Wednesday, November 23, 2011

SEC Charges Perpetrator of Washington-Area Ponzi Scheme

The SEC charged a Bethesda, Md. man, several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area. The SEC alleges that middle-class residents were lured by false pretenses and powerpoint presentations to invest in promissory notes. Many were encouraged to refinance their homes and utilize their personal savings and retirement funds to come up with more to invest. They were promised returns as high as 20 percent per year and told their investments were protected. Instead, the companies issuing the notes were engaged in high-risk, speculative options trading and suffered massive losses. Money from new investors was used to pay the returns to earlier investors and also for personal expenses.

The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors over a five year period. The scheme ultimately collapsed in the fall of 2010. The Bethesda man and five others have been charged.

SEC Charges Perpetrator of Washington-Area Ponzi Scheme

SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

The SEC filed an emergency enforcement action to stop a fraudulent scheme targeting investors seeking coveted stock in Internet and technology companies like Facebook and Groupon in advance of a public offering.

Several individuals utilized a newly-minted hedge fund (The Praetorian Global Fund) to claim to own shares worth tens of millions of dollars in companies such as Facebook and Groupon. The companies targeted were expected to soon hold an initial public offering. Taking advantage of investor interest in pre-IPO shares that are virtually impossible for company outsiders to obtain, the individuals solicited funds and gave investors a false sense of comfort that their money was protected by telling them that an escrow service was receiving their funds.

Yet in reality the individuals never owned the promised pre-IPO shares in these companies. The escrow service only served to transfer investor funds to personal accounts controlled by two of the involved individuals. The funds were then used for lavish personal expenses (private jets, cars, art) and to pay off other individuals involved.

The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of the matter, filed criminal charges against the lead individual, a Florida resident. The Florida resident has been the subject of prior SEC enforcement action and several state criminal actions.
SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

Tuesday, November 22, 2011

SEC Charges Longtime Madoff Employee with Creating Fake Trades

The SEC charged a longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The SEC alleges that the employee, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for nearly four decades, was asked by Madoff to provide the firm’s investment advisory operations with backdated arbitrage trade information to be made into fictitious trading on investors’ account statements. The employee’s own account at BMIS was among those in which backdated trades were entered, and he withdrew nearly $10 million in “profits” from the fictitious trading over several years. According to the allegations against the employee filed in U.S. District Court for the Southern District of New York, others implicated in Madoff’s investment advisory operations used the information provided by the employee to formulate fictitious trades to appear on investor account statements.

George S. Canellos, director of the SEC's New York Regional Office said "Kugel helped Madoff maintain the elaborate and enduring facade that his clients were engaged in actual trading when in fact no such trading occurred. Kugel withdrew millions of dollars of phony profits that he knew weren't from actual trading activity."

SEC Charges Longtime Madoff Employee with Creating Fake Trades

Saturday, November 19, 2011

FINRA and Ontario Securities Commission Sign Regulatory Cooperation Arrangement

FINRA and the Ontario Securities Commission (OSC) today announced they have entered into a Memorandum of Understanding (MOU). The MOU will facilitate the exchange of information with respect to regulated entities that operate across the U.S.-Canadian border. It was signed in Toronto on Nov. 10, 2011, and establishes a strong framework to improve the ability of the OSC and FINRA to oversee securities firms and markets. The arrangement will aid the exchange of information on firms and individuals under common supervision, support collaboration on investigations and enforcement matters, and provide a more complete view of market activity.

Mr. Wetston, Chair of the OSC,
said, "Cross-jurisdictional regulatory coordination is essential for protecting investors in today's global marketplace. This framework acknowledges the interconnectedness of our markets and represents our commitment to working collaboratively with our international regulatory partners to address threats to investors and markets."

Friday, November 18, 2011

SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement

The SEC charged Morgan Stanley Investment Management (MSIM) with violating securities laws. This occurred in a fee arrangement that repeatedly charged a fund and its investors for advisory services from a third party that they weren’t actually receiving.

The SEC’s investigation found that MSIM represented to investors and the fund’s board of directors that it contracted a Malaysian-based sub-adviser to provide advice, research and assistance to MSIM. In reality, the sub-adviser did not provide these purported advisory services, yet the fund’s board annually renewed the contract based on these ghost services for more than a decade. The total cost was $1.845 million to investors.

MSIM has agreed to pay more than $3.3 million to settle the charges.

“We want to take the advisory fee setting process out of the shadows by scrutinizing the role of investment advisers and fund board members in vetting fee arrangements with registered funds,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement

Thursday, November 17, 2011

SEC Cracking Down on Tarted-Up ADVs

This catchy headline is from Apparently the Commission has started targeting investment advisers who have lied on their registration forms. The SEC is quoted as saying that it has begun reviewing registration documents to find advisers who have not accurately portrayed their education, assets under management and other aspects of their firm.

