Securities and Exchange Commission

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

Published on: December 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.

Related Web Resources:

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore “Red Flags” Indicating Massive Fraud

Published on: December 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Inspector General H. David Kotz says that his office is looking into a complaint that a regional official told examiners to not go after “red flags” that were found in an exam of an investment adviser where a “massive fraud” was discovered. The official in question reportedly played a significant part in an earlier exam of the investment firm, and although the securities fraud was going on then, it was not uncovered at the time.

The anonymous complaint also claims that the regional office had a hostile work environment because management failed to discipline the official even after an earlier OIG investigation found that the person had watched pornography on an SEC computer. In his semiannual report to Congress, Kotz says that the OIG is almost done with its probe and will present its findings.

The OIG also determined that Bank of America Inc.’s Troubled Asset Relief Program fund’s status played a role in the “favorable” $33 million settlement that SEC staffers had initially recommended to resolve charges that the investment bank issued misleading proxy disclosures related to its Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff, however, refused to approve that settlement, and Bank of America eventually settled the case for $150 million.

Kotz says that the OIG has probed into allegations from an ex-Enforcement attorney that the division was negligent in how it handled an insider trading probe. A report of its findings will be issued during the next semiannual reporting period.

Other pending OIG investigations involve:
• Allegations that attorneys at a regional office did not properly investigate a law firm for alleged obstruction of justice related to an SEC case. Improper preferential treatment may have been a factor.
• Allegations that an SEC official violated ethics rules while providing testimony to a congressional committee.
• Allegations that a staff member acted in an abusive and intimidating manner toward contract staff.
• Complaints that SEC staff leaked information about an investigation of an examination to the media.
• Allegations that at least one contractor worked at the SEC before a background probe had been completed.

Related Web Resources:

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement, Stockbroker Fraud Blog, August 6, 2009

Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

Published on: December 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues,” such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge’s ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps

Published on: November 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Commission has agreed to propose an antifraud rule that deals with the issue of security-based swaps-related fraud, manipulation, and deception. The proposed Rule 9j-1 would bar fraud and manipulation in the offer, sale, and purchase of the swaps. Unlike regular securities transactions, securities-based swaps involve ongoing payments and deliveries between when they are bought and sold. The issues of payments, deliveries, and other rights and obligations are also tackled.

SEC Chairman Mary Schapiro says that the proposed rule would be an important way to make sure that the swap market is run with integrity while allowing the Commission the chance to target potential fraud or other misconduct through enforcement. The relevant change with this proposed rule from current antifraud provisions Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Act is that the proposed rule is applicable to ongoing rights and activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has given oversight of security-based swaps to the SEC, while the Commodity Futures Trading Commission is charged with overseeing non-security-based swaps. The CFTC had already proposed its anti-manipulation rule amendments dealing with manipulative and fraudulent conduct of swaps under its jurisdiction.

The SEC has also agreed to propose rules to effect a whistleblower bounty program.

Related Web Resources:

Securities and Exchange Commission

SEC Adopts Direct Access Rule Prohibiting “Naked” Access to ATSs or Exchanges

Published on: November 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Commission has adopted a rule that prohibits brokers from having “naked” access to alternative trading systems (ATS) or exchanges while requiring brokers with market access to put into place supervisory procedures and risk management controls to prevent market errors and other problems. Under the 1934 Securities Exchange Act’s new Rule 15c3-5, both broker-dealers that belong to an ATS or an exchange and ATS broker-dealer operators that allow direct trading by persons who aren’t dealers or brokers must put into place certain supervisory procedures and controls to effectively get rid of “naked” access arrangements (also known as “unfiltered” access arrangement) that have allowed customers to bypass broker-dealers and their risk management controls completely while giving them direct electronic access to an ATS or an exchange.

