SEC Enforcement

SEC Warns Charles Schwab Corp. of Possible Civil Charges Over Two Bond Funds

Published on: October 15, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Charles Schwab Corp. has received a Wells notice from the Securities and Exchange Commission about possible civil charges related to the discount brokerage’s Schwab Total Bond Market Fund and Schwab YieldPlus Fund. Schwab has been the target of regulatory investigations over the two funds and is a defendant in a number of civil lawsuits.

SEC staff members plan on recommending civil charges against a number of Schwab affiliates over possible securities violations. The Wells notice is not a finding of wrongdoing or a formal allegation. It does, however, give Schwab an opportunity to respond before the SEC makes a decision on whether to move forward with an enforcement action. The discount brokerage says the possible charges are unwarranted.

In San Francisco, Schwab is defending itself against a class-action fraud lawsuit in federal district court. YieldPlus fund investors are accusing the brokerage firm of failing to fully disclose the risks connected with some securities in the Schwab funds.

Texas Securities Fraud: Investment Firm Employee Accused of Making $8.6 Million from Dell Insider Trading

Published on: September 29, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging trader Reza Saleh with Texas securities fraud. The agency is accusing the Perot Systems employee of buying call options contracts just two weeks before Dell announced it was acquiring the services company. The SEC says that as a result of insider trading, Saleh made $8.6 million in illegal profits.

Call options allow a buyer to purchase stock at a certain price on a specific day in the future. Right after Dell announced the tender offer on September 21, Reza sold his call options. By this time, Perot Systems’s stock price had gone up by about 65%.

Soon after, the Options Regulatory Surveillance Authority identified Saleh as a suspicious trader. He also allegedly told a Perot Systems director that he bought the options because he knew Dell was going to make the announcement.

Filed in federal court in Dallas, the SEC complaint alleges that Saleh bought 9,332 Perot Systems call options contracts between September 4 and 18, 2009. The call options contracts would expire in October 2009 and January 2010.

The SEC is accusing Saleh of violating the Securities Exchange Act of 1934’s anti-fraud provisions. The SEC wants to place an emergency freeze on Saleh’s assets. It also is seeking a preliminary injunction and a final judgment enjoining the trader from violating relevant provisions of federal securities laws in the future. The agency wants Saleh to pay financial penalties in addition to disgorgement of ill-gotten gains.

Dell announced it was purchasing Perot Systems for $3.9 billion or $30/share in cash. Dell’s tender offer is asking for outstanding Perot Class A common shares. The deal will likely close by the end of January 2010.

Related Web Resources:
SEC: Insider trading charges in Dell deal, CNN, September 24, 2009
SEC Charges Perot Company Employee in $8.6 Million Insider Trading Scheme, SEC.gov, September 23, 2009
Securities Exchange Act of 1934
Continue Reading ›

Regions Bank Settles SEC Charges Over Latin American Investment Fraud Scam

Published on: September 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Regions Bank has agreed to a $1 million fine to settle SEC allegations that it helped defraud some 14,000 investors. Most of the affected investors are based in Latin America.

According to the SEC, Regions Bank helped two unregistered broker-dealers, U.S. College Trust Corp. and U.S. Pension Trust Corp., commit securities fraud against Latin American investors.

Beginning October 2001, Regions Bank played the role of “trustee” to the broker-dealers’ investment plans. It continued to accept USPT clients until January 2008. The SEC contends that this affiliation with a US bank gave the securities fraud scheme an aura of “legitimacy” and became a big draw for Latin American investors.

The SEC says that by taking on the role of trustee, Regions Bank formed individual trust relationships with investors, processed client contributions, and bought mutual funds on their behalf.

Investor had the option of paying one lump sum or making yearly contributions. Investors were not notified until March 2006 that USPT deducted substantial chunks of investors’ contributions-up to 85% of initial contributions made by investors who took part in an annual plan and up to 18% of single contributions-and used the money to pay for commissions and other fees.

The SEC says that Regions Bank either knew or should have known about USPT’s deceptive sales practices. The Commission is accusing Regions Bank of dispatching representatives to Latin America to meet prospective investors and allowing USPT to use the bank’s name in marketing and promotional materials.

The $1 million penalty will be placed in a Fair Fund to compensate investment fraud victims. Regions bank has also agreed to a cease-and-desist order.

