SEC Settlements

NY Hedge Fund Adviser Faces SEC Charges Over Conflicted Transactions and Whistleblower Retaliation

Published on: June 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Candace King Weir and her hedge fund advisory firm Paradigm Capital Management will pay $2.2M to resolve Securities and Exchange Commission charges accusing the firm of executing prohibited principal transactions and acting against the whistleblower employee who notified the regulator about the conflicted activity. Weir is charged with causing the principal transactions to happen.

The agency contends that Weir facilitated the transactions between her firm and C.L. King & Associates, a brokerage firm that she also own, while trading for the hedge fund PCM Partners L.P. II. This type of transaction presents a conflict of interest between the client and adviser, and the latter is supposed to disclose that they are involved on both sides of the trade. The adviser also needs to get the client’s permission for this.

According to the Commission’s order, Paradigm did not give written disclosure to the hedge fund or obtain its consent. Paradigm’s head trader then reported the trading conduct.

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud

Published on: June 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Attorney Robert C. Acri with Illinois securities fraud related to a real estate venture. Acri is the founder of Kenilworth Asset Management, LLC, a Chicago-based investment advisory firm. He has agreed to settle by disgorging the funds that were misappropriated from investors, as well as commissions, interest, and a penalty. Monetary sanctions total about $115,000.

The SEC brought the real estate investment fraud charges after detecting possible misconduct when it examined the firm. The regulator’s Enforcement Division was alerted and a probe followed.

According to the findings of the investigation, Acri misled investors over promissory notes that were issued to supposedly redevelop an Indiana shopping center, misappropriated $41,250 for other purposes, and failed to tell investors that the firm received a 5% on every note sale. This amount would total $13,750. He also purportedly did not let investors know a number of material facts, including that the reason there even was an investment offer is that he was trying to rescue funds that other clients had invested earlier in the same real estate developer.

Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

Published on: July 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.

SEC Tells Financial Firms That Settling Without Denying or Admitting to Wrongdoing is No Longer Allowed in Certain Securities Cases

Published on: June 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Chairman Mary Jo White recently announced that defendants in certain securities cases would no longer be allowed to accompany an agreement to settle with the statement that they are doing so but without admitting or denying wrongdoing. Speaking to a columnist with The New York Times, White said that in certain instances, admissions are necessary for there to be public accountability. However, White also did say that most SEC cases still would be settled under the “nether admit nor deny standard,” which provides the accused incentive to settle while compensation to victims sooner.

The new policy was announced to SEC enforcement staff last week in a memo from George Canellos and Andrew Ceresney, the regulator’s enforcement division co-leaders. They went on to say that in cases that warrant such an admission, if the accused were to refuse then a securities lawsuit might be the next step.

Securities cases that require admissions of wrongdoing will have to satisfy certain criteria, such as intentional misconduct that was egregious, wrongdoing that hurt a lot of investors or put them at risk of serious financial harm, or unlawful obstruction of the Commission’s investigation.

“This policy change is long overdue,” said SSEK Founder and Stockbroker Fraud Lawyer William Shepherd. “Over the past decade, the SEC has accommodated the targets it has been investigating far too often. Only rarely is there the requirement of admission of wrongdoing, and almost never for large financial firms and their management. When one is caught with a hand in the cookie jar, it’s time to say ‘I did it and I’m sorry, rather than “I neither admit nor deny it was my hand.”

The change policy comes in the wake of complaints that the SEC has been to lax with its enforcement, especially when it came to pursuing securities fraud cases against large financial institutions involved in the economic crisis, such as JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), which all settled cases against them without denying or admitting guilt. Having to admit wrongdoing potentially could hurt financial firms because plaintiffs in private securities cases and class action fraud litigation may then cite the acknowledgement of culpability, thereby strengthening their claims. This could force banks to have to pay out millions of dollars than if they hadn’t admitted to doing anything wrong.

S.E.C. Has a Message for Firms Not Used to Admitting Guilt, Stockbroker Fraud Law Firm, NY Times, June 22, 2013

Securities and Exchange Commission

More Blog Posts:
Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action, Stockbroker Fraud Blog, April 28, 2013

Hedge Fund Manager Philip Falcone Consents to $18M Securities Fraud Settlement

Published on: May 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Hedge fund billionaire Philip Falcone and his Harbinger Group (HRG) have reached an $18 million securities fraud settlement, an agreement in principle, with the SEC over allegations that he fraudulently took a $113 million loan from one of his funds to cover his taxes, manipulated the market, and gave preference to certain clients, including Goldman Sachs (GS). Falcone, who will personally pay $4 million, is settling the financial fraud case without admitting or denying wrongdoing. Although he can remain has CEO of his group and stay associated with Harbinger Capital Partners, he is barred from raise new money or using his hedge funds to make investments for two years.

