SEC Enforcement

Number of Federal Securities Fraud Cases Prosecuted Drop Significantly

Published on: January 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A recent New York Times article reports that according to new data, federal officials are prosecuting far fewer cases involving fraudulent stock scams than they did in 2000 before the Bush Administration came into office. According to financial and legal experts, less strict enforcement polices, Securities and Exchange Commission staff cutbacks, and a greater focus on fighting terrorism have led to the federal government’s laxer policing efforts when it comes to pursuing securities fraud cases.

The new information, based on Justice Department information and put together by a Syracuse University research group, says that there haven’t been so few securities fraud prosecutions in a year since 1991. Also:

• During the first 11 months of the 2008 fiscal year, there were 133 securities fraud prosecutions-compare this to 2002 when there were 513 prosecutions, spurred by the WorldCom and Enron scandals, and 2000 when there were 437 prosecutions for this same time period.

SEC Failed in Its Oversight of Bear Stearns, Says Inspector General

Published on: October 31, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Office of the Inspector General says the agency failed to fulfill its mission in the oversight of Bear Stearns. Inspector General David Kotz says not only did the SEC neglect to order the company to cut back on risk taking, but it missed possible “red flags” leading up to JP Moran Chase & Co.’s purchase of the faltering investment bank.

Kotz’s report says that despite identifying the risks that would lead to the sub-prime mortgage crisis, the SEC staff did not exert its influence to mandate that Bear Stearns add a potential market collapse scenario to its list of possible risks.

Kotz is accusing the SEC of not making any efforts to make Bear Stearns raise money or lower its debt. He is also criticizing the agency for allowing internal audits, rather than external audits, at Bear Stearns.

Also in his report, Inspector General Cox accuses the agency of not doing anything to find the shortcomings in Bear Stearn’s risk management of mortgages and failing to avail of opportunities to prod management at Bear Stearns to deal with problems. He says the SEC should have taken more time to evaluate Bear Stearn’s 2006 annual report and get additional information from the investment firm, which would have required the company to reveal more information about its mortgage portfolio to investors.

The SEC’s division of trading and markets disagrees with Kotz’s findings and claims that that the report began with incorrect assumptions and arrived at unrealistic and inaccurate conclusions that were not practical. SEC Chairman Christopher Cox says that, if anything, the SEC’s failures occurred because the agency had not been given enough authority to oversee the investment banks and that Kotz’s report affirms this.

The sale of Bear Stearns and Merrill Lynch & Co, Lehman Brothers Holding Company’s bankruptcy, and the filings by Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies means that the SEC is no longer overseeing any large investment firms. While the agency will continue reviewing broker-dealer businesses, it is terminating its oversight program of independent investment banks’ parent companies.

Related Web Resources:

SEC Watchdog Faults Agency in a Bear Case, Wall Street Journal, October 11, 2008
SEC Office of Inspector General

Bear Stearns, A Division of JP Morgan Continue Reading ›

Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages

Published on: October 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the US Securities and Exchange Commission filed a civil lawsuit against five World Group Securities brokers for allegedly pushing investors into refinancing their homes with subprime mortgages. The SEC is accusing the mortgage brokers of taking advantage of the clients’ lack of education, modest financial means, and poor fluency in English to fraudulently sell them unsuitable securities-primarily variable universal life policies.

Because most of the investors who were persuaded to purchase the securities lacked the funds or income to do so, the defendants allegedly persuaded them to come up with the money through the refinancing of their fixed-rate mortgages into subprime adjustable-rate negative amortization mortgages. The brokers received compensation from the securities sale and the mortgage refinancings.

The defendants in the case are Guillermo Haro, Jesus Gutierrez Kederio Ainsworth, Angel Romo, and Gabriel Paredes. The Commission says that the brokers violated the antifraud provisions of the securities laws.

The SEC says the men misrepresented the returns the investors would get back from the securities, the nature and liquidity of the variable universal life policies, and the new mortgages’ terms, as well as failed to reveal key facts to the investors. The Commision’s complaint also accuses the brokers of falsifying customer account forms and placing inaccurate securities sales information on order tickets.

The SEC calls the men’s actions and their willingness to allow their clients to risk the potential loss of their homes “egregious” conduct that will not be tolerated. The Commission is seeking disgorgement, injunctions, and financial fines against the defendants.

If you are a victim of investor fraud, it is important that you find out about the legal remedies available to you.

