Investor Lawyers Blog

SEC’s Use of In-House Judge in Insider Trading Case is Likely Unconstitutional, Rules Federal Judge

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

A federal judge has ruled that the decision by the Securities and Exchange Commission to have an in-house judge in an insider trading case was “likely unconstitutional.” In the wake of his decision, U.S. District Judge Leigh Martin May agreed to put a temporary stop to the regulator’s administrative case against Charles Hill unless the case is presided over by a judge who fulfills the requirement for constitutional appointment. The hearing in the insider trading case against Hill was scheduled to begin next week.

Hill, a self-employed Atlanta real estate developer, disputes the regulator’s allegations that he made illicit gains of $744K from trading on a tip a friend purportedly provided about the takeover of Radiant Systems Incorporated. The company was about to be acquired by NCR Corp. for $1.2 billion in 2011.

Hill filed his own lawsuit against the SEC, challenging its decision to have in-house administrative law judge James Grimes preside over his case. Grimes was retained through the SEC’s office of in-house judges instead of having the appointment approved by the regulator’s commissioners. Now Judge May is saying, per Hill’s argument, that the Commission may have broken constitutional protections.

Former Stockbroker Pleads Guilty to Fraud Involving $6M Ponzi Scam

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

Sunil Sharma, a former stockbroker who hasn’t been part of the securities industry for over 10 years, has pleaded guilty to fraud charges. The 68-year-old is facing 20 years behind bars for starting what prosecutors claim was a $6 million Ponzi scam that ran from 2008 to 2014.

He allegedly raised $8.36 million from over 30 investors, paying old investors with new investors’ money. According to officials, Sharma misappropriated some $2.5 million of investor funds for his own spending, including a cruise trip, leases for expensive cars, and a down payment on a house.

Investors received statements showing gains even as Sharma continued to lose their funds. He falsely claimed that investors were putting their money in safe investments when really the day trading strategy he employed was high risk.

States Take Action to More Easily Identify Barred Brokers Who Are Still Selling Insurance

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

The National Association of Insurance Commissioners (NAIC) has agreed to steps that will allow for the easier identification of brokers who have been barred from the securities industry yet continue to sell other products. The association is tasked with providing states regulatory guidance, as well as drafting model laws.

It is not uncommon for securities brokers to sell insurance, as well as other products and services. Even after someone has lost the license to sell bonds and stocks, he/she is still legally allowed to sell insurance with an insurance license. This type of license also lets individuals sell products that are like securities, such as fixed annuities and equity indexed annuities. Now, regulators are worried that such leniency will enable further bad behavior from brokers who have already been barred.

It was the Wall Street Journal that first reported on how many states can’t do a lot to track these brokers. Because of inconsistent coordination between regulators and insurance watchdogs, the latter may not even know that a broker has been barred from the securities industry. An insurance license lends credibility to ex-brokers even when they have a questionable broker record.

DOJ Prepares Mortgage Fraud Cases Against More Banks

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

According to the Wall Street Journal, the U.S. Department of Justice and state officials are readying more mortgage fraud cases against up to nine banks, with resolutions against Morgan Stanley (MS) and Goldman Sachs Group (GS) possibly finalized as early as later this month. Most negotiations are reportedly in the earlier stages and could go on for months.

The cases are over residential mortgage-backed securities that fell in value during the economic crisis. Individual securities cases are expected rather than a collective agreement. Other banks that are expected to settle include Credit Suisse Group AG (CS), Barclays PLC (BARC), HSBC Holdings PLC, Deutsche Bank AG (DB), UBS AG (UBS), Royal Bank of Scotland Group PLC (RBS), and Wells Fargo & Co. (WFC).Settlements could range in size from a few hundred million dollars to up to $3 billion depending on the extent of misconduct allegedly involved.

Also likely to be involved least some of the RMBS cases are the attorneys general of Illinois, Massachusetts, New York, and other states that also took part in the earlier rounds of RMBS fraud cases against banks.

Advisors Favor Exchange-Traded Funds

Published on: June 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

CNBC reports that according to a recent survey, advisors are preferencing exchange-traded funds over any other investment choice, in part because of their transparency, liquidity, and low costs. ETFs can also be traded throughout the day and are primarily passive. Their expense ratio is lower than actively managed mutual funds and they offer certain tax benefits. For example, unlike with mutual funds, capital gains are not as likely to arise with exchange-traded funds.

In the 2015 Trends in Investing Survey, conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, 81% of advisors said that they recommend or use ETFs—that’s significantly up from 2006 when the survey found that just 40 % of advisors used exchange-traded funds. Meantime, Morningstar, an investment research firm, reports that ETFs hold about $2.1 trillion of investor assets. However, the use of smart-beta ETFs is still low.

