Investor Lawyers Blog

SEC Probes Wells Fargo Over Allegations of Violations Involving Whistleblower Protections and Investor Disclosures

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

The U.S. Securities and Exchange Commission is investigating whether Wells Fargo (WFC) violated whistleblower protections, in the wake of allegations of aggressive and illegal sales tactics, and misled investors over these allegations. The probe comes after Senators Jeff Merkeley (D-Ore), Elizabeth Warren (D-Mass), and Robert Menendez (D-NJ) sent the Commission a letter asking the regulator to examine whether the bank misled investigators over cross-selling claims.

In the letter, the US senators asked the SEC to look into whether Wells Fargo violated Sarbanes-Oxley’s internal control provisions and whistleblower protection laws by firing employees who attempted to report alleged misconduct involving fake accounts. The three senators also asked the Commission to look at whether the bank failed to properly disclose bogus accounts while marketing high figures related to the creation of accounts.

Wells Fargo recently came under fire for setting up some two million bogus accounts. It settled the case, which was brought by California prosecutors and federal regulators—including the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau— for $185M in penalties and $5M in customer restitution. Questions have since arisen over why the bank did not notify investors about these cross-selling allegations until it settled with regulators, even though Ex-CEO John Stumpf admitted that he knew about the problems going as far back as 2013.

Nomura To Pay Over $3M to Settle RMBS Fraud Claims brought by NCUA for Credit Unions

Published on: November 2, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Nomura Home Equity Loan, Inc. and Nomura Asset Acceptance Corporation have agreed to jointly pay over $3M to settle allegations that they engaged in the sale of faulty residential mortgage-backed securities (RMBS) to the Western Corporate Federal Credit Union and the U.S. Central Federal Credit Union. The National Credit Union Administration brought the RMBS fraud case on behalf of the two corporate credit unions.

It was in 2011 that the NCUA Board, while serving as liquidating agent for both financial institutions, brought the claims against the Nomura entities. The RMBS lawsuit was brought in federal district courts in Kansas and California.

The $3M settlement dismisses NCUA’s pending cases against the two firms. By settling, neither firm is denying or admitting to the alleged wrongdoing.

Voya Financial Advisors, Cetera Advisors, and Six Other Broker-Dealers to Pay $12.5M in Fines and Restitution For Allegedly Not Properly Supervising The Sale of L-Share Variable Annuities

Published on: November 2, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining eight brokerage firms $6.2M for not supervising the sale of L-share variable annuities to customers. Five of the firms must pay another $6.3M to customers because the variable annuities that they were purchased were potentially not compatible with the latter’s investment goals and accounts.

The firms, and their sanctions, include: Voya Financial Advisors Inc., for $2.75M fine, First Allied Securities, Inc., for $950K fine, VSR Financial Services, for $400K fine, Cetera Financial Specialists LLC, for $350K fine, Cetera Advisors Networks LLC, for $750K fine, Summit Brokerage Services, Inc., for $500K fine, Kestra Investments, for $475K fine, and FTB Advisors, for $250K fine. The firms that have to pay restitution are: Voya, for $1.8M, while first Allied, Cetera Advisors Networks, VSR, and Summit Brokerage Services will collectively pay $4.5M. All the firms are settling, but they are not denying or admitting to any of the alleged claims.

At issue was the sale of the L-share annuities, which are “potentially incompatible, complex and expensive long-term minimum-income and withdrawal riders.” L-share annuities are more likely to pay registered representatives and their firms higher compensation than more traditional instruments.

Massachusetts Regulator Charges Ex-Investment Adviser Over $500K Ponzi Scam

Published on: November 1, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Secretary of the Commonwealth of Massachusetts has charged Stephen S. Eubanks over his alleged involvement in a Ponzi scam. According to state securities regulator William F. Galvin, the former investment adviser took at least $529K from 15 investors, including neighbors, friends, and their families. Four of the investors were Massachusetts investors who gave $195K of the funds.

According to the state’s complaint, in 2011, Eubanks allegedly pretended he was a successful hedge fund manager who ran Eubiquity Capital LLC. He solicited investors to get them to invest their money in options, stocks, and other securities. However, instead of investing their funds, he allegedly used $145K for his own expenses, including trips to Martha’s Vineyard and to cover boat costs, and $140K to pay back earlier investors.

