Investor Lawyers Blog

Financial Firms and Securities Cases: BNY Mellon to Pay $3M Over Computer Glitch that Affected Mutual Funds, Wedbush Fined $675K by FINRA and Nasdaq, and Triad Advisers Settles UIT Charges

Published on: March 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

BNY Mellon to Pay Massachusetts $3M Over Computer Problem That Impacted Mutual Funds

Bank of New York Mellon (BK) will pay $3 million to the state of Massachusetts to resolve a probe that found that a computer glitch did not calculate net asset values for over 1,000 mutual funds. Although the bank hired SunGard InvestOne to calculate these values, there was one-weekend last year when a malfunction occurred.

The Massachusetts Securities Division conducted an investigation and discovered that BNY Mellon lacked a back-up plan to deal with such a malfunction. Because of this, non-uniform and untimely information was sent to clients and funds. As Secretary of the Commonwealth William F. Galvin noted, it is the job of financial institutions like BNY Mellon to oversee third-party vendors and put into place a back-up plan in the event a vendor’s system fails. The bank says that in the wake of the outage, it took action to protect client interests and ensure that the daily net asset values were issued.

BNY Mellon said that it has since made investors and the funds that sustained losses because of the computer error whole. The bank has made changes to supervisory procedures.

WedBush to Pay $675K Fine to Nasdaq and FINRA over Trading and Clearing Errors Involving Exchange-Traded Funds

Wedbush Securities Inc. will pay a $675K fine to the Nasdaq Stock Market and the Financial Industry Regulatory Authority Inc. over clearing and trading mistakes involving redemption and trading activities related to leveraged ETFs. Wedbush served as Scout Trading, LLC’s clearing firm.

According to FINRA, from 1/10 to 2/12, Scout Trading was not long enough in the shares that made up the redemption orders. Scott Trading turned in more than 250 naked redemption orders via Wedbush. These involved nearly a dozen ETFS that totalled over 295 million shares. This activity and ETF short-selling on the second market by Scout Trading led to Wedbush’s failure to deliver on a number of occasions. (This could have led to a naked short sale in which the seller does not arrange to borrow the securities in a manner timely enough for the buyer to receive the delivery within the standard three days.)

$2.5B in Investor Money from Madoff Ponzi Scam Went Unclaimed

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

According to Fortune and Bloomberg, victims of Bernard Madoff’s Ponzi Scam were able to recover 57 cents for every dollar they invested in his fake funds because there were investors who never filed claims for $2.5B of the $20B lost in the fraud.

Seeing as the deadline to file claims to recover losses from Madoff’s scheme passed nearly seven years ago, it would be too late for any of these parties to try to get that money back now.

Fortune says no one even knows where this $2.5B is, as the Madoff’s trustee only sought to recover money from claims made. Bloomberg believes that almost half of this money is owned by feeder funds that invested with Madoff. The media outlet said that a couple of Caribbean-based hedge funds are the likely investors. Bloomberg speculated that the funds may have figured that whatever they recovered on the $1.2B would have been much smaller than what they might have had to give back had they stepped forward. The owners of the other $1.3B remain unknown, but could be individual investors who had reasons for not coming forward and filing their own claims.

To date, trustee Irving Picard has paid direct investors about $9.2B. There are tens of thousands of others who, unable to file directly with Picard because they’d invested in the feeder funds, are still waiting to get some money back.

SEC News: Municipal Adviser Allegedly Did Not Disclose Conflict, Microcap Company CEO is Accused of Making False Claims, and Whistleblowers are Awarded $3M

Published on: March 18, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Municipal Advisor Accused of Not Telling Client About Conflict
In the first case enforcing municipal advisor’s fiduciary duty under the 2010 Dodd-Frank Act, the SEC is filing charges against Central States Capital Markets, its CEO John Stepp, and two employees. The regulator claims that in 2011, David Malone and Mark Detter arranged for a brokerage firm to underwrite the municipal bond offerings. Both of them and Stepp were registered representatives at the firm. They did not tell one particular municipal client about this relationship or that they would benefit financially from the arrangement.

In three offerings, said the SEC, Central States was paid fees from “the City” for advisory work and also received 90% of the underwriting fees. The regulator said that Central States and the three men breached their duty to the client by not revealing the conflict even though they knew this was an issue. The SEC said this failure to disclose the conflict prevented the city from being able to obtain financial advice that was unbiased.

Central States and the three men consented to the SEC’s order without denying or admitting to the findings. Central States will pay $289,800 in disgorgement and interest and an $85K penalty. Detter will pay a $25K penalty and serve a two-year financial services industry bar, Malone will pay a $20K penalty and serve a one-year industry bar, and Stepp will pay a $17,500K penalty plus serve a suspension of six months from acting in a supervisory role with any brokerage firm, municipal advisor, or investment adviser.

