Investor Lawyers Blog

SEC Probes Into Municipal Securities Violations Expected to Lead to Enforcement Actions

Published on: November 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg/BNA reports that according to sources, efforts by the Securities and Exchange Commission to come down harder on violations of municipal securities disclosures will soon include the filing of enforcement cases against the issuers of those securities. The regulator’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative had pressed municipal securities issuers and underwriters to self-report previous violations by 12/1/14. Incentive for those efforts included more uniform and less severe sanctions in subsequent enforcement actions.

Issuers and underwriters are required to give the SEC information about previous municipal securities offerings they were involved in that may have included statements that were potentially inaccurate. Unfortunately, issuers and underwriters often do not completely comply with SEC rules about the accuracy of disclosures that are meant to increase investor protections. The initiative was an attempt to deal with such lapses.

Also, in 2014, the SEC announced just one MCDC enforcement case. The action accused Kings Canyon Joint Unified School District of misleading investors because of its failure to provide them with financial data and notices that they were contractually obligated to give out. However, the California school district was not fined and did not have to admit wrongdoing.

RBS May Be Subject to More Criminal Charges Over Alleged Loan Securities Price Inflations

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

According to the New York Post, sources say that the US Attorney’s office in Connecticut is going after Royal Bank of Scotland (RBS) and at least two traders over complex debt securities that investors bought up through 2013. Ex-RBS banker Matthew Katke, who pled guilty earlier this year to inflating collateralized loan obligation prices, reportedly provided cooperating testimony in the case.

Federal prosecutors are also reportedly pursuing criminal charges against RBS. That investigation is over the alleged sale of flawed mortgage securities related to the 2008 financial crisis.

The Wall Street Journal says that sources have told them that prosecutors are looking at a $2.2B deal that repackaged home mortgages into bonds eight years ago. It was just two years ago that RBS settled a Securities and Exchange Commission case that described the lead banker as attempting to push the deal through even though the diligence department had raised red flags.

The RBS probe mirrors the $150M civil settlement the bank reached in 2013. That case resolved SEC claims accusing it of misleading investors on a $2.2B subprime mortgage offering.

Man Pleads Guilty to $5.4M Texas Investment Fraud

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

Robert B. Hahn has pled guilty to wire fraud and money laundering in a $5.4M Texas financial fraud that bilked about 100 investors. He faces up to 20 years behind bars.

According to information presented before the judge, from 1/07 to 2/15, Hahn, who was an insurance agent, claimed to represent doctors in Tyler, Texas that were supposedly raising funds for the construction and renovation of health care facilities, debt retirement, and the purchase of medical equipment. Investors were told that the doctors would pay a 20% yearly interest rate on investments and loans.

Instead, Hahn took investors’ money and deposited them into his personal accounts or his insurance business. He would make cash “interest” payments to investors. This money was supposed to be a 20% return on the fake investments or loans when, in truth, the funds were, in Ponzi scam-like fashion, coming from the money given to him by other investors.
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Securities News: Barclays to Pay $120M to Settle Libor Rigging Litigation, Investment Advisor Firm Settles Charges Over Custody Rule Violations, and SEC Accuses Man of $190M Scam Involving Private Placements, Nursing Homes

Published on: November 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Barclays Resolves Securities Fraud Claims Related to Libor Rigging
Barclays PLC (BARC) has consented to pay $120 million to resolve securities fraud claims accusing the bank of conspiring with competitors to manipulate the London Interbank Offered Rate, also known as Libor. Barclays is the first to settle allegations made by “over-the-counter” investors.

It was just last month that the British bank consented to pay $94M to resolve litigation accusing it of trying to rig Euribor, which is the euro-denominated equivalent of Libor. Barclays has admitted to rigging both benchmarks. The bank paid settlements to regulators in the United States and in Great Britain.

Libor is used to establish rates on hundreds of trillions of dollars of transactions, such as those involving student loans, credit cards, and mortgages. Banks use Libor to assess how much it will cost to borrow from each other. To date, over a dozen banks have been sued for conspiring to rig Libor.

U.S. District Judge Naomi Reice Buchwald in New York, who approved the class action settlement, said in August that the plaintiffs could win fraud claims if they proved that panel banks lied to the administrator of Libor about borrowing costs and the plaintiffs had depended on these fallacies. Buchwald, in 2013, threw out a “substantial” chunk of this private case, which included federal antitrust claims.

Investment Advisory Firm, Co-Founders to Pay $1M to Settle Custody Rule Violation Charges
Sands Brothers Asset Management LLC and co-founders Steven Sands and Martin Sands will pay a $1 million penalty to resolve Securities and Exchange Commission charges accusing them of violating the custody rule. They also have consented to a year suspension from raising funds from existing or new investors. The firm will under go compliance monitoring for three years. Ex-COO and CCO Christopher Kelly will pay a $60K penalty and serve a one-year suspension from acting as a COO or practicing in front of the SEC as a lawyer.

