Securities Fraud

SEC Looking to Simplify Disclosure Rules to Minimize “Information Overload” for Investors

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

The Securities and Exchange Commission will review corporate disclosure rules to possibly get rid of disclosure rules that are creating “information overload” for investors. Speaking to the National Association of Corporate Directors, SEC Chairwoman Mary Jo White said that as the quantity and types of issues that companies have to disclose become greater and “more detailed,” she wonders whether investors need or benefit from all that information-or if ‘information overload’ makes it hard for customers to glean what they should know to make the best investment choices for them.

Commission rules, company efforts, and congressional mandates seeking to prevent lawsuits are what have led to such extensive disclosures. Now, the SEC may consider a possible overhaul after a study of company filing-rules, which was mandated by the 2012 Jumpstart Our Business Startups Act, is released. The JOBS Act mandates that the regulator figure out how to simplify rules for smaller companies.

White said that certain disclosure details are no longer necessary in the wake of such information that is now widely available online, including via social media. She pointed to examples of information being disclosed that may not be as relevant now as before, such as the ratio of earnings to fixed charges or dilution disclosure requirements. White also spoke about how it might be prudent to begin getting certain information to investors sooner than what current rules and forms mandate for timeframes or whether this could become an added burden to companies.

FINRA Accuses John Carris Investments of Pump-and-Dump Scam

Published on: September 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is charging John Carris Investments LLC with misleading and bilking investors. It seeks a cease and desist order against the financial firm and George Carris, its CEO, to immediately stop soliciting customers to buy Fibrocell Science, Inc. stock without giving them the correct disclosures. The SRO contends that in May 2013, JCI made solicitations to customers without revealing that Carris and another principal of the firm were selling their shares.

In an amended complaint, FINRA accused Carris, JCI, and five other firm principals of committing securities violations and other fraud. The SRO alleges that as JCI played the role of placement agent for FIbrocell, the firm and Carris artificially inflated Fibrocell stock’s price by pre-arranging trading and making Fibrocell stock buys that were not authorized in the accounts of customers.

FINRA contends that JCI and Carris fraudulently sold notes and stock in Invictus Capital, Inc., the firm’s parent company, without disclosing that its financial state was poor. The SRO believes that there was no reason to believe that investors would gain anything economically and Carris and JCI misled investors of Invictus by paying dividends to the latter’s early investors with funds that came from the sales of the company’s securities. Also, FINRA is accusing JCI of putting out false documentation that did not show payments the firm made for Carris’s personal spending and not remitting employee payroll taxes to the US Treasury.

Groupon Loses Dismissal Bid Over IPO Securities Fraud Case

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

A district court judge has ordered Groupon Inc. to face a securities lawsuit filed against it accusing the deal-of-the-day coupon company of misleading investors regarding its financial state right before its IPO in 2011. The Illinois-based company had sought to have the securities fraud case brought by investor Michael Carter Cohn, dismissed. Cohn wants his claim to get class action securities status.

The investor claims that Groupon committed securities fraud and used refund accounting that was not allowed to spike revenues in a prospectus related to its initial public offerings, as well as in filings with the Securities and Exchange Commission. According to U.S. District Judge Charles Norgle in Chicago, the claims “present plausible violations.” Norgle also turned down requests by Morgan Stanley (MS) and Goldman Sachs (GS), and Credit Suisse (CS) to throw out the claims against them. These banks arranged the public offering.

On March 30, 2012-not long after opening at $28 in Nasdaq stock exchange trading on November 4, 2011-Groupon reported a “material weakness” in its financial controls, as well as first reported quarterly sales as a company that was now publicly traded were not as high as stated earlier because of high refunds received by merchants. This lowered revenue during 2011’s last quarter to $492 million-that’s a $14.3 million difference. The company’s shares by November 13, 2012 hit $2.63 dollars.

FINRA Suspends and Fines GlobaLink Securities Principal

Published on: September 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is fining GlobaLink Securities Registered Principal Junhua Michael Liao $20,000. According to the SRO’s findings, through Liao, the firm executed an agreement to sell and market a Regulation D offering comprised of promissory notes for a medical receivables financing company. The financial firm then is said to have sold over $1.2 million of the notes to certain customers, resulting in about $56,700 in commissions.

FINRA also said that during the period in question, it was Liao’s job as the compliance officer for the firm to makes sure that GlobaLink Securities set up, kept up, and enforced a supervisory system and written supervisory procedures designed to ensure compliance with regulations and laws and rules that were applicable. The agency said that while the financial firm did keep up written supervisory procedures regarding private placement sales, the WSPs were not sufficient and lacked specific details about how the firm was to perform due diligence, handle transactions, ensure that a Regulation D product was appropriate for investors, and document GlobaLink’s actions and decisions pertaining to the transactions.

FINRA said that because of the deficient WSPs and inadequate supervision, the firm did not perform proper due diligence on the offerings and that this stopped GlobaLink and Liao from finding out that the issuer had previous payment problems on other note offerings, which resulted in the private placement memorandum misrepresenting the past performance of that issuer. Liao consented to the described sanctions as well as to the SRO’s entry of findings. In addition to the fine, he received a one-month suspension from associating with any other FINRA member in any type of principal role.

