Investor Lawyers Blog

SEC’s Report Evaluates The Definition of An Accredited Investor

Published on: December 31, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission (SEC) has put out a report assessing the definition of who qualifies as an accredited investor. The 2010 Dodd-Frank Act mandates that this definition be reevaluated every four years.

Accredited investors are allowed to take part in investment opportunities that are typically not available to non-accredited investors. The definition helps to identify who has the financial sophistication to get involved in such investments, as well as handle the possible risks involved in investing in hedge funds, private companies, venture capital funds, private equity funds, and other such investments.

Currently, anyone who has a yearly income over $200K or a total net worth greater than $1M is allowed to qualify as an accredited investor. (As of 2010, an investor’s main residence may no longer be included in the calculation of his/net worth.) In the report, prepared by staff from the Divisions of Corporation Finance and Economic Risk and Analysis, the Commission is asked to consider a number of suggestions, including revising the financial threshold qualifications for natural persons who meet the accredited investor definition, as well as modifying the list-based approach that allows entities to satisfy the definition. Other suggestions:

– Subject to investment limitations, keeping the current thresholds for net worth and current income as criteria for who can qualify.
– Establish new thresholds for inflation-adjusted income and net worth that are not impacted by investment limitations.
– Allow spousal equivalents to put together their money to qualify as accredited investors.
– Modify the accredited investor definition as it applies to entities by using a $5M investments test instead of a $5M assets test.

As Redemption Requests Go Up, Whitebox Advisors to Liquidate Three Mutual Funds

Published on: December 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Whitebox Advisors says it intends to liquidate its mutual funds next month following a slew of redemptions and losses this year. A spokesperson for the investment firm said that with so many people asking for their money back, the concentration risks to investors had become too high.
The three mutual funds that are closing are:

· Whitebox Tactical Opportunities Fund, which oversees $112.8M
· Whitebox Market Neutral Equity Fund, which oversees $40.25M
· Whitebox Tactical Advantage Fund, which oversees 20.3M
The news comes just weeks after Third Avenue Management shook up the equity and credit markets when it announced that it was liquidating its Focused Credit Fund (TFCVX), which is a $788.5M corporate debt mutual fund, but that distributions to investors would be delayed so as to prevent even bigger losses. Stone Lion Capital Partners has also suspended redemptions in its $400M of credit hedge funds following many redemption requests.
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Insider Trading News: SAC Capital Resolves Shareholder Lawsuit, Chinese Traders Settle SEC Charges, Another Court Turns Down Rajat Gupta’s Conviction Appeal SAC Capital Advisors Settles Insider Trading Case for $10M

Published on: December 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SAC Capital Advisors Settles Insider Trading Case for $10M
SAC Capital Advisors has consented to pay $10M to resolve a securities case brought by shareholders of pharmaceutical company Wyeth. The plaintiffs contend that they sustained losses because the hedge fund had been insider trading in the drugmaker’s stock.

The class action securities lawsuit was brought following the arrest a few years back of Mathew Martoma, an ex-SAC Capital portfolio manager. After he was convicted last year of insider trading for using confidential outcomes of a clinical trial involving an Alzheimer’s drug, Martoma was sentenced to nine years behind bars in 2014. According to prosecutors, Martoma’s trades allowed the hedge fund to make $275M.

Other settlements have already been reached over this matter, including a $1.8B settlement with US authorities as well as a guilty plea by SAC Capital. An SAC Capital unit also settled insider trading claims involving Wyeth and Elan Corp. stock—Elan and Wyeth had been developing the Alzheimer’s drug together—for $602M.

SEC Announces Settlement with Two Chinese Traders Over Insider Trading Case
The U.S. Securities and Exchange Commission says that business associates and cousins Yannan Liu and Zhichen Zhou, who are traders in Hong Kong and China, respectively, have consented to pay over $920,000 to resolve insider trading charges. The two of them will disgorge their entire ill-gotten gains as well as pay penalties.

