Investor Lawyers Blog

Citigroup Global Markets to Pay $15M Penalty to the SEC for Surveillance and Compliance Failures

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

The Securities and Exchange Commission said that Citigroup Global Markets (C) will pay a $15M penalty to settle charges that it did not enforce procedures and policies that would stop and identify securities transactions potentially involving the wrongful use of material, nonpublic information. Citigroup agreed to the SEC’s order without denying or admitting to the regulator’s findings.

The firm also has paid $2.5 million to advisory client accounts that were affected. That amount is how much Citigroup made from the principal transactions that resulted because of the purported compliance and surveillance failures.

According to SEC, which conducted a probe, over a period of ten years, Citigroup failed to review thousands of trades that were made by a number of trading desks. Even though firm personnel looked at reports to assess trades daily, technological errors caused several information sources regarding thousands of key trades to be left out.

As the SEC noted in its order, advanced computer systems are often now involved in automated trading. Technology oversight is key to making sure that compliance is in effect.

FINRA Probes Broker Pay for Conflicts of Interest

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

The Financial Industry Regulatory Authority has sent a targeted exam letter seeking to examine possible conflicts of interest in the way firms pay brokers. About a dozen brokerage firms received the letter, which the regulator said is aimed at gathering information as opposed to seeking out violations.

In its letter, the self-regulatory organization inquires about each firm’s different compensation practices, including common payout grids, mutual fund fees, and recruiting incentives. FINRA also wants to know about any compensation that firms may receive from product sponsors and how certain products are promoted. It also wants to learn about production thresholds that allow certain brokers to get bonuses and more compensation for additional revenue earned, improved compensation tied to revenue from certain product types, and policies for monitoring conflicts of interest as they relate to compensation.

FINRA Executive Vice President of Regulatory Operations/Shared Services Dan Sibears said that the SRO is conducting the sweeps to see if firms are properly managing conflicts of interest or if additional guidance needs to be issued. Enforcement actions typically do not result from this type of sweep unless egregious violations are discovered.

Over 14,000 Massachusetts Investors Receive Checks for Losses in $1B TelexFree Ponzi Scam

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

The first checks for compensation in the $1 billion global Ponzi scam involving TelexFree Inc. have gone out to over 14,000 investors in Massachusetts. Victims received $2.9 million in total as part of a settlement with Fidelity Cooperative Bank. This is only a small portion of the alleged losses.

About 1.9 million investors are still waiting to get any financial relief in the case, which affected not just people in the US as the scam spread globally and virally online and by word of mouth. The alleged Ponzi scam involved fraudsters selling inexpensive Internet phone service for long distance calls. They were recruited as members for $1,400 increments. Big financial returns were promised to investors for bringing in other investors and using Internet ads to market the business. While early investors made money, many others suffered substantial losses.

Telex-Free was shut down in Brazil in 2013, but the Ponzi operation continued in Massachusetts where it was headed up by James Merrill and Carlos Wanzeler. Both deny the criminal and civil charges.
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Citigroup Affiliates to Pay $180M To Resolve Hedge Fund Fraud Charges

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

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) have consented to pay close to $180M to resolve Securities and Exchange Commission charges accusing them of bilking about 4,000 investors in the Falcon fund and the ASTA/MAT fund. The two hedge funds went on to fail during the financial crisis. The settlement money will go to investors who were hurt in the purported fraud.

According to an SEC probe, the Citigroup (C) affiliates made misleading and false misrepresentations to investors. The two hedge funds, managed by Citigroup Alternative Investments, were highly leveraged and sold only to advisory clients of Smith Barney and Citigroup Private Bank. They were sold by financial advisers associated with Citigroup Global Markets. Together, the hedge funds raised close to $3 billion in capital from investors before they went on to fail.

In its order, the SEC said that the ASTA/MAT fund bought municipal bonds and hedged interest rates by employing a Treasury or LIBOR swap. It described the Falcon fund as multi-strategy, invested in fixed-income strategies (including collateralized loan obligations, collateralized debt obligations, asset-backed securities) as well as in the other hedge fund.

Investors claim that the two affiliates misrepresented the hedge funds as low-risk, safe, and suitable for bond investors looking for traditional investments, when, in fact, the funds were high risk. They contend that even as the funds started failing, CAI accepted close to $110 million in investments.

Insider Trading Charges Filed Against 32 Defendants in Hacking Scam Involving Newswire Services

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

The Securities and Exchange Commission has filed financial fraud charges against 32 defendants accused of insider trading by using information obtained from newswire services that were hacked. Two Ukrainians and 30 other defendants in the U.S. and abroad are accused of making $100 million in illegal gains.

According to the regulator, for about five years, Oleksandr Ieremenko and Ivan Turchynov, both from Ukraine, hacked in to at least two newswire services and stole hundreds of corporate earnings announcements before they were issued to the public. Bloomberg says the services are Business Wire, Marketwired, and PRNewswire Association LLC.

The suspected hackers are accused of grabbing over 150,000 news releases that allowed them to anticipate movements in the stock market and make trades that would turn a profit. They also purportedly set up a secret web-based location to transmit the stolen information to traders in numerous countries and U.S. states.

The two men are accused of concealing intrusions with proxy servers to hide their identities and pretending to be newswire service employees and customers. Turchynov and Ieremenko are also accused of using a video highlighting the theft of the earnings data prior to public release to recruit traders.

UBS Puerto Rico Branch Manager Had Warned that Brokers Were Pushing Improper Loan Practices

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

According to Reuters, internal correspondence records show that in 2012, a former branch manager at UBS Puerto Rico (UBS) warned the Swiss banking giant’s officials that its brokers were encouraging customers to get involved in improper loan practices. In a number of emails, Carlos Capacete, who was a branch manager at the time, wrote to at least two bank officers noting his suspicions of misconduct.

