Financial Firms

SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations

Published on: June 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed a civil case against Wedbush Securities Inc. and two of its officials. The regulator claims they violated a rule that mandates that firms have proper risk controls in place before giving customers market access.

According to the SEC order, between 2011 through 2013 Wedbush allowed most of its market access customers to send orders straight to U.S. Trading venues and did not keep up direct and sole control over trading platform settings. Customers used these platforms to transmit orders to the markets.

The Commission contends that Wedbush should have had the mandated pre-trade controls in place. It claims that the firm failed to perform a yearly review of its risk management controls related to market access and did not limit trading access to people that the firm had authorized and pre-approved. As a result, overseas traders who were never approved and may not have been in compliance with U.S. laws ended up having market access.

Second Circuit Overturns Judge’s Decision to Block Citigroup’s $285M Settlement With the SEC

Published on: June 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Second Circuit appeals court said that District Judge Jed Rakoff abused his discretion when he rejected the $285 million mortgage settlement between the SEC and Citigroup (C). The regulator accused Citigroup of selling sections of Class V Funding III, a $1 billion mortgage-bond deal, without revealing that the bank was betting against $500 million of the assets.

Rakoff, a district court judge, said that he partially blocked the settlement because he didn’t agree with a Commission practice in which the party involved gets to resolve a case without denying or admitting to wrongdoing. Last year the SEC reversed its policy that automatically lets companies settle without making a wrongdoing admission. Now, the regulator is compelling admissions in cases that are especially egregious. Also, following Rakoff’s ruling, other judges followed his lead in a number of lawsuits.

This week, however, the appeals court said that the Commission should be granted wide deference when it is deciding whether or not a case should go to trial or settle. The three-judge panel said the deal between the SEC and Citigroup was in the interest of the public.

Bank Fraud Cases: Wells Fargo to Pay $62.5M Settlement Over Class Action Lawsuit & City of Los Angeles, CA Sues JPMorgan Over Discriminatory Lending Practices

Published on: May 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo Settles Securities Lending Case for $62.5M

Wells Fargo & Co. (WFC) will pay $62.5 million to settle a class action securities fraud case. A group of retirement funds claim that the bank committed fraud and breached its fiduciary duty in its securities lending program. Now, a district court judge must preliminarily approve the agreement.

Wells Fargo promoted its securities lending program to large institutional investors, including insurance companies, pension funds, and foundations. The bank would lend the clients’ securities to third-party brokerage firms. For lending the securities, the bank was given cash collateral. It then invested the funds, sharing returns with the clients. The program was marketed as a means for institutional investors to make additional funds to cover the cost of having Wells Fargo maintain their investment portfolios.

Wells Fargo Must Face Los Angeles’s Lawsuit Over Predatory Loans

Published on: May 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Otis Wright II says that a lawsuit by the city of Los Angeles, which seeks to hold Wells Fargo & Co. (WFC) liable for foreclosures that occurred when the U.S. housing market collapsed, may proceed. Although Wright did not rule on the merits of the city’s claims, he said that L.A.’s allegations that the bank used “predatory loans” to target minority lenders were legally sufficient at this point.

The California city has filed separate cases against Wells Fargo, Bank of America Corp. (BAC) and Citigroup Inc. (C) accusing the mortgage lenders of engaging in discriminatory practices going as far back as at least 2004. L.A. says that the banks placed minority borrowers in loans that were out of their budget, raising the number of foreclosures in the city’s neighborhoods.

According to the city, local homeowners have lost around $78.8 billion in home value because of foreclosures that occurred between 2008 and 2012. Property tax revenue that was lost because of this was reportedly $481 million. Now, Los Angeles wants to hold the banks liable for the increase in municipal services and the tax revenue that was lost due to the foreclosures.

Stockbroker Fraud: Morgan Stanley Sues Convicted Ex-Broker, Former-Wells Fargo Broker Pleads Guilty, And Ex-John Thomas Financial Broker Evades Customer Complaints

Published on: May 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Files Lawsuit Against Ex-Broker Convicted in Kickback Scam

Morgan Stanley (MS) is suing ex-broker Darin DeMizio for legal fees. DeMizio was convicted over his involvement in a kickback scheme. Now, the financial firm wants him to pay back legal expenses because it says that he purposely defrauded the broker-dealer and hid the fraud while working there.

DeMizio was convicted five years ago for his scheme to pay kickbacks of $1.7 million to his brother and dad. He was sentenced to 38 months behind bars and ordered to pay Morgan Stanley $1.2 million in restitution.

SEC Investigates Merrill Lynch & Charles Schwab Over Allegations of Failures that Allowed Mexican Drug Cartels to Launder Money

Published on: May 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is investigating whether Merrill Lynch (MER) and Charles Schwab Corp. (SCHW) did not recognize signs that that some of their customers might have been laundering money because they didn’t do enough to find out who these clients were. Some of the purported money laundering has been linked to drug cartels in Mexico.

