Financial Firms

CFTC and FINRA File Charges Against Deutsche Bank Over Swap Data and Information Transmitted Over Squawk Boxes

Published on: August 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission has filed a civil case against Deutsche Bank AG (DB). According to the regulator, for five days the firm, which is a provisionally registered Swap Dealer, did not report any swap data for a number of asset classes, turned in untimely and unfinished swap information, failed to supervise the staff responsible for the reporting of the swap data, and had an inadequate Business and Continuity and Disaster Recovery Plan.

The bank’s swap data reporting system had suffered a System Outage. The CFTC said that the swap data reported prior to and after the outage showed that there had been ongoing problems with specific data fields and their integrity. As a result, the market data issued to the public was affected. Some of it purportedly continues to be affected to this day. The CFTC said that a reason for the System Outage and the reporting problems is that Deutsche Bank lacked an adequate Business Continuity and Disaster Recovery Plan or another supervisory system that was equally satisfactory.

Earlier this month, the Financial Industry Regulatory Authority fined Deutsche Bank $12.5M for substantive supervisory failures involving trading-related information and research that the firm had issued to employees over internal speakers, also referred to as squawk boxes. The self-regulatory organization said that even though there were red flags related to this matter, Deutsche Bank neglected to set up supervision that was adequate over both the access that registered representatives had to the “squawk,” or “hoots,” which is the information issue through the squawk boxes, and the communication of this data to customers.

Securities Fraud News: Hedge Fund Manager Accused of Securities Fraud Involving Payoffs to the Terminally Ill, SEC Halts Trading in Neruomama Shares, and Commodity Pool Fraud Leads to More than $10M in Penalties and Restitution

Published on: August 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

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.)

Ex-Goldman Sachs Trader to Pay $400K Fine to Settle RMBS Fraud Case

Published on: August 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Edwin Chin, an ex-Goldman Sachs Group Inc. (GS) senior trader, will pay $400K to resolve U.S. Securities and Exchange Commission charges accusing him of misleading the bank’s customers when he sold them residential mortgage-backed securities at prices that were higher than they should have been. Even though he is settling, Chin is not denying or admitting to the regulator’s findings. He has, however, agreed to the entry of the order stating that he violated the Securities and Exchange Act of 1934 and Rule 10b-5.

According to the Commission’s order, from 2010 until 2012, which is when Chin left the bank, the former Goldman trader made extra money for the firm by concealing the prices that it had paid for different RMBSs and reselling the securities at higher prices to customers. The difference in cost would go to Goldman.

The SEC said Chin made over $1.5M in additional trading profits. Because Goldman made more money, Chin did as well.

The regulator accused Chin of sometimes misleading buyers by suggesting that he was in the process of negotiating a transaction between customers when he was merely selling residential mortgage-backed securities from Goldman’s inventory. In one alleged incident, Chin earned an additional $200K by telling a hedge fund client that he would sell a bond at cost price and without compensation. Unfortunately, he purportedly neglected to tell the hedge fund that he had already bought the security, had it in inventory, and was charging the fund a worse price than what Goldman paid earlier that day. The SEC said that Chin misled the same client about the price of a different security the following day, resulting in an additional $100K in profit.

UBS to Pay $250K For Not Waiving Mutual Fund Fees

Published on: August 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority said that a UBS Group AG (UBS) unit will pay $250K to resolve charges accusing it of not waiving certain fees for mutual fund customers that were eligible for the reduction. FINRA said that the broker-dealer overcharged customers $277,636 to invest in mutual funds. The failure to wave these fees purportedly took place from 9/09 to 6/13.

The self-regulatory organization cited alleged supervisory failures. According to the settlement notice, UBS depended largely on its registered representatives to identify when sales charge waivers were warranted and identifying them. These waivers were linked to the reinstatement rights that let investors get around having to pay front-end sales charges.

Under these rights, individual investors are generally allowed to reinvest money made from selling class A mutual fund shares in the same fund family or the same fund without having to pay fees at the front end. They are given 90-120 days to reinvest for the waiver to be applicable.

