Investor Lawyers Blog

New SEC Program Will Examine Financial Firms and Their Retirement-Planning Guidance

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

The Securities and Exchange Commission said it would perform a number of exams on financial advice firms as part of its plans to more closely examine the guidance that investors are getting as they plan for retirement. The regulator’s new program is called the Retirement-Targeted Industry Reviews and Examinations Initiative. The SEC’s Office of Compliance Inspections and Examinations will conduct exams. OCIE is responsible for more than 10,000 advisory firms and 4,500 brokerage firms.

Areas of scrutiny will include firm oversight and investment sales processes and procedures, as well as the areas where retail investors seeking to save for retirement may be at risk of sustaining financial losses. The SEC wants to look at whether the compensation provided to advisers establishes conflicts of interest and how firms deal with this.

The regulator also wants to examine the marketing material provided to customers and whether they are accurate, as well as if financial advisers are conducting enough due diligence on investments. Marketing collateral will be checked for accuracy, including making sure documents disclose the necessary information and are not misleading or contain omissions. The Commission will also study specific recommendations that are being made to clients.

In its alert about the initiative, the SEC acknowledged that a lot of retail investors have become more dependent than ever on their own investments to support them during retirement. OCIE will look at the complex and changing factors that investors deal with when deciding where to invest their money, including the wide variety of investments that are made available in this constantly changing market environment. The regulator will also study registrant sales, and disclosures.
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SEC Charges Unregistered Brokers for Handling Over $79M of Investments in Immigrant Investor Program

Published on: June 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Ireeco LLC and Ireeco Limited with serving as unregistered brokers for over 150 foreign investors. The two firms are accused of illegally brokering over $79M of investments by those who wanted to become U.S. residents under the EB-5 Immigrant Investor Program.

The program offers a way for foreigners to invest money in a U.S. enterprise or a designated, private regional center in exchange for legal residency in this country. The SEC contends that the two brokerage firms went online to solicit foreign investors, promising to help them select a regional center. Instead, the firms allegedly directed most of them to the centers that paid commissions of approximately $35,000/investor once the U.S. Citizenship and Immigration Services (USCIS) approved a green card petition. The SEC said that participants invested $79 million in the regional centers.

The SEC said that Ireeco LLC and Ireeco Ltd. raised money for immigrant investment projects without being registered to legally operate as securities brokers. The two firms agreed to settle without denying or admitting to the findings.
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Morgan Stanley and Scottrade to Pay FINRA $950K FINRA for Inadequate Supervision of Third Party, Customer Account Transfers

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

The Financial Industry Regulatory Authority said that Morgan Stanley Smith Barney, LLC (MS) and Scottrade, Inc. will pay fines of $650K and $300K, respectively. The firms are settling claims accusing them of not putting into place supervisory systems that could reasonably monitor customer funds transmitted to third-party accounts. The self-regulatory organization cited both financial firms for having weak supervisory systems a few years back, but they purportedly did not take the necessary steps to remedy the deficiencies.

The SRO contends that from 10/08 to 6/13, three Morgan Stanley-registered representatives in two of the firm’s branch offices converted $494,000 from thirteen customers by setting up fraudulent wire transfer orders and branch checks from the clients’ accounts to third-party accounts. One example of such an instance involves representatives transferring funds from several customer accounts into their own bank accounts.

FINRA said that Morgan Stanley should have put into place systems and procedures that would have allowed it to review and monitor such transmissions. The regulator said that instead, the supervisory failures let the conversions occur without detection.

Investor Want Wells Fargo Advisers to Pay $100K in Damages Over F-Squared Investment Losses

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

A client of Wells Fargo Advisors (WFC) is looking to recover at least $100,000 in damages for losses he sustained from investing with F-Squared Investments Inc. The arbitration case comes six months after F-Squared consented to pay $35 million to resolve Securities and Exchange Commission charges accusing the asset manager of making false claims about its flagship investment product’s performance. The 68-year-old widower’s claim will test whether investors can pursue broker-dealers for selling F-Squared products.

The claimant, a moderately conservative investor who was looking for moderately conservative growth for his retirement account assets, began working with a Wells Fargo financial adviser in 2011. The brokerage firm made F-Squared managed-accounts available to advisors in 2013.

According to InvestmentNews, The investor’s advisor put about $900K of the client’s money-most of his savings, says his attorney-in products managed by two ETF strategists. Over 50% of the money went into F-Squared’s AlphaSector Allocator Select. Meantime, the investor said it paid Wells Fargo about $19,000 in fees for recommending the products. He believes that the firm had a conflict when it recommended investments because they came with such high commissions. Also, the fees erased potential capital gains for the claimant.
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SEC’s Stein Wants Regulator to Take a Closer Look at Exchange-Traded Funds and Alternative Mutual Funds

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

Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

SEC Accuses Chicago Underwriters of Municipal Bond Offerings Fraud

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

The SEC has filed enforcement actions against 36 municipal underwriting firms, most of them located in the Chicago area, for alleged violations involving municipal bond offerings. These are the first cases against underwriters brought under the Municipalities Continuing Disclosure Cooperation Initiative. Goldman Sachs & Co. (GS), Robert W. Baird & Co., J.P. Morgan Securities (JPM), Raymond James & Associates, Inc. (RJF), Morgan Stanley & Co. (MS), Citigroup Global Markets Inc. (C), Stifel, Nicolaus & Company, Inc. (SF), Piper Jaffray & Co. (PJC), Merrill Lynch, Pierce, Fenner & Smith Inc., and RBC Capital Markets, LLC were the firms ordered to pay the largest financial penalty of $500,000, respectively.