Bank of America Corp. (BAC) now owns Merrill Lynch. The SEC says that the two broker-dealers accepted as clients individuals who gave out fake addresses and shell companies. For example, one Charles Schwab client, a Texas rancher, had been moving funds to a holding company that was actually a shell company. Also, some account holders with Schwab were linked to drug money in Mexico. Certain accounts contained millions of dollars.

Broker-dealers must set up, document, and keep up steps so that it can identify its customers and confirm their identifies. Failure to do any of these can result in stiff penalties, such as the $1 million E*Trade Financial Corp. was ordered to pay in 2008. The firm did not check to confirm the identities of over 65,000 secondary account holders. Because of this failure false reporting occurred.

Credit Suisse to Pay $2.6B, Pleads Guilty to DOJ Charges Over U.S. Tax Evasion

Published on: May 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse (C) will pay $2.6 billion to the federal government and financial regulators in New York after pleading guilty to charges that it illegally helped thousands of American clients avoid paying taxes to the Internal Revenue Service. The U.S. Department of Justice said that for decades through 2009 the Swiss bank ran an illegal cross-border banking business.

This is the first time in years that a financial institution has pleaded guilty to a crime. Among the accusations was that Credit Suisse knew and agreed to help thousands of Americans set up accounts and help them hide their income and assets. Attorney General Eric Holder claims that the bank even got rid of account records, hid transactions, and failed to perform even the most basic steps to make sure clients were in compliance with US tax laws.

The DOJ contends that even after the 2008 US crackdown on Swiss accounts that compelled UBS AG (UBS) and Credit Suisse to become stricter about what services they offer American customers, the latter kept getting in the way of investigators looking into tax evasion allegations. Some Credit Suisse managers even purportedly helped clients transfer their assets to other offshore banks so their assets could stay concealed. Key documents to the DOJ’s probe were either lost or destroyed. Eight ex-Credit Suisse employees have been criminally charged with aiding in the tax evasion.

Goldman Sachs Under Investigation Over Hiring Practices, High-Frequency Trading

Published on: May 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs (GS) Group Inc. said it is under scrutiny in probes related to high-frequency trading and whether its hiring practices comply US antibribery laws. This is the first time the firm has publicly disclosed both investigations. The information was made available via Goldman’s quarterly filing with the SEC.

In the bank hiring practices investigation, Credit Suisse Group Ag (CS), Morgan Stanley (MS), UBS AG (UBS), and Citigroup (C) are also under scrutiny. The Securities and Exchange Commission wants to know whether the banks or their staff hired the relatives of well-connected officials in Asia, which could be a violation of the antibribery laws-in particular, the Foreign Corrupt Practices Act, which prevents companies from giving foreign officials items of value in exchange for business. Although it isn’t illegal to hire government officials’ relatives in Asia, hires cannot just be made for the purpose of earning new business.

As for the high-speed trading probe, the US Justice Department, the SEC, New York Attorney General Eric Schneiderman, and the Federal Bureau of Investigation are assessing trades that engage in fast algorithmic trading. Schneiderman wants to know if firms involved in high-speed trading have secret deals with trading venues, such as dark pools and stock exchanges, that lets them trade before other investors.

Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales

Published on: May 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Smith Barney LLC (MS) will pay a $5 million fine for supervisory failures involving its advisors soliciting shares in 83 IPOs to retail investors. The Financial Industry Regulatory Authority says that the firm lacked the proper training and procedures to make sure that salespersons knew the difference between “conditional offers” and “indications of interest.”

By settling, Morgan Stanley is not denying or admitting to the supervisory failures securities charges. It is, however, consenting to the entry of findings by FINRA.

FINRA believes these issues are related to Morgan Stanley’s acquisition of Smith Barney from Citigroup (C) a couple of years ago. In addition to inheriting more high net worth clients, the SRO contends that Morgan Stanley ended up with financial advisers who might not have gotten the needed training.

Bank of America Ordered to Hold Off Giving Back Money To Shareholders After Incorrectly Reporting $4B in Capital

Published on: May 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Reserve says that for now Bank of America (BAC) has to suspend its plans to give money back to shareholders because it did not correctly report capital ratios on recent stress tests. The mistake was a result of an “incorrect adjustment” connected to bad debts that the bank took on during the Merrill Lynch acquisition several years ago. This blunder caused Bank of America to report $4 billion more capital on its books than what actually exists.

The bank got $60 billion in structured notes as part of the Merrill deal. Because it did not lower its capital to factor in the losses related to the notes, the amount of capital was erroneously boosted.

Before the error became known, the Fed granted permission for the bank to up its quarterly dividend for the first time since the economic crisis. It also said BofA could repurchase $4 billion of stock. Now, BofA will have to develop a new capital plan.