SEC Enforcement

Stockbrokers and Their Firms: The Story of Bad Apples from Bad Orchards

Published on: June 24, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As a former Vice President and registered representative at several major brokerage firms for 20 years, I witnessed Wall Street in action. My assessment of Wall Street is that the majority of the 600,000+ registered representatives at over 5,000 brokerage firms are fairly honest people who seek the best interest of their clients. Unfortunately, there are some “bad apples” in that barrel – brokers who seek to line their own pockets with little regard for their clients.

Yet, it is not so much the apples but the “orchard” that is most troubling today. When I began my investment career in 1970, those running investment firms sought to take care of their clients and maintain their firm’s image. Over the following 20 years, I witnessed their profit motive increasingly outstrip those goals.

Today, it is clear that most financial firms pay little more than lip-service to their clients’ welfare. In the past decade, those who run these firms have discovered an important fact: Crime pays on Wall Street! The best example is the widespread research scandal which led to massive investigations, fines and lawsuits.

Defendants Ordered to Pay $14 Millions Over Alleged Prime Bank Scheme

Published on: June 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A U.S. District Court in Indiana entered a permanent injunction against several defendants charged by the SEC over their alleged involvement in a $32 million prime bank scheme. They were also ordered to pay $14 million in disgorgement, plus other sanctions

The SEC issued a release saying these defendants, including First National Equity LLC, P.K. Trust & Holding Inc., Worldwide T&P Inc. and several individuals, had raised approximately $32 million using while using misrepresenting and omissions to sell interests in a purported system to trade of various financial instruments, including notes.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

Fees on 12 B-1 Mutual Funds (or “B Shares”) Under Renewed SEC Scrutiny

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

“B Share”, or “back-end load”, mutual fund issues are being reconsidered by The Securities and Exchange Commission. The “B share” nick-name is derived from Rule 12 b-1 of the Investment Company Act of 1949, amended a quarter century ago to allow for the creation of such shares.

To combat a huge growth in “no load” mutual funds in the 1980’s, commission based investment firms lobbied for the creation of a product to compete. In response, the U. S. Congress agreed to amend the Investment Company Act to provide for a new class of mutual funds. On such funds, mutual fund companies can, instead of charging the investor an up-front commission, pay commissions to investment firms and their brokers right away, then charge the investor fees over time to recoup those commissions.

Since that time regulators have been besieged with complaints regarding B Shares. Deception, omission and out-and-out misrepresentations have often been made to lure investors into believing such funds are “no load”. Most observers acknowledge the potential for such abuse, yet little has been done to address the issue.

Barclays Bank and its Former Trader to Pay Over $11 Million To Settle SEC Insider Trading Claims

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Barclays Bank PLC and a former proprietary trader for Barclays’ U.S. Distressed Debt Desk agreed to pay a total of $11.69 million to settle Securities and Exchange Commission charges they traded on inside information received while on the creditors committees for six bankrupt companies. Neither admitted or denied the SEC’s claims.

The SEC filed an action in a U.S. District Court in New York claiming the bank and its former agent illegally traded millions of dollars of bond securities while aware of material nonpublic information received through six bankruptcy creditors committees. The six bankrupt debtors were Galey & Lord Inc., Pueblo Xtra International Inc., Desa International Inc., Archibald Candy Corp., Conseco Inc., and United Airlines.

The SEC charged that, for example, the defendants made 82 illegal trades in notes and other securities of United Airlines. In some instances “big boy letters” were issued, but neither Barclays nor its trader ever revealed the inside information to the counterparties, according to the SEC. (A “big boy letter” is an agreement in which the buyer of securities agrees not to sue the seller while acknowledging the seller may possess confidential information the buyer does not have.)

Order Banning Former Head of Bancshareholders of America from the Securities Industry Affirmed by the SEC

Published on: June 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The order by an administrative law judge barring Bradley T. Smith, the former president of Bancshareholders of America Inc., from the investment adviser and broker-dealer industries has been affirmed by the SEC.

Since 2005, Smith has been under a federal court injunction related to private security offerings made by five of his companies. The injunction was imposed by the U.S. District Court for the Southern District of Ohio in connection to a case where the SEC has accused Smith of making false representations to investors regarding his use of offering proceeds to pay for personal and business expenses.

The court had also fined him $120,000 and held Smith severally and jointly liable with Scioto National Bank and Continental Midwest Financial Incorporated-there are aggregate disgorgement and prejudgment interests of more than $2 million. The ALJ judge then barred Smith from the industries in 2006.

SEC Says Credit Suisse First Boston Broker’s Tips on TXU Used by Pakistani Banker

Published on: May 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says it is requesting that the name of Pakistani banker Ajaz Rahim be added to the lawsuit charging the trading in of call options for TXU Corp that were based on insider information regarding an investment group’s leveraged buyout of the entity. The commission filed its third amended complaint in the U.S. District Court for the Northern District of Illinois.

