Investor Lawyers Blog

SEC Charges First Eagle Investment Management With Improper Use of Shareholder Assets

Published on: September 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging First Eagle Investment Management and its distribution arm FEF Distributors with improperly using the assets of mutual fund shareholders to pay two broker-dealers to market and distribute its funds. To settle the charges, both entities will pay $40 million, which will go toward repaying shareholders that were impacted. The SEC said the violations took place from 1/08 to 3/14.

While it is typical for mutual fund managers to pay money to brokerage firms and other financial intermediaries to get funds placement on platforms and distribution through financial advisers, the payments are only allowed to come from the assets of an actual fund if they are part of a 12-1b plan that involves apprising shareholders and fund boards of such payments. Also, while funds are allowed to pay broker-dealers for services rendered, again they can only come out of a fund’s assets for said services and not for access to a brokerage firm’s clients.

The SEC has been looking into whether funds are being illegally paid to broker-dealers under the pretense that their money was going toward other services. The regulator’s efforts are related to its Distribution-in-Guise Initiative, which involves investigating whether certain mutual fund advisers are using fund assets improperly by disguising distribution payments as sub-transfer agency payments. The Commission contends that First Eagle and FEF distributors illegally caused the asset managers to pay close to $25 million for services that were related to distribution as opposed to using its own assets to pay firms for this access.

FINRA Headlines: Regulator Seeks to Curb Broker Record Expungement, Continues to Fight Elder Abuse and Issues Liquidity Risk Management Guidance

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

FINRA Takes Action to Make It Harder for Brokers to Expunge Their Disciplinary Records
The Financial Industry Regulatory Authority’s Board has given the regulator permission to ask for public comment on a plan that would establish tougher requirements for when a broker would be allowed to expunge disciplinary actions from his/her BrokerCheck record. The proposed rule would update existing arbitration rules regarding the expungement of information related to customer disputes.

One proposed requirement is that an arbitration panel would have to get a copy of the BrokerCheck report when determining whether to grant an expungement request. The panel then would have to give more details about its reason to recommend a request.

According to a 2013 study by the Public Investors Arbitration Bar Association, expungement requests have been granted in up to 90% of cases that ended in an award or settlement. However, in 2014 the SEC signed off on a rule preventing broker-dealers from conditioning a settlement so that a claimant cannot counter expungement after the case is resolved.

FINRA Board Continues to Fight Elder Financial Abuse
FINRA’s board has given the self-regulatory authority permission to put out a rule proposal that would protect older investors and other vulnerable investors.

Under the rule, firms would be obligated to get the name and contact data of a trusted individual when opening an account for a customer. The rule also would let a firm, if it suspects financial fraud, freeze the money in accounts of senior investors age 65 and over, as well as the accounts of adults with physical or mental impairments. The concern is that such impairments may make it difficult for them to protect their best interests especially when they are being bilked.
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Ex-Aurelia Finance Managers Compensate Asset Managers Bilked in Madoff Ponzi Scam

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

Five ex-Aurelia Finance wealth managers have paid “substantial compensation” to resolve criminal complaints related to the Bernard Madoff Ponzi scam. According to prosecutors, the Swiss-based private bank lost up to $800 million of client money that they put into the scheme.

Pascal Cattaneo, Jean Marc Weneger, Vladimir Stepczynski, Olivier Ador, and Laurent Mathysen-Gerst were charged with criminal mismanagement of the money because they put too much into a Madoff feeder fund. Among those who lost money through asset management units were Italy’s UniCredit, Santander (SAN.MC), and Swiss-based EFG International. Prosecutors claim that the ex-directors got rich on management fees, commissions, and finder fees paid for bogus returns that were never verified.

In total, the Madoff Ponzi scam cost its investors $17 billion. Those impacted included retail investors, celebrities, other wealthy private investors, and institutional investors.

Meantime, efforts to recover the money lost by Madoff’s victims continue.

SEC Denied Request that Temporary Ban on In-House Judges Be Lifted

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

District Court Judge Richard Berman in New York has rejected the Securities and Exchange Commission’s request that a preliminary injunction on its use of administrative law judges in its proceedings be lifted. Berman said that the regulator has not shown “likely success” in its claim that the ALJ process is constitutional.

