Another 100 Uvest Brokers Headed Out the Door at LPL

LPL Financial LLC expects to lose 100 bank brokers this quarter due to the continuing integration of Uvest Financial Services Group Inc., its broker-dealer that specializes in serving financial advisers that work with financial institutions. That is on top of 22 Uvest brokers who left the firm in the third quarter, Robert Moore, chief financial officer of the broker-dealer's holding company, LPL Investment Holdings Inc., said in an interview according to InvestmentNews.com. More...

Ex-Goldman director to face criminal charges

Rajat Gupta, one of the most prominent business executives to be caught up in the government's wide-ranging insider-trading probe, had been named by prosecutors as an unindicted co-conspirator in the criminal case against hedge fund tycoon Raj Rajaratnam earlier this year. According to Reuters, the former Goldman Sachs director, who also was once the global head of elite consultancy McKinsey & Co, will surrender to the FBI on Wednesday to face criminal insider trading-related charges.

Grupta's attorney, Gary Naftalis is quoted in the Reuters article as saying "Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless. The facts demonstrate that Mr. Gupta is an innocent man and that he has always acted with honesty and integrity. He did not trade in any securities, did not tip Mr Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo."

Readers will recall that Rajaratnam, founder of the Galleon Group hedge fund, was convicted in May by a New York federal jury after a two-month trial and was sentenced to 11 years in prison, the longest recorded for insider trading.

Gupta, 62, well-known in the business world after 34 years at McKinsey, had won a seat in 2006 on the board of Goldman. The SEC dropped an administrative case against Grupta in August, but did not give up its ability to sue him civilly. That has not occurred, presumably because of the pending criminal charges.

According to various press reports, the wiretaps on Rajaratnam has him talking about a tip from a board member at Goldman, regarding a pending press release regarding Goldman's historic fourth quarter loss in 2008. Prosecutors presumably believe that the board member is Grupta. That view is bolstered by testimony at Rajaratnam's trial by Goldman's CEO Lloyd Blankfein that Gupta had leaked boardroom secrets, according to Reuters.

Putting those two comments together, there is certainly a basis for a case against Grupta, but the government has a much longer way to go to prove that Grupta leaked material, non-public information. And while it might be true that a defendant does not have to profit from leaking information to be guilty of insider trading, it is going to be extremely difficult to convict someone who might simply be a blabbermouth, if he did not receive anything of value, that is in fact what he did.

Ex-Goldman Direct to Fact Criminal Charges

SEC Charges Major Portuguese Bank for Violating Registration Provisions of U.S. Securities Laws

On Tuesday the SEC charged multinational banking conglomerate Banco Espirito Santo S.A. (BES), based in Lisbon, Portugal, with violations of the broker-dealer and investment adviser registration provisions and the securities transaction registration provisions of the federal securities laws.

The SEC's enforcement action finds that between 2004 and 2009 BES offered brokerage services and investment advice to approximately 3,800 U.S.-resident customers and clients who were primarily Portuguese immigrants. However, during this time, BES was not registered with the SEC as a broker-dealer or investment adviser, and it offered and sold securities to its U.S. customers and clients without the intermediation of a registered broker-dealer. None of these securities transactions was registered and many of the securities offerings did not qualify for an exemption from registration.

Sanjay Wadhwa, Associate Director of the SEC's New York Regional Office, said, "Foreign entities seeking to provide financial or securities-related services in the U.S. must familiarize themselves with the statutory and regulatory framework in this arena. A failure to do so, as was the case here, can be a costly misstep."

BES agreed to settle the SEC's charges and pay nearly $7 million in disgorgement, prejudgment interest and penalties.

SEC Charges Major Portuguese Bank for Violating Registration Provisions of U.S. Securities Laws

Firms Must Protect Customer Information - Always

Regulation S-P prohibits financial institutions from disclosing private personal information about their customers to third parties, without the customer's authorization, and is designed to protect consumers against unauthorized access to their personal information.

While the regulation has a noble goal, it is also a trap for the unwary brokerage firm, and I frequently see firms get caught in a Reg S-P violation without ever intending to do so. One example is in discovery. I handle a fair amount of employment litigation, representing firms and brokers in their employment disputes. Those cases often involve the exchange of customer records during discovery, and every so often I come across a firm which thinks nothing of producing customer account information in the litigation. That is a violation of Regulation S-P, regardless of the fact that the production is required in litigation. The information has to be redacted before production.

