Investor Lawyers Blog

SEC Accuses Broker of Giving Some Customers Preferential IPO Access in Exchange for Over $1M in Kickbacks

Published on: January 2, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed a case accusing broker Brian Hirsch of illegally receiving over $1M in secret kickbacks in return for giving some customers favored access to “lucrative” initial public offerings. The regulators said that these customers made money because of the special treatment. Meantime, prosecutors in New Jersey have filed a parallel criminal case against Hirsch.

According to the SEC, Hirsch, who worked at two broker-dealers, disregarded policies and procedures and made “long-running” deals with specific customers, granted them bigger allocations of some of the public offerings that the firms were marketing. Advisor Hub reports that these two brokerage firms were Barclays Capital (BARC) and Stifel (SF).

As part of the deal, contends the regulator, a customer named Joseph Spera and another customer paid Hirsch cash kickbacks that were equivalent to a percentage of the trading profits they made for the offering stock allocated to them. Hirsch is accused of giving the two customers “preferential access to hundreds of IPOS and secondary public offerings.” These customers purportedly would usually sell their stock quickly so that they could make a “substantial profit.” This was at the expense of the firms’ other customers and the interests of issuers in raising funds from long-term investors.

Royal Bank of Scotland Settles Mortgage-Backed Securities Fraud Case Brought by Pension Funds for $125M

Published on: December 29, 2017 | by Shepherd Smith Edwards & Kantas, LLP

According to Reuters, Royal Bank of Scotland Group plc (RBS) has settled a mortgage-backed securities fraud case brought by the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) for $125M. The settlement resolves claims alleging that the bank made misrepresentations when selling MBSs to the pension funds, which contend that they sustained millions of dollars in losses as a result.

According to California Attorney General Xavier Becerra, a probe by his office determined that the descriptions the firm provided to investors “failed to accurately disclose the true characteristics” of many of the mortgages backing the securities, but that RBS, which knew about the alleged misrepresentations, did nothing to remedy them. The state AG’s investigation also found that RBS did not conduct the necessary due diligence to eliminate the loans that were of “poor quality.” Becerra contends that RBS purposely misled CalPERS and CalSTRS to enrich itself. He noted that the MBS fraud settlement gives back the money to the pension funds that the bank “wrongfully took” from them.

Already, The California AG’s office has gotten back more than $1B over securities that were sold to the state’s public pension funds, which sustained losses during the economic crisis of 2008. Last year, $150M was recovered from Moody’s, the credit rating agency. In 2015, $210M was recovered from another credit rating agency, Standard & Poor’s. Other banks to have settled include Citigroup (C) for $102M, Bank of America for $300M and J.P. Morgan Chase (JPM) for $300M.

FINRA Orders Citigroup to Pay $11.5M, Including at Least $6M to Investors, Over Inaccurate Stock Research Ratings

Published on: December 29, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering Citigroup Global Markets Inc. (CGMI) to pay $11.5M in restitution and fines to resolve charges accusing the firm of displaying “inaccurate research ratings” on over 1800 stocks—that’s more than 38% of the stock that CGMI covers. According to the self-regulatory organization, the result of the inaccurate ratings was that a lot of customers ended up buying shares they wouldn’t have purchased otherwise if the right information had been provided.

Citigroup settled the case without denying or admitting to wrongdoing. The alleged inaccurate ratings would have been issued between 2011 and 2015.

According to the self-regulatory organization, CGMI showed the inaccurate ratings not just to retail customers, but also to its brokers and supervisors. These inaccuracies were caused by errors in the firm’s electronic ratings data feed that it provides to its clearing firm. As a result: the wrong rating was displayed for certain securities, ratings for securities that CGMI did not cover were provided, and/or the ratings for securities that the firm did rate were not displayed at all. The research ratings on CGMI’s actual research reports, to which brokers had access, were not impacted by these mistakes.

