Investor Lawyers Blog

HSBC Executives Are Charged with FX Rigging

Published on: July 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

US prosecutors have arrested HBSC (HSBC) executive Mark Johnson for his alleged involvement in a front-running scam. Johnson is the global head of foreign exchange cash trading at HSBC Bank, which is a HSBC Holdings subsidiary. Also facing criminal charges is Stuart Scott, who is the former head of HSBC foreign exchange cash trading for Europe, Africa, and the Middle East. He was let go in 2014. Johnson and Scott are the first individuals to face criminal charges in the forex rigging probe.

According to the criminal complaint, which charges the two men with conspiracy to commit wire fraud, in 2011 Scott and Johnson inappropriately used information that the bank’s client gave them about a planned sale of one of the client’s subsidiaries. The client had retained HSBC to execute the foreign exchange transaction, which necessitated changing about $3.5B in sale proceeds into British Pound Sterling.

HSBC was supposed to keep the details of this pending transaction confidential. However, Scott and Johnson allegedly misused this information, buying Pound Sterling for the bank’s proprietary accounts, which they held until the transaction went through. This caused the transaction to take place in a way intended to compel the Pound Sterling’s price to jump up.

Ameriprise Financial Advises Clients to Sell OppenheimerFunds Muni Bond Funds with Puerto Rico Debt

Published on: July 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg.com, in the wake of Puerto Rico’s default on July 1 of $911 million of bond payments it owes creditors—including $779 million of general obligation bonds—Ameriprise Financial Inc. (AMP) is recommending that clients sell their OppenheimerFunds (OPY) municipal bond funds that are holding any of the island’s debt. In a report this week, Ameriprise senior research analyst Jeffrey Lindell said that with the acceleration of Puerto Rico bond defaults—as the island tries to lower its $70 billion debt via bondholder losses—mutual funds holding these bonds could end up having to “cut dividend rates.” He also wrote that as Puerto Rico bonds respond to “speculation and news,” the mutual funds’ net asset value could turn “volatile.”

In its recent article, Bloomberg provided data from Morningstar Inc., which reports that as of the end of March, Oppenheimer held $3.5 billion of Puerto Rico securities in 19 funds, which is more than anyone else. Now, Ameriprise wants clients to look at investment options that are not as risky as the funds holding Puerto Rico municipal bonds. The firm is suggesting that clients sell investments involving 16 Oppenheimer muni funds. Included in the recommendation to sell are a number of state specific municipal bond funds, including the:

· Oppenheimer Rochester Virginia Municipal (ORVAX)
· Oppenheimer Rochester Pennsylvania Municipal (OVPAX)
· Oppenheimer Rochester Maryland Municipal (ORMDX)
· Oppenheimer Rochester North Carolina Municipal (OPNCX) and
· Oppenheimer Rochester Arizona Municipal (ORAZX)

Several days after the July 1 default, credit rating agency Standard & Poor’s (SP) reduced the U.S. territory’s credit rating to “default” status. The default was not the first time Puerto Rico was unable to cover debt payments that were due—although it was the first default involving Puerto Rico’s general obligation debt, which was supposed to have a constitutional guarantee.

It was in May that NY City Council Speaker Melissa Mark-Viverito asked the SEC to investigate whether OppenheimerFunds played a part in causing Puerto Rico’s financial crisis to worsen. Mark-Viverito believes that banks, hedge funds, and other investors who bought into Puerto Rico utility debt and general obligation bonds contributed to the territory’s debt woes.

SEC Advisory Committee Recommends Broadening Accredited Investor Pool

Published on: July 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In a voice vote on Tuesday, the U.S. Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies is making a recommendation to broaden the criteria for which investors are eligible to purchase unregistered securities. Currently, an accredited investor that can invest in these securities must have made at least $200K/year for the last two years or have a net worth of at least $1M (the value of one’s main residence not included). Under the recommended broader requirements, investors who have a chartered financial analyst or similar credential, or who have passed the series 82, 65, or 7 securities license exams, would also qualify. The advisory committee wants to create a bigger pool of accredited investor applicants to help small companies raise more funds.

Although the SEC committee’s recommendation isn’t binding, SEC Chairwoman Mary Jo White said that it is important to modify the existing accredited investor definition. The Dodd-Frank Act requires the Commission i to periodically look at the criteria defining an accredited investor.