According to the Commission, the goal is to stop larger frauds - the director of enforcement is quoted as saying '“If they come face to face with inspectors early on … they're going to know that we're watching, and they're going to be unlikely to graduate to larger frauds.”

Can the Commission really be this naive? Checking Form ADV for lies is going to prevent significant securities fraud? I am pretty sure that those who are committing fraud are not lying in any obvious way on Form ADV, and they are certainly aware that the Commission is "watching," to the extent that the Commission is watching at all.

Liars clubbed? SEC cracking down on tarted-up ADVs

FINRA Orders Chase to Reimburse Customers $1.9 Million

FINRA announced that it has ordered Chase to reimburse customers more than $1.9 million for losses incurred from recommending unsuitable sales of unit investment trusts (UITs) and floating rate loan funds. FINRA also fined Chase 1.7 million.
FINRA's investigation found that Chase brokers made recommendations to unsophisticated customers with little or no investment experience and conservative risk tolerances, without having reasonable grounds to believe that those products were suitable for the customers. FINRA also found that Chase failed to properly supervise its sales of UITs and floating rate loan funds.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "With the growing number of complex products in the market today, it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers. Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase's customers."
FINRA's also found that WaMu Investments, Inc., which merged with Chase in July 2009, made similar unsuitable recommendations to customers. FINRA found that like Chase, WaMu failed to provide adequate training and failed to reasonably supervise the sale of floating-rate loan funds to customers.

Wednesday, November 16, 2011

Former CEO to Return $2.8 Million in Bonuses and Stock Profits Received During CSK Auto Accounting Fraud

The SEC announced that the former chief executive officer and chairman of CSK Auto Corporation has agreed to return $2.8 million in bonus compensation and stock profits that he received while the company was committing accounting fraud.

The former executive officer was not personally charged by the SEC for the company’s misconduct, however he is still required under Section 304 of the Sarbanes-Oxley Act (SOX) to reimburse CSK Auto for incentive-based compensation and stock sale profits that he received during the company’s fraudulent period. This marked the agency’s first SOX clawback case against an individual who was not alleged to have otherwise violated the securities laws.

Robert Khuzami, Director of the SEC's Division of Enforcement said, "CEOs should know that they can be deprived of bonuses or stock profits they received while accounting fraud was occurring on their watch."

Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office, added, “[He] received incentive-based pay while CSK Auto was fraudulently overstating its income to shareholders. His bonuses and stock profits are now being rightfully returned to the company for the benefit of the shareholders."

Former CEO to Return $2.8 Million in Bonuses and Stock Profits Received During CSK Auto Accounting Fraud

Friday, November 11, 2011

SEC Charges China-Based Longtop Financial Technologies for Deficient Filings

The SEC's Division of Enforcement charged China-based Longtop Financial Technologies Limited with failing to file current and accurate financial reports with the SEC. The Division of Enforcement alleges that Longtop failed to comply with its reporting obligations after failing to file an annual report for its fiscal year that ended March 31, 2011. Furthermore, Longtop’s independent auditor stated in May 2011 that its prior audit reports on Longtop’s financial statements contained in annual reports for 2008, 2009 and 2010 should no longer be relied upon.

Antonia Chion, Associate Director of the SEC’s Division of Enforcement said, “We are taking this action to protect investors because it appears there is no current and reliable information available to the investing public about Longtop."

If the administrative law judge revokes the registration of Longtop’s securities, no broker-dealer may execute any trades in those securities. This would also abolish Longtop as a public shell company so that it could not be sold and used as a vehicle for future fraud.

SEC Charges China-Based Longtop Financial Technologies for Deficient Filings

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales

The SEC charged UBS Securities, LLC for inaccurate recording practices when providing and recording “locates” to customers seeking to execute short sales. UBS settled the enforcement action by agreeing to pay an $8 million penalty and retain an independent consultant. A“locate” represents an approval by a broker-dealer that it has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. It is common practice for a customer to ask a broker-dealer to locate stock for short selling. Broker-dealers are required under Regulation SHO to accurately record the basis for locates given out.

According to an SEC press release, "UBS employees routinely recorded the name of a lender’s employee even when no one at UBS had actually contacted the employee to confirm availability. The SEC’s investigation found that UBS employees sourced thousands of locates to lender employees who were out of the office and could not have provided any information to UBS on those days."

Broker-dealer employees often use electronic availability feeds sent by lenders to judge the availability of locates. At times it is necessary to directly speak with lenders to confirm the availability. According to the SEC's order, UBS's "locate log" inaccurately portrayed which locates had been based on electronic feeds or direct confirmation.