Multimillion-Dollar Investment Adviser Fraud Cases Target Widows, Older Investors, and Other Retail Investors

Published on: December 28, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Two Investment Advisers Accused of $20M Investor Scam
The US Securities and Exchange Commission has filed civil charges against investment advisors Ronald A. Fossum and Alonzo Cahoon. They are accused defrauding retail investors in an unregistered securities scam. According to the regulator, from about 3/2011 to 6/2016, Fossum raised over $20M from more than 100 investors via securities offerings in investment funds under his control or ownership, including the:

Accelerated Asset Group, LLC
Turnkey Investment Fund, LLC
Smart Money Secured Income Fund, LLC

Fossum is accused of misappropriated hundreds of thousands of dollars of investors’ money to pay his own expenses, including living in a home owned by one of the fund’s free of rent. He also allegedly used investor funds to pay for international travel and federal taxes.

Train Babcock Advisors Charged With $9M Fraud Against Charity Client

Published on: December 27, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed civil charges against Train Babcock Advisors LLC, lawyer Robert Gaughran, and accountant Kevin Clune related to an over $9M institutional fraud targeting a charitable foundation set up by an elderly widow in 1991. The organization, which focuses on improving healthcare and education, was set up using assets from her estate after she died in 2001.

To resolve the civil charges, Train Babcock Advisors will pay over $1.7M in disgorgement plus interest and penalties. It also has consented to withdrawing its SEC registration as an investment adviser. The firm is in the process of shutting down operations.

The $9M fraud was masterminded by former Train Babcock Advisors John Rogicki, who pleaded guilty to criminal charges in October. Earlier this month, he was sentenced to 30 to 90 months behind bars. Rogicki was also ordered to pay the foundation over $6.7M.

Houston Technology Company is Accused of $28M Texas Securities Fraud

Published on: December 26, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed fraud charge against Behavioral Recognition Systems, Inc. and its former CEO Ray C. Davis. According to the Commission, the Houston-based technology company, and Davis solicited over $28M from hundreds of investors, diverting over $7.8M to the latter’s personal use.

Between 1/2013 and 7/2015, investors targeted in the alleged Texas securities scam were solicited for funds and their involvement in seven equity securities offerings. “Material misrepresentations and misleading statements” were allegedly made to them about: how investor proceeds would be used, executive compensation, operating costs, and related party transactions.

The regulator’s complaint, claims that Behavioral Recognition Systems and Davis lied more than once in order to get investors to give them their money. Offering documents claimed that investor money would go toward “working capital,” “growth, “mezzanine funding,” and “general corporate purposes” for Behavioral Recognition Systems. Instead, contends the SEC, Davis used shell companies under his control to divert about $11M of investor money for his own use–$7.8M of that money was allegedly diverted during the period at issue. Bogus invoices from the shell companies for services purportedly rendered were then generated to conceal the fraud.
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Regulators Fine Merrill Lynch $26M and J.P. Morgan Securities $2.8M, Respectively

Published on: December 26, 2017 | by Shepherd Smith Edwards & Kantas, LLP

According to Reuters, Bank of America Merrill Lynch (BAC) must pay FINRA and the SEC $13M in penalties each — $26M in total — because its anti-money-laundering procedures and policies were purportedly inaccurate. According to the regulators, from ’11 to ’15, these policies and procedures were “not reasonably designed” enough to account for the additional risks involved in certain services offered by some of its retail brokerage accounts.

The SEC’s cease-and-desist order states that Merrill Lynch did not do an adequate enough job of monitoring, identifying, and reporting certain suspect activity involving transaction patterns in customer accounts. Among the allegations is that when the firm provided traditional banking services, the software that was supposed to identify possibly suspect transactions did not screen for such activities.

The $26M fine comes just two months after the Financial Conduct Authority in the UK fined Merrill Lynch $45.5M for not reporting 68.5 million exchange-traded derivative transactions between ’14 and ’16. Because the firm’s wealth management division cooperated with the FCA’s probe, the original fine of $64.9M was reduced by 30%.