The judge also turned down the SEC’s contention that its administrative case against ex-Standard & Poor’s Rating Services (S & P) managing director Barbara Duka should proceed. Duka is challenging that securities case, arguing that SEC proceedings with administrative judges violate the Constitution because of how the justices are named and supervised.

Berman wants the SEC to fully probe charges of bias related to in-house judges. Critics have expressed concern that the in-house court presided over by Commission judges places the regulator at an unfair disadvantage over defendants. The SEC disagrees with these concerns, claiming that not only are judges impartial but also its court system is more efficient than that of the federal courts.

SEC Files Fraud Charges in $18M Arizona Securities Scam that Bilked 225 Investors

Published on: September 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging James Hinkelday, Jason Mogler, Brian Buckley, Casimer Polanchek, and James Stevens with bilking millions of dollars from investors. The regulators claims that the Arizona residents misappropriated about 97% of $18 million from 225 investors who thought their money was being used to acquire and develop beachfront property in Mexico, run recycling facilities, and buy foreclosed residential properties to resell. The men are accused of making Ponzi-like payments to investors who threatened to sue them.

In its complaint, the SEC says that the men-none of whom were registered with the agency to sell investments-solicited prospective investors via magazine, radio, and Internet ads, along with cold calls, marketing materials, and investor presentations. Polanchek purportedly looked for investors at cruises, bars, and self-help seminars. The men also were involved in The Investment Roadshow, which is an Arizona radio program that instructed listeners on how to use self-direct IRAs to put money in their companies. Prospective investors were guided to a website where they could schedule appointments and join seminars to find out more about the investment opportunities.
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Insider Trading Cases: Judge Says SEC Can Charge Former Euro-Pacific Capital Brokers, Ex-Morgan Stanley Broker Pleads Guilty, Traders Who Used Hacked News Releases Settle for $30M, Father and Son Face Charges,

Published on: September 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC Can Pursue Ex-Euro Pacific Capital Brokers For Insider Trading
In Manhattan, U.S. District Judge Jed Rakoff said that the SEC could pursue insider trading charges against two ex- Euro Pacific Capital Inc. stockbrokers despite a recent ruling issued by the 2nd U.S. Circuit Court of Appeals in another case.

Judge Rakoff turned down Benjamin Durant and Daryl Payton request to dismiss the SEC case accusing them of illegal trading prior to an IBP Corp. deal. The brokers had contended that the securities case should be dismissed because of the Second Circuit’s ruling that threw out the convictions of two hedge fund managers. The appeals court held that prosecutors have to prove a trader was aware that the source who provided a tip got a benefit beyond friendship for the exchange.

Payton, Durant, and others were criminally charged and pleaded guilty to insider trading. They had traded on SPSS stock based on a tip that IBM was going to acquire SPSS Inc. However, after the 2nd circuit ruling in the hedge fund case, a federal judge threw out the guilty pleas and prosecutors dismissed the criminal charges.

Still, the SEC continued with its criminal case against Payton and Durant. Now Rakoff is delaying the scheduled civil trial while the U.S. Supreme Court decides whether to deal with the appellate court’s ruling.

Former Morgan Stanley Broker Accused of Swallowing Tips Pleads Guilty
Vladimir Eydelman, an ex-Morgan Stanley (MS) broker, has pleaded guilty to tender-offer fraud, securities fraud, and conspiracy to commit both in an insider trading case. In federal court in New Jersey, the 43-year-old admitted to receiving insider corporate tips on pieces of paper and napkins, which he then chewed up and swallowed at Grand Central Station in New York.

The tips involved information filched from computers at a New York law firm. The insider trading scam, which lasted five years, resulted in $5.6 million in profits. Frank Tamayo, who provided Eydelman with the information, pleaded guilty to the charges against him last year. Eydelman used the information given to him to buy securities for himself, relatives, friends, Tamayo, and his brokerage clients before news of the deals went public.

