Investor Lawyers Blog

Father and Sons Charged in $20M Stock Scam

Published on: September 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging a father, three sons, and two other men with bilking people who invested money in Gerova Financial Group. The regulator’s complaint names John Galanis, his sons Derek, Jason, and Jared, Gerova president Gary T. Hurst, and investment adviser Gavin Hamels. John has been a defendant in SEC enforcement actions numerous times over the last four decades. Jason faced SEC charges in 2007.

The SEC contends that Jason and Hirst came up with a securities scam in 2010 to secretly issue $72M of unrestricted shares to a friend in Kosovo. The Galanis’ are accused of redirecting the proceeds from the sales of those shares from the friend’s brokerage accounts and wiring the money to themselves and others. This resulted in about $20 million in illicit profits.

Jason is accused of bribing Hamels to buy stock in Gerovia to help stabilize its price as shares went into liquidation. Hamels is accused of buying the stock for clients according to arrangements made with Jared about prices, times, and how much to buy. He allegedly did not tell clients about Jason’s bribe.

The SEC is charging all of the men with federal securities laws and securities registration violations. It is charging Hamels with investment adviser fraud. Meantime, prosecutors in New York have put out a parallel action filing criminal charges against the six men, as well as Ymer Shahini, who was the family friend in Kosovo.
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Broker Fraud News: Ex-Dallas Broker Faces Prison, Fintegra Files for Bankruptcy, and Broker Who Promised Investors They’d Double Their Money Can No Longer Sell Securities

Published on: September 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Dallas Broker Accused of Texas Securities Fraud Face Five Years
Wade Lawrence, a former Dallas broker, has pleaded guilty to Texas securities fraud. As part of his plea bargain the 43-year-old will have to forfeit $1.5 million and pay over $250,000 in fines. He also faces up to five years behind bars for his $2.1 million securities scam.

According to prosecutors, over the course of working for several securities firm over the last seven years, Lawrence falsely offered risky investments with the promise of 20% to 100% returns. He lost a significant amount of money and invested just a portion of investors’ funds. Lawrence used a lot of investors’ cash to cover his own living expenses, personal travel, as well as pay for fancy jewelry. The Associated Press reports that to date Lawrence has given back $581,000 to investors.

Minnesota-Based Brokerage Firm Files for Bankruptcy
Broker-dealer Fintegra has filed for bankruptcy in U.S. Bankruptcy Court in Minnesota. The firm had to stop its securities business in June after it was hit with a $1.5M arbitration award that placed it under the $250,000 regulatory net capital requirements of minimum.

According to the FINRA arbitration panel, Finestra and a broker violated state anti-fraud provisions related to the sale of Miasole Investments II, an unregistered security. The securities fraud complaint, submitted by Fintegra customers, states that the broker-dealer could only pay $300,000 of the award. However, InvestmentNews reported that the attorneys for one of the clients said that to date none of the award has been paid.

Fintegra, in its FOCUS report with the SEC, admitted that it had been named in five separate lawsuits, all involving the alleged sale of securities that were either unsuitable or violated state securities laws.
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Pension Fund Fraud: Ex-Detroit Treasurer Gets 11 Years in Prison, Gates Foundation Trust Sues Petrobas, Utah Bank to Pay $5M Over Missing Retirement Monies

Published on: September 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Detroit Pension Trustee Gets 11 Years in Prison
Jeffrey Beazley, a former treasurer of the city of Detroit, Michigan, has been sentenced to 11 years behind bars for getting kickbacks and bribes from businessmen who received hundreds of millions of dollars from two of the city’s pension systems. Beasley, a former fraternity brother of ex-Detroit Mayor Kwame Kilpatrick, was treasurer of the city from 2006 until September 2008. He was in charge of both pension systems and served as trustee for the city’s Police and Fire Retirement System and General Retirement System.

The two pension systems serve over 30,000 pensioners, city employees, and beneficiaries. The kickbacks and bribes were part of a wider corruption scam involving Kilpatrick and others and cost the pensions over $97 million. The former mayor is serving 28-years behind bars for his role. A jury found Beasley guilty of bribery, extortion, and fraud conspiracy.

The Bill and Melinda Gates Foundation Trust Sues Petrobras and Its Auditor
The Bill and Melinda Gates Foundation Trust, which is the trust that oversees the $41 billion endowment of the couple’s foundation, has filed a lawsuit accusing Brazil’s Petróleo Brasileiro SA (Petrobras) and its auditor of involvement in a widespread corruption scam. The trust claims they lost millions of dollars because of the scheme. WGI Emerging Markets Fund, LLC, which managed investments for the Gates trust, is a co-plaintiff.

While other plaintiffs have also sued Petrobras, the oil company remains adamant that it was the victim of bribery and a bid rigging plot involving a few company insider and suppliers. Among US investors that have filed over a dozen complaints are those that purchased Petrobras-sold American depositary receipts. These plaintiffs include the Rhode Island city of Providence, public pension funds in Hawaii and Idaho, and the Attorney General of Ohio.

