SEC Enforcement

SEC Orders Morgan Stanley to Pay $7.9 Million for Failing to Provide “Best Execution” on Client Trades

Published on: May 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley & Co. Inc., the world’s second largest securities firm, will pay $7.9 million for its failure to provide best execution to certain retail orders for over-the-counter securities, the Securities and Exchange Commission announced today. Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation.

“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” said Linda Chatman Thomsen, Director of the regulator’s Division of Enforcement. “Best execution is a fundamental duty of a broker- dealer,” Thomsen, added. “Morgan Stanley violated its duty” and committed fraud by setting-up its order-execution system “to receive amounts that should have gone to retail customers.”

The company began overcharging clients after embedding undisclosed fees on some trades when it adopted a new computer system to handle transactions in 2001, the SEC said. The lapses affected more than 1.2 million transactions valued at about $8 billion from 2001 through 2004. A Morgan Stanley trader stumbled onto the problem in December 2004 when unusually high trading in a company’s stock generated a $400,000 profit within a few minutes, the SEC said. The trader alerted his supervisor, and by that afternoon a technician pinpointed the programming “error”.

State Securities Registration Laws Will No Longer Apply to Nasdaq Capital Market Listed Securities

Published on: May 8, 2007 | by Shepherd Smith Edwards & Kantas, LLP

When state securities regulators led by Elliot Spitzer of New York exposed a shocking level of crime and fraud on Wall Street, corporations and securities firms stepped up their campaign to gut state securities laws and the powers of state regulators. These special interests had already convinced Congress to forbid class action claims for securities fraud under state laws.

Meanwhile, many are accusing the SEC, with its commissioners all appointed by the President, of pandering to those same special interests. Despite its purpose to protect investors, the Securities Exchange Commission (SEC) has taken numerous actions to reduce its own restrictions and has taken positions on numerous court cases which are contrary to the interests of investors.

In its latest action, the SEC announced May 3 that, beginning May 24, securities listed on the Nasdaq Capital Market will be exempt from state “blue sky” registration requirements.

Securities and Exchange Commission Charges Ex-Portfolio Manager With Failing To Disclose Personal Stock Transactions

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

Geoffrey Brod, a former Aeltus Investment Management LLC portfolio manager has been charged by the SEC with concealing personal stock trades held by mutual funds that he was overseeing. The SEC is also charging him with falsifying internal reports. According to the SEC, Brod’s wrongful activities are in violation of his company’s ethics, as well as the antifraud and reporting provisions of the 1940 Investment Company Act.

SEC rules mandate that Brod turn in quarterly and yearly reports of personal securities transactions to Aeltus, which mandates pre-clearance of all portfolio managers’ securities trades, prohibits short-term trades, allows no more than 30 securities trades in a quarter, and requires both a 60-day holding period and a yearly certification of code compliance.

Brod is said to have actively taken part in personal, short-term trading in public company stocks. He had access on a regular basis to mutual fund holdings and their transactions in securities that were traded publicly. His method of trading, says the commission, required a very short-term trading pattern, and his holding period lasted about two to seven days. He engaged in about 3,5000 personal trades.

Edward Jones Issues Settlement Checks To Customers as Ordered by SEC for Kickback Scheme

Published on: May 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Edward Jones is now sending checks and making electronic payments to its current and former customers as part of its settlement of revenue sharing claims. The Securities and Exchange Commission announced the distribution of $79 million from the “Fair Fund” (also known as the “Edward Jones & Co., L.P. Qualified Settlement Fund”) as compensation to victims of Edward Jones’ practices according to the settlement reached. These payments do not compensate Jones’ clients for any losses caused by any other unfair sales practices.

According to the SEC, Edward Jones failed to adequately disclose kickbacks the firm received from various mutual fund companies, known as the “Preferred Fund Families.” The Preferred Families mutual funds are American Funds; Federated Investors; Goldman Sachs Group; Hartford Mutual Funds; Lord Abbott Funds; Putnam Investments; and Van Kampen Investments. The SEC’s order is available on the SEC website.

Edward Jones’ kickback scheme impacted approximately 2.1 million of its customers who purchased shares of the Preferred Fund Families between January 1, 1999 and December 31, 2004. The firm told the public and its customers it was promoting the sale of the Preferred Families’ mutual funds because of the funds’ long-term investment objectives and performance. However, Edward Jones failed to disclose that it received tens of millions of dollars of undisclosed revenue sharing payments from the Preferred Families each year for selling their mutual funds.

Examining SEC Chairman Christopher Cox’s Leadership

Published on: April 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Christopher Cox brought a sense of calm to the Securities and Exchange Commission after he became chairman. Rather than the split, partisan votes that had become the standard under the previous chairman, Mr. Cox has appeared to look for the widest support possible. Under Mr. Cox, every vote made on a proposed rule has led to a 5-0 decision.