The SEC has provided another example of an unintentional violation, and charged three former brokerage executives for failing to protect confidential information about their customers. According to the Commission, when GunnAllen Financial Inc. was winding down its business operations last year, its former president and former national sales manager violated customer privacy rules by improperly transferring customer records to another firm. The SEC also accused the firm's compliance director with failing to enforce the supervisory procedures in an unrelated incident.

According to the settlement agreements, the president allowed 16,000 annuity and mutual fund account applications to be transfered to the Sales Manager's new firm. It appears that what actually happened is that the Sales Manager downloaded the applications, and once at his new firm, sent a letter to those customers, advising them that GunnAllen could no longer service their accounts, and that he and his new partners were going to service the accounts, and offering to let the customers opt out of the transfer of their account to the new firm.

While there is undoubtedly a proper motive behind these actions, and those customers do need to have someone handle their accounts, the procedure is backwards, and the letter should have been sent before the transfer, and should have been sent by GunnAllen, not the new firm. Customers would have been given the opportunity to opt out before the disclosure of their information, and the conduct would have been in compliance with Regulation S-P.

According to the settlement, GunnAllen did exactly that, sending a letter to the customers notifying them of the closing of the firm and providing them with information and choices as to how they wanted their accounts handled. But the Sales Manager jumped the gun, and two days after the letter was sent, arranged for the transfer of the accounts.

The individuals settled the charges with the SEC. The President and the Sales Manager each received a censure and a $20,000 fine. More...

SEC Charges Former CEO in Tulsa With Misleading Investors about Liquidity Risks

The SEC has charged the co-founder and CEO of a Tulsa-based energy company with misleading investors in one of its subsidiaries about liquidity risks they faced from his energy trading. According to the SEC’s complaint filed in federal court in Tulsa, the individual was CEO and president of SemGroup L.P., which bought, transported and sold petroleum products and traded crude oil and related commodities and derivatives. The trading activities were managed by the CEO. In addition to these responsibilities, he was also a director of SemGroup’s subsidiary, SemGroup Energy Partners L.P. (SGLP), which owns midstream oil and gas assets such as pipelines and storage facilities. SGLP issues publicly-traded limited partnership units, and the CEO signed certain corporate filings that SGLP made with the SEC. 

The SEC alleges that the filings assured investors that its revenue stream from SemGroup was “stable and predictable” and protected from volatility in oil prices. However, below the surface, the CEO's energy trading was increasingly draining SemGroup’s credit facilities and other liquidity sources and jeopardizing the company’s ability to fulfill its commitments to SGLP. Investors were never warned of these risks, which came to a head in July 2008 when SemGroup’s lenders canceled the credit facility and the company filed for bankruptcy. The price of SGLP’s limited partnership units subsequently declined more than 60 percent. It is alleged that the CEO should have been aware that filings he had signed were misleading about the reliability of SGLP's revenue stream and therefore did not adequately inform the investors of the risks.

The accused CEO has agreed to settle the SEC’s charges without admitting or denying the allegations by paying a $225,000 penalty and forfeiting his rights to SGLP limited partnership units currently worth more than $1.1 million. He also consented to entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933.

SEC Charges Former CEO in Tulsa with Misleading Investors about Liquidity Risks

Citigroup to pay $285 Million for Misleading Investors

The SEC has charged Citigroup Global Markets Inc. with misleading investors about a $1 billion CDO called Class V Funding III. When the U.S. housing market was showing signs of distress, Citigroup structured and marketed Class V III and exercised significant influence over the selection of $500 million of the assets included in the CDO. Citigroup then took a proprietary short position with respect to those $500 million of assets. That short position allowed Citigroup to profit in the event of a downturn in the housing market and gave Citigroup economic interests in the Class V III transaction that were adverse to the interests of investors. Without admitting or denying the SEC’s allegations, Citigroup has consented to settle.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

The SEC has also instituted settled administrative proceedings against Credit Suisse Asset Alternative Capital, LLC (CSAC), Credit Suisse Asset Management, LLC , and the Credit Suisse protfolio manager responsible for the transaction, based on their conduct in the Class V III transaction. The SEC has also brought a litigated civil action against a former Citigroup employee.