Commission Charges Five Registered Representatives with Fraudulent Sales of Unsuitable Securities Funded Through Subprime Mortgage Refinancings, SEC, October 3, 2008
World Group Securities brokers charged with fraud, Bizjournals.com, October 13, 2008

Related Web Resource:

Subprime Mortgage, Investopedia Continue Reading ›

2004 SEC Vote that Changed Net Capital Rule May Have Played a Role in Current FInancial Crisis

Published on: October 6, 2008 | by Shepherd Smith Edwards & Kantas, LLP

A recent New York Times article about the current US financial crisis refers to an April 28, 2004 meeting involving members of the Securities and Exchange Commission.

During the meeting, the SEC members considered an urgent request made by large investment banks for an exemption from an old regulation limiting the amount of debt that their brokerage units could take on. The exemption would release millions of dollars that were in reserve as a cushion against the brokerage units’ investment losses. The released funds could then be used by a parent company to invest in credit derivatives, mortgage-backed securities, and other instruments.

Although one commissioner, Harvey J. Goldschmid, had questions the consequences of such an exemption, he was reassured that only large firms with assets over $5 billion would be able to avail of the exemption. Market regulation head Annette L. Nazareth, who would later be appointed and serve as an SEC commissioner until January 2008, told the commission that the new rules would allow the commission to forbid companies from engaging in high risk activities. Another SEC commissioner, Roel C. Campos, supported the exemption, albeit with “fingers crossed.”

Following a 55 minute discussion that was not attended by many people, a vote was called. The unanimous decision changed the net capital rule-designed to be a buffer during tough financial times. In loosening these rules, the agency also decided to depend on investment companies’ computer models to determine an investment’s risk-level. This essentially left the task of monitoring investment risks to the banks themselves.

One man-Indiana software consultant Leonard D. Bole-loudly disagreed with this approach, noting that the firms’ computer software would not be able to predict certain kinds of market turmoil. His letter to the SEC, sent in January 2004, never received a response.

Once the firms availed of the rule change, the ratio of borrowing compared to their overall assets increasing dramatically. While examiners were aware of potential problems related to risky investments and a heavier dependence on debt, they virtually ignored the warning signs while assuming that the firms had the discipline to regulate themselves and not borrow too much.

The SEC, which was now finally able to monitor the large investment banks’ riskier investments, never fully availed of this advantage. Seven people were given the task of monitoring these companies, yet their department currently does not have a director. And not one inspection has been completed since SEC Chairman Christopher Cox reorganized the department some 18 months ago.

The commission formerly ended its 2004 program last month, acknowledging its failure to anticipate problems that have resulted with Bear Stearns and the four other large investment banks. Cox says it is now obvious that “voluntary regulation does not work.” Critics of the SEC, however, say the commission has fallen short with its enforcement efforts in recent years.

If you have lost money during the financial crisis because of broker-dealer misconduct or mismanagement, there are legal remedies available to you.

Related Web Resources:

Agency’s ’04 Rule Let Banks Pile Up New Debt, New York Times, October 2, 2008
SEC
Continue Reading ›

SEC Issues “ComplianceAlert Letter” Citing Common Weaknesses and Deficiencies of Registered Firms

Published on: July 29, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued a staff letter reporting on the “common weaknesses and deficiencies” shared by SEC-registered companies. The findings were based on examinations given to the firms.

The “ComplianceAlert Letter” is intended to provide key information, encourage compliance officer to address these issues, and foster “robust compliance” within the industry. The letter, the second one sent in as many years by the SEC, is sectioned into distinct areas focusing on broker-dealers, investment advisers/mutual funds, and transfer agents.

Among the deficiencies:

• Failure to comply with procedures and polices
• Questionable personal trading practices
• Proxy service provider issues • Proxy voting • Valuation and liquidity issues • “Free lunch” seminars
Examiners recently finished a review of a number of big broker-dealers to evaluate their “valuation and collateral management practices” and how these impact subprime mortgage-related products. The SEC examiners noted that it had become increasingly difficult for firms to confirm inventory valuations because of insufficient market liquidity.

Issues of concern included:

• Inadequate staff and supervisory procedures • Insufficient documentation standards
• Pricing inconsistencies
• Lack of margin call processes
The agency also expressed concern that transfer agents may be engaged in a conflict of interest because they receive a partial search fee related to the search process for “lost” security holders and using third-party search companies.

Related Web Resources:

Read the SEC ComplianceAlert, July 2008
SEC Compliance Alert Warns Investment Advisers on Ethics, Hedgeco.net Continue Reading ›

SEC Director Says Deploying Enforcement Resources Continues to Be A Challenge

Published on: May 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

At the 28th Annual Ray Garrett Jr. Corporate and Securities Law Institute, Securities and Exchange Commission’s Chicago Regional Office Director Merri Jo Gillette told lawyers that the challenges of maintaining and deploying enforcement resources continues for the SEC.

