Investor Lawyers Blog

SEC News: Regulator Proposes Amendment For Settling Securities Transactions, Adopts Rules to Improve Regulatory Framework for Clearing Agencies, Gives Authorities Access to Information from Security-Based Swap Data Repositories, and Enhances Investment Adviser Requirements for Providing Information

Published on: October 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

New Proposed Amendment Would Shorten Period for Settling Securities Transactions

The SEC has voted to propose a rule amendment that would abbreviate the typical length of a settlement cycle period for the majority of broker-dealer securities transactions. Instead of having this period run from three business day following the trade date it would be reduced to two days. The hope is that the amendment, if approved, would lower the risks that can occur due to the value and quantity of unresolved securities transactions before a settlement is completed.

The proposal would modify the Exchange Act’s Rule 15c6-1(a). Under the amendment, a broker-dealer would not be allowed to get into a contract for the sale or purchase of a security that provides fund payments unless it is an exempted security, municipal security, government security, banker’s acceptance, commercial paper, or commercial bill. The regulator hopes that the proposed amendment would reduce the market, credit, and liquidity risks for all participants in the U.S. market.

SEC Adopts Rules Impacting Securities Clearing Agencies

The Commission has adopted rules to enhance the regulatory framework for securities clearing agencies. The improved standards would preside over the running of and overseeing of securities clearing agencies that are either systemically important or are taking part in security-based swaps and other complex transactions. The SEC also voted to propose that the enhanced standards be applied to other securities clearing agency categories.

Investors Capital To Pay $1.1M Over UIT Sales

Published on: October 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Cetera Financial Group network brokerage firm will pay $1.1M in fines and restitution related to its sale of unit investment trusts. The broker-dealer is Investors Capital Corp.

According to the Financial Industry Regulatory Authority, in 74 clients’ accounts, certain advisers recommended steepener notes, as well as short-term trading of UITs that were not suitable for these investors. Investors Capital is also accused of not applying discounts when applicable to certain UIT purchases.

The regulator claims that two representatives at Investors Capital recommended these unsuitable short-term UIT transactions between 6/2010 and 9/2015.

Securities Cases: Hawaii-Based Investment Adviser is Accused of Cherry-Picking Trades, Broker Ordered to Pay $600K for Elder Financial Fraud, and FINRA Bars Ex-Axa Advisors Broker

Published on: October 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Charges Hawaii-Based Investment Adviser for Misleading Clients and Cherry Picking

The U.S. Securities and Exchange Commission has filed civil charges against Oracle Investment Research, which is based in Hawaii, and its owner Laurence I. Balter. The regulator claims that the investment adviser cherry picked trades that were profitable for his own accounts. He is also accused is misleading clients, including senior citizens, about the risks involved in the investments he recommended, as well as about the fees they would be charged.

According to the SEC Enforcement Division, Balter and Oracle Investment Research bought options and equities in an omnibus account but waited to distribute the trades until their execution. Then, he would allegedly move the profitable trades into his accounts and the unprofitable ones to the accounts of clients.

U.S. Supreme Court Hears Insider Trading Case

Published on: October 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Supreme Court is hearing an insider trading case in which a man convicted of the crime is disputing that decision. Bassam Salman claims that he should not have been convicted of insider trading and that the trading he engaged in was not illegal.

Salman made nearly $1.2M trading on information provided by his brother-in-law. The information he traded on had to do with deals involving Citigroup Inc. (C) clients. His relative, Maher Kara, was an investment banker there.

However, as Salman’s lawyer argues, prosecutors have to prove that the alleged source of insider information in insider trading cases obtained a tangible benefit in return for providing the tip. Salman maintains that his brother-in-law did not make such a gain.

Credit Suisse Settles for $90M Allegations that It Misrepresented Performance Metric

Published on: October 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse Group AG (CS) has admitted wrongdoing and will pay a penalty of $90 M to the SEC settle civil claims accusing the firm of misrepresenting how much it brought into its wealth management business.

According to the regulator’s probe, Credit Suisse strayed from its methodology for figuring out NNA (net new assets), which it disclosed to the public. This is the metric that investors value to gauge a financial institution’s success in bringing in new business.

Although disclosures said that the bank was assessing assets individually according to each client’s goals and intentions, Credit Suisse would occasionally employ an undisclosed approach that was “results-driven” to determine NNA to satisfy specific targets that senior management had set. SEC Enforcement Division Director Andrew J. Ceresney said that the bank’s failure to reveal that it was employing a results-driven approach prevented investors from having the chance to properly judge Credit Suisse’ success in drawing in new money.

Oil Company Wants SEC’s Texas Fraud Case to Go to Trial

Published on: October 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Sethi Petroleum Inc. and its founder Sameer P. Sethi are asking a federal judge to send the U.S. Securities and Exchange Commission’s fraud case against it to trial. Sethi Petroleum is based in Dallas, Texas. The regulator had sought summary judgment in the Texas lawsuit, which accuses Sethi Petroleum and Sethi of fraudulently selling securities to investors for a drilling project in Montana and the Dakotas. However, the two of them claim that a jury needs to decide whether the interests that investors are holding are even securities.

