Investor Lawyers Blog

SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule

Published on: October 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC to Propose Reforms to Improve Liquidity Management for Open-End Funds
The Securities and Exchange Commission voted to propose a package of rule reforms to improve effective liquidity risk management for open-end funds, including exchange-traded funds and mutual funds. If approved, both would have to put into place liquidity risk management programs and improve disclosure about liquidity and redemption practices. The hope is that investors will be more able to redeem shares and get assets back in a timely fashion.

The liquidity risk management program of a fund would have to include a number of elements, including classification of the fund portfolio assets liquidity according to how much time an asset could be converted to cash without affecting the market, the review, management, and evaluation of the liquidity risk of a fund, the set up of a fund’s liquidity asset minimum over three days, as well as board review and approval. The proposal also seeks to codify the 15% limit on illiquid assets that are found in SEC guidelines.

Commission Looks for Comment on Regulation S-X
The SEC announced last month that it is looking for public comment regarding the financial disclosure requirements in Regulation S-X and their effectiveness. The comments are to focus on form requirements and the content contained in financial disclosure that companies have to submit to the regulator about affiliated entities, businesses acquired, and issuers and guarantors of guaranteed securities.

UBS Puerto Rico to Pay $18.5M to Settle FINRA Sanctions Over Supervisory Failures Related to Closed-End Fund Sales

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

The Financial Industry Regulatory Authority (FINRA) is fining UBS Financial Services Incorporated of Puerto Rico (UBS PR) $7.5 million for supervisory failures involving its transactions in UBS sponsored Puerto Rican closed-end funds (CEF). The brokerage firm also must pay $11 million in client restitution for losses related to those shares.

According to FINRA, a self-regulatory organization for the brokerage industry, for over four years, UBS PR neglected to monitor the combined concentration and leverage levels in customer accounts to make sure transactions were suitable for the respective profiles and objectives of its customers. FINRA said that considering that the firm’s retail customers typically kept high concentration levels in the country’s assets and frequently used these concentrated accounts as cash loan collateral-and in light of the U.S. territory’s volatile economy-UBS should have put into place a system that could reasonably identify and prevent unsuitable transactions.

Instead, the regulator said, UBS PR persuaded certain customers to establish credit lines that were collateralized by their securities accounts. If the value of the account dropped under the required collateral level, the customer would have to deposit more assets or liquidate securities. A credit line that is collateralized by an account that is very concentrated could significantly increase an investor’s risk of loss. When the market dropped in 2013, and a lot of the CEFs lost value, customers were forced to sustain hefty losses to satisfy the calls they received notifying them that their account’s value was now under the required collateral level.
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Latour Trading Faces SEC Charges Over Market Structure Rule Violations, Will Pay Over $8M

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

The Securities and Exchange Commission is charging Latour Trading LLC with violating the agency’s rules regarding market structure. To resolve the case, the high-frequency trading firm will pay over $8M, including more than $3 million of disgorgement of gross trading profits, rebates it received from exchanges, and prejudgemenet interest, as well as a $5 million civil penalty.

According to the SEC, Latour violated the SEC’s Market Access Rule and Regulation National Market System for almost four years, sending millions of orders that were non-compliant to US exchanges. The Commission noted that because the firm shares parts of its electronic trading infrastructure with parent company Tower Research, some of the employees from that company could modify the computer code without the firm’s approval or knowledge.

In 2011, Tower Research made a coding modification that produced an error in the infrastructure, causing Latour to transmit millions of orders to exchanges that were not in compliance with Regulation NMS’s requirements. Specifically, from 10/10 through 8/14, Latour sent about 12.6 million intermarket sweep orders for over 4.6 billion shares.

With ISOs, trade centers may execute them at prices that might otherwise seem to violate Regulation NMS’s Rule 611, which usually mandates that trades be done at the best available price displayed. Also, trade centers can execute them right away according to the ISO router’s obligation to transmit additional orders against better price displayed quotes.

UBS Puerto Rico To Pay the SEC $15M Over Closed-End Bond Fund Sales

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

UBS Financial Services Inc. of Puerto Rico (UBS PR) has consented to pay $15 million to resolve the Securities and Exchange Commission’s claims related to the brokerage firm’s supervision of the sale of its closed-end Puerto Rico bond funds (CEFs). The SEC contends that UBS PR did not properly supervise ex-broker Jose Ramirez, who is accused of increasing his compensation by at least $2.8 million when he allegedly had customers improperly borrow funds to invest in Puerto Rico bond funds. UBS fired Ramirez last year.

The funds came from UBS Bank USA, which is a bank affiliated with UBS PR. Under bank and UBS rule, the funds from UBS Bank are not allowed to be used to carry or purchase securities. According to the SEC, not only was using the funds from the Bank a violation, investors were placed at risk of losses while Ramirez profited. The SEC has filed a separate complaint against the ex-UBS broker.