Under the custody rule, firms have to get independent confirmation of assets when they can control or access client funds or securities. This is so that investors know their money is protected from misuse or theft. The firm, the two Sands brothers, and Kelly settled the charges without or denying or admitting to them.
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FINRA Cases: Deutsche Bank Fined $1.4M for Reg SHO and Short Interest Reporting Violations, Scottrade to Pay $2.6M for Email and Electronic Record Failures, and Cantone Capital Faces Fraud Charges

Published on: November 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Fines Deutsche Bank Securities $1.4M

The Financial Industry Regulatory Authority is fining Deutsche Bank Securities Inc. (DB) $1.4M for Regulation SHO violations, as well as for supervisory failures. According to the self-regulatory organization, for more than 10 years, the firm improperly included securities positions of a broker-dealer affiliate who isn’t from the US in a number of aggregation units. Deutsche Bank purportedly did this when trying to figure out the net position of each unit.

Under Reg SHO, firms can use an aggregation unit to track positions in security from certain trading operations or trading desks separate from other positions. However, to determine the aggregation unit’s net positions, firms are not allowed to use the securities positions of a non-US brokerage firm affiliate.

Also, FINRA mandates that firms—barring specific exemptions—regularly report total short positions in customer and proprietary firm accounts in equity securities. The positions have to be reported not on a net basis. Instead, they should be based on a gross basis. The SRO said that for more than eight years, Deutsche Bank reported net positions in its financial aggregation accounts, submitting those as its short interest position.

The SRO said that Deutsche Bank’s supervisory system as it relates to short interest reporting and its aggregation unit structure was not designed in a reasonable enough manner to identify and stop these rule violations. By settling, Deutsche Bank is not denying or admitting to the violation charges.

Scottrade Ordered to Pay $2.6M Fine for Electronic Records, Email Retention Failures

Scottrade, Inc. must pay a $2.6M fine to settle FINRA allegations accusing the firm of not keeping a lot of securities-related electronic records in the format mandated, which is known as WORM. Scottrade is also accused of not keeping specific categories in outgoing email and failing to have a supervisory system in place that could fulfill compliance related to certain FINRA and Securities and Exchange Commission rules regarding books and records.

Madoff Ponzi Scam Investors to Get $1.18B, Ernst & Young Found Liable in Auditing of Feeder Fund

Published on: November 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A federal bankruptcy court has approved plans to issue $1.18B to investors who lost money in Bernard Madoff’s multibillion-dollar Ponzi scam. This means that immediate distribution of the funds can take place to those whose claims for repayment have been approved by Madoff trustee Irving Picard.

This is the sixth distribution to date in the over $20B investment fraud run by Madoff, who is spending the rest of his life behind bars for his crimes. This latest round will bring the amount paid to his victims to about $91.13B. Another $320M is being held for investors whose claims are still pending or in litigation.

According to Securities Investor Protection Corp CEO Stephen Harbeck, ex-Madoff customers who invested up to $1.16M will get all of their lost funds back while those who invested more will get about 61 cents for every dollar.

Madoff, who ran his Ponzi scam for decades, used new investors’ money to pay earlier investors. He never conducted any securities trades but instead used a lot of the money to fund his lavish lifestyle. It wasn’t until 2008 that the scheme was uncovered. Thousands of retail investors, charities, celebrities, and others were among those who suffered devastating losses.

In other Madoff Ponzi scam-related news, a Washington State jury ruled that Ernst & Young is guilty of negligence because of the way it audited a feeder fund that sent money to Madoff’s company. The fund was overseen by FutureSelect Portfolio Management.

Ernst & Young audited for funds run by Rye Investment Management, which is a Tremont Group Holdings Inc. unit, and FutureSelect sued Ernst & Young in 2010 after losing over $195M in the Madoff Ponzi scam because it had invested in the Rye funds. Tremont, which is an OppenheimerFunds Inc, affiliate, already has settled charges against in this case. The terms of its settlement are confidential.

Securities Fraud Cases: Wedbush to Pay $813K Over Investment Fraud Allegations, SEC Files Pump-and-Dump Charges in Marley Coffee Case, and CFTC Accuses IB Capital of Soliciting $50M for Forex Trading While Unregistered

Published on: November 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Wedbush to Pay Trusts, Family Members Over $813,000
A Financial Industry Regulatory Authority Panel says that Wedbush securities and investment advisor Kevin Thomas Scarpelli must jointly and severally pay several investors over $813,000 to resolve allegations of professional negligence and failure to supervise related to investments made in Natural Resources USA Corp. The respondents denied the allegations and asked that the claims be thrown own.