The Commission claims that Sethi raised over $4M in a little over a year for the oil venture with the promise of 20 gas and oil wells. 90 investors in nearly 30 states were promised 62.5% net working interest on these wells. They were purportedly told that wells were already making 1 million barrels/month, when Sethi Petroleum actually only held interests in just eight wells—and not all of them were being drilled—in which investors held only .15 to 2.5% interest. These wells produced far less than the 1 million barrels/month touted, claims the regulator. The actual figure was closer to 9,000 to almost 14,000 barrels/month.

The SEC claims that Sethi invested just $950K of investor funds in the wells, while he used $577K to pay himself and his dad. $1.1M of investor funds purportedly went to employees at Sethi Financial Group, with sales employees getting $1.04M. Seth is accused of lying about his own record of regulatory and criminal violations and his company is accused of lying when it claimed that it was working with Hess Corp. and Mobil Corp.

Morgan Stanley Charged by Massachusetts for Running Allegedly Unethical Sales Contests

Published on: October 3, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts claims that Morgan Stanley Smith Barney (MS) ran a high-pressure sales contest to give its financial advisers incentive to get clients to borrow funds against their brokerage accounts. Massachusetts Secretary of the Commonwealth William Galvin filed the complaint against the firm.

According to the state, from 1/14 through 4/15, Morgan Stanley conducted two contests in Rhode Island and Massachusetts that involved 30 advisers. The object of the contests were to convince customers to take out loans that were securities-based. It involved them borrowing against the value of securities found in their portfolio. The securities were to be collateral.

Galvin’s office said that the contests urged Morgan Stanley advisers to cross-sell loans that were backed by investment accounts in order to enhance lending business, as well as banking, and stay competitive with other firms. Galvin claims that advisers were told to get clients to establish credit lines even if they had no plans of using them. The state’s complaint said that clients would be targeted after they’d mention certain key “catalysts” including graduations, weddings, and tax liabilities.

UBS Financial Services to Pay Over $15M to Settle Charges Related to the Sale of Reverse Convertible Notes to Retail Investors

Published on: September 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission (SEC) said that UBS Financial Services (UBS) has consented to pay over $15 million to resolve civil charges accusing it of not adequately training and educating sales team members regarding complex financial products that were sold to retail investors. According to the SEC’s order, UBS did not put into place procedures and policies that were reasonably designed to train and educate registered representatives about making suitable recommendations regarding reverse convertible note sales. The purported lack of education and training caused certain firm representatives to fail to adequately understand the nature of the reverse convertible notes they were selling.

The SEC is accusing UBS of inadequate supervision from 2011 through 2014. The regulator said that because of these supervisory issues, the firm did not prevent the resulting violations of securities laws through the wrongful sale of reverse convertible notes. It was during this time that UBS Capital Markets’ Structured Solutions unit structured about 2,500 reverse convertible notes that were based on 425 underlying stocks. As a result, claims the SEC, UBS registered representatives sold about $548 million in reverse convertible notes to over 8,700 unsophisticated retail investors. As is typical with such consent judgments and settlements, UBS is neither admitting nor denying the SEC’s findings.

Reverse Convertible Notes

Reverse convertible notes are complex structured note products that are not suitable for most investors. They are often high risk and very volatile. The notion of implied volatility drives the performances of reverse convertible notes. They are debt obligations of the issuer and linked to the performance of a securities basket or an unrelated security. They are not for everyone and they come with certain risks.

Former ARCP CFO Pleads Not Guilty to Criminal Securities Fraud Charges

Published on: September 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Brian S. Block, the ex-CFO of American Realty Capital Properties Inc., now called Vereit, has pleaded not guilty to criminal charges that accuse him making false filings with the SEC, making false certifications, securities fraud, and conspiracy to commit securities fraud. His criminal trial is scheduled for May 2017.

The U.S. Department of Justice had filed the charges against Block earlier this month. He was arrested at his home in September.

According to a statement issued by Manhattan U.S. Attorney Preet Bharara, Block is accused of knowingly misleading the public and doing so through material misrepresentations about a key metric for evaluating the real estate investment trust’s 2014 financial performance. The government claims that Block overstated, by approximately $13M, the “adjusted funds from operations” for that year. As a result, the public thought that ARCP was performing better than how it was actually doing.

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SEC Accuses Peruvian Traders of Insider Trading, Charges Anheuser Busch InBev with Whistleblower Protection and FCPA Rule Violations, and Orders an Oil Services Company to Pay $140M Over Accounting Fraud Allegations

Published on: September 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Claims Peruvian Attorneys and Broker-Dealer Manager Used Accounts to Insider Trade

The U.S. Securities and Exchange Commission has filed charges against three people in Peru, accusing them of insider trading prior to the merging two mining companies. The regulator wants penalties, disgorgement, and interest.

According to the Commission, HudBay Minerals Inc. employee Nino Coppero del Valle told fellow lawyer and friend Julio Antonio Castro Roca about a tender offer the mining company had turned in to acquire shares in August Resource Corp., which is located in Arizona. Hudbay is based in Canada.

Castro then allegedly traded using this materially nonpublic information via a brokerage account that was held by a shell company in the British Virgin Islands. He is accused of doing this so that the trades couldn’t be traced back to the two of them. They purportedly made over $112,000 in illicit profits.