Galvin’s notice said that Eubanks lost all of the investors’ money. Many of the investors were close friends of Eubanks, including an ex- college roommate and the older father of a former fraternity brother. He befriended the other investors online.

CFTC Cases: IB Capital Fx Ordered to Pay Over $35M in Restitution For Soliciting Investors While Improperly Registered, $21.8M Default Judgment Obtained in Commodity Pool Fraud, and Spoofing Case Leads to Over $38M in Monetary Sanctions

Published on: October 31, 2016 | by Shepherd Smith Edwards & Kantas, LLP

IB Capital FX, Two Dutch Citizens to Pay Over $35M to Customers
IB Capital FX, LLC, Emad Echadi, and Michel Geurkink must pay, severally and jointly, a $420K civil penalty and $35M in restitution for soliciting at least $50M from 1,850 customers internationally and in the US even though they lacked the required registration for trading that involved off-exchange margined retail foreign (forex) currency. Also, the firm should have been registered with the US Commodity Futures Trading Commission.

It was the CFTC that obtained the consent order, which permanently prevents the defendants from violating CFTC Regulations and the Commodity Exchange Act further. They also are now subject to permanent registration and trading bans.

$21.8M Default Judgment Issued is in Ponzi Scam
In a default judgment, Puerto Rico resident Alvin Guy Wilkinson and his Wilkinson Financial Opportunity Fund, LP and Chicago Index Partners, LP—both are Connecticut-based financial firms—will jointly and severally pay $21.8M for misappropriating commodity pool funds in a purported Ponzi scam. According to the CFTC’s order, the defendants committed fraud, did not register with the SEC, engaged in misappropriation, and made misrepresentations to the National Futures Association.

American Capital REIT is Accused of Charging Hundreds of Millions of Dollars in Excessive Fees

Published on: October 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A class action securities case brought by stockholders is accusing American Capital Agency Corp. of charging excessive management fees that were given to directors and executive officers as compensation. The real estate investment trust invests in agency mortgaged backed securities “on a leveraged basis.” Because of this, American Capital must pay 90% of profits to investors as dividends.

However, according to William Wall, the lead plaintiff in the REIT case, a number of the individual defendants “improperly funneled” millions of dollars that should have gone to AGNC stockholders. He said that the REIT’s board allegedly forced the company to pay the AGNC Manager “exorbitant” fees in light of the management agreement between the AGNC Manager and AGNC. The fees went to the defendants.

Noting that the REIT’s dividend is a key metric for its success, the class action securities complaint said that in 2012 the board cut AGNC’s dividend by over 50%. The plaintiff said that the board had the contractural right to either end the unfair management agreement or make the AGNC Manager charge fees that were fairer. Instead, AGNC allegedly kept paying the manager over $100M annually even though results were “abysmal.”

Estate of Bernie Madoff’s Friend to Pay Trustee Irving Picard Over $262M

Published on: October 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The estate of Stanley Chais has agreed to pay the victims of Bernard Madoff’s Ponzi scam $277M to settle claims accusing Chais, a Beverly Hills manager, of enriching himself through the fraud while costing thousands of investors, including his own clients, money.

Chais was one of Madoff’s oldest friends and one of his earliest investors. When the multi-billion dollar scam failed eight years ago, however, Chais claimed he had been fooled by Madoff, too, and that he knew nothing about the fraud. Yet he and his estate have since been the subject of securities fraud cases related to the Madoff Ponzi scam for years. Chais died in 2010.

Now, his estate has agreed to pay Madoff trustee Irving Picard over $262M, as well as $15M to California’s attorney general to settle a class action case. Picard had accused Chais and his wife Pamela, as well as entities under their control, of allegedly making about $1B from bogus securities transactions conducted by Madoff’s firm. Chais also earned hundreds of millions of dollars as a money manager for sending his customers’ money into Bernard Madoff’s financial firm.