Microcap Company CEO Charged With Making False Claims, Including Fake Clean Energy Contracts With Foreign Governments
The Securities and Exchange Commission is charging Cary Lee Peterson, who is the CEO of RVPlus Inc., with making false claims of having lucrative ties with the United Nations and billions of $2.8B of clean energy contracts with governmental bodies in Liberia, Haiti, and Nigeria. In truth, RVPlus had no connections with the U.N. and the contracts at issue never existed.

According to the regulator, Lee Peterson made bogus claims in public filings for the company and statements that he made to private investors, took control of over 90% of RVPlus’s free trading shares, and issued them to individuals who illegally sold them into the market. In SEC filings, Peterson claimed on more than one occasion that RVPlus had put out invoices and was owed millions of dollars from the contracts.

GL Capital Partners Ex-CEO Pleads Guilty to $15M Fraud

Published on: March 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Daniel Thibeault, the ex-CEO of GL Capital Partners, has entered a guilty plea to criminal charges accusing him of bilking fund investors of $15M. According to the Securities and Exchange Commission, Thiebeault used funds that were in the GL Beyond Income Fund to make fake consumer loans.

Meanwhile, investors were led to believe that their money was going toward buying or making real consumer loans. They hoped to make a return from the interest. Instead, the fake loans were reported as GL Beyond Income Fund assets to hide the money that Thibeault was misappropriating.
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Two-Ex Rabobank Bankers Get Prison Sentences Over Libor Involvement

Published on: March 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A U.S. district court judge has sentenced two former Rabobank bankers to time in prison for their involvement in rigging the London interbank offered rate. Anthony Allen received a two-year prison term and Anthony Conti was sentenced to a year and a day.

Conti and Allen were convicted by a jury in last year. Prosecutors accused them of conspiring to turn in fake rates for calculating Libor, which is based on submissions from over a dozen banks. They believed the two bankers sought to help other Rabobank traders make more money on trades. Meantime, their defense lawyers contended that the men’s submission to Libor were made in good faith.

Allen was the worldwide head of liquidity and finance at Rabobank and the supervisor of Conti, who was a senior money markets trader who made submissions to Libor daily. Libor plays a key role in determining the borrowing costs for trillions of dollars in loans.

The U.S. Justice Department has criminally charged 11 other individuals in its probe into Libor rigging. Four of them, three of them who were traders at Rabobank, have entered guilty pleas.

Stockbroker Fraud: Ex-JPMorgan Broker Who Gambled Gets Five Years, FINRA Bars Broker Over Elder Financial Fraud, Risky Alternative Investment Sales and Ex-Broker is Indicted by Jury for Allegedly Bilking Clients of $2.8M

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

Former JPMorgan Broker Who Stole Over $20M from Richest Clients, Gambled, Goes to Prison
Michael Oppenheim, a former broker with JPMorgan Chase & CO. (JPM), has been sentenced to five years behind bars. Oppenheim pleaded guilty last year to stealing over $20 million from 10 of his richest clients. At one point Oppenheim managed nearly $90 million for 500 clients. He claims he was addicted to sports gambling.

He began betting on NFL games in 1993 and later got involved in online sports betting. After losing hundreds of thousands of dollars, he began stealing from clients to cover his losses. Oppenheim also started options trading in tech stocks to repay these clients and in one day lost $2.7M. He concealed the theft by providing customers with bogus account statements.

Prosecutors contend that Oppenheim persuaded clients to take out up to millions of dollars from their accounts by promising to put their money in low risk municipal bonds that would be kept at the bank. Instead, he used the funds to get cashier’s checks that he deposited into accounts that were his but located outside the bank. Oppenheim purportedly targeted clients he knew wouldn’t be watching their accounts closely. His scam went on for over seven years.

FINRA Bars Broker for Senior Financial Fraud
The Financial Industry Regulatory Authority has barred David Joseph Escarcega from the financial industry. Escarcega is accused of making a dozen unsuitable recommendations involving debentures tied to the life insurance policy secondary market and targeting elderly clients. He must also pay a $52,270 fine, which is how much he kept in commissions.

According to FINRA, Escarcega sold the debt instruments, which were issued by CWG Holdings Inc., from 3/12 to 6/13. The regulator said that the debentures were very risky and only suitable for investors that could afford to lose all of their investments. The 12 customers involved in this matter were not that type of investor. A lot of the investments were placed in IRAs.
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SEC Cases: Ex-AIG Broker-Dealers to Pay $9.5M For Purportedly Directing Investors Toward Pricier Mutual Funds, California Water District Resolves Bond Offering Charges for $125M, & Businessman is Accused of Stealing Investor Money

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

Former AIG Affiliate Brokerage Firms to Pay $7.5M Fine, $2M Restitution Over High-Priced Mutual Funds
Royal Alliance Associates, FSC Securities Corp., and SagePoint Financial have agreed to pay over $9.5M to resolve Securities and Exchange Commission charges accusing them of guiding clients toward expensive mutual fund share classes so that the firms could garner additional fees. The brokerage firms were formerly under the AIG Advisor Group umbrella.