Financial Firm News: Raymond James Fined $2M Over Email Supervision, FinMa Finds JPMorgan Chase Responsible for Anti-Money Laundering Violations, and Bank of America, Wells Fargo, Citigroup, and Other Big Banks Get Federal Approval for Their Living Wills

Published on: December 23, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James Financial to Pay Fine to FINRA Over Email Communications

The Financial Industry Regulatory Authority has fined Raymond James Financial Services (RJF) $2M for not maintaining supervisory systems and procedures that were “reasonably designed” enough to oversee emails. The firm settled the case but without denying or admitting to the charges. It also agreed to a risk-based retrospective review of past emails for potential violations.

FINRA examined Raymond James’ email system “during a nine-year review period.” According to the self-regulatory organization, the system had significant flaws that allowed email communications to not undergo “meaningful review.” As a result, “unreasonable risk” was created that could have allowed for “certain misconduct” to go undetected. Also, the firm did not assign enough resources or staff to the team tasked with evaluating emails that had been flagged by the system, even as the number of flagged correspondence grew in volume.

FINRA said that Raymond James “unreasonably excluded” certain personnel who worked on customer brokerage accounts from “email surveillance.” The SRO claims that the emails of 300 registered representatives who were employed in branches with their own email servers were not subject to the “lexicon” of phrases and words for detecting emails that might merit review for potentially suspect conduct.

FINRA Warns About Cryptocurrency Related-Fraud

Published on: December 22, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is warning investors interested in buying shares in companies touting potentially high returns related to cryptocurrency-related activities, but that are unable to “back up such claims,” to be on the lookout for potential financial fraud.

The self-regulatory organization provided a number of “tips” for avoiding a stock scam involving cryptocurrencies, including:
• Conduct your own research before making any investments.
• Watch out for “unrealistic predictions” or claims of results even if they are published online or issued via press release.
• Be wary of “aggressive” cold caller-sourced solicitations, especially if the stocks being recommended are “very low-priced.”
• Be careful of anyone promising guaranteed or specific returns.
• Consider “pushy sales pitches” or pressure to “act now” mandates to be red flags.
• Check FINRA’s BrokerCheck to see if the representative or firm is registered or to find out of they have been sanctioned for any alleged violations in the past.
• Look at the Securities and Exchange Commission’s Edgar database to see if the company that is selling the stock has submitted filings with the regulator. That said, registration of a security with the SEC is no guarantee that the investment is a good one.
• Watch out for stocks that see big price jumps because fraud or stock rigging may be involved.

Already, the US Securities and Exchange Commission has suspended trading in different securities over uncertainties regarding the accuracy of activities related to cryptocurrencies. Just this week, the regulator temporarily halted trading in shares of The Crypto Co. after its stock price increased by over 2,700 this month amidst concerns about “potentially manipulative transactions” and the “accuracy and adequacy of information” provided to investors and regulators.

UBS Did Not Fully Disclose the Risks Involved in Puerto Rico Bond Funds to Investors and Brokers, Reports CNBC

Published on: December 22, 2017 | by Shepherd Smith Edwards & Kantas, LLP

According to a recent CNBC investigation, not only did UBS Puerto Rico (UBS-PR) fail to disclose to investors the risks involved in the bond funds UBS pushed on the island’s residents, but also the brokerage firm neglected to fully apprise its own brokers of the incredible risks. While these findings are not new, the CNBC probe digs deeper into the matter.

The majority of these investors were island locals, who have now also been further devastated as a result of Hurricane Maria. Already, UBS has come under fire and paid hundreds of millions of dollars in securities settlements and awards from FINRA arbitration panels over losses investors sustained when these investments failed dramatically more than four years ago. UBS also has settled with regulators, including the U.S. Securities and Exchange Commission and FINRA, and paid over $60 million for its wrongful conduct and abuse of investors. The firm did not, however, deny or admit to wrongdoing.

UBS Executives Purportedly Knew Puerto Rico Bonds Would Fail
CNBC’s investigative team obtained approximately “2,000 pages of confidential documents” that display conversations and the “inner workings” between UBS executives in Puerto Rico and the U.S. mainland prior to the funds’ collapse. According to the documents, as far back as a year before the Puerto Rico funds failed, UBS management already knew that problems were brewing and they discussed what could happen if the firm did not deal with these issues immediately.