After considering the pleadings, evidence, and testimony, the panel decided that Wedbush and Scarpelli must pay claimants: Mary L. Riscornia TTEE nearly $263,000, Jennifer Tiscornia over $252,313, Nicolas E. Toussaint over $55,300, Nicolas E. Toussaint TTEE over $1800, Michael J. Nicolai over $18,4000, Michael Nicolai TTEE over $156,221, Jeffrey M. Nicolai over $22,154, Katherine M. Nicolai over $22,000 and Alexandria P. Nicolai over $22,000 in damages, interest, legal fees, and costs. The FINRA panel denied Scarpelli’s request to have his record expunged of this securities case.

SEC Files Charges in $78M Pump-and-Dump Scam Involving Jammin’ Java Stock, Marley Trademark
The Securities and Exchange Commission is accusing ex-Jammin’ Java CEO Shane Whittle of masterminding a $78 million pump-and-dump scam involving the company’s shares. Jammin’ Java operates Marley Coffee, which uses the late reggae legend Bob Marley’s trademark to sell products.

According to the regulator, Whittle used a reverse merger to-in secret-get control of millions of Jammin’ Java shares, which he then spread to offshore entities under the control of Michael Sun, Wayne Weaver, and René Berlinger. The shares were dumped on the public after their price rose in the wake of bogus promotional campaigns. Whittle purportedly hid the scam by making misleading omissions and statements in reports submitted to the SEC.
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SEC Says Amish Investors Were Bilked in $3.9M Securities Fraud

Published on: November 17, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is suing Earl D. Miller for securities fraud. According to the regulator, the Indiana man bilked investors, many of whom were Amish and new to investing, through private investment vehicles 5 Star Capital LLC and 5 Star Commercial LLC.

The SEC says Miller began recruiting investors last year. The private investment entities he created were supposed to invest in real estate property and green products with patents that one of the companies owned. However, claims the regulator, no patents were actually owned. Instead, contends the agency, the money went to companies that were supposedly developing other products, including energy-efficient washing machines and a pedal-run wheelchair. The bulk of these investments quickly failed. Most of the funds were invested in loans and were supposed to result in interest payments every month. However, such payments only were issued for five months and then they stopped completely.

Miller marketed his investment services in Amish newspapers and in Amish community meetings. He gave investors promissory notes for their money. The notes came with a fixed 8-12%/year return rate, which is a lot higher than the rates for other fixed-return investments, including bank deposits. He also purportedly said he was not paid any money for managing the fund even though he allegedly took $1M for his own spending. At least 70 investors were bilked.
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Massachusetts Regulator Expands Proxy Vote Fraud Probe of Realty Capital Securities to Include Independent Broker-Dealers and Advisers that Sold Alternative Investments

Published on: November 17, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts securities division is widening its probe into alleged proxy voting fraud at Realty Capital Securities to include independent broker-dealers and advisers that sold RCS alternative investments, including nontraded real estate investment trusts. According to Massachusetts Secretary of the Commonwealth William Galvin’s complaint against RCS, firm employees communicated with other brokerage firm agents and talked about how to procure proxy votes. Massachusetts securities division spokesperson Brian McNiff said that these employees would send these agents a broker-dealer authority letter without verifying if they “had authority to vote client shares.”

Galvin, in his complaint, accused RCS of fraudulently gathering proxy votes to support real estate deals backed by AR Capital. He said RCS agents pretended to be shareholders and cast bogus votes for AR Capital-sponsored brokers. AR Capital is owned by Nicholas Schorsch and William Kahane. Schorsch is a principal shareholder in RCAS Capital, also known as RCAP, which is RCS’s parent company.

The state regulator has been probing Schorsch-related companies for the past year. In 2014, Galvin began a probe into RCS after American Realty Capital Property, which Schorsch controlled at the time, disclosed that it had purposely not corrected a $23 million accounting mistake.

This week, and in the wake of the charges filed by Massachusetts against RCS Capital, Fidelity Clearing & Custody and Charles Schwab and Corp. (SCHW) made the decision to step selling AR Capital products. Alternative investment products by AR Capital are marketed to advisers via Realty Capital Securities. Also, Cetera Financial Group said it would stop the sales of AR Capital-branded alternative investments, including REITs. The retail brokerage network announced the cessation a day after Galvin charged RCS with fraud.

Southwest Securities Found Liable for $5.45M in Texas Investment Fraud

Published on: November 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Dallas jury says that Southwest Securities Inc., which is a broker-dealer owned by PlainsCapital subsidiary Hilltop Holdings, and broker Leighton Stallones are liable for statutory fraud, fraud, and conspiracy and violation of securities laws related to a 2007 real estate scam. Now, the firm must pay two investors, SSST Riviera Investments Ltd. and Gerritsen Beach Investments Ltd., more than $5.45M in the Texas securities case-$2.9M and $2.55M, respectively.

According to the two entities, Stallones assisted developer Stephen Jemal in concealing the scheme by lying about how his brokerage accounts were doing. Jemal is accused of modifying account records to make it seem as if he had millions of dollars when some of his accounts held under $1,000.
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