Prudential Annuities Fined $950K for Not Stopping Broker From Stealing $1.3M from Elderly Customer’s Variable Annuity Account

Published on: July 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Prudential Annuities Distributors Inc. $950K for not identifying and stopping a senior fraud scam that allowed a broker to steal $1.3M from an older investor’s variable annuity account. The self-regulatory organization said that the firm failed on numerous occasions to properly investigate “red flags” indicating that Travis Weitzel was moving money from the 89-year-old’s VA account to a bank account listed under the maiden name of Wetzel’s wife.

According to FINRA, from 6/10 until 9/12, Wetzel turned in 114 forged annuity withdrawal requests to Prudential Annuities. He initiated up to five withdrawals a month, totaling close to $50K. He asked for the money to be wired from the elderly customer’s account to the third-party account of his wife.

The SRO said that Prudential Annuities did as Wetzel instructed without properly investigating the warning signs. When the firm looked at certain withdrawals during several quarterly audits, it saw that the money was going to a third party and determined that these were legitimate transactions. Prudential also purportedly failed to discern what the relationship was between the elderly customer and the third-party account holder.

Securities Fraud News: Union Pension Funds Settle Class Action Case for $64M, Deadline for Implementing Volcker Rule is Extended, and Ex-Panther Energy Trader Goes to Prison For Spoofing

Published on: July 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

$64M Pension Fund Fraud Settlement Reached Against Dana Holding Corp. Executives
Plaintiffs in the shareholder class action case brought against Michael Burns and Robert Richter have reached a $64M out-of-court settlement with the two ex-Dana Holding Corp. executives. The union pension funds include lead plaintiffs SEIU Pension Plans Master Trust, Plumbers & Pipefitters National Pension Fund, and the West Virginia Laborers Pension Trust Fund.

They accused Bornes and Richter, the company’s ex-CEO and CFO, respectively, of purposely misleading investors about Dana Holding’s financial woes in the months prior to its filing for bankruptcy in 2006. Although the securities fraud case was initially dismissed by a district court on the grounds that the plaintiffs failed to show that the two men and Dana knew they were engaging in wrongdoing, the 6th U.S. Circuit Court of Appeals in Cincinnati reversed that decision, saying evidence showed otherwise.

Federal Reserve Gives Banks More Time to Meet Volcker Rule Requirements
The U.S. Federal Reserve has extended the deadline for banks to rid themselves of ownership in certain legacy investments and cut ties with funds that are barred under the Volcker Rule. The rule, part of the Dodd-Frank Act, aims to stop banks with government-backed deposits from betting on Wall Street for their benefit. It doesn’t allow insured banks and their subsidiaries to own or be affiliated in any way with a private equity fund or hedge fund or take part in proprietary trading. Lenders are not allowed to trade using their own capital and are restricted from investing in funds.

AOG Wealth Management President Ordered to Pay Couple $331K for Private Placement Investments

Published on: July 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Arbitration Panel is ordering AOG Wealth Management chief executive and president, Frederick Baerenz, to pay Roger and Barbara Bond $331K in compensatory damages over private placement investments.

The panel found Baerenz liable for unsuitable trading because he allegedly misled the Bonds about the risks involved in the direct private placements they invested in from ’06 to ’09. At the time, Baerenz was affiliated with Pacific West Securities.

The Bonds invested about $941K in private placements. Their legal team contends that these were not suitable investments for them.

Private Placements

Private placements are offerings of a company’s securities that are not registered with the SEC. They are not offered to the general public.

Hedge Funds Continue to See Losses

Published on: July 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg reports that in the 12 months ending in March 2016, funds of hedge funds lost over $100M due to poor performance and outflows. The figures come from eVestment, a research firm that examined data from over 2,500 funds.

According to eVestment’s report, over those four quarters hedge fund clients withdrew $50.3B, whiles managers reported $51.5B in investment losses. Assets in the hedge fund sector dwindled 11% to $841.6B. They have not been that low since June ’09.

Funds of funds invest in hedge fund portfolios. They used to be the largest single investor of these funds and at one point were accountable for nearly 50% of assets. Now they comprise just 28%, reports eVestment. Returns for funds of funds have not improved this year so to date.