According to the regulator, Liu and Zhou traded Chindex International and MedAssets Inc. stocks because of nonpublic information they received about their upcoming acquisitions by private equity firms. Liu had been a private equity associate at a company that was connected to both deals.

Securities Fraud News: Barclays to Pay $13.5M For Unsuitable Fraud Transactions, Appeals Court Upholds Asset Freeze of Wyly Brothers’ Relatives, Ex-NBA Player to Get Sentence for Ponzi Scam Conviction

Published on: December 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Barclays Capital Gets FINRA Fine for Unsuitable Mutual Fund Transactions

The Financial Industry Regulatory Authority said that Barclays Capital, Inc. (BARC) must pay over $10M in restitution plus interest to customers that were impacted by violations related to unsuitable mutual fund transactions. The self-regulatory organization said that the firm did not give certain customers the breakpoint discounts that applied. Aside from the restitution, Barclays must pay a $3.75M fine.

According to the SRO, from 1/10 through 6/15, the firm’s supervisory systems were not adequate enough to make sure that unsuitable transactions didn’t happen or that the firm’s duties related to mutual fund sales to retail brokerage clients were met. FINRA said that Barclays supervisory procedures wrongly defined a mutual fund switch as warranting three transactions within a specific period of frame. Because of this erroneous definition, the firm did not act on thousands of automated alerts warning of transactions that might be unsuitable, failed to include certain transactions for suitability review, and neglected to make sure that customesr got disclosure letters about transaction costs. Over 6,100 unsuitable mutual fund switches occurred, causing r about $8.63M in customer harm.

FINRA said that the Barclays did not give its supervisors enough guidance so that they could make sure that brokerage customers were engaging in mutual fund transactions that were suitable for their investment goals, holdings, and ability to tolerate risks. The SRO, which evaluated activities over a six-month period of time, said that 39% of mutual fund transactions were found unsuitable and customers suffered financial harm, including realized losses, of over $800K.

Also, during these five years, the firm’s supervisory system did not succeed in making sure that purchases were properly aggregated so eligible customers could get breakpoint discounts, including those involved in 100 Class A share mutual fund transactions.

By settling, Barclays is not denying or admitting to FINRA’s charges. It is, however, consenting to the entry of findings.
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Wells Fargo Sued by Commerz Bank in Mortgage-Backed Securities Case

Published on: December 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Commerzbank is suing Wells Fargo (WFC) for losses sustained on failed mortgage-backed securities (MBS). The German finance firm claims the California lending giant did not properly supervise MBS during the housing bubble, which Commerzbank argues, led to hundreds of millions of dollars in losses.

Commerzbank alleges that Wells Fargo caused it over $100 million in losses because of Wells Fargo’s purported lack of action. The German firm invested over $290 million in MBSs and Wells Fargo was the trustee of 19 of the MBSs. A lot of the securities were backed by mortgages from subprime lender Option One.

The German bank believes that Wells Fargo and other trustees should have ensured that the loans backing the securities satisfied certain standards, notified investors when loans defaulted, and forced mortgage lenders to compensate investors for the poor quality loans. Instead, Wells Fargo did not do any of these actions.

Court Refuses to Overturn Criminal Conviction of Ex-UBS/Citigroup Trader

Published on: December 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In the U.K., a panel for the Court of Appeal refused to overturn the criminal conviction of ex-UBS (UBS) and Citigroup (C) trader. Tom Hayes is behind bars for conspiring to rig Libor. However, while his conviction will stand, the panel did lower his criminal sentence from 14 years to 11 years, citing his non-managerial role at the two banks and his diagnosis of mild Asperger’s.

Hayes is considered the main leader, spurring dozens of traders to manipulate the London interbank offered rate. However, his lawyers claim that Hayes did not hide his conduct from others at the bank and never considered his actions dishonest. Hayes said that his behavior was common in his industry.

When he voluntarily testified before prosecutors, Hayes admitted to manipulating rates. He also testified against a number of ex-friends and colleagues. Hayes also is facing criminal charges in the U.S.