According to the SEC’s order, in judging the availability of shares for locates, broker-dealer employees often utilize electronic availability feeds that are sent by lenders to many different broker-dealers. At times, reliance on those feeds might not be reasonable, and it may be necessary to contact lenders directly to confirm actual availability of the security. UBS’s locate log purported to show which locates were granted based on direct confirmation of availability with a lender and which locates were based on electronic feeds. This practice made it difficult to discern whether UBS had reasonable basis for granting locates. The SEC’s order does not find that UBS executed short sales without reasonable basis for believing that it could borrow the stock to fulfill its settlement obligations.

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales

SEC Charges San Diego-Based Investment Adviser and Its President with Fraud

The SEC charged a San Diego-based investment advisory firm and its president with fraud for failing to disclose a conflict of interest to clients and materially misrepresenting the liquidity of a hedge fund.

The SEC’s Division of Enforcement alleges that when Western Pacific Capital Management LLC and its president pushed clients to invest in a security, they did not disclose that Western Pacific would receive a 10 percent commission. Western Pacific and its president also failed to register as a broker, failed to provide required written disclosures to clients, improperly redeemed one hedge fund investor’s interest ahead of another’s, and made material misstatements and omissions to clients regarding the fund’s liquidity.

“Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them,” said Marshall S. Sprung, Assistant Director in the SEC Enforcement Division’s Asset Management Unit. “[they] breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed.”

SEC Charges San Diego-Based Investment Adviser and Its President with Fraud

Three Former Directors at Military Body Armor Supplier Settle SEC Charges

The SEC announced that three former directors of  Pompano Beach, Fla.-based DHB Industries have agreed to more than $1.6 million in monetary sanctions to settle charges that they were involved in an accounting fraud. The settlements impose permanent officer-and-director bars in addition to the monetary sanctions. The settlements are subject to court approval.

Eric I. Bustillo, Director of the SEC's Miami Regional Office said, “These directors failed to comply with their responsibilities by ignoring the repeated red flags of the massive accounting fraud that senior management orchestrated at DHB. While we won’t second guess the good-faith efforts of most company directors, we will hold accountable those who completely abdicate the duties they owe to the companies and shareholders they represent.” DHB Industries is currently known as Point Blank Solutions.

Three Former Directors at Military Body Armor Supplier Settle SEC Charges

SEC Charges Feeders to Ponzi Scheme

The SEC charged two Minnesota-based hedge fund managers and their firm for facilitating a multi-billion dollar Ponzi scheme operated by a Minnesota businessman.

The SEC alleges that three parties (two individuals and a business) invested more than $600 million in hedge fund assets with the Minnesota businessman while collecting more than $42 million in fees. The Commission alleges that the three falsely assured investors and potential investors that the flow of their money would be safeguarded by the operation of collateral accounts when in reality the process did not exist as explained. When the Minnesota businessman was unable to make payments on investments held by the funds they managed, the three parties helped to conceal this by entering into secret note extensions with the Minnesota businessman. 

This is the fourth enforcement action that the SEC has brought against hedge fund managers that collectively fed billions of dollars into the Ponzi Scheme.

SEC Charges Feeders to Ponzi Scheme

Thursday, November 10, 2011

SEC Approves New Rules to Toughen Listing Standards for Reverse Merger Companies

Today the SEC approved new rules of the 3 major U.S. listing markets that raise the standards that companies going public through a reverse merger must meet in order to be listed on those exchanges.

The press release states that "under the new rules, Nasdaq, NYSE, and NYSE Amex will impose more stringent listing requirements for companies that become public through a reverse merger. Specifically, the new rules would prohibit a reverse merger company from applying to list until:

The company has completed a one-year “seasoning period” by trading in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange following the reverse merger, and filed all required reports with the Commission, including audited financial statements.

The company maintains the requisite minimum share price for a sustained period, and for at least 30 of the 60 trading days, immediately prior to its listing application and the exchange’s decision to list."

SEC Chairman Mary L. Schapiro said of the change, “Placing heightened requirements on reverse merger companies before they can become listed on an exchange will provide greater protections for investors.”

SEC Approves New Rules to Toughen Listing Standards for Reverse Merger Companies

Wednesday, November 9, 2011

SEC Obtains Record $92.8 Million Penalty Against Hedge Fund Manager

Today the SEC obtained a record financial penalty of $92.8 million against a billionaire hedge fund manager for widespread insider trading.