Gillette says that the fiscal challenges brought about by the flailing US economy and the Iraq war that have affected other federal agencies are also impacting the SEC. Because of this, the SEC’s enforcement group’s 1,000 staff members are choosing to focus on the most urgent matters while maintaining an effective presence in “as many areas as we can.”

The SEC Enforcement Official said the division had developed a number of working groups, each one focusing on one securities enforcement issue. Working groups currently are concentrating on the issues of municipal securities, insider trading and hedge fund misconduct, sub-prime lending-related fraud, and options backdating.

vFinance Investment Inc. is Slapped with SEC Charges for Failing to Retain E-Records

Published on: January 11, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commisison is charging vFinance Investment Inc., its President Richard Campanella, and former New Jersey Branch Manager Nicholas Thompson for failing to keep records and show them to Commission staff. The SEC’s need for the e-records stemmed from possible securities fraud involving a company that vFinance is the market maker for.

The Securities and Exchange Commission is accusing Thompson of erasing documents, e-mails, and instant messages from his computer’s hard drive even though he knew that the records had been requested by the commission. By law and according to vFinance’s policies, e-mails and instant messaging communications with clients must be preserved.

The SEC says that vFinance Investment President Campanella should have made sure that the documents were being preserved. He was reportedly “on notice” that vFinance was not keeping Thompson’s business records.

SEC Enforcement Director Highlights Agency’s Efforts To Eliminate Fraud Targeting Senior Investors

Published on: November 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that it has brought about over 45 enforcement actions involving scams targeting senior investors in the past two years. At the ALI-ABA Life Insurance Company Products Conference earlier this month, SEC Enforcement Director Linda Thomsen talked about the agency’s efforts to fight fraud against the elderly. She expressed concern over the fact that there are so many investment schemes out there focused on defrauding the elderly.

Thomsen said that the SEC has targeted a number of cases involving supervisory deficiencies. In one case, a Georgia broker convinced the Fulton County Sheriff’s Office that it was investing with a MetLife affiliate, when, in fact, the affiliate was actually affiliated to the broker.

Thomsen says MetLife knew their broker had compliance issues yet failed to supervise him properly and let him work in a “detached location.” The broker also convinced the sheriff’s office that an investment was permissible when it was not.

MetLife Securities Broker Charged with Stealing from 9/11 Victim’s Widow

Published on: October 15, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and U.S. Attorney for the Eastern District of New York have filed cases accusing a former MetLife employee of what is perhaps a new low in securities fraud: Misappropriation of funds from the widow of a victim of the September 11 terrorist attack on the World Trade Center.

The SEC said that defendant Kevin James Dunn Jr., then an employee of MetLife Securities Inc., was friends with the widow and convinced her to invest her terror-attack compensation funds with him and MetLife. The SEC said Dunn “then proceeded to betray the customer’s trust” by engaging in a “series of material misrepresentations” about the purchase and sale of securities in her account. That and other fraudulent actions were “aimed at swindling [the client] out of a substantial portion” of her 9/11 widow’s compensation.

Dunn allegedly misappropriated $248,000 from the client by creating a joint account in both their names, forging her signature on transaction documents, and “telling her outrageous lies” concerning the status of the account. He also deceived her into providing him with blank checks which he used to deposit funds into his own bank account.

Oppenheimer, Morgan Stanley, Nomura Securities, and A.G. Edwards Traders Face SEC Charges of Stealing Stock Loan Kickbacks Worth $12 Million Plus

Published on: October 12, 2007 | by Shepherd Smith Edwards & Kantas, LLP

38 stock loan traders from A.G. Edwards, Morgan Stanley, Oppenheimer, and Nomura Securities are accused of stealing over $12 Million in stock loan kickbacks from their Wall Street firms. The Securities and Exchange Commission has charged the employees with the more than $12 million theft.

The SEC says that from 1998-2006, the traders worked with fake stock loan finders to skim profits from their employers through finder fees as well as cash kickbacks from finders. The stock loan traders conducted actual, legal stock loans but logged that the transactions involved finders so there would be finder’s fees.

The finders were usually friends or relatives of the traders who were in charge of illegitimate “shell companies” that were not even a part of the stock loan business. The “finder” would then pay traders with stock loan kickbacks. The more sophisticated scams involved traders using their kickbacks to pay the other traders who had pushed through the loan transactions.