The ban, however, doesn’t apply to the nine investment advisers that Falcone runs through the company. (This, some say, is so that Falcone can unwind the hedge fund without hurting investors.) The pending deal is once again raising questions about whether the SEC is doing enough to take action against wrongdoers in the industry.

For instance, Harbinger Group’s business that involves Falcone acting as a private equity investor in different companies is not really impacted by the SEC settlement. Also, the independent monitor selected by the SEC to watch the firm is one who was on a list that Falcone recommended.

SEC Actions Roundup: Bridge Premium Finance Settles Over Alleged $6M Ponzi Scam, Ex-Lancer Group Hedge Fund Manager’s Lawyer Sues Over FOIA Request, & Private Equity Firm Ranieri Partners Settles Securities Allegations

Published on: March 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Settles with Bridge Premium Finance Over Alleged $6M Ponzi

The U.S. District Court for the District of Colorado has approved a proposed settlement between the SEC and Premium Finance LLC, William Sullivan, and Michael Turnock. The three of them are accused of selling financing so that small businesses could cover their insurance premiums. The alleged Ponzi scam purportedly cost investors $6 million, even as they were promised up to 12% in returns.

Judge John Kane had initially rejected the proposed settlement, which came with SEC’s standard language allowing defendants to resolve cases without denying or admitting to the allegations. Pointing to strong federal policy that favors consent judgments and the “limited and deferential” review the courts have over such agreements, last month the Commission asked the court to reconsider. It also noted that such admissions could hurt the regulator’s enforcement program, potentially causing harm to the public. Turnock and Sullivan also filed a response to the complaint and admitted to some of the allegations.

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed

Published on: February 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Columbia has decided to dismiss the last two counts in the Citizens for Responsibility and Ethics in Washington’s Federal Records Act lawsuit against the Securities and Exchange Commission. The public interest group wants to make the SEC reconstruct about 9,000 documents related to certain enforcement probes.

Judge James E. Boasberg said that to the degree that the act’s section 3106 mandates an affirmative duty to act when I comes to destroying records, the Commission has not taken advantage of its discretion in taking internal remedial steps and, as a result, has satisfied any “duty to imposed.”

It was in August 2011 when allegations surfaced that the SEC may have improperly destroyed files related to MUIs—matters under inquiry. Sen. Chuck Grassley (R-Iowa) began questioning the agency after a whistleblower drew the matter to his attention. SEC General Counsel Mark Cahn then proceeded to order the Enforcement Division to cease from destroying documents from closed cases until notice was given to do otherwise. Then, after a probe, then-SEC Inspector General H. David Kotzlater determined that the division did not behave improperly when it got rid of such files. CREW, however, went on to file its Federal Records Act case in the hopes of obtaining a declaratory judgment noting that the destruction of the documents had violated the FRA.

SEC News Roundup: Commission to Present Money Market Mutual Fund Reform Proposal, Achieves Record Number of Insider Trading Settlements During FY 2012

Published on: January 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Commission to Present Money Funds Reform Proposal

According to SEC Commissioner Daniel Gallagher, staff members are putting together a money market mutual fund reform proposal that will address the problems that occurred in 2008. Another area that will likely be looked at more closely in the proposal would be the floating the net asset value of the funds. Gallagher, who made his comments at a US Chamber of Commerce, said this was important because there are “serious” related issues involving tax, accounting, and operations that need to be tackled.

Meantime, the Financial Stability Oversight Council is looking at three draft money fund reform recommendations that it wants the SEC to deal with, including floating NAVs, a stable NAV that has a capital buffer with a cap of 1% of a fund’s value in addition to delayed redemptions, and a stable NAV along with a 3% capital buffer that could be lowered if applied along with other measures.

SEC Roundup: $62M Securities Fraud Award Against Ex-Lancer Group Hedge Fund Manager Stands, Investment Management Division Adopts Risk-Based Approach to Regulatory Initiatives, & Conflicts of Interest Areas Now Are Priority

Published on: November 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has decided not to review a ruling by the U.S. Court of Appeals for the Eleventh Circuit affirming a $62M award against Michael Lauer, an ex-Lancer Group Hedge Fund manager, in the securities lawsuit filed against him by the Securities and Exchange Commission. The federal appeals court had said that the district court’s decision granting the Commission’s motion for summary judgment on liability and remedies was proper.

Per the SEC fraud lawsuit, Lauer is accused of misrepresenting the hedge funds’ true value by artificially inflating the value of holdings found in shell companies that were thinly traded. The Commission contends that he hid his scam by making false statements in investor newsletters, private placement memoranda, and phone calls. (Lauer has since been acquitted of related criminal charges.)

In his certiorari petition filed earlier, Lauer argued that federal court couldn’t strike a defendant’s motion to dismiss due to lack of subject matter jurisdiction without evaluating whether it had such jurisdiction. He also claimed that the appeal’s court ruling that the district court’s decision was grounded in enough evidence was not de novo review.

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

Published on: May 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission’s practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.