Hedge Funds with Puerto Rico Revenue Bonds Want Court to Delay General Obligation Bondholders’ Lawsuit

Published on: October 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A battle of hedge funds, and their competing interests, has erupted in Puerto Rico over the last few weeks. This week, hedge funds Tilden Park Capital Management LP, Whitebox Advisors LLC, Merced Capital LP, and GoldenTree Asset Management LP filed a motion asking a court to impose a legal stay that would delay the lawsuit filed by general obligation bondholders that want Puerto Rico to stop directing sales-tax revenue away from the general fund. These hedge funds that submitted the motion collectively hold about $2 billion of tax revenue bonds, which are called COFINA bonds, locally.

Meantime, the general obligation bondholders that filed the lawsuit are also hedge funds. They include entities under the management of Aurelius Capital Management, FCO Advisors, Autonomy Capital, Covalent Partners, Monarch Alternative Capital, and Stone Lion Capital Partners. Earlier this month, they asked a court to stop the island from using sales-tax revenue to pay back COFINA debt. Those funds believe that the sales tax revenue should pay back the general obligation bonds first because Puerto Rico’s constitution states that general obligation should be repaid before other debt. However, the hedge funds holding the COFINAs that are requesting the legal stay are arguing that COFINA’s share of the sales-and-use-tax should not be “subject to clawback” in the event of a payment shortfall of the general obligation bonds.

This fight is playing out at the same time the U.S. Government is trying to help the U.S. Commonwealth with its financial crisis. PROMESA, which stands for the Puerto Rico Oversight Management and Economic Stability Act, is the new law that includes the legal stay that the CONFINA holders want imposed. The stay postpones creditor lawsuits against the island until February 15, 2017 in order to give Puerto Rico time to work out how to repay the $70 billion of debt it owes. Although Puerto Rico is way overdue on $1.8 billion of principal plus interest payments, this includes what the island owes on general obligation bonds, the Commonwealth paying back COFINAs.
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SEC Adopts Final Rules to Modernize Fund Raising for Intrastate and Regional Offerings, Enhance Information that is Reported by Funds, and Enhance the Effectiveness of Risk Management Programs

Published on: October 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has adopted final rules to modernize the way companies are allowed to raise funds for their businesses via small and intrastate offerings, all the while keeping investor protections in place. The final rules include amendment to Securities Act Rule 147 and a new Securities Act Rule 147A for out-of-state residents and companies organized or incorporated outside the state.

Under the Rule 147A and Securities Act Rule 147 amendments, the current intrastate offering framework, which allows companies to raise funds from investors in their state without having to federally register the sales and offerings, would be modernized. New Rule 147A would differ from Rule 147 in that it would permit out-of-state residents and companies outside the state, or companies that were incorporated outside the state, to access these securities offerings.

There are also now amendments to Regulation D’s Rule 504 that would grant registration exemption for offers and sales as high as $1M of securities within a one-year period, as long as the issuer does not qualify as an Exchange Act reporting company, blank check company, or investment company. The aggregate quantity of securities that could be offered and sold under Rule 504 within any yearlong period would go up from $1M to $5M. Meantime, the new final rules would repeal Rule 505, which allowed for offerings of up to $5M yearly that were sold only to accredited investors or 35 non-accredited investors maximum.

SEC Cases: Embraer Settles FCPA Charges for $205M, Bank Leumi is Charged with Engaging Unregistered US Cross-Border Business, and Lime Energy Company and Executives Settle Accounting Fraud Charges

Published on: October 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Aircraft Manufacturer Settles FCPA Violation Charges With the SEC and DOJ for Over $205M

Embraer S.A. has arrived at a global settlement with the U.S. Securities and Exchange Commission, the U.S. Department of Justice, and Brazilian authorities. The agreement resolves allegations that the aircraft manufacturer violated the Foreign Corrupt Practices Act, and it requires the company to pay over $205M.

According to the SEC’s complaint, Embraer made over $83M because of bribe payments made by its subsidiary in the US. The payments were made via third-party agents to foreign government officials in Saudi Arabia, the Dominican Republic, and Mozambique, as well as an agent in India. The company allegedly generated false records and books to hide the illegal payments and took part in an accounting scam in India.

To settle, Embraer will pay the DOJ $107M as part of a deferred prosecution deal and over $98M to the SEC in disgorgement plus interest. It is also expected to pay disgorgement to authorities in Brazil in that country’s civil case.