Investor Lawyers Blog

Oz Management to Settle SEC Charges Over Inaccurate Data by Paying $4.25M

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

Investment adviser Oz Management, LP has agreed to pay a $4.25M penalty to settle SEC charges that it provided inaccurate trading data to four prime brokers. This led to inaccuracies in the books and records of the brokers, including the inaccurate listing of about 552 million shares. Also, the inaccurate trading information resulted in inaccuracies in the information given to the regulator during investigations.

The SEC’s order said that for almost six years, up through the end of 2013, the firm misidentified certain trades in information given to the brokers. Trade settlement was not impacted. However, in addition to the erroneous listings previously mentioned, the wrong information was also woven into the data that the brokers electronically provided to regulators.

Because of this, about 14.4 million shares were inaccurately reported when addressing SEC requests. It was this inaccurate information that the Financial Industry Regulatory Authority used to make a number of referrals to the agency.

The SEC discovered the purported violations during a 2013 probe when it realized that Oz Management’s files didn’t identify trades the same way as was noted on blue sheets. In certain trades the investment adviser did not characterize the sales as short or long in the same way that they were marked when they were sent to the market. Instead, the trades were filtered according to other factors.

LPL Financial Fined $250K by Massachusetts Over Misrepresentations Made to Senior Investors

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

Massachusetts Secretary of the Commonwealth William Galvin has fined LPL Financial (LPLA) $250K to resolve charges that its representatives misrepresented their qualifications when working with older investors. The state’s regulator claims that the brokerage firm approved having brokers use senior-specific titles on their business cards. The titles were not in compliance with the state’s regulations regarding senior designations.

After Galvin’s office discovered one such incident, LPL conducted an internal probe and discovered that at least 10 brokers may have been using titles that were not in compliance with the state’s Senior Designations Regulations. The regulator said that the firm had even approved the title on one broker’s business card more than once.

Galvin contends that since June 2007, LPL failed to establish or enforce a procedure allowing it to look at senior-specific titles to make sure they complied. He noted the importance of not using titles that imply one has an expertise in advising senior investors when there is none. The Senior Designations Regulations prohibit the use of titles that imply a training or certification that the titleholder doesn’t actually possess.
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$30M Fraud that Bilked NHL Players Leads to Guilty Convictions

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

A federal jury has found two men accused of running a financial scam that bilked investors, including several National Hockey League players, of $30 million guilty of money laundering, conspiracy, and wire fraud. The trial against Phillip Kenner, an Arizona financial adviser, and Tommy Constantine, a former professional race car driver, lasted ten weeks.

According to prosecutors, from 2002 to 2013, Kenner convinced at least 13 NHL players to invest $100,000 in a Hawaii real estate development. He met the players through a college friend who was drafted by the league.

He and Constantine stole the players’ money, causing $13M in losses. They used the funds to pay for their lavish lifestyles.

The two men, in a second scam, convinced many of the same hockey players to invest $1.4M in Eufora, a prepaid debit card business owned by Constantine. This money went into bank accounts controlled by the two men.

Massachusetts Regulator Charges Securities America Over Bait and Switch Ads By Broker Accused of Targeting Senior Investors

Published on: July 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of the Commonwealth William Galvin is charging Securities America with inadequate supervision of a broker who is accused of using a “grossly deceptive” radio ad campaign to target older investors. The state regulator said that the financial firm shouldn’t have approved the spots that Barry Armstrong ran on his AM radio show. His show, which airs on WRKO-AM, is syndicated on different stations.

The broker purportedly ran ads asking listeners to call for information related to Alzheimer’s Disease when what Armstrong really was doing was collecting their contact information so he could offer to sell them financial advice. Galvin’s office said that the broker engaged in ‘bait and switch’ by falsely advertising one service when he was really selling another type of service.

The regulator contends that Securities America failed to identify or prevent Armstrong’s unethical conduct by neglecting to ask even one question about the content of the ads or attendant mailing materials. Now, the state wants a censure, a cease-and-desist order, and a fine imposed against the firm.
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Ex-Deutsche Bank Employees May Face Libor Rigging Charges

Published on: July 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg reports that according to sources, the U.S. Department of Justice is getting ready to file securities charges against former employees of Deutsche Bank AG (DB) for manipulating the London interbank offered rate. The government is looking at five ex-traders who may have rigged the U.S. dollar equivalent of the interest-rate benchmark. If the criminal charges do go through these would be the first ones against the German bank’s traders over Libor.

Earlier this year, Deutsche Bank agreed to pay $2.5B to regulators for rigging Libor and other benchmarks: $600M to the New York Department of Financial Services, $775M to the DOJ, $800M to the Commodities Futures Trading Commission, and $340M to the U.K’s Financial Conduct Authority. The latter had doubled its fine because of what it considered the bank’s “slow” and “ineffective response to questions and purportedly “false, inaccurate, or misleading” statement that it made.

The global settlement included a ban against Deutsche Bank’s traders who had engaged in interest rate rigging. The bank’s DB Group Services in the U.K. also pleaded guilty to one count of wire fraud for its involvement in the scam to defraud counterparties to interest rate swaps by manipulating U.S. Dollar LIBOR contributions.

Bipartisan U.S. Senate Bill Wants to Up SEC Fines For Securities Law Violations By Almost Ten Times

Published on: July 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senators Chuck Grassley (R-Iowa) and Jack Reed (D-R.I.) introduced a bipartisan bill this week that would allow the Securities and Exchange Commission to impose much higher civil monetary penalties against individuals and financial firms that violate securities laws. The measure is called the Stronger Enforcement of Civil Penalties Act of 2015.