Reuters says that in the documents it reviewed, Capacete told regional manager Doel Garcia that he had encouraged Mariela Torres, a UBS Puerto Rico compliance director, to look into suspect loans. In another email, Capacete followed up with his inquiry to see if the loans had been investigated for possible misuse involving the bank’s credit lines.

Then, in yet another email, Capacete documented what he knew about the loans, which he believed were fraudulent, explained how he discovered the purported wrongdoing, and noted his efforts to notify Torres about the alleged misconduct. Capacete also wrote that a UBS attorney had told him that the firm had conducted an audit and found that his suspicions were wrong.

Despite this alleged audit, late last year UBS reached a $5.2 million municipal bond settlement with Puerto Rico’s Office of the Commissioner of Financial Institutions to resolve allegations of improper loan practices. The bank settled that case without denying or admitting to the charges. It did, however, consent to enhancing its supervision of several brokers whom regulators said may have steered clients toward improperly borrowing money to purchase more funds. UBS also terminated a broker for the same allegations and received an arbitration award of $2.5 million against it in an early case concerning the same broker.
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Investors Could Get Hurt By REM, and Other ETFs Impacted by Growing Short-Term Rates

Published on: August 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In the last five years, artificially low interest rates have resulted in yield hungry investors being drawn to investments such as iShares Mortgage Real Estate Capped ETF, an exchange-traded fund that trades under the symbol REM. Since 2010, this ETF has gathered over $1 Billion in assets, in part because of its 14% dividend.

Unlike older and more traditional REIT ETFs, REM does not own companies that possess properties. Instead, the exchange-traded fund puts its money in financial firms that borrow at short-term rates and buy long-term mortgage securities while making a profit from the difference and passing that over as income. All this creates the 14% yield.

Unfortunately, with the increased likelihood of a Fed rate hike, the yield curve has started to become flat, reducing the spread that creates the 14% yield for REM. Also, short-term rates have started going up faster than long-term ones. The result has been that REM’s price has started to drop. And, if the central bank were to initiate a rate hike, that 14% yield and REM’s performance could end up in even more trouble. Bloomberg says that already REM has been down 5% since the Memorial Day weekend.

According to Shepherd Smith Edwards and Kantas Partner and Securities Fraud Attorney Sam Edwards, “Funds like REM seem very attractive to investors, especially when rates are so low. The risk of a fund like REM is far greater than traditional REIT investments and will suffer greatly in a rising interest rate environment. The vast majority of investors in funds such as this do not comprehend the risk of such a complicated strategy and find out too late they were taking more risk than was appropriate.”
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Ex-Caldwell Broker is Barred by FINRA for Churning Accounts

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

The Financial Industry Regulatory Authority has permanently barred ex-Caldwell International Securities Corp. broker Richard Adams from the industry. Adams is accused of churning customer accounts.

 According to FINRA, from July 2013 to June 2014, Adams engaged in excessive trading and churned the accounts of two customers, making close to $57,000 in commissions. The customers lost over $37,000 as a result.

Adams is also accused of not reporting numerous unsatisfied judgments and liens on his U4 Registration Form, which he is required to do under FINRA rules. By settling the civil case against him, Adams is not denying or admitting to the charges.

Churning
This type of illegal activity typically involves a broker engaging in the excessive selling or buying of securities in a customer account for the purpose of earning commissions. Signs of possible churning may include frequent in-and-out purchase and securities sales that appear unrelated to the customer’s investment goals.
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Goldman Sachs to Pay $272M to Pension Funds In Mortgage Securities Case

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

Goldman Sachs Group (GS) will pay $272 million to more than 400 bond investors, including two electrical pension funds, to settle a lawsuit alleging that it made misleading disclosures in order to sell mortgage securities backed by faulty loans. The lead plaintiff in the case was the NECA-IBEW Health and Welfare Fund, which is an Illinois-based electrical workers pension fund.

When NECA-IBEW filed its lawsuit against Goldman Sachs in 2008, it contended that not only did it make false statements but also it left out key information about the mortgages it sold into 17 trusts the year before. The plaintiff also said that Goldman misled investors about the underwriting of the loans behind the securities, as well as about the quality of appraisals and whether borrowers were capable of paying back their loans. The fund said that the securities’ prices fell during and after the economic crisis while their credit ratings slipped from triple-A to triple C junk grades.

Writing about the complaint in 2008, HousingWire Publisher Paul Jackson said that some of the claims were over the alleged use of inflated appraisals by the originating entities. He noted that many of the loans in the trusts were of the no-doc, reduced-doc, stated-income ilk, which the plaintiff believes are fraudulent.

Edward Jones to Pay $20M to Resolve Municipal Bond Sales Overcharges

Published on: August 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Edward D. Jones & Co., the brokerage firm subsidiary of Jones Financial Companies, has consented to pay $20 million to resolve U.S. Securities and Exchange Commission allegations accusing the firm of overcharging clients by at least $4.6 million on new municipal bond sales. The regulator contends that the brokerage firm offered bonds at a higher price than what securities laws require.

Underwriters are supposed to sell new bonds at an initial offering price that was negotiated with the bond issuer. The SEC claims that instead of offering municipal bond sales to customers at the worked out a price, the firm allegedly brought the bonds into its own inventory and then later sold them at high prices. Also, said the Commission, in certain instances the bonds were offered to customers after they had already started to trade in the secondary market at higher prices than what was initially offered.

The regulator said that at the very least Edwards Jones was negligent with the overcharges and its behavior was “inconsistent” with the standards and written agreements that govern municipal underwriting. The SEC says it will continue its probe into the matter.
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