SEC Charges ACI Capital Group Owner with New York Securities Fraud

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

The Securities and Exchange Commission has filed charges against Fredrick D. Scott, the New York money manager who owns investment advisory firm ACI Capital Group. The regulator contends that he falsely claimed that the company’s assets under management were as high as $3.7 billion to give him greater credibility when he promoted investment opportunities that were too good to be true. Scott allegedly ran a number of financial scams that targeted small businesses and individual investors.

The SEC says that Scott solicited investors for money by promising high return rates and then stole their funds the moment they deposited it with his investment advisory firm. He used their money to pay for personal expenses and investors never received returns.

One securities scam Scott purportedly perpetuated was what is referred to as an advance fee scheme. Investors were promised that ACI would give multimillion-dollar loans to people wanting bank financing. However, they first had to advance a percentage of the loan figure to the investment advisory firm. Afterwards, they were to get the remaining balance that was promised to them. Unfortunately, investors never received this money.

Broker Gets 1-Year Suspension From FINRA Over Inadequate Due Diligence and Supervision

Published on: September 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Gary Mitchell Spitz, a broker and a registered principal of an Iowa-based brokerage firm, is suspended from associating with any FINRA member for a year and must pay a $5,000 fine. The SRO says that Spitz did not perform proper due diligence of an entity—a Reg D, Rule 506 private offering of up to $2 million—even though this action is mandated by his firm’s written supervisory procedures.

FINRA’s finding state that because of Spitz’s inadequate review, he did not make sure that the offering memorandum had audited financials of the issuer or make sure that these financials were accessible to non-accredited investors prior to a sale—also, a Regulation D requirement. The SRO says that Spitz let certain registered representatives, who were associated with the firm, to sell the entity’s shares and turn in offering documents that customers had executed directly to that entity. This meant that Spitz did not get copies of the documents or perform a suitable review of the transactions before they were executed. Certain customers even invested in the entity prior to Spitz getting the subscription documents from these representatives.

Spitz also is accused of not acting to make sure that the representatives made reasonable attempts to get information about the financial status, risk tolerance, and investment goals of customers. FINRA says he did not retain and review these representatives’ email correspondence and that they worked for a company that was the entity’s manager. Spitz let these representatives use the company’s email address to dialogue with customers and prospective clients but that the firm’s server did not capture the correspondence.

Foremost Trading LLC Must Pay $400K to CFTC for Supervisory Violations

Published on: September 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Foremost Trading LLC has settled the securities charges filed against it by the US Commodity Futures Trading Commission. The regulator accused the introducing broker of failing to properly supervise the handling of specific trading accounts by employees, agents, and officers. To settle, Foremost Trading must pay a $400K civil penalty and cease and desist from future CFTC regulation violations.

According to the agency’s order, the accounts involved were held by clients who were referred to the introducing broker via three unregistered entities that sold futures trading systems. Foremost Trading and its staff are accused of disregarding warning signs that the Systems-Systems Providers were using fraudulent means and business practices to get these clients.

Clients complained to Foremost. However, contends the CFTC, the latter did not properly investigate claims or let other clients know about the allegations. Meantime, the introducing broker kept setting up accounts for clients referred to it by Systems Provider, even vouching for the latter’s track record when communicating with clients.

Many Financial Fraud Victims Don’t See It Coming, Says Survey

Published on: September 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to people who took a survey a report called the Financial Fraud and Fraud Susceptibility in the United States, while most people have been targeted by financial scammers, nearly half of them don’t see it coming. Almost 24,000 adults in the 40 and over age group participated.

Among the survey results:

• Over 80% of respondents had been approached about taking part in what was potentially financial scam.

SEC Votes to Amend Broker-Dealer Financial Responsibility Rules

Published on: September 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

By unanimous decision, the Securities and Exchange Commission has agreed to amendments to the Securities Exchange Act or 1934’s rules regarding customer protection, net capital, notification, and record books for broker-dealers. The regulator is seeking to enhance protections for investors and prevent business practices that are not sound.

Under The Act, broker-dealers have to satisfy certain financial requirements so that customers are protected in the event of the firm’s financial failure. The Act offers safeguards so that customer funds and securities being held by a broker are protected.

The Customer Protections Rule

US DOJ To Bring Charges Against Those Accountable for 2008 Financial Crisis

Published on: August 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, US Attorney General Eric Holder wants Wall Street to know that the Justice Department is getting ready to bring criminal and civil securities fraud charges against those accountable for the financial crisis of 2008. Cases against a number of large financial firms are likely. During his interview with the WSJ, Holder said that “No individual, no company is above the law.”

Holder has been criticized, along with the Obama Administration, of not doing enough to file criminal charges against financial firm executives over the 2008 meltdown. However, recent disclosures indicate that the US government is going after new prosecutions of possible wrongdoing involving mortgage-backed securities.

After that industry’s fast growth led to the housing bubble, which then burst, resulting in a credit crisis, financial institutions were left with securities that dropped in value. DOJ officials also say that prosecutors continue to be involved in probes involving RMBS.