The regulator claims that Ramirez misled customers about how safe the CEFs were, as well as misrepresented the risks involved. He purportedly lied to his branch manager when he was asked about suspect transactions.

To avoid getting caught, Ramirez allegedly told customers to move money from their credit line to an external bank account before placing the funds into their brokerage account at UBS PR and then buying the CEFs. The CEFs, which were heavily invested in Puerto Rico bonds, dropped in value when the Puerto Rican bond market started to decline in the Fall of 2013. Customers then had a choice of either paying down part of the loans or risk liquidation of their investments.

The $15 million settlement will be put into a fund for investors who sustained losses when the funds dropped in value. The Commission’s order instituting a settled administrative proceeding claims that UBS PR did not have the systems and procedures to prevent or detect the misconduct that Ramirez was engaging in. Even though UBS PR was allegedly apprised at least twice that customers of Ramirez might be violating the loan policy, the brokerage firm’s policies did not provide for reasonable follow up. UBS PR also purportedly lacked a system to make sure that credit line proceeds that were moved out of firm accounts were not used to buy securities.
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SEC Accuses Investment Adviser of Fraud Involving Over $40M In Illiquid Securities

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

The Securities and Exchange Commission is pursuing securities fraud charges against Family Endowment Partners LP and owner Lee Dana Weiss. The regulator claims that the registered investment adviser persuaded clients to invest over $40M in illiquid securities without disclosing that Weiss possessed an ownership stake in the entities that issued the securities. The regulator said that these entities made payments to Weiss.

According to the SEC, between ’10, and ‘12 FEP and Weiss caused two hedge funds and recommended that 11 clients invest over $40M in securities that were issued by a French company. The firm and Weiss did not purportedly disclose that there were conflicts of interest, including that he had a financial stake in the company or that he and entities under his control received over $600,000 payments from the company after the investments were made.

In ‘11, Weiss allegedly recommended that one client invest $2.55 million in subsidiaries of the French company despite knowing that the funds would go toward paying other clients’ delinquent interest. Also that year, he and his firm suggested that clients put $5 million in a consumer loan portfolio. The transaction was set up so that part of the proceeds of over $300,000 would go to a third-party manager, which was actually an inactive real estate company controlled by Weiss’s friend. The friend would then move the payments to Weiss and others.

NASAA Board Releases Proposed Model Act to Protect Vulnerable Adults from Financial Exploitation for Comment

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

The North American Securities Administrators Association announced that its Board of Director has approved to release for comment a proposed model act to tackle the problems faced by brokerage firms, investment adviser firms, and their representatives when dealing with signs that older senior investors, or other vulnerable adults, may be suffering from financial exploitation. The proposed model is called “An Act to Protect Vulnerable Adults From Financial Exploitation.”

If approved, the act would mandate that qualified investment advisers and brokerage firm employees notify their securities regulator, as well as Adult Protective Services, if they have reason to believe that a vulnerable adult has been subject to financial exploitation. They would also be able to notify a third party that had been previously designated by that client of their suspicions, as long as that person is not the one suspected of the exploitation. The act would let qualified firm employees provide records related to the attempted/suspected exploitation to the authorities.

Brokerage firms and investment advisers who fulfill the requirements of the act would be granted immunity from civil or administrative liability related to the elder financial fraud. Also, advisers and broker-dealers would be granted the authority to delay account disbursements if they thought that something untoward was happening.

A vulnerable adult in such scenarios would be someone who is age 60 or older or an adult who is vulnerable in other ways that could prevent him/her from being able to self-protect from exploitation. NASAA’s proposal comes soon after the one that was issued by the Financial Industry Regulatory Authority.
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Credit Suisse to Pay $4.25M Over Blue Sheet Trading Data that Was Deficient

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

The SEC is charging Credit Suisse Securities (USA) LLC (CS) with submitting deficient blue sheet data to the regulator about customer trades. The financial firm is settling the charges by paying a $4.25 million penalty. It has admitted to violating federal securities laws. Credit Suisse acknowledged that it made at least 593 deficient blue sheet submissions to the Commission while leaving out 553,400 reportable trades that represented 1.3 billion shares between 2012 and 2014.

Blue sheet data refers to the color of the forms this type of information used to be placed on before being mailed from a broker-dealer to the SEC. The agency uses the trades when conducting investigations and doing other work. The process by which the regulator now procures this information is electronic but the “blue sheet” name has stuck.

The deficiencies at the firm were related to a probe in which the SEC was looking at blue sheet data and comparing them to data that came from the National Securities Clearing Corp. Credit Suisse has identified the cause of the deficient blue sheet submissions as human and technological errors. The firm has since put into place a number of changes to make sure its blue sheets are accurate from now on.