The SEC is accusing Rahim of accepting tips offered by CSFP banker Hafiz Naseem, who is said to have misappropriated information from Credit Suisse, LLC, which advised TXU regarding the buyout.

Naseem was charged in connection to his alleged involvement in the controversy in the SEC’s second amended complaint. The SEC had issued allegations of insider trading just before the TXU buyout against “Certain Unknown Purchasers of TXU Call Options.

SIPC Insurance of Brokerage Accounts to be Disclosed to Investors But Not Explained

Published on: May 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

For decades investors have been told their accounts were protected by the Securities Investor Protection Corporation (SIPC) without being told what was covered by this insurance. Few realize this protection only provided that whatever securities and cash are in an account when a firm goes out of business would be returned to the investor. (Furthermore, such claims are difficult to file and often take years to process.)

Thus, if investors are defrauded into purchasing investments, if their accounts are churned for commissions or if other wrongdoing occurs in their accounts, they are NOT protected by this Federal insurance. Even claims for unauthorized transactions, including the sale of viable securities in order to purchase worthless securities from the firm or its officers are not always refunded. In short: Fraud is not covered by SIPC!

After years of complaints, efforts by attorneys representing investors and pressure by some consumer-friendly legislators, the National Association of Securities Dealers, Inc. (NASD) and the Securities Exchange Commission (SEC) were finally persuaded to act. However, rather than force brokerage firms to disclose the insurance coverage (or lack of it) the NASD and SEC passed a much less effective requirement.

Penthouse International Inc., a Former Director, and a Former Shareholder Agree to Settle SEC Charges of Alleged Involvement in a Revenue Recognition Scheme

Published on: May 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Penthouse International Inc., Charles Samel-a former Penthouse director and executive vice president-and former shareholder Jason Galanis have agreed to settle SEC allegations that they were involved in a revenue recognition scheme.

The SEC says the two men took part in accounting and financial reporting violations while at Penthouse in early 2003. Penthouse then allegedly improperly included in its financial statements revenue of $1 million. It had gotten the money as an up-front payment related to a five-year Web site management agreement. Including the amount on its statements, says the SEC, had increased the company’s reported revenue and changed a $167,000 quarterly net loss to an $828,000 profit.

The commission also cited other ways in which Penthouse’s Form 10-Q was materially misleading. The SEC says that the electronic signature of Penthouse’s principal executive and financial officer was included in the statements to meet Sarbanes-Oxley certification requirements for the publishing company’s 2003 quarterly report. Apparently, the signature made it seem that the officer, Robert Guccione, had looked at and signed the document when he actually had not, says the SEC. The commission also says that Penthouse’s outside counsel and auditors did not review the filing and that this lack of review was not revealed in the filing.

Citigroup Will Pay $200,000 in SEC Sanctions Connected to LMWW Auction Market Misconduct

Published on: May 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Last week, Citigroup Global Markets Inc. said it would pay a $200,000 fine to settle charges by the Securities and Exchange Commission. The charges are connected to Leg Mason Wood Walker Inc’s allegedly improper interference with auction rate securities. Citigroup is LMWW’s merger successor.

According to the SEC, the penalty amount was determined based on LMWW’s willingness to cooperate, the “relatively small share of the auction rate securities markets,” and LMWW’s decision to report the allegedly illegal practices at a later time than did other broker-dealers from an earlier settlement.

During that related case, 15 broker-dealers-Citigroup included-said they would pay penalties of over $13 million related to charges that they participated in violative practices affecting the $200 billion auction rate securities market.

When Asked the Fate of $134 million of Investors’ Funds Ex-professor Claims “Amnesia.”

Published on: May 14, 2007 | by Shepherd Smith Edwards & Kantas, LLP

After $134 million was found missing from the funds he managed, a flamboyant former professor is now claiming amnesia after being charged with lying to federal investigators. The U.S. Attorney’s office in Charleston, South Carolina, said Al Parish, 49, made false statements and provided false documents to the Securities and Exchange Commission. The former Charleston Southern University professor then surrendered to FBI agents.

Last week, the SEC reported that Parish had been charged with civil fraud, saying he provided false statements to over 300 investors indicating that the five funds he managed were trading profitably. The SEC said that after it tried to contact Parish, “he checked into a local hospital claiming to have amnesia.”

While his attorney said Parish had remained in the area since the civil case began and would not flee, prosecutors argued that Parish is a flight risk because of the large amount of missing funds involved in the case and should therefore be held without bail. The judge agreed ordering Parish to be held without bail. If convicted, Parish faces up to five years in prison and a $250,000 fine.