Articles Tagged with Securities Investor Protection Corporation

Eight People Implicated in $39M Penny Stock Fraud Get Prison Sentences, Must Pay Restitution
In Ohio, eight people were sentenced to prison terms ranging from almost two years to a dozen years for their involvement in a penny stock scam that caused investors to suffer $39M in losses. One of the defendants, Zirk de Maison, received the 12-year sentence. He was ordered to pay $39.1M in restitution. The other defendants also were ordered to pay restitution in lower amounts.

According to prosecutors, the defendants conspired to bilk investors and potential ones in a number of public issuers. They did this by putting out millions of shares and artificially controlling the price and volume of the shares that were traded. This was accomplished through undisclosed commissions paid to brokers, boiler room operators, and promoters who got investors to invest, as well as through the fraudulent concealment of ownership interests in the companies in which the funds were invested.

In some instances, brokers and ex-brokers were paid illegal kickbacks of sometimes up to 50%. Clients were not told of these payments. The co-conspirators used most of investors’ money to enrich themselves. Some of the defendants were boiler room owners.

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The SIPC Modernization Task Force, which was created by the Securities Investor Protection Corporation, has made 15 recommendations to update SIPC and Securities Investor Protection Act provisions. Among the 15 recommendations:

• Raising coverage protection for customers of failed brokerage firms from $500K to $1.3M.
• Getting rid of the distinction between protection levels for securities and cash.
• Providing pension fund protections for participants on a pass-through basis.
• Amending the current minimum assessment to whichever is greater-a) the amount established by SIPC Bylaw to not go over 0.2% of the member’s gross revenues from the securities business or b)$1,000.
• When total amount of claims aggregates is $5 million, allowing for direct payment procedures.
• Mandating that SIPC members’ auditors submit audit report copies with SIPC.
• Affirming banks and other custodians’ duty to protect Rule 15c3-3 accounts; reaffirming that the accounts will have to contend with trustee control should the broker-dealer enter liquidation proceedings.
• Granting the same avoidance powers to the SIPA trustee and a trustee dealing with a case under the bankruptcy code.
• Continuing to allow reverse purchase agreement and repurchase related claims to be treated as general creditor claims.

SIPC’s board is now evaluating the recommendations, some of which will require congressional action (ie. rule making).

Meantime, investors of Bernie Madoff have submitted two petitions requesting that the US Supreme Court review the U.S. Court of Appeals for the Second Circuit’s ruling, which upheld Irving Picard’s method of calculating “net equity” under SIPA in which customers are allowed to get back their “net equity.” However, how that amount is calculated is not specified.

Picard is the Madoff trustee and is overseeing the liquidation of the Ponzi mastermind’s brokerage firm, Bernard L. Madoff Investment Securities LLC. Contending that BLMIS created false profits, Picard Is suing “net winners” that allegedly took more money than they deposited into their accounts. The money retrieved would pay back “net losers.”

In a certiorari petition submitted on February 3, lawyers for hundreds of investors contended that the appeals court made a mistake in giving SIPA trustees “unlimited discretion” to determine “net equity” according to whatever circumstances are involved. The investors argued that SIPA defines “net equity” in a manner that mandates that SIPC insurance coverage be issued according to the amount the broker owes to customers. This figure the reflected on the last statement.

A few days later, Massachusetts School of Law Dean Lawrence Vevel, who is also an investor, filed his certiorari petition accusing the Second Circuit of disregarding congressional intent when it upheld in favor of Picard’s approach to “net equity.” He argued that Congress obviously meant to replace client securities even if the securities had never been bought.

The Madoff trustee has refused to pay back claimants according to their final BLMIS accounts. Instead, he has said that customer claims have to be based on the withdrawals and deposits that are noted in BLMIS’ books and records.

Diverse Group of Securities Experts Make Recommendations For Future of Organization, SIPC, February 21, 2012
Madoff Investors Ask High Court to Review Affirmance of Trustee’s ‘Net Equity’ Method, Bloomberg BNA, February 22, 2012


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Appeals Court affirm SEC Finding that Broker Acted “Willfully” When Keeping IRS Lien Information from FINRA, Stockbroker Fraud Blog, February 24, 2012
FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012
Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses, Institutional Investor Securities Blog, January 6, 2012 Continue reading

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