aurelius Capital Management, FCO Advisors, Autonomy Capital, Covalent Partners, Monarch Alternative Capital, and Stone Lion Capital Partners. Earlier this month, they asked a court to stop the island from using sales-tax revenue to pay back COFINA debt. Those funds believe that the sales tax revenue should pay back the general obligation bonds first because Puerto Rico’s constitution states that general obligation should be repaid before other debt. However, the hedge funds holding the COFINAs that are requesting the legal stay are arguing that COFINA’s share of the sales-and-use-tax should not be “subject to clawback” in the event of a payment shortfall of the general obligation bonds. 

This fight is playing out at the same time the U.S. Government is trying to help the U.S. Commonwealth with its financial crisis.  PROMESA, which stands for the Puerto Rico Oversight Management and Economic Stability Act, is the new law that includes the legal stay that the CONFINA holders want imposed. The stay postpones creditor lawsuits against the island until February 15, 2017 in order to give Puerto Rico time to work out how to repay the $70 billion of debt it owes.   Although Puerto Rico is way overdue on $1.8 billion of principal plus interest payments, this includes what the island owes on general obligation bonds, the Commonwealth paying back COFINAs.
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A number of hedge funds with Puerto Rico general obligation bonds want a court to stop the U.S. territory from using its sales-tax revenue to pay back other debt. Those hedge funds say that such an action is a violation of the Commonwealth’s constitution.

To date, the Commonwealth owes nearly $13 billion of general obligation bonds. Under its constitution, Puerto Rico is required to pay back its general obligation bonds before paying off other expenses. According to the plaintiffs, part of the territory’s’ sales tax revenue is supposed to go toward that repayment.

The plaintiffs sued Puerto Rico Governor Alejandro Garcia Padilla to stop the territory from moving money away from bondholders, which they say violates the new federal law concerning Puerto Rico, called PROMESA. The hedge funds submitted their amended complaint last week, in which they added the Puerto Rico Sales Tax Financing Corp., commonly called COFINA, as a defendant. The plaintiffs include entities under the management of Aurelius Capital Management, Covalent Partners, Autonomy Capital, Monarch Alternative Capital, FCO Advisors, and Stone Lion Capital Partners. 

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Investment Advisor Firm Accused of Paying Off Terminally Ill Patients to Commit Fraud
The SEC has filed fraud charges against Donald Lathen and his Eden Arc Capital Management. Lathen is accused of recruiting at least 60 individuals who had less than six months to live and agreeing to pay them $10K each for the use of their names on joint brokerage accounts. When one of these individuals would die, he would allegedly redeem the investments by falsely representing that he and the terminally individual person were joint account holders.

Lathen recruited the terminally ill patients through contacts he had at hospices and nursing homes. In reality, it was Lathen’s hedge fund that owned the option investments.

As a result, of the purported omissions and misrepresentations, issuers paid over $100M in early redemptions. Lathen is accused of violating the custody rule by not properly putting the securities and money from the hedge fund in an account under the name of the fund or in one that held only client money and securities.

SEC Stops Trading in Neromamam Ltd.
The SEC has stopped the trading of Neuromama Ltd. (NERO) shares. The shares trade on the mostly unregulated over-the-counter markets and the regulator is concerned about transactions that may be “potentially manipulative, as well as other red flags that have purportedly been cropping up for years.

Neruomama’s paper value went up times four to $35B this year despite not much volume. The company’s shares went up by four times to $56/share. (On January 15, ’14, its value was $4.73B.)

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A group of hedge funds that are holding Puerto Rico debt are suing the U.S. territory and Governor Alejandro García Padilla. Monarch Alternative Capital, Aurelius Capital Management, Stone Lion Capital Partners, Covalent Capital Partner, Aurelius Capital Management, Fundamental Credit Opportunities, and a number of other funds claim that Puerto Rico and Governor García violated PROMESA, which stands for the Puerto Rico Oversight, Management and Economic Stability Act. President Barack Obama signed the new debt restructuring law on June 30, which is when García issued a debt moratorium on the nearly $800 million in general obligation debt that was due on July 1 (along with other Puerto Rico debt for a collective total of about $2 billion). The hedge funds say that Governor García had no legal right to call a debt moratorium in the wake of PROMESA.

The bondholders want the court to stop the island from “unlawfully dissipating” assets before a federal oversight board is appointed. PROMESA places the U.S. territory under the supervision of the board, which is tasked with pressing for fiscal reform and supervising spending. However, the board won’t be in place for at least two months.

