Investor Lawyers Blog

Virtus Investment Advisers to Pay $16.5M to Settle False Performances Claims Related to ETF Portfolio Strategy

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

The Securities and Exchange Commission says that Virtus Investment Advisers will pay $16.5M to resolve charges accusing the investment management firm of misleading mutual fund investors and others using ads with false historical performance information about exchange-traded fund portfolio strategy AlphaSector. According to the regulator, the firm publicized a performance track record that it got from F-Squared that was substantially overstated. Virtus had hired F-Squared as a mutual fund subadvisor as well as a subadvisor for those that followed AlphaSector.

The SEC, following its probe, said that Virtus falsely stated in SEC filings, client presentations, marketing collateral, and other communications that the AlphaSector’s strategy had a performance history going as far back as 2001 and had for a number years outperformed the S & P 500 Index. The investment management firm is accused of accepting F-Squared’s misrepresentations as fact while disregarding the red flags that raised doubts about these statements.

Six years ago Virtus recommended that shareholders of specific mutual funds and the boards of trustees approve a modification in strategy and management to AlphaSector and F-Squared. This recommendation was made because of the false historical data on AlphaSector.

SEC Headlines: Regulator Warns Investment Advisors About Outsourcing Compliance, Chairwoman White Talks About Private Placement Fundraising, Criticizes Bill Seeking to Place Limits on BDCs

Published on: November 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is reminding advisory firms to stay aware of their own compliance functions. After about 20 examinations of advisers that utilized compliance firms, the regulator found that external compliance officers sometimes were not aware of a firm’s business access, did not communicate regularly with firm principals, nor did they have access to company documents.

Issuing a risk alert, the SEC said that whether a chief compliance officer is a direct employee of a registrant, a consultant, or a contractor, this employee should be given adequate information and authority to be able to do the job. The Commission said that it is the job of the registrant to put into place and execute a compliance program that works. It also warned that firms that do outsource their compliance function might be at risk of not comprehending their own possible shortcomings in this matter. The SEC said that outsourced CCOs should be careful about using “standardized checklists” to get information from advisory firms.

In other SEC news, Commission chairwoman Mary Jo White said that even though private placement issuers, private equity managers, and hedge funds are raising more funds from investors now more than before, the incidents of related fraud is not rising. Some people worried that when the 2012 Jumpstart Our Business Startups Act got rid of the ban on the general solicitation of certain kinds of private placements, there would be those that would use this as an opportunity to take advantage of less sophisticated investors. However, even with the new regulations, not that many private equity managers, hedge funds, and private placement issuers are taking advantage of the opportunity to advertise directly to investors.
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10 Former Barclays and Deutsche Bank Traders Charged with Rigging Euribor

Published on: November 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Prosecutors in the United Kingdom have charged 10 former Barclays Plc (BARC) and Deutsche Bank AG (DEB) employees with rigging the Euribor benchmark. The ex-Deutsche Bank traders are Christian Bittar, Achim Kraemer, Joerg Vogt, Andreas Hauschild, Kai-Uwe Kappauf, and Ardalan Gharagozlou. The former Barclays traders are Philippe Moryoussef, Colin Bermingham, Sisse Bohart, and Carlo Palombo. An unidentified 11th trader is also expected to be charged.

Except for Bermingham, the rest of the defendants live outside Great Britain. These are the first charges in the Serious Fraud Office’s probe of Libor rigging involving the Euro interbank offered rate. More individuals are expected to be prosecuted.

Earlier this week, Bittar, who was once among Deutsche Bank’s most successful traders before he was let go in 2011, won a separate ruling. Although his name wasn’t mentioned in the Financial Conduct’s ruling in an interest rate benchmark’s manipulation probe into his former employer, Bittar contended that he was clearly identifiable in the details of the settlement. Bittar argued that because of this he was entitled to look at FCAs settlement with Deutsche Bank prior to its disclosure.