US Attorney Bharara Asks Second Circuit To Reconsider Overthrown Mortgage Fraud Verdict Against Countrywide

Published on: August 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Attorney for Manhattan’s Southern District is asking the Second Circuit Court of Appeals to look at a ruling that overturned the jury verdict that held Countrywide Home Loans liable for mortgage fraud. Countrywide, which is now owned by Bank of America (BAC), made billions of dollars on home loans that went into default following the 2008 financial crisis.

It was in 2007 that the mortgage provider introduced a new program, referred to as the “high-speed swim lane,” to process applications for mortgages. Within Countrywide, the program was dubbed the “hustle.”

The program did not include the majority of conditions required to make sure loans would be paid back after Wall Street banks, Freddie Mac, or Fannie Mae sold them to investors. Unfortunately, Freddie and Fannie were not told that these conditions had become more relaxed or that loans no longer met certain criteria. The two mortgage finance firms had tightened their own loan buying requirements and underwriting guidelines. As a result of the loosened restrictions by Countrywide, contended the Justice Department, “rampant instances of fraud” resulted.

Despite the 2013 jury verdict that found Countrywide and a Bank of America executive liable for mortgage fraud, a Second Circuit judge panel overruled the decision. It found that even though Countrywide purposely breached contracts, this was not fraud because the lender had not intended to fool customers at the time that contracts were signed.

Now, U.S. Attorney Preet Bharara wants a Second Circuit panel of judges to consider that Countrywide made false statements when selling loan bundles to customers, including Freddie Mac and Fannie Mae. He said that the court bypassed evidence at trial that showed how the defendants made fraudulent misrepresentations when selling the loans and while the contracts were being executed. Prosecutors are arguing that the language in the contract refers to each mortgage sale during the actual sale and not upon the writing of the contract.

Securities Headlines: FINRA Wants Ex- Merrill Lynch Adviser to Pay Monetary Sanctions Over Misleading Recommendations, Four Life Insurers Must Pay $3.4M Related to Death Benefits, and JPMorgan Settles with Indiana Over Proprietary Products for $95OK

Published on: August 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Merrill Lynch Adviser Accused of Misleading Clients with IRAs
Landon L. Williams, and ex-Merrill Lynch adviser who is no longer registered with the Financial Industry Regulatory Authority, is accused of misleading five of the firm’s clients by giving them inaccurate information when issuing recommendations for investments. All of the clients had individual retirement accounts. At the time, Williams served as a Merrill Lynch Edge Advisory Center adviser for a year until August 2014.

Merrill Edge customers have less than $250K in accounts. Instead of working with one broker, they work with a team of advisers.

In its complaint, FINRA note a couple of examples, including when Williams allegedly told one customer that the yearly operation cost of a fund was 1.113% when, in fact, it was 1.28%. He purportedly informed one client that she would be able to make up her front-end sales charges in three years even though his notes related to that fund said that she would make them up in seven years.

FINRA is seeking monetary sanctions.

Life Insurance Companies Settle with U.S. States Over Unclaimed Death Benefits
Securian Financial Group Inc., Hartford Financial Services Group, Standard Insurance Co., and Great American Insurance Group have reached a $3.4M settlement with the state insurance departments of North Dakota, Florida, California, Pennsylvania, and New Hampshire. The deal is related to the payment of unclaimed death benefits.

Primus Pacific Partners Sues Goldman Sachs for $510M

Published on: August 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Group Inc. (GS) is a defendant in a securities lawsuit brought by Primus Pacific Partners. Primus used to own 20% of Eon Capital, a Malaysian lender. In its complaint, brought in the New York State Supreme Court, Primus accused Goldman and ex-Managing Director Tim Leissner of hiding that there were conflicts of interest involving Malaysian Prime Minister Najib Razak and the 1Malaysia Development Berhad (1MDB), which is a sovereign wealth fund.

Goldman had been advising Eon Capital when the latter was considering a takeover offer from Hong Leong Bank Bhd, which is a Malaysian bank. According to Primus, in January ’10, Goldman and Leissner determined that Hong Leong’s first bid wasn’t fair. A few months later later, however, they decided that a revised offer that was only 2.8% greater was fair and recommended that Eon Capital take the deal.

The plaintiff believes that Goldman approved of the higher bid because it was seeking to impress the Malaysian Prime Minster whose brothers would benefit from a merger. Nazim Rajak worked for Hong Leong as a director while Nazir Rajak was chairman of CIMB Group Holdings Bhd, which advised Hong Leong about its takeover bid of EON Capital.