SEC charges Regions Bank for role in Latin American fraud scheme, Investment News, September 21, 2009
Read the SEC Complaint (PDF)
Continue Reading ›

SEC Warns Broker-Dealers to be Mindful of Their Recruiting Bonuses

Published on: September 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Head Mary Shapiro is warning broker-dealers to be careful of the recruiting tactics they employ-especially those involving recruiting bonuses. She cautioned that attractive compensation packages can compel registered representatives to watch out for their own self-interests over the interests of investors, resulting in acts of securities fraud. For example, Shapiro cautioned that a broker who knows that she or he will be given a larger compensation for meeting certain commission goals might make unsuitable investment recommendations, churn customer accounts, or take part in other commission-revenue focused actions that aren’t necessarily in the clients’ benefit.

Shapiro is also asking broker-dealer heads to watch over big up-front bonuses. Brokerage firms continue to offer large recruiting bonuses to top registered representatives at rival investment banks. Recruiting packages at wirehouses Merrill Lynch, UBS, Morgan Stanley, and Wells Fargo Advisers are between 200-250% of trailing 12-month production. In many instances, an investment adviser who satisfies production targets and brings in a certain percentage of assets is frequently rewarded.

Shapiro’s letter to the firm’s CEOs reminded them that it is the broker-dealer’s responsibility to “police such conflicts” and supervise broker-dealer activities, especially those related to sales practices. She reminded the broker-dealers that when a sales group expands, it is the investment bank’s responsibility to not just supervise advisers but to make sure the compliance structure maintains the adequate capacity. She noted that investor interests must always be of prime importance when investment products, such as securities, are sold.

Unfortunately, there are brokers who choose to place their own financial gain over the interests of their clients. This can result in securities fraud losses for investors. A few examples of broker misconduct include churning, misrepresentation, negligence, breach of fiduciary duty, and unauthorized trading.

Related Web Resources:
Read Shapiro’s Letter (PDF)

Schapiro Message to B-D CEOs: Watch Your Recruiting Tactics, Research Mag, September 1, 2009
Chairman Mary Schapiro, SEC Continue Reading ›

SEC Seeks Legislation Allowing It to Pursue Securities Regulators After Their Resignation

Published on: August 15, 2009 | by Shepherd Smith Edwards & Kantas, LLP

On July 29, the House voted by voice to approve a bill that clears away any confusion regarding the Security and Exchange Commission’s authority to go after individuals accused of violating federal securities laws while working for a self-regulatory organization (New York Stock Exchange, Financial Industry Regulatory Authority, etc.) even if they are now employed elsewhere.

Rep. Kevin McCarthy (R-Calif) had introduced H.R. 2623 last May. McCarthy says that the bill doesn’t broaden the SEC’s authority, but it does eliminate any questions about whether the agency can pursue “formerly associated persons” that are no long working for the SRO. McCarthy noted that there are “loopholes” in the 1934 Securities Act that let employees at certain organizations get out of being held accountable just by resigning.

The change also would make it obvious that the SEC can pursue former employees of registered clearing agencies, government securities broker-dealers, and the Municipal Securities Rulemaking Board.

In the past, Congress has attempted to grant the SEC this authority. Although the Securities Act of 2008 contained an identical provision that the House passed by voice vote on suspension, this did not make it through the Senate Banking Commission. That bill also suggested that the SEC be given the authority to issue monetary fines in cease-and-desist proceedings, as well as during litigation.

Rep. Barney Frank (D-Mass), who also chairs the House Financial Services Committee, made a motion to pass H.R. 2623 on suspension of the rules.

McCarthy says that Congress needs to codify the scope of the SEC’s authority of “formerly associated persons” of various entitites, including SRO’s, so that the courts can hear these cases rather than dismissing them because there is no statutory authority. McCarthy says it became clear that this kind of legislation was necessary in 2007 when the SEC accused Sal Sodano of failing to enforce compliance with the 1934 Securities Act. Sodano had been the CEO and chairman of the American Stock Exchange at the time the allegations were said to have taken place but by 2005 he had resigned from the Amex post. According to an administrative law judge, the law allowed the SEC to sanction former employers that had worked for different entities, but not an ex- SRO director or officer.

Related Web Resources:
House Passes Legislation Allowing SEC to Sanction Former SRO Officials, Financial Crisis Update, July 31, 2009
HR 2623, Washington Watch Continue Reading ›

Texas Securities Fraud: A Houston Attorney and a Texas A & M Professor Charged with Investment Fraud

Published on: June 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission and the Commodity Futures Trading Commission are accusing Houston attorney and accountant Daniel Petroski and Texas A & M Professor Robert Watson of using forged bank records to engage in investor fraud. On May 21, the US District Court for the Southern District of Texas froze the assets of the two men and of two firms associated with the alleged misconduct.

