Investor Lawyers Blog

Securities Enforcement: DBSR to Pay Almost $6M to Settle SEC Related to Ratings Methodology for RMBSs and Re-REMICs, FINRA Censures NFP Advisor Services for Inadequate Supervision of Private Securities Transactions

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

Credit Rater Accused of Misrepresenting Surveillance Approach for Complex Securities
Credit rating agency DBSR Inc. will pay nearly $6 million to settle Securities and Exchange Commission charges. The regulator is accusing the credit rater of misrepresenting the surveillance method it used for rating certain kinds of complex financial instruments over a three-year period.

In its yearly examination of DBSR, The agency’s Office of Credit Ratings found that the credit rating agency misrepresented that it would each month monitor its current ratings of re-securitized real estate mortgage investment conduits and residential mortgage-backed securities. DBSR said it did this via a three-step quantitative analysis and a surveillance committee review of each rating.

However, said the SEC, the firm failed to perform this monthly scrutiny and did not have its committee look at each rating every month. Instead, when the committee would get together it would only examine a limited subset of outstanding Re-REMIC and RMBS ratings. The credit rater lacked the sufficient technological resources and staffing for performing surveillance for all outstanding Re-REMIC ratings and RMBS each month. The SEC also said that DBRS failed to disclose modifications to specific surveillance assumptions even though its methodology said that is what it would do.

As part of the settlement, DBRS consented to disgorge over $2.7M in rating surveillance fees that it received from ’09 to ’11 in addition to prejudgment interest. It consented to paying a $2.925M penalty and will hire an independent consultant to look at its internal controls, make recommendations for how to improve them, and other matters.

NFP Advisor Services to Pay $500K to FINRA Over Inadequate Supervision
The Financial Industry Regulatory Authority has censured NFP Advisor Services for failing to properly supervise its registered representatives when they conducted private securities transactions. These representatives were registered not just with the firm but also with a registered investment advisor.

Ex-Coastal Investment Advisors President Admits to Bilking Investors, Including Seniors

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

Ex- Coastal Investment Advisors Inc. President Michael Donnelly and the firm’s affiliated broker-dealer will settle Securities and Exchange Commission charges accusing him of bilking brokerage customers and advisory clients of close to $2M. According to the SEC complaint, Donnelly’s 13 victims included unsophisticated investors and older investors belonging to the 64 to 85 age group.

Donnelly would get clients to write checks to Donnelly Advisors Group. The money was supposed to pay for their investments. Instead, the regulator says, rather than investing the funds, Donnelly took investor money and used them to pay for his own living expenses and for his children’s private school tuition.

From ’07 to ’14, he hid the securities scam by providing bogus trade confirmations, account statements, and other fake information that made it appear as if investors had actual investments that were doing well. For example, he generated portfolio reports that listed fake investments. He even set up an online report for at least one client in which he inserted ticker symbols of stocks he supposedly bought for that individual. Donnelly also modified brokerage statements and trade confirmations to make clients think they were holding certain investments.

According to the criminal action against him, which is discussed below, when one couple asked Donnelly for their money, he allegedly convinced another investor to liquidate part of an annuity while making it seem as if the funds were to go toward buying out another investor. He then used the money to give the couple back their funds. Donelly’s investment scam failed last year after he was caught.
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Securities News: Deutsche Bank to Pay $2.5M For Swaps Violations, Fifth Street Finance Sued in Class Action Lawsuit, and Countrywide’s $8.5B MBS Settlement Gets IRS Approval

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

Deutsche Bank Reaches Swaps Violation Settlement with CFTC
The Commodity Futures Trading Commission and Deutsche Bank AG (DB) have reached a settlement over the regulator’s order accusing the firm of not properly reporting its swaps transactions from 1/13 through 7/15. The regulator also said there were supervisory failures and that the bank failed to modify the reporting errors at issue until after it found out that the CFTC was conducting a probe.

According to the regulator, Deutche Bank did not properly report swap transaction cancellations in all asset classes, resulting in somewhere between tens of thousands and hundreds of thousands of reporting errors, violations, and oppositions in its reporting of swaps. CFTC believes that the bank knew about the problem but did not notify its Swap Data Repository in a timely manner, nor did it properly probe, deal with, and modify the information deficiencies until last year when it became aware of the investigation. As a result of the reporting failures, the wrong information was put out to the public.

The CFTC believes that the bank’s reporting failures were partly because of deficiencies in its swaps supervisory system. A more adequate system could have better supervised Deutsche Bank’s activities involving compliance with reporting requirements.