In their complaint, filed in United States District Court for the District of Puerto Rico, the creditors claimed that Governor García took advantage of this time gap in implementation and is spending hundreds of million dollars in ways that garner “political favor.” The hedge funds argued that certain expenditures would have been challenged by the board if it were already in place.

The plaintiffs, as holders of general obligation bonds, say they are entitled to some of the money being spent because Puerto Rico still owes them the debt payments. They want the district court to freeze the payments that have been issued and mark them as invalid until the board can take a look at them.

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A group of hedge funds in New York that invested in Puerto Rico general obligation bonds are suing the island’s government. The bond lawsuit came just days before the island is expected to default on a $2 billion debt payment due, including over $700 million in general obligation bonds on July 1, and on the same day that the island announced it was ending talks with bondholders about debt payments.

The negotiations has resulted in a number of failed proposals and counterproposals, but no resolutions. The U.S. Commonwealth continues to owe $70 billion in public debt, including $12.5 billion in general obligation debt.

The hedge funds’ complaint seeks to invalidate a law allowing Puerto Rico Governor Alejandro Garcia Padilla to put into effect a temporary debt moratorium. The bondholders contend that when they purchased the general obligation bonds, they had counted on the protection that was supposed to guarantee the bonds under the territory’s constitution.The hedge funds are arguing that they are entitled to be paid first—and in full—and on time. They claim that the the moratorium cannot be applied to the bonds that they hold. Also, the hedge funds are accusing the Puerto Rico government of improperly diverting tax revenue to the Puerto Rico Sales Tax Financing Corp. (COFINA) so more debt could be issued while bondholders were not paid.

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Problems continue to plague Puerto Rico as its financial situation continues to deteriorate. Just recently, as things have worsened for the U.S. territory, a number of hedge funds have asked the United States District Court in San Juan, Puerto Rico to freeze the assets of the Commonwealth’s Government Development Bank (“GDB”). The hedge funds, who are large owners of Puerto Rican debt, are accusing the bank of insolvency and spending its remaining money to help support other sectors of the island’s beleaguered government.

The plaintiffs in the case include Claren Road Asset Management and Brigade Capital Management. The hedge funds reportedly hold about $3.75 billion of the bank’s debt.

In their lawsuit, the hedge funds said that the GDB has not provided the financial data that creditors have requested. They want the Court to prohibit additional cash transfers except for those that are necessary. The hedge funds do not want public entities, municipalities, and other depositors to be able to take their money out.

The plaintiffs expressed concern that should the GDB run out of funds, a lot of essential services may have to stop and creditors would sustain significant losses. The GDB has a debt payment due on May 1 of about $422 million. In response to the hedge funds’ case, GDB President Melba Acosta-Febo claimed that the accusations made in the complaint are “erroneous” and allegations that the GDB knowingly kept back financial information in order to preference deposits over bondholders are “wholly false.”

The hedge funds believe that GDB kept giving loans even while knowing these loans would likely not be repaid.

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SEC Files Charges in $1.9M Broker Scam
A California man is facing Securities and Exchange Commission charges. The regulator is accusing Gregory Ruehle of fraudulently selling purported stock in a medical device company and keeping investors’ money. The unregistered broker purportedly raised about $1.9M from over 100 investors but did not transfer or deliver the securities that they purchased to them. Meantime, Ruehle is said to have used the funds to cover his personal spending and pay off gambling debts.

According to the SEC, Ruehle began bilking investors in 2012. He allegedly misrepresented to investors in Minnesota and California that he would sell them securities that he owned in ICB International Inc., for which he was a former consultant.

Instead, said the regulator, Ruehle sold investors more securities than what he owned and he failed to tell them that the securities that belonged to him were not transferrable. Ruehle is accused of generating fake documents that he claimed came from the company and issuing bogus company stock certificates to investors, along with a letter that falsely stated that the stock had been transferred to them.

The SEC wants permanent injunction, disgorgement, prejudgment interest, and penalties against Ruehle. The unregistered broker is also now the subject of criminal charges in a parallel case that was brought by U.S. Attorney’s Office for the Southern District of California.

FINRA Bars Two Men for Hedge Fund Fraud
In other broker news, the Financial Industry Regulatory Authority has announced that it is barring brokers Walter F. Grenda and Timothy S. Dembski from the securities industry. The industry bar is for fraud involving the sale of the Prestige Wealth Management Fund, LP, which is a hedge fund.
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