Now, however, critics say that they are frustrated with Cox’s approach. They say that because Mr. Cox is constantly working toward consensus, the SEC may be progressing too slowly on certain key issues and that investors and Wall Street have ended up having no guidance on these topics.

This debate regarding Mr. Cox touches the core of some big questions regarding the role of an SEC chairman. A large question to consider is whether Mr. Cox should aim for changes that are contentious, even though they put off interest groups and colleagues, or whether he should generate less decisions that are unanimous but lasting.

The 10 Leading SEC Enforcement Developments Of 2006 (Part II)

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

6. The Continuation of Market Timing Cases

Market timing cases involving the SEC affected both sides of the trading desks. Those in charge of approving or facilitating market timing trades and as persons directly involved in market timing trades were singled out by the SEC, and significant monetary penalties were sometimes involved.

A. Bear, Stearns & Co, Inc. and Bear, Stearns, Securities Corp.

The 10 Leading SEC Enforcement Developments Of 2006 (Part I)

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

1. Stop Options Backdating

More than 100 companies were investigated by the Department of Justice and the SEC because of an article published in the Wall Street Journal in March 2006. The newspapers had asked a finance professor to give it a list of companies that made stock option grants that led to large stock market gains. The Journal studied several of the companies on the list and found that several of the option grant patterns found could not have happened without backdating. The article resulted in one of the largest securities investigations ever. The DOJ and the SEC only filed a few backdating cases, including cases against Comverse Technology, Inc. and Brocade Communication Systems, Inc.

2. Corporate Civil Penalties Guidance

Registered Limited Liability Partnerships Interests Investment Contracts Are Within Federal Securities Laws’ Meaning, Says U.S. Court of Appeals for the 11th Circuit

Published on: April 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Interests involving registered limited liability partnerships (RLLPs) are contracts within the federal securities laws’ meaning, according to the U.S. Court of Appeals for the 11th Circuit. The court reversed a ruling made against the Securities and Exchange Commission (SEC) for its enforcement action against two promoters and their company, Merchant Capital LLC.

According to the appeals court, the SEC filed an enforcement action against Merchant Capital LLC, Steven Wyer, and Kurt Beasley. The commission had alleged violations of the federal securities laws’ registration and antifraud provisions. Beasley and Wyre had established Merchant to take part in buying, reselling, and collecting charged-off consumer debt from financial institutions.

Merchant started raising money in 2001 by soliciting individuals to become partners in Colorado RLLPs that were eventually sold as freestanding entities. Although Merchant had organized 28 RLLPs with 485 partners, it did not reveal that the different partnerships existed. Its RLLPs ended up with more than $26 million in total capitalization.

SEC Charges Two Former In-House Enron Attorneys With Violating Securities Laws

Published on: March 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission filed a complaint on Wednesday against Rex Rogers, the former associate general counsel at Enron, and Jordan Mintz, the former general counsel for Enron’s finance group, with civil violations of securities laws because of omitting or fudging regulatory filing disclosures.

The SEC alleges that Mintz engaged in fraud by arranging the murky disclosure of Enron’s repurchasing of a power plant in Brazil from an LJM partnership that was run by former Enron finance chief Andrew Fastow. The SEC claims that Mintz knew that LJM had bought the plant with the understanding that it would sell it back to Enron and that this wiped out the sale’s legitimacy.

Mintz is also accused of delaying the closure of the resale for a number of months until after Fastow had sold his interest in LJM Partnerships so that Enron wouldn’t have to reveal that the deal was done with an Enron officer. Rogers is also being charged with not disclosing all the details of this deal.

Goldman Sachs Affiliate Agrees To Pay $2 Million in Fines and Penalties Over Short-Sale Scheme Charges by NYSER and the SEC

Published on: March 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

NYSE Regulation Inc. and the Securities and Exchange Commission say that a clearing affiliate and prime broker of Goldman Sachs Group will pay $2 million in fines and penalties over its alleged role in an illegal short-sale trading scheme that was executed by Goldman Sachs customers through their accounts with the brokerage. Goldman Sachs Execution and Clearing, LP has not admitted to or denied any wrongdoing by agreeing to the censure. They are, however, agreeing to cease and desist from future violations.

The SEC charges that firm customers unlawfully sold securities short right before public offerings of the companies’ securities. It is accusing Goldman of violating the rules that mandate that brokers must mark sales short or long, while restricting stock loans on long sales. Both NYSER and SEC say that if Goldman had proper procedures in place, it would have discovered via its own records this illegal activity by its customers. Two Goldman customers have already settled SEC charges connected to their alleged participation in these activities.

SEC Chairman Christopher Cox told the U.S. Chamber of Commerce on the day of this announcement that the commission and its senior staff members are very concerned about abusive naked short-selling. He admitted that Regulation SHO had not properly addressed these issues and that the commission will now eliminate the regulation’s grandfather provision. Cox said that naked short-selling was connected to settlement and clearance systems and that the SEC would use technology to further deal with this issue. He said the action against Goldman was important.