Investor Lawyers Blog

Goldman Consents to Three-Year Bar On Certain Advisory Work, Settles Leak Case with NY Fed for $50M

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

Goldman Sachs Group Inc. (GS) will pay a $50M fine to the New York Federal Reserve as part of a settlement over document leaks. The firm also consented to be barred from some advisory work in the state for three years. It admits that it did not properly supervise an employee.

The leak involves former Fed employee Rohit Bansal who worked for Goldman. According to a statement from the New York Department of Financial Services, while there he was assigned to work with a midsized bank as his client. He’d regulated the same bank while at the Fed—this was a bank that the Fed had specifically told him he couldn’t work with until early this year.

Bansal, however, held about 20 meetings with Jason Gross, a former co-worker at the Fed, who purportedly gave him about 35 documents with confidential regulatory information. Bansal is accused of using those documents to assist the Goldman client.

After Goldman management found out about the way he had gotten the confidential information, they fired him and started their own probe. (Meantime, sources tell Bloomberg, the Fed also let go of Gross.)

Massachusetts Regulator Says Fidelity Let Unregistered Advisers Trade on Its Broker-Dealer Platform

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

Commonwealth William Galvin has filed an administrative complaint against Fidelity Brokerage Services. The firm is accused of letting at least 13 unregistered investment advisers trade on its broker-dealer platform, which caused Fidelity and the advisers to earn fees.

This practice, which involved unregistered advisers having their clients turn in trade authorizations to the brokerage firm so that they could access the accounts, purportedly took place for more than ten years beginning in 2005. For example, the state regulator contends that over twenty Fidelity customers paid one unregistered investment adviser $732,000 in fees over ten years in which he made over 12,000 trades in his account and nearly 29,000 trades in client accounts.

Galvin believes that Fidelity knew that this person was acting as an unregistered adviser, even at one point pressing him to register. However, claims the regulator, despite remaining unregistered, the trader was rewarded because of referrals he made to the broker-dealer. Seven Fidelity customers paid him $732,000 as compensation for his services.
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Edward Jones, AXA Advisors, Stifel Nicolaus, and Others to Pay $13M to Retirement Accounts, Charities for Mutual Fund Overcharges

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

The Financial Industry Regulatory Authority says that another five firms must pay restitution to specific retirement and charitable accounts for overcharging them for mutual funds. Edward D. Jones will pay $13.5M, Stifel Nicolaus (SF) will pay $2.9M, AXA Advisors will pay $600K, Janney Montgomery Scott will pay $1.2M, and Stephens Inc. will pay $15K.

The announcement comes just a few months after the self-regulatory organization fined five other firms over $30M for similar violations. Those firms were LPL Financial LLC (LPL), Raymond James Financial Services (RJF), Raymond James & Associates, Wells Fargo Advisors Financial Network, LLC (WFC), and Wells Fargo Advisors, LLC. Due to their purported oversight, over 50,000 charitable organizations and retirement accounts ended up paying too much for their mutual fund shares.

CFTC Sues Chicago Trader and 3RedTrading for Spoofing

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

The U.S. Commodity Futures Trading Commission is suing 3RedTrading LLC and its owner Chicago broker Igor Oystracher for allegedly engaging in spoofing on some of the largest exchanges in the world. The spoofing purportedly took place over 51 trading days between 12/11 and 1/14 on the Chicago Board Options Exchange, the New York Mercantile Exchange, the Chicago Mercantile Exchange, and the Commodity Exchange.

The CFTC claims that Oystacher and 3Red gave the impression of “false market depth” to benefit themselves while hurting other market participants. The regulator believes that the trader spoofed in futures markets that were based on natural gas, copper, an options volatility index, and the S&P 500 equity index.

According to the complaint, 3Red and Oystacher made large passive orders on one side of the market at (or close to) the best bid or offer price, which they would then cancel before executing the trades. The purported orders were made through accounts belonging to 3Red.

Oystacher is accused of using “avoid orders that cross,” a feature on his trading software, while putting a big resting order on one side of the market to deceive others into believing that prices were about to drop or go up. However, because he was using that particular feature, the small order he’d make on the other side of the market would cancel the big resting one within five milliseconds. As a result, says the CFTC, 3Red and Oystacher were able to sell or buy futures contracts in amounts and at price levels that otherwise would not have been available to them if they hadn’t engaged in spoofing.

Bloomberg reports that a source said last month that already a grand jury has heard testimony about Oystacher and his alleged activities. Two other sources told the media outlet that federal prosecutors might be bringing criminal charges.
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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.