Investor Lawyers Blog

SEC Approves Rule Requiring Firms, Brokers Link to BrokerCheck

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

Over two years after it was initially proposed, a FINRA rule requiring that broker-dealers include a link to the self-regulatory organization’s BrokerCheck database has been approved by the Securities and Exchange Commission. The rule slated to go into effect, at the latest, at 180 days after the FINRA regulatory notice is published in the Federal Register. The deadline for publishing the notice is December 7, 2015.

Per the rule, a brokerage firm will have to include an obvious reference and hyperlink to the front page of FINRA’s BrokerCheck.com. Links to BrokerCheck would also have to be included on the profile pages of each broker.

FINRA has been trying to make retail investors more aware that BrokerCheck exists. The online database includes the work history of every registered broker, where they are registered, and other information, such as if they’ve been subject to disciplinary measures or named on previous securities cases.

A previous version of the proposed rule had called for LinkedIn and Twitter profiles of brokers to also include links back to BrokerCheck. However, rather than link directly to that home page, the hyperlink would have taken an investor to the BrokerCheck profile of a particular representative. Many in the industry, however, were strongly opposed to that mandate.
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FINRA Fines Voya Financial, J.P. Turner, Cetera, and Other Firms For Not Discounting Big REIT Sales

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

The Financial Industry Regulatory Authority has fined six independent brokerage firms for not giving clients the proper discounts on big sales of business development companies and real estate investment trusts. According to InvestmentNews, the self-regulatory organization has been scrutinizing whether financial firms are giving the appropriate discounts, also known as breakpoint discounts to clients.

When the sale of certain nontraded real estate investment trusts is anywhere from over $500K up to $1 million, a discount is usually available. This means that the REIT’s price, which is typically at $10/share with the broker getting a 70 cent commission, can go down to $9.90/share and a commission of 60 cents.

FINRA said that J.P. Turner, Voya Financial Inc. (VOYA), Transamerica Financial Advisors Inc., Investacorp., National Planning Corp., and Cetera Investment Services did not identify and put into effect volume discounts for certain eligible purchase of BDCs and non-traded REITs. Because of this, said the SRO, customers paid sales charges that were too high. Now, all six firms will have to pay restitution to the clients that were affected.

SEC Charges Briargate Trading LLP with Spoofing

Published on: October 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Briargate Trading LLP and its co-founder Eric Oscher with placing fake orders to make it seem as if there were a lot of interest in their stocks so they could manipulate prices. The practice is an illegal trading strategy called spoofing. To settle the regulator’s charges, both the New York-based proprietary trading firm and Oscher have consented to pay over $1 million.

According to the regulator, the spoofing scam lasted from 10/11 to 9/12 and involved securities found on the New York Stock Exchange. Oscher, an ex-NYSE specialist, used his account at the firm to make numerous, big, non-bona fide orders before the exchange opened for trading in the morning. The orders affected market perception of the stocks’ demand and their prices.
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Securities Headlines: Halcyon Cabot Partners is Expelled from Industry by FINRA, Blackstone Settles Disclosure Failure Charges for Nearly $39M, SEC Approves Proposal to Improve Transparency for OTC Equity Securities

Published on: October 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

SEC Case Headlines: New Jersey Fund Manager Faces Charges Over $1.1M Ponzi Scam, $32M Fraud Scam Involving Amber Mining is Halted, and Executives Face Charges for Allegedly Bilking Investor in Stock Fraud

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

NJ Fund Managers Faces SEC Fraud Charges
The Securities and Exchange Commission is charging William J. Wells and his Promitor Capital Management LLC with bilking investors in a $1.1 million Ponzi scam. According to the regulator, Wells falsely misrepresented himself as a registered investment adviser to some investors. However, rather than invest their money in specific stock as he told them he would, Wells and his firm placed most of the funds primarily in risky options that garnered poor results. He then allegedly hid the outcomes using bogus investor account statements that recorded performance figures that were severely inflated.

Wells also allegedly tried to conceal the investment loses by making Ponzi-like payments in which he paid earlier investors using the funds of new investors. By the end of this summer, fund brokerage accounts at Promitor held under $35 while the remainder were sucked dry from the Ponzi-like payment, trading losses, or transferred into Wells’ own bank account.

Meantime, the U.S. Attorney’s Office for the Southern District of New York has filed a parallel criminal action against Wells.

Regulator Files Charges, Obtains Asset Freeze in $32M Amber Mining Scam
The SEC has gotten asset freeze and file fraud charges against Steve Chen and 13 entities based in the state of California. According to the regulator, Chen falsely promised investors they would make money in an investment venture involving amber holdings.
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Six Ex-Brokers Go to Trial Over Libor Rigging Allegations in London

Published on: October 6, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In London, six ex-brokers accused of helping to rig interest rate benchmarks are now on trial in criminal court. The defendants include ex-ICAP (IAP) employees Darrell Read, Danny Wilkinson, and Colin Goodman, former RP Martin employees James Gilmour and Terry Farr, and ex-Tullet Prebon broker Noel Cryan, who are all charged with conspiring to rig the rates. All of them have pleaded not guilty.

According to prosecutors, the brokers tried to persuade traders at banks to turn in false Libor rates. They are accused of assisting convicted and former Citigroup (C) and UBS (UBS) trader Tom Hayes to rig Libor. Hayes was recently sentenced to fourteen years behind bars. He is appealing his case. The defendants also allegedly helped others to manipulate Libor submissions related to the Japanese yen.

Specifically, Read, Wilkinson, and Goodman are charged with conspiring with ICAP employee Brent Davies, Hayes, and other traders at UBS. The ex- RP Martin employees are charged of conspiring with traders at UBS, Luke Madden at HSBC (HSBC), and Paul Robson at Rabobank to manipulate the rate. Farr is also accused of conspiring with Hayes while at Citigroup. And former Tullet Prebon’s Noel Cryan also allegedly conspired with UBS traders.

Florida Investment Adviser is Charged With Securities Fraud

Published on: October 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging investment adviser Arthur F. Jacob and his Innovative Business Solutions LLC with fraud. The regulator claims that the two of them deceived clients from 2009 into 2014 and violated the federal securities laws’ antifraud provisions along with an SEC antifraud rule.

In its order instituting administrative proceedings regarding the purported investment adviser fraud, the SEC Enforcement Division contended that IBS and Jacob misrepresented the profitability and risks of investments he had bought for clients. Rather than disclosing the risks involved in certain exchange-traded funds, Jacob purportedly told clients that his investment approach was safe, presented no or little risk, and would garner predictable earnings. He also is accused of making misstatements to clients regarding their investments’ profitability.

Jacob and his Florida-based firm are not registered as an investment adviser with the regulator or any state. He is accused of telling clients that registration was not mandatory and of hiding his disciplinary history. For example, Jacob was disbarred from being an attorney because he misappropriated client moneys and engaged in other misconduct, including make false statements while under oath and to the Bar Counsel, submitting false tax returns for a client, charging unreasonable fees, and violating a court order.
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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.