Securities Fraud

Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud

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

A FINRA arbitration panel is ordering ex-broker Karl Hahn, who previously worked with Bank of America Corp’s (BAC) Merrill Lynch (MER), Oppenheimer & Co. (OPY), and Deutsche Bank AG’s (DB) Deutsche Bank Securities, to pay investor Chase Bailey $11 million because he sustained about $6 million in losses allegedly caused by securities fraud. Bailey contends that Hahn made excessive trades and misrepresented securities related to transactions involving a number of investments, including a variable annuity, approximately $2.3 million in fraudulent real estate financing involving East Coast properties, and covered calls.

In the filmmaker/Internet entrepreneur’s securities arbitration claim, Bailey named the three financial firms where Hahn previously worked. It is during this period that Bailey was allegedly defrauded. (He had moved his funds from one brokerage firm to the other each time Hahn was hired by that employer.) Bailey settled his case with Merrill for $700,000, while claims against Deutsche Bank and Oppenheimer were tossed out.

Per the FINRA arbitration ruling, Bailey is awarded $6.4 million in punitive damages and $4.1 million in compensatory damage. Ordering brokers to pay punitive damages is uncommon.

Securities Fraud Roundup: 6th Circuit Affirms Ruling Affirms Broker’s Liability Over Reverse Merger, Ex-Stockbroker Pleads Guilty to Insider Trading Over IBM’s SPSS Acquisition, & Father and Son Convicted in $50M Real Estate Fraud

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

6th Circuit Affirms Ruling Affirming Broker’s Liability Over Reverse Merger

The U.S. Court of Appeals for the Sixth Circuit says that a district court was correct in granting summary judgment to the Securities and Exchange Commission over its claim that broker Aaron Tsai made disclosure and registration violations related to a “reverse merger” involving a shell company. The lower court had ordered Tsai to pay about $352,000 in disgorgement and prejudgment interest while barring him from future violations. Affirming that court’s decision, the appeals court said that the broker’s transactions in unregistered stock were not exempt, pursuant to 1933 Securities Act Rule 144(k).

Tsai was the former president and CEO MAS Acquisition XI Company, which had a reverse merger and sold shares on the OTCBB in 2000. After his initial filing was turned down, he moved shares from five former directors who were initial company shareholders, to 28 other shareholders via previously signed stock powers. Tsai then obtained approval to finish up the reverse merger with Blue Point. The SEC filed civil enforcement naming him and other defendants while alleging Securities Act and Exchange Act violations, including failure to register securities before their sale or offering and failure to reveal that he had beneficial ownership of the securities.

LPL Financial Continues to Stay On Regulators’ Radar

Published on: April 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to a number of state and federal regulators, they are continuing to keep their eyes on LPL Financial (LPLA), the fourth biggest brokerage firm in the US after Wells Fargo (WFC), Morgan Stanley (MS)and Merrill Lynch (MER). With 13,300 brokers, 4.3 million customers, and 6,500 offices, it is the biggest broker-dealer in rural America.

Yet even as LPL has grown, so has the number of censures it, and its brokers have been faced with numerous allegations, including securities fraud, selling unsuitable investments to unsophisticated investors, and speculative trading in client accounts. Just in the last 18 months, regulators in Massachusetts, Illinois, Oregon, Montana, and Pennsylvania have imposed penalties on LPL for inadequate broker supervision.

LPL’s recent fast growth can in part be attributed to the 2008 economic crisis, which caused many investors to flee from more prominent brokerage firms and into the arms of independent broker-dealers. Brokers at firms such as LPL are not employees but contractors that are able to earn a huge percentage of the fees and commissions. The supposed advantage for investors is that independent broker-dealers don’t have their own investment products that they are trying to foist onto customers.

However, some analysts believe that the bigger commissions that LPL has to pay its brokers means that the firm has less cash for compliance and is more prone to draw in brokers wanting to get around the rules. Evidence of possible problems from this independent broker system can be found in Montana, where 31 LPL brokers were named in eight securities complaints in the past five years. According to the state, almost half of the LPL brokers there are registered there as their own supervisors. In Washington State, authorities filed a case against LPL last year because a broker allegedly sold nontraded real estate investment trusts to dozens of older investors.