Senator Grassley said that the current SEC fines are “decimal dust,” which don’t serve as much of a deterrent. He said that a penalty “should mean something.” He and Senator Reed said they want to enhance investor protections. As Mr. Reed pointed out, over half of American households own securities, with many dependent on the market for their retirement and their kids’ college education. He said that investors shouldn’t have to incur substantial losses while violators get away with a “slap on the wrist.”

Under the new bill, the SEC would be able to impose up to $1 million against individuals for every serious offense as long as the penalty isn’t already tied to illegal funds that that the person received. Serious offenses would include deceit, fraud, deliberately ignoring regulations, and manipulation. The current maximum penalty for individuals over such offenses is $160,000.

F-Squared Files for Chapter 11 Bankruptcy

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

Exchange-traded fund manager F-Squared Investments Inc. has filed for bankruptcy. The firm wants the U.S. Bankruptcy Court for the District of Delaware to allow it to sell its intellectual property, including its investment strategies and contracts to manage money, to Broadmeadow Capital, a Chicago-based money manager.

It was in December that F-Squared agreed to pay investors $35 million to settle Securities and Exchange Commission charges alleging that the firm misled investors about the performance of its Alpha Sector investment strategy. The regulator said that the ETF fund manager falsely marketed the strategy as having a successful track record that was based on actual performance.

Instead, contends the SEC, the data was from a hypothetical performance for a past period that was generated from backtesting. Also, a performance calculation error caused results to be inflated by 350%.

Advisers were attracted to this inflated performance record and F-Squared’s contention that its strategy could get around tough market shifts by engaging in opportunistic trading in and out of multiple industrial-sector ETFs. In seven years, the firm went from being practically a nonentity to having a $28.5 billion strategy as of last year.

F-Squared became the largest marketer of index products using ETFs. By the end of the year that ended in March 2015, however, the firm experienced a close to $8 billion asset decline. It reduced its workforce by 25%.
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SEC Stops Ponzi Scam that Targeted Portuguese and Spanish Communities

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

The Securities and Exchange Commission is filing fraud charges against DFRF Enterprises for running a Ponzi scheme and pyramid scam that targeted investors belonging to Portuguese and Spanish-speaking communities. According to the regulator, the company claimed to run over 50 gold mines in Africa and Brazil even though its revenues came solely from selling membership interests to investors.

The alleged scammers raised over $15 million, bilking at least 1,400 investors. The owner of DFRF, Daniel Fernandes Rojo Filho, allegedly took over $6 million of this money to pay for personal expenses, including luxury vehicles and other lavish spending.

The regulator contends that in 2014, Filho and others started selling memberships in DFRF. Investors were recruited through a pyramid-like scam, with commissions paid to earlier investors for recruiting new members, much like a Ponzi scheme.

Many of these sales took place through meetings with prospective investors in hotel conference rooms, businesses, and homes, mostly in Massachusetts. The investment opportunity was also promoted on video through the Internet. In less than a year, membership sales rose from under $100,000 in June 2014 to over $4 million for the month of March 2015.
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Wells Fargo, LPL Financial, and Raymond James to Pay Investors of Retirement Accounts and Charities Over $30M for Mutual Fund Overcharges

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

The Financial Industry Regulatory Authority said that LPL Financial, LLC (LPLA), Raymond James & Associates (RJF), Raymond James Financial Services, Wells Fargo Advisors, LLC (WFC), and Wells Fargo Advisors Financial Network, LLC must pay over $30M in restitution plus interest to customers who were impacted when the firms did not waive mutual fund sales charges for certain retirement and charitable accounts. According to the self-regulatory organization, between July 2009 and the end of 2014 the financial firms either improperly overcharged certain investors who had purchased Class A mutual fund shares or sold them Class B or C shares instead. The latter two come with ongoing, high back-end fees.

Mutual funds typically offer different share classes for sale. Each class has its own sales fees and charges. Although Class A shares come with an initial sales charge, they usually have lower annual fees than Class B and C shares. However, mutual funds will usually waive Class A sales charges when selling them to charities and some retirement accounts.

The broker-dealers offered these waivers for the retirement and charitable plan accounts under limited conditions. The waivers also were disclosed in prospectuses. Yet, according to FINRA, at various times since at least July 2009, the firms did not actually waive the sales charges for these customers when they were offered the Class A shares.

Because of this, contends the agency, over 50,000 eligible retirement accounts and charitable organizations either paid sales charges for the Class A shares or bought other share classes that required them to pay higher ongoing fees and other expenses. FINRA said that the firms did not properly supervise the sale of these mutual funds and depended on its brokers to offer the waiver discounts even though they weren’t properly trained.

FINRA Orders BNP Paribas Securities to Pay Retired Couple $16.6M for Unsuitable Investment Sale

Published on: July 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that BNP Paribas Securities Corp. has to pay retirees James and Margaret Eringer $16.6 million for selling them a leveraged derivative call option, which was not a suitable investment for them. This securities claim, which was brought in 2010, is the longest running case that FINRA has presided over. The arbitration panel finally issued a ruling after over 90 days of hearings.

The Eringers made their money when they sold a bakery business that belonged to one of their parents. The British couple spent about 60% of their investible assets on the investment in 2007.

According to their securities attorney, they made the purchase through Ontonimo Limited, which is a corporate entity that BNP Paribas mandated they create since the firm could not directly sell this kind of security to retail investors. This type of investment product is usually sold to institutional clients and hedge funds.

The Eringers paid BNP over $2 million for costs and fees. The firm also purportedly made James Eringer sign an agreement indicating that he was an investment adviser himself even though he had no professional financial experience nor did he have a securities license. Within 18 months, the Eringers’ contend, their investment became “worthless.”
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