Because the bank is a provisionally registered Swap Dealer, it has to abide by certain recordkeeping, disclosure, and reporting duties related to swap transactions. These requirements are supposed to improve transparency, encourage standardization, and lower systemic risk in swaps trading.

Investors File Class Action Securities Case Against Fifth Street Finance
An investor has filed a class action securities fraud case against Fifth Street Finance Corp. on behalf of shareholders. According to the plaintiff, and for those who bought Fifth Street Finance common shares between 7/7/14 and 2/6/15, the company, Fifth Street Asset Management, Inc., and specific directors and officers violated federal securities laws by allegedly taking part in a fraudulent scam to artificially inflate Fifth Street Finance assets and investment income to raise revenue of Fifth Street Management.

CFTC Cases: Cash Flow Financial Must Pay Over $91.9M in Commodity Pool Ponzi Scam, BNP Paribas to Pay $140K Over Improper Segregation of Customer Funds, & Unauthorized Trading Leads to $500K Penalty

Published on: October 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Cash Flow Financial Embroiled in Commodity Pool Ponzi Scam
The U.S. Commodity Futures Trading Commission said that Cash Flow Financial LLC, Alan James Watson, and Michael S. Potts will pay over $91.9 million for their involvement in a commodity pool Ponzi scam. The regulator claims that the defendants fraudulently solicited at least $45M from over 600 investors and misappropriated most of their money for their own spending and to cover principal and supposed “returns” to other commodity pool investors.

As part of the default judgment, Cash Flow Financial/Watson must pay restitution and a $2M civil monetary penalty, and interest. The firm is permanently enjoined from taking part in commodity futures, options, swaps, forex, and securities futures product transactions. Potts must pay an over $558K penalty, interest, and disgorge over $186K in illicit profits. Watson will pay over $37M in restitution.

Also, in Virginia, Watson pleaded guilty to wire fraud in a related criminal case. He must serve 12 years behind bars.

BNP Paribas Securities Resolves Charges of Improper Investments Related to Segregated Customer Monies
BNP Paribas Securities Corp. will pay a civil penalty of $140K to settle charges accusing the registered Futures Commission Merchant of violating the regulator’s limits that apply to segregated commodity customer funds and how they are invested. The firm reported two violations to the agency and another one was discovered by CME Group Inc., which is FCM’s designated self-regulatory organization.

According to CFTC, on two of three days, BNP Paribas Securities invested over 10% of segregated customer funds in a money market mutual fund, which was a violation. Also, BNP purportedly invested over 50% of segregated customer funds in money market mutual funds, which was also a violation.
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FDIC Approves New Swaps Rules for Banks

Published on: October 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Deposit Insurance Corp. has adopted new rules mandating that banks collect more collateral, also known as margin, for swaps transactions. This would serve as a type of insurance in the event that trades were to fail.

Swaps involve two parties swapping price swing risks in interest rates, currencies, commodities, and other matters. Manufacturers, financial firms, energy firms, and farmers use swaps to hedge and bet against these swings. Swap dealers and significant swap participants should be registered with the Securities and Exchange Commission and the Commodity Futures Trading Commission. They typically take part in over $8 billion in swaps yearly.

Swaps are part of a multi-trillion-dollar global market of contracts. They let counterparties trade a benchmark or fixed price for one that fluctuates. This allows companies to hedge exposure to the changes in the market in terms of its values and process. The new rules come in the wake of the 2010 Dodd-Frank Act, which required such regulations to lower the risks involved in derivatives.

According to The Wall Street Journal, the FDIC’s new rules seek to prevent the kind of risk-taking that led to the government having to bail out certain firms, such as American International Group Inc. Prior to the financial crisis AIG establish a huge derivatives book. When the trades failed, counterparties demanded that collateral be increased. Because the insurer couldn’t pay, the government had to get involved. If the new rules were in place back then, AIG would have been required to put aside more collateral before getting involved in the contracts. This would have placed a limit on its portfolio’s growth.

FINRA Orders 12 Financial Firms to Pay $6.7M for Not Charging UIT Purchase Discounts

Published on: October 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Twelve financial firms will pay over $4 million in restitution and fines of over $2.6M for purportedly not applying sales charge discounts to the sale of Unit Investment Trusts. The fines are also for supposed supervisory failures.

The firms and the payments they will make include:

• First Allied Securities, Inc., which will pay over $689K in restitution and a $325K fine.