Global regulators had fined Deutsche Bank $2.5 billion earlier this year and the FCA published a document detailing the wrongdoing that included the term
“manager B” when referring to one of its managers. Bittar said that term clearly referred to him. A London judge said that Bittar was indeed improperly identified.

Massachusetts Regulatory Charges Realty Capital Securities With Fraud Related to Proxy Votes in Real Estate Deals

Published on: November 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of the Commonwealth William Galvin is charging Realty Capital Securities with fraud involving the purported gathering of proxy votes to support AR Capital-sponsored real estate deals. Realty Capital Securities is part of RCS Capital Corp., also known as RCAP. Galvin wants to take away RCS’s registration as a brokerage firm in the state.

An RCS employee provided details about how colleagues pretended to be shareholders on proxy calls so they could vote for deals that were in management’s best interests. There was purportedly no training over how to deal with proxy solicitation. Oversight is said to have involved RCS management regularly asking employees for updates about proxy votes and whether any progress had been made.

The Massachusetts regulator said that Realty Capital Securities agents pretended to be shareholders and cast bogus votes for investment programs that were sponsored by Nicholas Schorsch’s AR Capital. Schorsch is a principal shareholder in RSC Capital, which is the wholesaler broker-dealer of RCAP.

For example, reports InvestmentNews, fake votes were cast in a September vote at a Business Development Corporation of America meeting. The vote was required so that Apollo Global Management could purchase real estate assets from Schorsch. Galvin said that BDCA paid RCS $375K for the solicitation of the proxy votes.

Although the deal failed this week—Apollo was supposed to buy a $378M majority stake in the company—the global management firm was able to buy RCS’s wholesaling business, including brokerage firms Strategic Capital and Realty Capital Securities, at a lower price of $6M.

Oil Companies Expected to Default

Published on: November 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Unpaid debt incurred by oil companies to pay for new drilling equipment and rigs could lead to a number of them defaulting. According to CNN, many of these companies had expected prices for oil to hit the $100 range when they incurred the debt and are now contending with oil prices of about $45 and no sign of the original expectation being met in the near future.

Unlike a year ago, when low interest rates and junk bond markets helped spur the energy boom in the United States and inexpensive credit let companies invest in new technologies for oil drilling, there has been a rise in credit costs. At ETF.com’s recent Fixed Income Conference, DoubleLine Capital founder Jeffrey Gundlach said that while US production of oil has slowed, the inventories for domestic crude oil levels have stayed high.

In August, Moody’s Investors Services said that it expected more US oil companies to default because banks have become stricter about lending standards and contracts that had committed to higher crude prices for production in the future get set to expire. The credit rating agency said that the energy sector would be a main default driver in 2016.
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Securities Fraud Headlines: NBA’s Tim Duncan Sues Financial Adviser Again, JPMorgan Hackers Face Criminal Charges, and FINRA Warns Military Vets May Be Targeted by Their Own

Published on: November 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Spurs Star Tim Duncan Says Ex-Financial Adviser Bilked Him of Millions

NBA star Tim Duncan is suing his former financial adviser again. The San Antonio Spurs player says that Charles Banks cost him millions of dollars because he persuaded him to invest $1.1 million in a cosmetics company. Banks purportedly told him that the company was profitable even though it was about to go bankrupt.

Duncan sued Banks in January in another Texas securities case accusing the latter of making unsuitable recommendations that cost him some $25 million. Banks gave financial advice to the NBA player for almost twenty years. Duncan claims that some of the recommendations made were in his former financial adviser’s best interests while detrimental to him.

FINRA Awards First United Bank & Trust Over $11.5M in Arbitration Case Against First Horizon National Involving CODs and Other Securities

Published on: November 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has awarded First United Bank & Trust and First United Corp. over $11.5M in their securities fraud case against FTN Financial Securities Corp., Hugh James Boone, and Franklin Benjamin Kennedy. The bank is claiming unsuitable investments, misrepresentations, omission, breach of fiduciary duty, failure to supervise, breach of implied contract, and common law fraud involving the claimants’ purchase of preferred term securities, trust preferred securities, and other collateralized debt obligations. Two of the preferred term securities at issue are the PreTSL Notes, also known as the I-PreTSLI notes, and the PreTSL XVII.