Known investors that have begun to pull out significant money from hedge funds include the New York city pension plan, American International Group (AIG)MetLife (MET), and others. The New York Times reports that Larry Robbins of Glenview Capital Management and William Ackman of Pershing Square Capital Management, two of the most well-known hedge fund managers, have lost money consistently. Viking

SEC Fines RiverFront Investment Group For Charging Clients Extra Fees

Published on: July 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission says RiverFront Investment Group has agreed to pay a $300,000 to settle allegations that the firm charged clients additional investment management fees beyond the agreed upon wrap fees. RiverFront is settling the SEC charges without denying or admitting to them.

With wrap fee programs, clients pay a yearly fee that is supposed to cover a number of services, including the cost of trades made by a sponsoring brokerage firm. Any additional fees have to be fully disclosed.

According to the regulator, RiverFront used a designated broker-dealer from ’08 until late ’09, which is when it started to use other brokers. However, although RiverFront told investors that some “trading away” from the sponsoring broker was occurring, the firm did not accurately describe how often this was happening. The use of these other brokers cost clients additional fees.

RiverFront maintains that it had been looking for best execution prices when working with the other broker-dealers, and the SEC acknowledges that the firm did not make money by trading away when it used these brokerage firms. However, clients still paid millions of dollars in added charges. It wasn’t until late 2011 that RiverFront modified its Form ADV disclosure so that clients were notified about its use of non-designated brokers.

SEC News: Regulator Approves In-House Enforcement Reforms, Adopts Guidance For Security-Based Swap Transaction Reporting, and Will Audit Financial Advisers Over Mutual Fund Shares

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

Securities and Exchange Commission to Audit RIAs Over Mutual Fund Share Classes
The SEC has announced that it will audit registered investment advisers so that it can examine the kinds of mutual fund share classes that they sell to clients. Share class recommendations and compliance are of particular interest to the regulator.

Because RIAs are fiduciaries, they have a duty to uphold their clients’ best interests. This includes selecting the lowest-cost share classes and 529 plan investments on a client’s behalf, depending on the latter’s investment goals. The Commission wants to see whether conflicts of interest exist, such as when an adviser is also the brokerage firm or is affiliated with a firm that garners fees from selling certain mutual fund share classes.

The SEC also wants to look at whether RIAs are disclosing if there is anyone getting paid compensation for the sale of either mutual fund share classes or other investment products. The fee might be a charge for the actual sale or a fee incurred according to the assets sold.

SEC Adopts Amendments to Regulation SBSR
The U.S. Securities and Exchange Commission has adopted guidance and amendments for Regulation SBSR, which includes rules for the public dissemination and regulatory reporting of security-based swap transactions. The rules and guidance were created to enhance transparency in the market for security-based swaps. They were mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Bill to End Securities Law Exemptions in Puerto Rico Passes the U.S. House

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

The U.S. House of Representatives has voted to pass legislation that would get rid of exemptions from federal securities law for registered securities offered in U.S. territories, including Puerto Rico. The bill is called the U.S. Territories Investor Protection Act of 2016. Rep. Nydia Velazques (D-NY), who sponsored the legislation, said that if passed into law it would give key protections to American citizens in the territories. The bill would also put an end to long standing exemptions that were granted to territorial securities under the Investment Company Act.

Rep. Velazquez believes that had there been such a law previously, certain investment losses that have been sustained in the U.S. territories could have been prevented. She recently noted that certain issuers of securities in Puerto Rico have allegedly become their own underwriters, allowing them to sell and package the securities without letting investors know of this conflict of interest.

Unfortunately, this exact situation is what played out in Puerto Rico over the last decade. Many residents in Puerto Rico have suffered because they were not told of conflicts of interest and about how risky the bond funds they bought were. Their losses have been further compounded by the U.S. territory’s debt crisis. Puerto Rico owes $70 billion to investors, many of whom purchased the bonds indirectly through bond funds.

With Velazquez’s bill, investment companies on the island and other U.S. territories would have to deal with the same rules as their counterparts on the mainland. The legislation includes a three-year grace period for companies to get into compliance with new rules. (It also grants the SEC the authority to extend that timeframe via rulemaking if necessary.)

Last month, U.S. President Barack Obama signed into law PROMESA, the Puerto Rico Oversight Management and Economic Stability Act, which will help the island restructure its debt. On July 1, Puerto Rico defaulted on $911 million of bond payments that were due to creditors that day. At least $799 million of that was general obligation debt, which was supposed to be constitutionally guaranteed. However, Puerto Rico Governor Alejandro Garcia Padilla issued a debt moratorium that made the default on these debt payments possible.