Morgan Stanley, JPMorgan, Barclays and Other Banks To Pay $1.86B to Settle Credit Default Swaps Price Fixing Claims

Published on: October 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Details of the settlement involving a dozen big banks accused of conspiring to rig prices and restrict competition in the credit default swaps market have been released. According to papers filed in federal court in Manhattan last week, the following firms will collectively pay nearly $1.9 billion:

· JPMorgan Chase & Co. (JPM): $595M

· Morgan Stanley (MS): $230M

· Barclays Plc (BARC): $178M

· Goldman Sachs (GS): $164M

· Credit Suisse (CS): $159M

· Bank of America Corp. (BAC): $90M

· Deutsche Bank (DB): $120M

· BNP Paribas (BNP): $89M

· Citigroup (C): $60M

· Royal Bank of Scotland (RBS): $33M

· HSBC Holdings Plc (HSBC): $25M

UBS Advisory Firms To Pay Investors $13M For Failure to Disclose Closed-End Fund Strategy Modification

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

UBS Fund Advisor LLC and UBS Willow Management LLC will pay $17.5M, including $13 million to investors that were hurt to resolve Securities and Exchange Commission charges accusing them of failing to disclose that there was a change in an investment strategy involving closed-end fund UBS Willow Fund LLC. The two UBS (UBS) advisory firms have advised the fund.

The SEC contends that from 2000 through 2008, UBS Willow Management – which was a joint venture between an outside portfolio manager and UBS Fund Advisor – invested the assets of the Willow Fund in line with the strategy discussed in marketing collateral and offering documents. However, according to the regulator’s order that instituted a settled administrative proceeding, in 2008, the fund advisor changed tactics and went from focusing on investments in debt put out by beleaguered companies to buying big amounts of credit default swaps.

The Willow fund started to sustain huge losses because of the credit default swaps, which went from 2.6% of the fund’s market value in ’08 to over 25% by March ’09. The fund was eventually liquidated three years later.

The SEC says that UBS Willow Management failed to notify its board of directors or the fund’s investors that the investment strategy had changed. For a time, a marketing brochure given to prospective investors misstated the strategy of the fund, and letters to investors included misleading or false information about credit default swap exposure.
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Barclays Resolves RMBS Lawsuits for $325M

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

Barclays (BARC) will pay $325M to resolve two civil cases related to residential mortgage-backed securities sales that took place during the housing boom. The plaintiff of both securities lawsuits is the National Credit Union Administration, which regulates federal credit unions.

A number of credit unions under NCUA’s purview failed after they invested in mortgage-backed securities. The union believes that the banks that underwrote the securities misled buyers.

RMBS are investments that pool the returns and risks of personal mortgages. The quality of these securities came into question several years ago when homeowners began to default on the mortgages backing them. NCUA believes that it is its statutory duty to obtain recoveries for credit unions while making sure that customers are protected.

By settling, Barclays is not admitting fault. According to The New York Times, the bank sponsored and underwrote approximately $35M in mortgage securitizations in the US and sold $19.4B in loans that were originated and sold to third parties by affiliates of an entity that it had acquired. Upon completion of this settlement, NCUA will dismiss pending litigation against Barclays in district court in Kansas and New York.

CFTC Charges Guardian Asset Group With Illegal Off-Exchange Precious Metal Transactions

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

The U.S. Commodity Futures Trading Commission has submitted a civil injunctive enforcement action against Guardian Asset group LLC and its owner Andrew Kurzbard. The regulator claims the defendants took part in illegal-off-exchange transactions involving precious metals. The transactions purportedly involved retail customers and took place on a financed, margined, or leveraged basis.

According to the regulator, from February 2012 through at least February of the following year, Guardian and Kurzbard solicited customers by phone to get them involved in precious metal transactions. The company was able to collect at least $1.7 from its customers related to the transactions while earning over $434K in commissions.

The CFTC said that Guardian accepted customer funds and orders, acting as a Futures Commission Merchant but was not registered with the regulator as an FCM. The regulator says that because Kurzbard is Guardian’s control person, he is liable for its Commodity Exchange Act violations.

The CFTC’s complaint also claims that Guardian executed illegal precious metal transactions using AmeriFirst Management LLC. It was two years ago that the regulator filed an enforcement action against that company, accusing it and others of illegal, off-exchange precious metal transactions. AmeriFirst was charged with numerous violations, including fraud. The agency entered a consent order resolving the claims against AmeriFirst later that year after finding it liable for fraud and of engaging in illegal off-exchange precious metal transactions.
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