Libor helps shape the borrowing costs for trillions of dollars in loans. Banks set rates, including Libor, by turning in rates at which they would be willing to lend each other money in different currencies and at different maturities.

Man Released from Prison Faces New Fraud Charges in $11M Investor Stock Scam

Published on: December 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Edward Durante with bilking investors once again. Durante, who already served a 10-year sentence for a previous securities fraud conviction, is accused of using different aliases to defraud even more investors of millions of dollars and hiding his criminal past.

According to the regulator, Durante sold shares of a shell company that he was secretly in control of and told investors that stock sale proceeds would support the company’s operations. Instead, he allegedly used the funds for his own spending while the company’s stock was worthless.

The Commission contends that Durante started planning this scam while in prison. He purportedly used the name Anthony Walsh to acquire VGTel Inc. He scammed at least 50 inexperienced investors of at least $11 million by selling them this shell company’s stock. (Financial Advisor magazine places the number of investors bilked at closer to 100 investors.)
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FINRA News: Regulator Seeks to Restrict Brokers’ Political Contributions, Sends SEC Proposal Regarding Broker-Compensation, and Fines Firm $2.95M Over Inaccurate Blue Sheet Data

Published on: December 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is proposing rules that would limit how much in political contributions brokers would be allowed to make to avoid conflicts of interest. FINRA is now calling for feedback during the comment period regarding the proposed rule, which runs for 21 days after notice is published in the Federal Register.

Under the proposed rule, brokers would have a contribution cap of $350 during an election year and $150 during any other year. Should a broker contribute beyond these caps, there would not be a penalty as long as a refund is issued within four months of the donation’s receipt. A failure to satisfy exemptions will lead to a bar for the broker from being allowed to solicit a government entity or official for business purposes for two years after the donation was made.

It was in 2010 that the U.S. Securities and Exchange Commission (SEC) adopted “pay-to-play” rules that placed investment advisers under the same limits.

Cantor Fitzgerald to Pay $7.3M Over Microcap Sales

Published on: December 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is ordering Cantor Fitzgerald to pay $7.3 million for selling billions of unregistered microcap shares in 2011 and 2012. The firm is also facing sanctions for not having the proper supervisory /anti-money laundering programs in place to identify suspect activity or red flags related to microcap activity.

According to the self-regulatory organization, the Cantor Fitzgerald’s supervisory system was not designed in a reasonable enough manner to fulfill its obligation to assess whether the microcap securities it was liquidating for clients were SEC-registered or, if not, then were subject to a registration exemption. FINRA said that after Cantor Fitzgerald decided to broaden its microcap liquidity business in 2011, it did not make sure its supervisory system had a meaningful and reasonable way to determine whether the sales of these securities occurred in compliance with the law. Also, said the regulator, the firm did not provide proper guidance and training about how or when to look into whether a sale was exempt from SEC registration, and supervisors were not given the tools that they needed to identify when red flags were an indicator of unregistered, illegal distributions.
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US Continues Its Probe As Deutsche Bank Alleges $10B in Suspect Russia Trades

Published on: December 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

To date, Deutsche Bank AG (DB) says it has identified $10 billion in suspect trades that may not have been checked for money laundering. In the review, uncovered $6 billion of mirror trades involving its operations in Russia. According to a Russian central bank report, there are clients using rubles to purchase Russian shares and then selling them in London at the same time, usually for dollars. While mirror trades are legal in certain situations, they can be used to circumvent U.S. rules related to reporting money as it moves internationally. The German lender notified international authorities of its investigation a few months back.

According to Bloomberg, prosecutors in the United States have been investigating whether the bank’s dealings with the mirror trades violated U.S. rules regarding money laundering. Already, Russia’s central bank has fined Deutsche Bank after examining the latter’s trading in that country. Also, a source reportedly told Bloomberg that Russia’s regulator said that Deutsche Bank was the victim of an illegal scam and has since dealt with its related shortcomings.

The transactions under investigation include those involving trading in an account that was consistently involved in buy orders. In addition to the “mirror trades,” the investigation uncovered $4 billion of suspect trades that may have been conducted with another bank.