The claimants said that that purchase of the PreTSL Notes were among a number of transactions in their leverage strategy. They said that the respondents were aware that the notes had deteriorated after they were issued but did not inform the claimants. The respondents denied the claimants’ allegations. Boone and Kennedy in their response said that they acted properly as financial adviser.

Investors May Have Lost Up to 88% in Goldman Sachs BRIC Fund

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Group Inc. (GS) is folding its BRIC fund and merging it with a broader emerging market fund. The BRIC fund, which invests in Russia, China, Brazil, and India, has been losing money. In its filing to the SEC, the bank said that it doesn’t see the nine-year-old product experiencing “significant asset growth.” Unfortunately for some investors of the BRIC fund, depending on when you invested, you may have lost up to 88%.

The acronym for the fund comes from the names of the countries in which it invested. Goldman’s BRIC fund allowed investors to bet on growth in Brazil, Russia, India, and China. It was Goldman Sachs Chief Economist Jim O’Neill who invented the name, selecting the nations for their potential for growth and their importance to the economy some 14 years ago.

Following an investment boom, these large emerging markets are now starting to falter, as have investors’ previous gains. China is expected to experience its weakest expansion in 25 years and Brazil and Russia are going into recessions. While India has experienced growth, the nation’s prime minister is finding it challenging to put reforms into place.
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Republican Rep. Introduces Bill to Place Limits on SEC’s Use of In-House Judges

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Rep. Scott Garrett (R-N.J.) recently introduced legislation that would let defendants choose the option of having their case tried in federal court instead of by a Securities and Exchange Commission administrative law judge. Garrett believes that the regulator has been overusing its in-house courts, practically turning itself into “judge, jury, and executioner” in enforcement cases.

Garrett, along with others who oppose the use of SEC in-house judges, says that defendants have greater latitude when their cases go to a jury. His bill would also up the evidence standards for cases that are presided over by an SEC judge.

Several parties have filed lawsuits opposing the SEC’s administrative court process. They claim that the system is a constitutional violation. Some feel that the SEC has the upper hand when it comes to the outcome of enforcement cases because its own judges are deciding the rulings.

Securities Headlines: FINRA Seeking to Fine MetLife Over Variable Annuity Sales, SEC Accuses Scottish Trader of Sending Fake Tweets, Market Rigging, and Judge Orders Man to Stop Crowdfunding Fraud

Published on: November 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Plans to Fine MetLife for Purported Variable Annuities Violations
The Financial Industry Regulatory Authority is looking to impose a significant fine against MetLife’s broker-dealer unit related to possible violations involving variable annuities. The company is cooperating with the regulator’s probe, which is looking at alleged suitability, misrepresentation, and supervision issues related to the selling and replacements of variable annuities.

According to MetLife’s quarterly regulatory filing, FINRA told the insurance giant that it plans to recommend disciplinary action. InvestmentNews reports that in an e-mailed statement, MetLife spokesperson John Calagna said that the company did not agree with the conclusions reached by the regulator and plans to defend itself.

SEC Charges Scottish Trader with Over Market Rigging Involving False Tweets
The Securities and Exchange Commission has filed securities fraud charges against James Alan Craig of Scotland for allegedly filing false tweets that caused sharp declines in the stock prices of two companies, even causing one of them to experience a trading halt. The regulator said that Craig sent out false statements via Twitter on accounts that he deceptively set up to make them look like legitimate Twitter accounts of known securities research firms.

According to the SEC’s complaint, Craig’s first bogus tweets caused the share price of one company to drop 28% until Nasdaq temporarily stopped trading. The next day, he sent out false tweets about another company that led to a 16% drop in the share prices of that company. Both days he purchased and sold shares of the companies he targeted to try to profit from the sharp price changes. He was mostly successful in his efforts.
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