According to the two agencies, Petroski and Watson raised over $19 million from about 65 investors, while claiming they would use a foreign-currency trading software, “Alpha One,” that they said belonged to their company, Private FX Global One Ltd. Watson’s “deal clearing company, “36 Holdings,” was also to participate in the investing.

The SEC and the CFTC contend that the two men engaged in misrepresentation when they made it appear as if their foreign exchange trading business never had a losing month, achieved a yearly return of over 23%, and that their venture had millions of dollars in Swiss and US bank accounts. The two agencies are also accusing the two men of generating bogus records for investigators, including records indicating that 36 Holdings had an account with Deutsche Bank where Global One earned over $2 million this year by trading foreign currencies. In fact, 36 Holdings does not have a Deutsche Bank account.

In addition, the SEC’s complaint accuses the two men of putting, at maximum, 33% of their proceeds in a Swiss bank before transferring some $5 million to a Houston bank-even though they told investors that the amount of foreign currency and other assets was closer to 80%. The defendants are also accused of giving their own employees bogus Swiss bank statements and making false claims that 36 Holdings had nearly $70 million deposited there.

The SEC accuses the defendants of violating the Securities and Exchange Act of 1934’s Section 10(b), Rule 10b-5 thereunder, and the Securities and Exchange Commission Act of 1933’s Section 17(a). The CFTC and the SEC are seeking a preliminary injunction, final judgment from permanent enjoinment of future violations, disgorgement with interest, and fines.

Morgan Keegan, Charles Schwab and Others Fight as Wells Fargo Unit Settles Claims of Misrepresented Securities in Short Term Bond Funds

Published on: June 9, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Company, a Wells Fargo unit, has agreed to a $40 million settlement with federal and state regulators over allegations that it misrepresented securities in short-term bond funds. The settlement could be a sign that other fund providers, including Morgan Keegan, Charles Schwab Corp., and Fidelity Investments, may face similar lawsuits. Already bond providers are facing securities fraud lawsuits and arbitration claims from clients that experienced heavy losses from investing in debts that were either high risk or became illiquid.

The Massachusetts Securities Division and the Securities and Exchange Commission had accused Evergreen and one of its affiliates of inflating the value of its Ultra Short Opportunities Fund by up to 17%. The SEC says that this inflated value allowed the fund in 2007 and 2008 to be ranked high compared to other peer funds, when its true value should have placed it closer to the bottom of its class. At the time of the alleged violations, Evergreen was a Wachovia Corp. subsidiary.

With the housing crisis getting worse, Evergreen is accused of not using the information it had access to about mortgage-backed securities when engaging in the valuation process. Evergreen dealt with the fund by adjusting the prices on specific holdings, but only notified a select number of investors about the reasons for the re-pricings, as well as the possibility of adjustments in the future.

The investors that were given this information managed to leave the fund before their shares’ value went down even more. However, the other shareholders that did not receive the preferential information were left at a disadvantage. In June 2008, Evergreen closed the Ultra Short Fund, which, at the time, had $403 million in assets.

By agreeing to settle, Evergreen is not admitting to or disagreeing with the SEC’s findings. As part of the agreement, the Wells Fargo unit will pay $33 million to fund shareholders, $3 million in disgorgement of ill-gotten gains, a $4 million SEC penalty, and $1 million to Massachusetts.

Evergreen settles state, US charges for $40 mln, Reuters, June 8, 2009
Settlement in Mutual Fund Case, NY Times, June 8, 2009 Continue Reading ›

SEC Enforcement Action Holding Southwest Securities Broker Accountable for Market Timing is Affirmed by 5th Circuit

Published on: May 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Court of Appeals for the Fifth Circuit is affirming the Securities Exchange Commission’s enforcement action against Southwest Securities broker Scott Gann who is accused of engaging in market timing activities that violated certain funds’ restrictions. The 5th circuit’s decision affirms a lower court’s ruling in favor of the SEC.

In 2002, Scott Gann and George Fasciano, both employees of Southwest Securities Inc, designed a plan for Haidar Capital Management and Capital Advisor that would allow them to trade mutual funds by engaging in market timing. The two men agreed to share the commissions.

The court says the two men studied the fund companies’ rules and requirements regarding market timing and that everyone involved was aware that the trades would have to take place “under the radar” so block notices wouldn’t be sent to them. The two men then opened up 21 accounts for nine HCM affiliates-each one had the same investors.

Trading for HCM started on Feb 10, 2003. SWS was issued a block notice 15 days later. Fasciano and Gun then switched the identifier number that was being used so they could keep trading.