According to the regulator, the firms put clients in share classes that charged 12b-1 fees for distribution and marketing even though they were eligible to purchase shares that didn’t come with these added fees.

Because of the placement in the costlier fund classes, the firms collected an additional $2M in fees and did not disclose their conflict of interest in choosing the share classes that would make them more money.

The AIG affiliates are accused of not monitoring advisory accounts quarterly to make sure that churning didn’t take place. The SEC order is claiming breach of fiduciary duty and numerous compliance failures.

California Businessman Allegedly Stole Investor Money, Covered Up Fraud
Daniel R. Nase is accused of stealing investor assets and then trying to conceal the theft once the SEC discovered his scam. The regulator claims that the California businessman raised funds from investors via an unregistered offing of common stock in his Bic Real Estate Development Corp. He then used the funds to cover his own bills.

The Commission said that Nase, who was not registered with any state regulator or the SEC to sell investments, told investors that his company would invest in promissory notes and real estate. Instead, he improperly placed those under his name, his wife’s name, of the name of their family trust. He allegedly tried to hide his fraud by investing the assets that he stole back into BIC to make it look like he was raising his equity stake in the company.

California Water District Accused of Misleading Investors in $77M Bond Offering
The SEC is charging Westlands Water District with misleading investors about its financial state while issuing a $77M bond offering. The agricultural water district is the largest one in the state of California.

According to the SEC, Westland, in prior bond offerings, consented to keep a 1.25 debt service coverage ratio but discovered in 2010 that a lower water supply and drought conditions would keep it from making enough money to keep up that ratio, which measures an issuer’s ability to make future bond payments. To meet the ratio without upping customer rates, Westlands reclassified the funds.
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Genworth Financial Settles Class Action Securities Lawsuit for $219M

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

Long-term-care insurance company Genworth has reached a $219M settlement with plaintiffs of a class action securities case claiming misrepresentations related to its business. The complaint alleges securities law violations by the insurer, its chief executive Tim McInerney, and ex-CFO Marty Klein, including misrepresentations of its core business’s profitability and the reporting of financial results that understated the needed reserves.

The inaccurate disclosures played a part in the significant drop in Genworth share’s price, causing shareholders to sustain damages. Meantime, Genworth continues to argue that the plaintiffs’ claims have no merit. The company said that it decided to settle to avoid the further cost and burden of continued litigation.

The lead plaintiffs in the case are the Canadian province of Alberta, which purchased over 1.2M Genworth common stock shares during the class period at issue, and the Fresno County Employees’ Retirement Association in California, which purchased nearly 200,000 shares. Genworth started reporting results of a review of its reserves for long-term-care insurance in October 2013.

The reserves are the funds put aside to pay for future benefits that are payable on policies. Shareholders were purportedly told that the reserves were “adequate” and that it included a “margin for future deterioration.”

Florida Man Accused of Insider Trading to Return Illegal Profits

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

The U.S. Securities and Exchange Commission announced this week that Jay Y. Fung, a Florida man accused of insider trading, has agreed to repay over $700K in illegal profits plus over $60K in interest that he made after he bought stock and call options in Pharmasset Inc. prior to its acquisition by Gilead Sciences. Fung made the trades after a friend tipped him about the pending deal.

In addition to buying shares of Pharmasset, he passed the insider tip onto his business partner who bought options, too. That individual has not been charged nor has he been accused of knowing that the information that Fung gave him was non-public and privileged.

Fung has since pled guilty in a parallel criminal case accusing him of conspiracy to commit conspiracy fraud. He could be facing up to five years in prison. His cooperation with authorities, however, will likely lessen his time under his plea deal.

SEC Files Fraud Charges Against Aequitas Management Over Ponzi Scam

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

The Securities and Exchange Commission says that Aequitas Management LLC and four affiliates allegedly bilked over 1,500 investors. One of the affiliates, Aequitas Capital Management, has been in the headlines recently in the wake of news that the investment firm was letting go of almost all of its employees because of financial problems.

According to the regulator, the Oregon-based investment group and three of its executives tried to hide their financial woes while raising over $350M from investors. Meantime, investors were allegedly fooled into believing that they were putting their money in transportation, education, and health-care related investments when really their funds were going toward trying to save the firm. Earlier investors were purportedly paid with the money of newer investors, which is a trademark of a Ponzi scam.

The SEC’s complaint contends that CEO Robert Jesenik and EVP Brian Oliver knew about Aequitas financial problems but kept soliciting investors so they could continue bringing in money to cover the firm’s expenses, including redemptions and interest payments to earlier investors, and try to keep the business afloat. Ex-COO and CFO N. Scott Gillis is accused of hiding the fact that the firm was insolvent. He purportedly knew that Oliver and Jesenik were still soliciting investors.

Meantime, Aequitas’s top executives continued to make “lucrative” salaries as they brought more investors into a “losing venture.” They traveled in private jets and paid for golf outings and dinners for potential investors. They also persuaded prior investors to bring in more funds.