Citigroup To Pay $285 Million to Settle SEC Charges For Misleading Investors About CDO Company Profited From Proprietary Short Position Former Citigroup Employee Sued For His Role In Transaction

SEC Charges California-based Investment Adviser with Fraud and Breach of Fiduciary Duty

On October 18, 2011, the SEC filed a complaint in United States District Court in Riverside, California against Copeland Wealth Management (a financial advisory corporation), Copeland Wealth Management (a real estate corporation), and a certified public accountant (Copeland's founder), for fraud and breach of fiduciary duty. As an investment adviser registered with the SEC, the financial advisory corporation manages approximately $125 million in assets under management. The assets under management are primarily mutual funds and real estate funds. The involved real estate company, an unregistered investment adviser, is the general partner for 21 limited partnerships primarily invested in real estate. Lastly, the certified public accountant involved, is the founder, co-owner and officer of both the corporation and the real estate company.

It is alleged that the three parties made material misrepresentations and omissions regarding: the use of investor funds, conflicts of interest, guaranteed returns, the unauthorized trading of put options, and the payment of undisclosed real estate commissions and other related compensation. The parties have not yet admitted or denied the allegations.

SEC Charges California-based Investment Adviser with Fraud and Breach of Fiduciary Duty

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis

Today the SEC charged former bank executives with misleading investors about mounting loan losses at San Francisco-based United Commercial Bank in 2008 and 2009 during the height of the financial crisis.

The SEC alleges that the bank’s former chief executive officer, chief operating officer and senior officer concealed losses on loans and other assets from the bank’s auditors, causing the bank’s public holding company UCBH Holdings Inc. to understate 2008 operating losses by at least $65 million (approximately 50 percent). Soon continued declines in the value of the bank’s loans led the bank to fail. The California Department of Financial Institutions closed the bank and appointed the FDIC as receiver. United Commercial Bank was one of the 10 largest bank failures of the recent financial crisis, causing a loss of $2.5 billion to the FDIC’s insurance fund.

Robert Khuzami, Director of the SEC’s Division of Enforcement, said, “Today’s charges reflect an all too familiar pattern – corporate executives once seen as rising stars embrace deception to avoid losses and conceal negative news, with investors and the FDIC insurance fund left to pick up the pieces, but accountability for these executives begins today.”

Today the U.S. Attorney for the Northern District of California announced parallel criminal charges against former employees of the bank, and the FDIC announced enforcement actions against 13 individuals for violations of federal banking regulations.

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis

SEC Files Action to Halt Green-Product Ponzi Scheme

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that a convicted felon and others defrauded investors in PermaPave Companies, a group of firms based on Long Island, N.Y.

About 140 individuals, many working in the construction or landscaping business, invested in the scheme between 2006 and 2010, the SEC alleged. Investors were told that PermaPave Companies had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns to investors of 7.8% to 33%. In reality, the complaint states that there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

The defendant and two other accomplices used new investments to make payments to earlier investors and then siphoned off much of the rest, buying luxury cars, gambling trips to Las Vegas, and jewelry. In addition, the complaint alleges that the defendant used investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty to conducting in 2000.

The three men were arrested earlier today and criminal charges have been filed.

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme

SEC Charges Fund Manager with Fraud In PIPE Transactions

The SEC has charged a Long Island-based investment adviser with defrauding investors in hedge funds investing in PIPE transactions and misappropriating more than $1 million in client assets for his personal use. A “PIPE” transaction involves “private investment in public equity.” Microcap public companies often engage in PIPE transactions to raise capital.

The SEC alleges that the advisor and his firm The NIR Group LLC repeatedly lied to investors to hide the truth that his PIPE investment and trading strategy was failing during the financial crisis. The advisor misused investor money by writing checks to pay for personal services and luxury items such as a Lexus, Mercedes, and Rolex watch.

SEC Charges Long Island-Based Hedge Fund Manager with Fraud Involving PIPE Transactions