Father and Sons Charged in $20M Stock Scam

Published on: September 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging a father, three sons, and two other men with bilking people who invested money in Gerova Financial Group. The regulator’s complaint names John Galanis, his sons Derek, Jason, and Jared, Gerova president Gary T. Hurst, and investment adviser Gavin Hamels. John has been a defendant in SEC enforcement actions numerous times over the last four decades. Jason faced SEC charges in 2007.

The SEC contends that Jason and Hirst came up with a securities scam in 2010 to secretly issue $72M of unrestricted shares to a friend in Kosovo. The Galanis’ are accused of redirecting the proceeds from the sales of those shares from the friend’s brokerage accounts and wiring the money to themselves and others. This resulted in about $20 million in illicit profits.

Jason is accused of bribing Hamels to buy stock in Gerovia to help stabilize its price as shares went into liquidation. Hamels is accused of buying the stock for clients according to arrangements made with Jared about prices, times, and how much to buy. He allegedly did not tell clients about Jason’s bribe.

The SEC is charging all of the men with federal securities laws and securities registration violations. It is charging Hamels with investment adviser fraud. Meantime, prosecutors in New York have put out a parallel action filing criminal charges against the six men, as well as Ymer Shahini, who was the family friend in Kosovo.
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Broker Fraud News: Ex-Dallas Broker Faces Prison, Fintegra Files for Bankruptcy, and Broker Who Promised Investors They’d Double Their Money Can No Longer Sell Securities

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

Ex-Dallas Broker Accused of Texas Securities Fraud Face Five Years
Wade Lawrence, a former Dallas broker, has pleaded guilty to Texas securities fraud. As part of his plea bargain the 43-year-old will have to forfeit $1.5 million and pay over $250,000 in fines. He also faces up to five years behind bars for his $2.1 million securities scam.

According to prosecutors, over the course of working for several securities firm over the last seven years, Lawrence falsely offered risky investments with the promise of 20% to 100% returns. He lost a significant amount of money and invested just a portion of investors’ funds. Lawrence used a lot of investors’ cash to cover his own living expenses, personal travel, as well as pay for fancy jewelry. The Associated Press reports that to date Lawrence has given back $581,000 to investors.

Minnesota-Based Brokerage Firm Files for Bankruptcy
Broker-dealer Fintegra has filed for bankruptcy in U.S. Bankruptcy Court in Minnesota. The firm had to stop its securities business in June after it was hit with a $1.5M arbitration award that placed it under the $250,000 regulatory net capital requirements of minimum.

According to the FINRA arbitration panel, Finestra and a broker violated state anti-fraud provisions related to the sale of Miasole Investments II, an unregistered security. The securities fraud complaint, submitted by Fintegra customers, states that the broker-dealer could only pay $300,000 of the award. However, InvestmentNews reported that the attorneys for one of the clients said that to date none of the award has been paid.

Fintegra, in its FOCUS report with the SEC, admitted that it had been named in five separate lawsuits, all involving the alleged sale of securities that were either unsuitable or violated state securities laws.
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Pension Fund Fraud: Ex-Detroit Treasurer Gets 11 Years in Prison, Gates Foundation Trust Sues Petrobas, Utah Bank to Pay $5M Over Missing Retirement Monies

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

Ex-Detroit Pension Trustee Gets 11 Years in Prison
Jeffrey Beazley, a former treasurer of the city of Detroit, Michigan, has been sentenced to 11 years behind bars for getting kickbacks and bribes from businessmen who received hundreds of millions of dollars from two of the city’s pension systems. Beasley, a former fraternity brother of ex-Detroit Mayor Kwame Kilpatrick, was treasurer of the city from 2006 until September 2008. He was in charge of both pension systems and served as trustee for the city’s Police and Fire Retirement System and General Retirement System.

The two pension systems serve over 30,000 pensioners, city employees, and beneficiaries. The kickbacks and bribes were part of a wider corruption scam involving Kilpatrick and others and cost the pensions over $97 million. The former mayor is serving 28-years behind bars for his role. A jury found Beasley guilty of bribery, extortion, and fraud conspiracy.

The Bill and Melinda Gates Foundation Trust Sues Petrobras and Its Auditor
The Bill and Melinda Gates Foundation Trust, which is the trust that oversees the $41 billion endowment of the couple’s foundation, has filed a lawsuit accusing Brazil’s Petróleo Brasileiro SA (Petrobras) and its auditor of involvement in a widespread corruption scam. The trust claims they lost millions of dollars because of the scheme. WGI Emerging Markets Fund, LLC, which managed investments for the Gates trust, is a co-plaintiff.

While other plaintiffs have also sued Petrobras, the oil company remains adamant that it was the victim of bribery and a bid rigging plot involving a few company insider and suppliers. Among US investors that have filed over a dozen complaints are those that purchased Petrobras-sold American depositary receipts. These plaintiffs include the Rhode Island city of Providence, public pension funds in Hawaii and Idaho, and the Attorney General of Ohio.