They made 2,500 trades over a seven-month period in 56 companies mutual funds. They were sent 69 block notices.Their trades had an aggregate value of $650 million. Gann made about $56,640.67.

The SEC filed its enforcement action against the two men in 2005 and contended that the trades violated Section 10(b). Without admitting to wrongdoing, Fasciano settled.

The district court found that Gann had made material misstatements with the intent to deceive and had violated Section 10(b) and Rule 10b-5. The court ordered Gann to disgorge his profits from the HCM trades and pay a penalty of $50,000. The court also further enjoined him from future violations. This was affirmed by the appeals court.

In the 5th Circuit Court, Judge Jacques Wiener Jr. said that Gann failed to make a factual showing to show that the district court clearly made a mistake when it ruled in favor of the SEC and found that Gann violated the 1934 Securities Exchange Act Section 10(b).

While the court notes that market timing is not against the law, there are a number of mutual fund companies that do not allow this type of activity. Brokers who engage in market timing will occasionally get “block notices” from funds to let them know that they’ve gone against the fund’s restrictions, as well as bar certain accounts controlled by the broker from future trades.

Outcome of SEC Actions Appear to Favor Larger Broker-Dealers than Smaller Ones, Says Harvard Law School Study

Published on: March 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission may be “too close” to larger investment firms that they give them preferential treatment in SEC Actions, says a Harvard Law School study. One “tentative” explanation cited by the study is that SEC officials look to the larger broker-dealers-especially those located in New York-for future employment opportunities. The study also noted that the SEC was more likely to order smaller broker-dealers (than larger firms) to court, rather than merely slapping the firm with an administrative proceedings.

The Harvard study took a look at patterns the SEC exhibited when it enforced actions against investment firms in 1998, 2005, 2006, and Jan – April in 2007. Findings included:

• When large investment firms and smaller firms faced the same SEC violations for similar levels of harm, there was a 75% smaller chance that a big broker-dealer would have to go to court than one of its smaller counterparts.
• There was a 44% chance that employees from large broker-dealers would have to go to court to fight an SEC action, compared to a 73% possibility for employees of smaller broker-dealers.
• When facing SEC administrative proceedings, bigger firms were less likely to be banned from the industry. 25% of small firms defendants in such actions received permanent industry bans, compared to just 5% of large firm defendants.
• There did not appear to be a justifiable reason for why there was a disparity between the outcomes of SEC actions involving larger broker-dealers and smaller ones.
• However, both large and small firms were slapped with equivalent fines.

The study did not look at SEC enforcement actions in 1999 and 1920 because of worries the findings might be affected by the burst of the “dot.com bubble,” as well as the outcomes of SEC actions from 2008 that may have been impacted by the financial crisis.

Merrill Lynch, Pierce, Fenner & Smith Inc To Settle SEC Charges of Pension Consulting Business-Related Violations for $1 Million

Published on: February 18, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch, Pierce, Fenner & Smith Inc has reached a $1 million settlement agreement with the Securities and Exchange Commission over charges that the broker-dealer misled its pension consulting clients by neglecting to disclose conflicts of interest. By agreeing to settle, Merrill Lynch is not denying or admitting wrongdoing. The investment firm will, however, cease and desist from committing future violations.

According to the SEC, Merrill Lynch recommended that clients pay hard dollar fees using directed brokerage. The firm’s investment advisers, however, failed to mention that choosing this option-which would direct trades to be executed through Merrill-could allow the company and its investment adviser representatives to receive substantially higher revenues. The SEC also accused Merrill Lynch of neglecting to reveal a similar conflict of interest when it recommended to clients that they utilize the firm’s transition management desk and of making misleading statements about the firm’s process for identifying new money managers.

SEC charges against Merrill Lynch include anti-fraud provision violations, failure to maintain specific records, and failure to supervise its investment advisers in the Ponte Vedra South office in Florida.

Also cited by the SEC for misleading pension consulting clients about the way Merrill identified new money managers is Jeffrey Swanson. The former Merrill adviser agreed to case and desist from violating the 1940 Investment Advisers Act in the future. By agreeing to the censure, however, Swanson is not admitting to or denying wrongdoing.

The SEC also censured former Merrill Lynch adviser Michael Callaway for breach of fiduciary duty when he made misrepresentations about the manager identification process and his compensation related to transition management services. The SEC says Callaway should have made sure that any conflicts of interest should have been revealed to clients. Both Callaway and Swanson were from the Florida office.

The SEC says that the outcome of this case should remind investment adviser representatives that they must disclose all conflicts of interest when offering advice to clients.