Fed Orders Goldman Sachs to Pay $36M Fine Over Confidential Documents Leak

Published on: August 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Group Inc. (GS) will pay $36.3M to settle allegations accusing ex-employees of obtaining access to confidential documents from the Federal Reserve. The Fed contends that Joseph Jiampietro, while working as a Goldman Sachs managing director, obtained the unauthorized supervisory data belonging to bank regulators and utilized the information for his work at the financial firm.

The Fed said that ex-Goldman Sachs banker Rohit Bansal was the one who shared the confidential documents with Jiampietro. Bansal had gotten the documents from his friend Jason Gross, a New York Fed employee that he used to work with at the regulatory agency. The confidential data involved a bank that was a client of Goldman Sachs. Last year, Bansal pleaded guilty to a misdemeanor charge involving the Fed documents, while Gross pleaded guilty to giving Bansal the information.

The Fed believes that Jiampietro used the confidential information to make pitches to potential and current clients. A lawyer for Jiampietro, who had previously worked for UBS Group Ag (UBS) and JPMorgan Chase & Co. (JPM), maintains that the allegations against his client are “demonstrably false.”

Financial Firm News: Deutsche Bank Ordered to Face Part of Subprime Mortgage Fraud Lawsuit & Morgan Stanley & Bank of America Must Contend with MBS Case

Published on: August 1, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A U. S. district court judge said that Deutsche Bank AG (DB) must face part of a mortgage fraud case accusing the German bank of bilking investors who purchased over $5.4M of preferred securities. The plaintiffs, led by two individuals and Belmont Holdings Corp., claim that Deutsche Bank hid its exposure to the subprime mortgage market.

Judge Doborah Batts turned down the bank’s bid to throw out claims related to about $2.55B of securities sold in 11/07 and 2/08. She did, however, dismiss claims involving $2.9B of securities sold in 5/07, 7/07, and 5/08. Investors claim that Deutsche Bank should have notified them in offering documents that it had significant exposure to subprime markets via collateralized debt obligations and residential mortgage-backed securities. They believe that early notification could have prevented them from purchasing the preferred securities before their values dropped, resulting in billions of dollars of losses.

Securities News: Citigroup to Pay $7M Over Incomplete Blue Sheet Data, Cetera Fined $75K for Client Record Issue, and Raymond James Settles EB-5 Program Violations for $1.45M

Published on: July 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James to Pay Vermont Almost $1.5M in Immigrant Visa Case
The Securities Division of the Vermont Department of Financial Regulation said that Raymond James & Associates (RJF) must pay $1.45M in penalties because one of its registered representaitves allowed investor money to be misused in a$350M development fraud involving the EB-5 program. The program lets rich foreign investors obtain permanent residency if they invest a certain amount in projects that help establish jobs for U.S. citizens.

Earlier, a Securities and Exchange Commission-appointed receiver sued Raymond James, which received wire transfers involving the scam beginning in 2008. The money was from investors who thought they were investing in a Vermont ski resort. One of the fraudsters, Ariel Quiro, is accused of borrowing against the Raymond James accounts and using nearly $2.5M of investors’ money to cover margin interest loans to the firm. Last month, Raymond James arrived at a $5.95M settlement with the Vermont Department of Financial Regulation over violations involving the ski resort. $4.5M of the money was for paying back investors.

Regarding this $1.45M fine, Vermont regulators said that it was a Raymond James representative who set up the brokerage and margin accounts involved in the alleged scam. The financial representative also failed to procure the proper documentation showing that Quiros was entitled to act for certain limited partnerships and let him authorize the transfer of $13M in limited partnership money to buy the ski resort even though written instructions directed otherwise.

Citigroup Admits Wrongdoing Over Blue Sheet Data
According to the SEC, for 15 years, Citigroup Global (C) markets provided the regulator with incomplete blue sheet data regarding trades that it executed. The coding error involved software that the firm used from 5/99 to 4/14 for processing the Commissions’ requests for the information, including data about trade times, prices, volume traded, and information identifying customers. As a result, Citigroup left out nearly 27,000 securities transactions in responses to over 2,300 blue sheet requests.