SEC Proposes to Modify Rules Regarding The Use of Its In-House Judges in Enforcement Cases

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

The Securities and Exchange Commission has issued proposals that would amend its rules governing its use of administrative law judges in enforcement proceedings. The proposed amendments come in the wake of criticism and lawsuits contending that having in-house judges preside over SEC cases gives the regulator an unfair advantage over defendants and violates the constitution because of the way the judges are appointed.

According to The Wall Street Journal, from October 2010 through March 2015, the SEC won 90% of its cases that were presided over by an in-house judge. It won just 69% of cases in federal court during that same time period. Every fiscal year since October 2004, the SEC has emerged victorious against at least four out of five defendants in cases that went before its judges.

Billionaire Mark Cuban, who was previously found not liable in the SEC’s insider trading case against him, recently said in a court brief that if his case had been heard by an SEC judge instead of in federal district court, he would have not benefited from certain protections and the outcome would have been very different for him. Cuban filed the brief in support of real estate developer Charles Hill, who also has been accused of insider trading. Hill is seeking to have his case transferred from the SEC’s in-house court to federal court.

Already a federal judge has ruled that the use of an in-house judge in the Commission’s case against Hill was “likely unconstitutional” and a federal judge stayed the case in June pending further review. The SEC is appealing.

Three primary changes to the Commission’s Rules of Practice that have been proposed, including, the

· Modification of the timing of administrative proceedings. such as giving more time before a hearing takes place in certain cases. Currently, defendants have four months to get ready for trial. The modified rules would give them eight months.

LPL to Pay $3.2M Over Nontraded REIT and ETF Sales

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

LPL Financial (LPLA) has agreed to pay 3.2 million fine to settle penalties related to its sale of nontraded real estate investment trusts and leveraged exchange-traded funds. The settlements were reached with the Non-Traded REIT Task Force of the North American Securities Administrators Association and regulators in Massachusetts and Delaware. The firm sold the REITs at issue for six years beginning in 2008.

Under the agreement, LPL will pay $1.425 million in civil penalties for its purported failures to put into place a supervisory system that was adequate enough to handle its nontraded REIT sales and enforce written procedures related illiquid trust sales. The money will be divvied up between the District of Columbia, 48 states, the U.S. Virgin Islands, and Puerto Rico. By settling with NASAA, LPL is not denying or admitting wrongdoing.

Also, the Delaware Attorney General and the Massachusetts Attorney General have arrived at their own settlements with LPL’s Boston arm. The firm consented to pay $1.8 million for putting about 200 clients from Massachusetts in high-risk leveraged ETFs. The broker-dealer and Massachusetts had come to an earlier settlement about nontraded REIT sales two years ago.
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SEC Headlines: Regulator Settles Private Equity Fund Fraud Case for $6.8M, Accuses R.T. Jones of Not implementing Cybersecurity Measures, and Files A Securities Case Over Stock Manipulation

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

Men Accused of $6.8M Private Equity Fund Fraud Allegedly Bilked Friends and Family
The Securities and Exchange Commission has settled charges with two men and their unregistered investment advisory firm for allegedly bilking investors in a private equity fund. Under the agreement, William B. Fretz, John P. Freeman, and their Covenant Capital Management Partners, L.P. will owe the regulator about $6.8 million. Any money collected will go to investors that were defrauded.

According to the SEC order instituting administrative proceedings over the alleged private equity fund fraud, the two men, their firm, and Covenant Partners, L.P., which is the fund they managed, sold partnership interests in the fund to friends and family. However, instead of investing the money, they used the cash for themselves and their other business.

Fritz and Freeman are accused of taking more than $1 million and placing it with their brokerage firm, Keystone Equities Group L.P., which was failing. They also purportedly paid close to $600,000 in performance fees they didn’t make and used assets from the fund to pay back personal obligations.

Freeman, Fretz, and CCMP consented to settle charges accusing them of willfully violating federal securities laws and SEC anti-fraud laws. However, they are not denying or admitting to the SEC fraud charges.

Investment Adviser R.T. Jones Capital Settles SEC Charges Related to Cybersecurity
R.T. Jones Capital Equities Management has settled SEC charges accusing it of not putting into placed required cyber security procedures and policies prior to a breach that compromised the personal identifiable (PII) information of thousands of its clients. Without denying or admitting to the findings, the investment adviser agreed to pay a $75,000 penalty and consented to cease and desist from future violations of the Securities Act of 1933’s Rule 30(a) of Regulation S-P.

According to an SEC probe, R.T. Jones violated federal securities laws’ “safeguard rule.” The rule mandates that registered investment advisers put into place written procedures and policies that are designed in a manner reasonable enough that they protect customers’ information and records from security threats. The regulator said that for four years R.T. Jones did not adopt any such policies.
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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.