Fast-Growing Brokerage Firm Often Tangles With Regulators, New York Times, March 21, 2013

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Federal Workers’ Privacy Rights if STOCK Act Provision Mandating Online Disclosure of Financial Data Goes Into Effect, Says District Court Judge, Institutional Investor Securities Blog, April 8, 2013 Continue Reading ›

SEC Reaches $600M Insider Trading Settlement with SAC Capital Advisors-Affiliated Hedge Fund Advisory Firm

Published on: March 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Calling it its largest insider trading settlement to date, the Securities and Exchange Commission has settled its securities case with CR Intrinsic Investors LLC, an SAC Capital Advisors-affiliated hedge fund advisory firm, for $600 million. The regulator had sued the CR Intrinsic Investors and portfolio manager Matthew Martoma last year, accusing the latter of gaining access to inside information about an Alzheimer’s drug trial that was being developed by pharmaceutical companies Wyeth and Elan Corp. plc. before the results were released to the public.

The advanced information noted that the drug might be ineffective. This allegedly prompted Martoma to liquidate the position of his funds in both companies’ stocks and take on short positions. Martoma and his funds are said to have yielded $276 million in avoided losses (or profits) from the scam. He is now facing related criminal charges.

Earlier this month, the SEC amended its securities lawsuit, adding SAC and four affiliated hedge funds as relief defendants for allegedly receiving ill-gotten games from the insider trading scheme. According to the regulator’s acting director of enforcement George Canellos, the evidence in this case came from “the earth,” meaning that they were obtained from phone records, trading records, business records, and other information (as opposed to wiretaps).

The defendants resolved the securities case without denying or admitting to the claims. They agreed to pay about $275 million in disgorgement, a $275 million penalty, and $52 million in prejudgment interest. A court, however, must approve the settlement.

US v. Martoma (PDF)

SEC v. CR Intrinsic Investors (PDF)

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Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action, Stockbroker Fraud Blog, March 26, 2013 Continue Reading ›

Institutional Investment Fraud and The Courts: District Court Won’t Stay Derivatives Case Alleging FCPA Violations, Control Person Claims Against Over Revenue Bond Purchases Can Proceed, Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence

Published on: March 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

District Court Won’t Stay Derivatives Case Alleging FCPA Violations

The U.S. District Court for the Eastern District of Louisiana decided not to stay a shareholder derivative lawsuit accusing Tidewater Inc. of violating the Foreign Corrupt Practices Act. Judge Jane Triche Milazzo believes that a stay would burden not just the court but also the defendants. The court threw out the case last year, concluding that shareholder plaintiff Jonathan Strong, who did not make a presuit demand on the Tidewater board, failed to plead with particularity why such a demand was futile.

Per Strong, the offshore energy services provider violated the act when it ignored payments of about $1.76M that a subsidiary made to government officials in Nigeria, allegedly to get around custom regulation to be able to import vessels into that nation’s waters, and Azerbaijan, allegedly as bribes over tax audits. The derivatives lawsuit was filed after the Tidewater and the subsidiary agreed to pay about $15.5 million in a related settlement with the US Department of Justice and the Securities and Exchange Commission.

Demand Notes Used to Help Pay For Ailing Real Estate Business Were Securities, Says District Court

Published on: March 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Eastern District of Michigan, a judge refused to throw out an SEC enforcement action against two men accused o f securities fraud. James Mulholland Jr. and Thomas Mulholland allegedly sold fake demand notes connected to a failing real estate venture. Contending lack of subject matter jurisdiction, and also that, per the law, the notes were not securities, the defendants had sought to have the Michigan securities case dismissed, the court, however, disagreed, pointing out that each note is presumed to be a security unless rebutted by fitting under or sufficiently resembling one of a number of note categories that the US Supreme Court has determined to not be a security.

The two men ran Mulholland Financial Services Inc., which they financed by putting out demand notes that they sold through “word-of-mouth referrals,” as well as to relatives, friends, and clients. When the financial firm started to collapse and it had to be dissolved, James and Thomas allegedly kept using the company to raise investor money, including $2 million in 2009, and selling demand notes to over six dozen investors while promising a 7% return. They also are accused of telling prospective investors that MFSI would make the profits that would lead to the returns, with principal and the interest made to be given within 30 days of any written demand request.

Many of these investors were reportedly retirees who were unseasoned investors. When the Mulhollands filed for bankruptcy protection, these investors lost everything they had placed in the notes.