The final judgment entered today by the Honorable Jed S. Rakoff of the U.S. District Court for the Southern District of New York finds the manager liable for a civil monetary penalty of $92,805,705, which marks the largest penalty ever assessed against an individual in an SEC insider trading case. The charges were brought against the manager on October 16th and alleged that he and several others engaged in a massive insider trading scheme. This action is part of a larger insider trading probe, which has resulted in civil charges against a total of 29 individuals and entities. The SEC alleged insider trading in the securities of more than 15 publicly traded companies for more than $90 million in illicit profits or losses avoided.

“The penalty imposed today reflects the historic proportions of...illegal conduct and its impact on the integrity of our markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

SEC Obtains Record $92.8 Million Penalty

SEC-CFTC Statement on MF Global

On October 31st, the SEC and CFTC made the following statement:

"For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global, Inc., a jointly registered futures commission merchant and broker-dealer, in anticipation of a transaction that would include the transfer of customer accounts to another firm. Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm. The SEC and CFTC have determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets. SIPC announced today that it is initiating the liquidation of MF Global under the Securities Investor Protection Act (SIPA)."

SEC-CFTC Statement on MF Global

Bank of America Backlash - Bank Transfer Day

As we have noted in numerous posts in the past, Bank of America has made a series of significant, and sometimes astounding, mistakes in its business operations, causing significant losses to shareholders, and pain to its employees and customers. 

Most of our observations have been on the brokerage side, and specifically with the handling of the Merrill Lynch acquisition, but their problems and mistakes extend to the banking side as well. 

The arrogant announcement that the bank was going to impose a $5 a month fee for use of its debit cards was the most recent mistake. Not only is it outrageous to charge customers for access to their own money, the simple fact is that debit card use is hirer among lower wage earners than higher wage earners, and such a fee hits those who are least able to afford it the hardest. 

We all know the end of the story - Bank of America dropped its plans for the fee after the huge backlash from consumers. However, what it could not avoid was Bank Transfer Day.

Bank of America's arrogance was nearly perfectly timed with the Occupy Wall Street protests. Say what you will about the protests and protesters, Bank of America played right into the protests hands. Wall Street once again preying on the little guy was a story line that was hard to ignore, and the combination of the protests with BofA's stupidity fueled the specific protest - Bank Transfer Day.

The media is giving credit to a variety of people for Bank Transfer Day, but regardless, it is not disputed that the event was a pure grassroots movement, by bank customers frustrated by one too many nickel-and-diming fees. According to the Motley Fool, LA gallery owner Kristen Christian created a Facebook event on Oct. 4 that called for people to move their money from banks to credit unions. Titled "Bank Transfer Day" and scheduled for Nov. 5, the event struck a chord with a large number of people. More than 70,000 RSVP'd in the month leading up to the action.

As noted in the article, the event might have been a larger success if planned for a weekday rather than a Saturday, but there is no denying that it was a success. According to media reports, and results from the Credit Union National Association, over 650,000 people joined credit unions since the day BofA announced its debit card fee.

Bank Transfer Day: A Resounding, If Unanticipated, Success for Credit Unions

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Monday, November 7, 2011

Wall Street Occupy Wall Street Rebuttal?

A letter to the OWSers that was allegedly dropped from an office building at Zuccotti Park so the unemployed college students hanging out in the park would see it. A bit arrogant, but it makes a couple of interesting points. From Registered Rep. Editor-in-Chief David Aldo Geracioti's blog.

Go ahead and continue to take us down, but you're only going to hurt yourselves. What's going to happen when we can't find jobs on the Street anymore? Guess what. We're going to take yours. We get up at 5am and work till 10pm or later. We're used to not getting up to pee when we have a position. We don't take an hour or more for a lunch break. We don't demand a union. We don't retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we'll eat that.

Thursday, November 3, 2011

Interesting Stats on Income Inequality

I never quite understood why people were linking taxation to the increasing spread between incomes of the super-rich and the middle class. An article from Investors Business Daily, quoting from the Congressional Budget Report might have the answer:
To the extent that income inequality is a problem, it's not clear what can be done to resolve it. Among the contributing factors:

Economic growth. Strong economic growth, rising stock prices and household income inequality tend to go hand in hand.

Technology. Tech advances have put a premium on skilled labor, according to a Congressional Budget Office report . Because the pool of skilled workers hasn't grown as much as demand, their wages have climbed faster.

Free trade and immigration. Cheap labor abroad and an influx in low-skilled immigrants can depress wages at the bottom, according to the CBO.

Women in the workforce. As the CBO put it, "an increase in the earnings of women could boost inequality by raising the income of couples relative to that of households headed by single people."

Tax policy changes don't explain the widening income gap. The CBO found that, by one measure, "the federal tax system as a whole is about as progressive in 2007 as it was in 1979." Article