The program offers favorable settlement terms to municipal bond issuers and underwriters that voluntarily self-report violations to securities laws, including those involving omissions and material misstatements in muni bond offering documents. In these actions, the SEC contends that between ’10 and ’14, the firms violated federal securities law when they sold muni bonds.

These acts purportedly included using offering documents that omitted or included materially false statements regarding the bond issuers’ compliance with continuing disclosure duties. The firms also are accused of not doing a good enough job of detecting omissions and misstatements before making bond sales to customers.

Continuing disclosure allows muni bond investors to have access to annual financial reports and other data on a continual basis. The SEC said that the issuers’ failure to comply with the duties related to continuing disclosure posed a challenge to investors wanting that information.
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Boston Investment Adviser Accused of Losing Over $12M of Investor Funds is Charged with Securities Fraud

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

According to the Securities and Exchange Commission, Interinvest Corp., a Massachusetts investment adviser, bilked investors of over $12 million, perhaps up to $17 million, when its founder invested their money in Canadian penny stock companies in which he had undisclosed interests. Hans Peter Black, who is a resident of Canada, calls the charges against him “outrageous.”

The SEC claims that Interinvest and Black funneled over $17 million of client funds to four penny stock companies on whose boards he sits. Another entity that he controls received about $1.7 million in Canadian dollars. Black’s relationships to all of these entities were purportedly never disclosed to clients or stated in the firm’s Form ADV. This is the form that investment advisers use to register with the SEC and state securities regulators.

In February, the regulator sent a subpoena to Interinvest requesting documentation of its bank accounts, compliance policies, and trades. The SEC said that Black did not comply with its request. Black also is accused of misrepresenting the nature of the penny stock company’s investments, disregarding client instructions, and purposely deviating from the conservative investment strategy his firm promoted.

San Antonio Spurs’ Tim Duncan Addresses $20M-Plus Texas Securities Case Against His Former Financial Adviser

Published on: June 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this year, our securities law firm published a blog post reporting that San Antonio Spurs’ Tim Duncan had filed a Texas securities case against financial representative Charles Banks. Duncan contends that due to unsuitable recommendations made to him by Banks, he allegedly lost some $25 million.

Banks, a private-equity investor, was Duncan’s adviser for nearly two decades, since the beginning of his professional sports career. The NBA All-Star says that Banks persuaded him to get involved in investments that were bad for Duncan but good for the financial adviser. He also claims that Banks forged his signature and withheld his return on a loan. The San Antonio Spurs star says that over the years, he’s invested millions of dollars in products and businesses that Banks either owned or had a financial stake in.

Meantime, Banks claims that Duncan’s losses are because of the player’s own impatience or due to misunderstandings. He argued that Duncan is using the Texas securities case to exit certain limited partnership investments.
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SEC File Action Against Company Accused of Offering Security-Based Swaps to Retail Investors

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

The Securities and Exchange Commission said it has brought an enforcement action against Sand Hill Exchange for illegally offering complex derivative products to retail investors. The regulator said that the company, based in in Silicon Valley, was offering and selling security-based swaps contracts to investors who did not qualify as “eligible contract participants” (ECPs) according to the law.

Sand Hill Exchange was started as an online business not unlike a fantasy sports league. It dealt with the valuation of private start up companies in the area. However, its founders Elaine Ou and Gerrit Hall ended up revising the company business model numerous times, with Sand Hill eventually inviting people to use real funds to purchase and sell contracts referencing companies that have not yet had their initial public offering.

To fund accounts, Sand Hill solicited investors to use dollars or bitcoins. Users, however, were not asked about their financial holdings nor were offerings restricted to those who held a certain number of assets. Instead, anyone could qualify.

It was the Dodd-Frank Act that put into place two integral requirements for security-based swaps offered or sold to retail investors who fail to meet the eligible contract participant standards. First, there has to be a registration statement for the offering, and second, the contracts must be sold on a national securities exchange. The requirements give the retail investors full access to key information about the offering while limiting such transactions to platforms that are only subject to the highest regulatory scrutiny.
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US Government Places Restrictions on Wells Fargo, JP Morgan Chase, and Other Banks for Not Complying with Orders Related to Foreclosure Abuses

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

The Office Comptroller of the Currency has placed restrictions on the mortgage-servicing operations of J.P. Morgan Chase & Co (JPM), Wells Fargo & Co. (WFC), HSBC Holdings PLC (HSBC), Everbank Financial Corp. (EVER), U.S. Bancorp (USB), and Santander Holdings USA Inc. for their failure to totally comply with enforcement orders related to home foreclosure abuses. The OCC said that the banks did not satisfy all the requirements in consent orders that were issued in 2011 over foreclosure processing errors.

Under agreements reached with regulators, most of the biggest mortgage services in the country have consented to pay billions of dollars and fix their controls and systems to resolve claims that they robo-signed, improperly handled loan papers, or fraudulently endorsed affidavits used in foreclosures following the 2008 financial crisis. The banks are accused of improperly putting into motion hundreds of thousands of home foreclosures without assessing each case individually.

The enforcement orders led to scrutiny into US banks’ foreclosure files to assess how many borrowers should be compensated. However, in 2013, the Federal Reserve and the OCC stopped the probe without concluding its investigation.