FINRA Bars Global Arena Capital Brokers for Cockroaching, Churning, and Other Securities Violations

Published on: September 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has barred seven brokers accused of committing violations and repeatedly transferring from one brokerage firm to another from the securities industry. The brokers worked at the brokerage firm Global Arena Capital Corp. Also barred is the broker-dealer’s president, Barbara L. Desiderio. She is accused of letting the brokers engage in stockbroker fraud and deceiving the regulator.

The other brokers are David Awad, Alex Wildermuth, Peter Snetzko, James Torres, and Michael Tannen. Global Arena branch managers Kevin Hagan and Richard Bohak have been barred from serving in a principal role. Brokers Andrew Marzec and Niaz Elmazi were barred for not cooperating with the regulator’s probe.

According to FINRA, while at the firm, the brokers used sales pitches that were misleading, churned accounts, and committed other abusive acts. Seven of the brokers who were barred had been placed on heightened supervision by the self-regulatory organization when they exited HFP Capital Markets to go work at Global Arena. HFP Capital Markets has since been expelled from the industry by FINRA.
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Credit Suisse To Pay Over $80M to Settle Dark Pool Allegations, Says Source

Published on: September 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg.com reports that according to someone familiar with the matter, Credit Suisse Group AG (CS) will pay over $80 million to resolve federal and state authorities’ claims that it failed to fully disclose information to clients about how it ran its dark pool. Over $50 million of the payment is expected to take the forms of fines and disgorgement in a settlement with the SEC, while about $30 million would resolve the allegations made by the New York Attorney General.

Credit Suisse’s dark pool, Crossfinder, is the biggest alternative trading system in the country. The source said that the Swiss bank is accused of misrepresenting certain aspects about the way it runs the platform.

In dark pools, demand and supply remain private. Only specifics about executed trades are disclosed. Dark pools comprise one-fifth of trading in the U.S. stock market. Large investors, high frequency traders, and hedge funds are among those that trade on these alternative trading systems. There is concern that some traders are able to exploit and profit, sometimes with the help of dark pool operators. Meantime, ordinary investors may be suffering because of their inability to avail of such benefits.

US Study Says Older People Are More Susceptible to Financial Fraud Because of How The Brain Works

Published on: September 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to a study published previously in the Proceedings of the National Academy of Scienceshttps://www.nia.nih.gov, the reason why elderly people are more susceptible than younger folk to financial fraud is because the ability to identify trustworthiness decreases with age. The researchers looked at two different groups-one group was comprised of younger adults (ages 20 to 42) and older adults (ages 55-84.)

The groups judged faces in photographs. These faces had been pre-rated for approachability and trustworthiness.

While both groups identified those that had been pre-rated as neutral or trustworthy as approachable and trustworthy, the older group was more likely than the younger group to identify the faces that had been pre-rated as ‘untrustworthy’ as trustworthy. Shelly Taylor, a UCLA psychologist who was involved with the study, said that the reason for this was that older adults did not detect certain “easily distinguished” facial cues indicative of untrustworthiness.

The researchers asked another forty-four participants to undergo functional magnetic resonance while rating the faces. While the older adults did not display much of an activation in the anterior insula, which is the part of the brain known for regulating “gut feelings” that affect decision-making, the younger adults’ anterior insula exhibited a stronger response. Taylor said that while the younger adults were getting that ‘uh-oh’ feeling, the older adults were not.
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Bank of America, Deutsche Bank, Citigroup, & Other Big Banks Settle $1.87B Settlement Over Swaps Price-Fixing Case

Published on: September 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

$1.87B securities settlement has been reached with 12 major banks. The case resolves investor claims that the financial firms conspired to rig prices to hold back competition in the credit default market. For now, the resolution is an agreement in principal and the parties have two weeks to work out the details before turning the deal over to U.S. District Judge Denise Cote in Manhattan for preliminary approval.

The defendants in this credit default case are:

· Bank of America Corp. (BAC)

· UBS AG (UBS)

· Goldman Sachs Group Inc., (GS)

· Barclays (BARC)

· Royal Bank of Scotland Group Plc (RBS)

· BNP Paribas SA (BNP)

· Morgan Stanley (MS)

· Citigroup (C)

· JPMorgan Chase (JPM)

· Credit Suisse Group AG (CS)

· Deutsche Bank AG (DB)