Also per the new rule, new risk management controls must be put into place to stop orders that exceed capital thresholds or pre-set credit, do not comply with regulatory requirements, or appear erroneous in another way. Brokers-dealers also must implement certain controls before the orders are sent to ATSs or exchanges, set up, document, and maintain procedures to regularly evaluate the risk management controls, and tackle any problems as soon as possible.

The SEC believes that to put into place these new systems will initially cost broker-dealers some $100 million. Maintenance of the systems is expected to cost about $100 million a year.

Related Web Resources:
SEC Adopts New Rule Preventing Unfiltered Market Access, SEC.gov, November 3, 2010

SEC rule to clamp down on ‘naked access,’ Financial Times, November 4, 2010

Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know

Published on: November 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is seeking comments on whether amendments should be made to federal securities laws so that private litigants can file transnational securities fraud lawsuits. Comments are welcomed until February 18, 2011. The SEC says to refer to File No. 4-617.

In its request, the SEC points to the US Supreme Court’s ruling in Morrison v. National Australia Bank. The decision placed significant limits on Section 10(b) antifraud proscriptions’s extraterritorial reach. That said, Congress, through Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929Y, gave back to the government its ability to file transnational securities fraud charges. It is under the new financial reform law that Congress has ordered the SEC to determine whether a private remedy should apply to just institutional investors or all private actors and/or others.

Included in what the study will analyze are how this right of action could impact international comity, the economic benefits and costs of extending such a private right of action, and whether there should be a narrow extraterritorial standard. The SEC also wants to know if it makes a difference whether:

• The security was issued by a non-US company or a US firm.
• A firm’s securities are traded only outside the country.
• The security was sold or bought on a foreign stock exchange or a non-exchange trading platform or another alternating trading system based abroad.

Related Web Resources:
Morrison v. National Australia Bank (PDF)

US Securities and Exchange Commission

Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC (PDF)

SEC Commissioner Luis Aguilar Encourages Agency Not to Refrain From Exercising Enforcement Powers from Dodd-Frank to Protect Investors

Published on: October 25, 2010 | by Shepherd Smith Edwards & Kantas, LLP

SEC Commissioner says the Securities and Exchange Commission should go back to employing a “muscular approach” and use its new enforcement powers bestowed under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform legislation gives the SEC more authority and enforcement tools in the areas of extraterritorial reach, subpoenas, aiding and abetting liability, and whistleblowing. The SEC also now has oversight over hedge and private equity funds and over-the-counter derivatives.

Aguilar spoke on October 15 at the University of California at Berkeley’s Center for Law, Business and the Economy. He says that his views are his own.

Aguilar says that Americans must feel as if the SEC will use whatever tools and powers at its disposal to protect investors from. He notes that action, not rhetoric, is now required. Aguilar cites areas that the SEC has been slow to deal with in terms of enforcement action. For example, there is the area of clawbacks. Aguilar noted that even though the 2002 Sarbanes-Oxley Act lets the commission bring an enforcement action against CFO’s and CEO’s to recover incentive pay and bonuses related to a financial restatement because of misconduct, the SEC waited five years to exercise this authority when it brought action against ex- CSK Auto Corp. (CAO) CEO Maynard Jenkins. Aguilar says that if the law had been enforced earlier, less investors might have been harmed.

The SEC commissioner wants the SEC to “resist” the trend toward an entrenched two-tier market where different investors are overseen and protected differently. He says that recent SEC cases involving pension funds and auction-rate securities are clear indicators that institutional investors also need protections.

Our securities fraud law firm works with institutional investors throughout the US. We have helped many clients recoup their financial losses.

Related Web Resources:
Speech by SEC Commissioner: An Insider’s View of the SEC: Principles to Guide Reform, SEC.gov, October 15, 2010

SEC Commissioner Luis Aguilar

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

SEC Examines Proxy Advisory Firms

Published on: October 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is reviewing the proxy process to determine how information is transmitted to shareholders and the public. They are also studying how shareholder votes are counted.