The court said that it is obvious that the defendants’ main motivation for issuing the notes was to make money, they appeared to have a plan for how they were to distribute the notes, the 7% return that was promised constituted a “reasonable expectation” by the public, the notes were uninsured and uncollateralized, and no regulatory scheme was identified by the defendants that would apply if securities laws weren’t applicable. The court said that all these factors meet the criteria of the Reves test, from the US Supreme Court’s Reves v. Ernst & Young, therefore supporting that the demand notes are securities.

COURT CONCLUDES DEMAND NOTES WERE SECURITIES UNDER FEDERAL ACTS, Bloomberg Law, March 13, 2013

Reves v. Ernst & Young (PDF)

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Securities Law and Congress Roundup: SEC Plans to Look at Corporate Political Spending Has Some Republicans Asking Why, Regulator Wants Lawmakers To Set Up Independent Auditor for Advisory Firms, & DOJ Stands by Its Record on Prosecuting Financial Firms

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

SEC Plans to Look at Corporate Political Spending Has Some Republicans Asking Why

In a letter to Securities and Exchange Commission Chairman Elisse Walter, a number of House Republicans, including Oversight Committee Chairman Darrell Issa (R-Calif.) and House Financial Services Committee Chairman Jeb Hensarling (R-Texas), asked why the agency plans to consider making corporate political spending disclosures a requirement when this matter seems “unrelated to its mandate” that it protect investors, maintain the markets, and “facilitate capital formation.” The lawmakers expressed concern that such a move by the SEC would be “especially problematic” seeing as it has no experience in this matter and the writing of such a rule would likely require much in terms of resources and staff.

The Congressional lawmakers said that the Commission should concentrate not on a “discretionary rule” but on a rulemaking that is mandatory. They pointed to the agency’s delays in getting the Jumpstart Our Business Startups Act efected in time for the mandated statutory deadline. They are asking why resources should be allocated to non-essential rulemaking that brings up serious concerns.

State of Illinois Settles Securities and Exchange Commission Fraud Charges

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

Without denying or admitting to the charges, the state of Illinois has settled the securities fraud case filed against it by the SEC. The Commission contends that Illinois misled investors about municipal bonds and the way it funds its pension obligations. There will be no fine imposed on the state. Illinois, has, however, implemented numerous remedial actions and put forth corrective disclosures related to the charges over the last few years.

Per the Commission, even as the state offered and sold over $2.2 billion of municipal bonds between 2005 and 2009, it did not tell investors the effect problems with its pension funding schedule might have. Illinois is also accused of not disclosing that it had underfunded its pension obligations, which upped the risk of its overall financial condition.

The regulator’s order contends that Illinois had set up a 50-year pension contribution schedule in the Illinois Pension Funding Act. However, it turns out that the schedule was not sufficient to take care of both a payment amortizing the plans’ actuarial liability, which was unfunded, and the price of benefits accrued during a current year. Also, the statutory plan ended up structurally underfunding the state’s pension duties while backloading most pension contributions into the future. The structure caused stress on both the pension systems and Illinois’s ability to fulfill its competing obligations.

Financial Industry Representatives Settle FINRA Cases Over Securities Fraud

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

These financial representatives have settled the Financial Industry Regulatory turned in their Letter of Acceptance, Waiver, and Consent in the securities cases made against them by the Financial Industry Regulatory Authority. By consenting to the sanctions described and the entry of findings, this does not mean they are denying or admitting to the allegations.

New York Registered Principal Accused of Making Misrepresentations and Missions

Neftali Mercedes must pay $97,000, in addition to interest as restitution to customers. He is accused of intentionally making material omissions and misrepresentations about the risks related to speculative securities and an issuer’s financial state.

Securities Roundup: Venecredit Fined $25K for Working with Foreign Finders, Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges, & BrokersXpress Broker is Suspended Over Private Placement-Related Misconduct

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

Venecredit Fined $25K for Working with Foreign Finders to Generate Retail Investor Business

According to the Financial Industry Regulatory Authority, Venecredit Securities must pay a $25,000 fine for allegedly using foreign finders to get new retail investor business. The financial firm has now been censured for two years.

The SRO says that the foreign finders served as the primary contacts between Venecredit and the clients and had access to account information via the clearing firm’s platform. These finders worked for a foreign brokerage firm that shares directors and officers with Venecredit and its wholly owned entity. FINRA contends that not only did Venecredit fail to create and put into effect proper supervisory measures that would have allowed it to look at customer complaints about the employees at the foreign brokerage firm, but also it failed to keep electronic correspondence from both the foreign traders and the personal email accounts of its registered representatives.