Investor Lawyers Blog

SEC Cases: Och-Ziff Hedge Fund Settles FCPA Violation Charges for $413M, Employee is Accused of Insider Trading Prior to Drug Announcement, and Company Pays Fine After Firing Whistleblower

Published on: October 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

NY Hedge Fund to Pay $413M to Settle Civil and Criminal Charges Over FCPA Violations

Och-Ziff Capital Management Group has settled both criminal and civil charges accusing the New York hedge fund of paying bribes to obtain business in Africa. This is the first hedge fund to face punishment over violating the Foreign Corrupt Practices Act.

As part of its settlement with the SEC, Och-Ziff will pay almost $200M to the Commission. Meantime, the hedge fund’s CEO, Daniel S. Och, will pay the regulator almost $2.2M to resolve charges accusing him of causing certain violations. CFO Joel M. Frank also agreed to settle the SEC the charges against him and will pay a penalty.

Forcerank Will Pay $50K Fine for Illegally Offering Security-Based Swap Offering to Retail Investors

Published on: October 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to a Securities and Exchange Commission probe, Forcerank LLC will pay a penalty of $50K for illegally offering complex derivatives products to retail investors. The company did this via mobile phone games referred to as “fantasy sports for stocks.” Forcerank is settling the case without deny or admitting to the findings that it violated sections of the Securities Exchange Act and the Securities Act.

The SEC’s order said that Forcerank’s mobile phone games involved players predicting the order that 10 securities performed against one another.. Players earned points and sometimes even money prizes according to how accurately they predicted the outcomes. The New York-based company earned 10% of entry fees, as well as developed a data set regarding market expectations that it intended to sell to investors, including hedge funds.

The SEC said that the agreements between players and Forcerank were security-based swaps since they provided for a payment contingent upon an event linked to a possible commercial, economic, or financial result and were determined by individual securities’ values. The Commission also claims that Forcerank LLC neglected to submit a registration statement for a security-based swap offering and did not sell contracts using a national securities exchange. Both are required to make sure that full transparency about a security-based swap offering is provided to retail investors and transactions are restricted to platforms that are under the highest regulation.

Deutsche Bank Reaches $9.5B Settlement With the SEC For Not Properly Safeguarding Information

Published on: October 12, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank Securities (DB) will pay a $9.5B penalty to the U.S. Securities and Exchange Commission for not properly safeguarding material nonpublic research information. Even though it is settling, Deutsche Bank is not denying or admitting to the findings.

According to the regulator, Deutsche Bank urged its equity research analysts to communicate often with trading personnel, sales staff, and customers, but it did not have in place the proper procedures and policies to stop analysts from disclosing certain information, such as analyses and views that hadn’t been published yet, estimate changes, trading day squawks, short-term trading recommendations, non-deal road shows, and idea dinners. The SEC’s order also found that the bank had put out a research report that had a “BUY” rating for Big Lots, the discount retailer, but that the rating did not line up with the perspective of the analyst who had prepared and certified it as accurate.

This particular individual, analyst Charles Grom, had told others that the discount retailer should have gotten a downgrade. Grom was eventually charged by the SEC with certifying a stock rating in a manner that was not consistent with his own views. He settled the charges with a suspension from the securities industry and by agreeing to pay a $100K penalty.

Hedge Funds Holding Puerto Rico General Obligation Bonds File Lawsuit

Published on: October 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A number of hedge funds with Puerto Rico general obligation bonds want a court to stop the U.S. territory from using its sales-tax revenue to pay back other debt. Those hedge funds say that such an action is a violation of the Commonwealth’s constitution.

To date, the Commonwealth owes nearly $13 billion of general obligation bonds. Under its constitution, Puerto Rico is required to pay back its general obligation bonds before paying off other expenses. According to the plaintiffs, part of the territory’s’ sales tax revenue is supposed to go toward that repayment.

The plaintiffs sued Puerto Rico Governor Alejandro Garcia Padilla to stop the territory from moving money away from bondholders, which they say violates the new federal law concerning Puerto Rico, called PROMESA. The hedge funds submitted their amended complaint last week, in which they added the Puerto Rico Sales Tax Financing Corp., commonly called COFINA, as a defendant. The plaintiffs include entities under the management of Aurelius Capital Management, Covalent Partners, Autonomy Capital, Monarch Alternative Capital, FCO Advisors, and Stone Lion Capital Partners.

San Francisco Hedge Fund Files Securities Fraud Lawsuit Against Blood Testing Company Theranos

Published on: October 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Wall Street Journal and other media are reporting that Theranos is now the defendant of a securities fraud lawsuit brought by one of its major investors. The plaintiff is San Francisco hedge fund Partner Fund Management, which is one of the blood testing company’s largest financial backers. Partner, which brought its case in the Delaware Court of Chancery, is seeking damages beyond its investment and costs related to the lawsuit.

Although the complaint is under seal, Partner has confirmed that it has brought a legal case against the beleaguered blood testing company. According to a letter, which the hedge fund sent to investors, Theranos took part in “lies, material misstatements, and omissions” to persuade Partner to invest in the company. The letter notes that Theranos CEO/founder Elizabeth Holmes and ex-President Sunny Balwani are also defendants in the case.

Partner Fund believes that Holmes was deceptive when claiming that Theranos’s proprietary technologies were working and close to receiving regulatory approvals. Meantime, Theranos has stated that it would combat the securities fraud lawsuit.

RBS Securities Settles MBS Fraud Case With Connecticut for $120M

Published on: October 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Royal Bank of Scotland (RBS) subsidiary RBS Securities Inc. will pay the state of Connecticut $120M to settle allegations related to its dealings with mortgage-backed securities leading up to the 2008 financial crisis. According to state officials, RBS played a part in the crisis when it neglected to do the proper due diligence around certain tools for mortgage-backed investments. They accused the subsidiary of unethical and dishonest behavior, as well as of making false statements.

They contend that RBS, which was one of the largest underwriters of residential mortgage-backed securities, did not make sure that the information it offered about RMBS deals was accurate. Connecticut Attorney General George Jepsen said that he and the state’s Department of Banking worked together in investigating this matter.

RBS doesn’t securitize newly originated RMBSs anymore. It was, however, the lead underwriter for approximately 250 residential mortgage-backed securities between ’05 and ’08. Part of its job was to perform the due diligence on mortgage loans used for collateral. However, Connecticut claims that RBS’s due diligence was “inadequate,” causing “omissions and misstatements” to be made to the public and investors. They even contend that in certain instance, RBS rated certain loans that had already been lower rated by third-party vendors with higher-grade ratings.

Texas Securities Cases: IMS Securities to Pay $100K Over Variable Annuity Exchanges, State Regulator Bans Broker from Making Nontraded REIT Recommendations, and Former Dallas Billionaire Sam Wyly to Pay $198M To Settle Fraud Case

Published on: October 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Texas-Based Brokerage Firm Accused of Inadequate Supervision Involving VA Exchanges

The Financial Industry Regulatory Authority is ordering IMS Securities Inc. to pay a $100K fine. The Texas-based brokerage firm is accused of failures related to its monitoring of variable annuity exchanges. By settling, however, it is not denying or admitting to the allegations.

According to the self-regulatory authority, the firm exhibited inadequate supervisory procedures for “problematic rates of exchange” in transactions involving variable annuities. FINRA claims that from 7/ 15/13 through 7/8/14, IMS Securities depended on its CFO to review annuity exchanges but did not provide tools or guidance to help look for “problematic rates of exchange.” The broker-dealer is accused of not probing possibly “problematic patterns” of VA exchanges and not enforcing written supervisory procedures related to consolidated reports.

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.