She says the exam will focus on the role of proxy advisory firms, the types of conflicts they deal with, the way these issues affect their business and the voting process, and the role that the agency should play when it comes to regulate proxy advisory firms. She expressed commitment to a “top-to-bottom review of proxy infrastructure” and the role that proxy advisory firms face.

Schapiro made her remarks in front of the Economic Club of New York last month. At the event, she also noted that although the Obama Administration has increased the SEC’s budget—the Dodd-Frank Wall Street Reform and Consumer Protection Act did not give the agency the ability to oversee its own budget—she said that she still would like the SEC to be self-funded.

The financial regulatory reform legislation did provide the SEC with reserve funds to go toward hiring and technology upgrades. Schapiro says that the agency has been successful in its efforts to recruit from hedge funds, trading desks, institutional and retail investment firms, and credit ratings agency analysts.

Related Web Resources:
Chairman Mary L. Schapiro, SEC.gov

NJ Settles Municipal Bond Offering Fraud Charges with SEC

Published on: September 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The state of New Jersey has settled Securities and Exchange Commission charges involving the alleged fraudulent marketing of municipal bonds. This is the first time that the SEC has filed charges against a US state for allegedly violating federal securities law.

The charges, brought by the SEC’s Municipal Securities and Public Pensions Unit, involved $26 billion in approximately 79 bond offerings that were offered between August 2001 and April 2007. The SEC accused New Jersey of concealing from bond investors the fact that the state didn’t have the money to fulfill its obligations under two of its largest pension plans for state employees and teachers. New Jersey also allegedly using accounting tricks to avoid increasing taxes to fund a 2001 benefits increase for both plans and hid this information from investors. As a result, the SEC contends that losses totaling approximately $2.4 billion were covered up.

The SEC says that New Jersey did not have written procedures on how to review bond documents and failed to train employees about its disclosure obligations. A training program regarding disclosures is now in place.

By agreeing to settle, New Jersey is not admitting to or denying the charges. It has, however, agreed to cease and desist from future violations. The SEC did not order a monetary fine or penalty as part of the settlement.

SEC Charges State of New Jersey for Fraudulent Municipal Bond Offerings, SEC.gov, AUgust 18, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors

Published on: September 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Judge Ellen Segal Huvelle says she will approve the $75 securities settlement between Citigroup and the SEC once the agreement includes changes that the bank has already made to its disclosure policy in the agreement. The federal judge says she wants the changes added to the settlement terms so that executives can’t revise them. She also wants the $75 million used to compensate shareholders who lost money because of Citigroup’s misstatements.

Last month, Huvelle had refused to approve the settlement over Citibank’s alleged failure to fully disclosure its exposure to subprime assets by almost $40 billion. The SEC accused the investment bank of misleading investors and telling them that its exposure was only $13 billion. When questioning the agreement, Huvelle asked why Citigroup shareholders should have to pay for the bank executives’ alleged misconducts. She also wanted to know why only two individuals were pursued.

The SEC had also filed cases against former CFO Gary Crittenden and ex-investor relations head Arthur Tildesley Jr. Both men have settled the cases against them without denying or admitting wrongdoing.

Despite giving conditional approval of the settlement, Huvelle noted that she didn’t think the $75 million would “deter anyone” unless Citibank abided by the changes to the disclosure policy. She also noted that the bank was “doing a disservice to the public” because other Citigroup executives were not held accountable for their alleged involvement.

The Wall Street Journal reports that lawmakers and others have becoming extremely frustrated at the considerably small number of senior executives that have been charged in connection with the financial debacle that has impacted Wall Street. The SEC has said that it can only file charges when there is sufficient evidence. Meantime, defense attorneys have argued that the multibillion dollar losses by investment firms were a result of bad business calls and not intentional fraud.

Related Web Resources:
Citigroup’s $75 Million Settlement With SEC Gets Green Light — Almost, Law.com, September 28, 2010

US court approves SEC settlement with Citi, Financial Times, September 24, 2010

Judge Won’t Approve Citi-SEC Pact, Wall Street Journal, August 17, 2010