SEC Warns About Fake Investment Advisers Who Inflate or Fake Their Credentials

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

The Securities and Exchange Commission has issued an alert cautioning investors to double check the credentials of financial professionals before working with them. This week, the regulator’s Enforcement Division announced two securities fraud cases against investment advisers accused of making false claims about their background and experience.

In one case, Michael G. Thomas purportedly told investors that Fortune Magazine had named him one of the “Top 25 Rising Business Stars.” The distinction does not exist. He also allegedly inflated his past investment performance, pumped up a fund’s projected performance, and made misrepresentations about who would be advising and co-managing a fund.

Thomas has consented to pay a $25,000 penalty. He agreed to not take part in the offer, issuance, or sale of certain securities for five years. Thomas is barred from associating with investment advisers, dealers, and brokers during that time.

SEC, Prosecutor Charge Miami Investment Adviser With Defrauding Retired Teachers and Law Enforcement Officers with Ponzi Scam

Published on: June 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Miami investment adviser Phil Donnahue Williamson with running a Ponzi scam and bilking at least seventeen investors. The U.S. Attorney’s Office for the Southern District of Florida has filed a parallel criminal action against him.

According to the SEC, Williamson raised over $2 million over the course of seven years-from ’07 to ’14-while making misrepresentations about the way investors’ money would be used, as well as regarding the investments’ valuations and returns. He also allegedly misused or misappropriated at least $748,000 of client money to pay for personal expenses, other businesses, and unrelated investment activities. Among his investors were several retired local law enforcement officers and teachers who were looking to put their savings in safe investments.

Williamson allegedly used the money he solicited for the Sterling Investment Fund, which supposedly invested in properties and mortgages in Georgia and Florida, to run his Ponzi scheme. He advised investors to buy an LLC interest in the fund.

The Sterling Fund’s subscription agreement stated that the minimum agreement was $25,000 and that the funds would go toward buying mortgage loans or institutional third-party financing, which was to be used to also buy mortgage loans and otherwise support the business of the company.
Continue Reading ›

SEC Files Insider Trading Charges Involving Secondary Stock Offerings

Published on: June 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is filing insider trading charges against four persons accused of stealing confidential data from investment banks and public company clients so they could trade prior to secondary stock offerings. The four of them allegedly made over $4.4 million in illegal trading profits. Some 15 stocks were reportedly involved. The insider trading scam purportedly went on for three years, from 6/10 to 7/13.

According to the regulator, Steven Fishoff, a former day trader, conspired with his brother-in-law Steven Costantin and friends Ronald Chernin and Paul Petrello. The four of them pretended to be portfolio managers and they allegedly persuaded investment bankers to share confidential information about secondary offerings that were going to take place. Essentially, after agreeing not to tell anyone about the offering or trade in the securities, the defendants were made privy to private data.

The defendants allegedly broke their promises not to tell others about the information, tipping one another with their insider knowledge so they could lower the issuer’s stock price. They would short the stock before the offering was made public. This allowed them to earn short sale profits after the stock price had plunged.

Merrill Lynch to Settle Short-Selling Case for $11M, Admits to Wrongdoing

Published on: June 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC said that Merrill Lynch (MER) would pay $11 million to resolve allegations of short-selling-related noncompliance. The regulator said that the wirehouse executed short sales in certain securities when the supply for this type of transaction was restricted.

Customers frequently ask brokerage firms to “locate” stock that can be used for short selling. The financial firms generate easy-to-borrow lists made up of the stock they believe is accessible for such locates. However, contends the SEC, from January 2008 through January 2014 Merrill used information that was dated to create these ETB lists.

For example, there were times when certain securities that were placed on the ETB list in the morning were no longer as easily available for borrowing later in the trading day. Yet Merrill’s platforms were set up so that they continued to process short sale orders according to the now-dated list—even as firm personnel appropriately stopped using the list for sourcing locates when certain shares’ availability had become restricted.

Sage Advisory Group Must Pay Over $1M for Two Securities Fraud Cases

Published on: June 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The United States District Court for the District of Massachusetts has ordered Sage Advisory Group and principal Benjamin Lee Grant (“Lee Grant”) to pay over $1M for two SEC fraud cases. The ruling comes after a federal jury found both of them liable.

In the first case, the regulator is accusing Lee Grant of using allegedly false and misleading statements to fraudulently persuade brokerage customers to move their assets to Sage, which was the firm he was starting in 2005. He purportedly told clients that the 2% wrap fee they would have to pay Sage for transaction, management, and advisory services would not cost as much in the long run as the 1% fee and trading commissions that his former employer, brokerage firm Wedbush Morgan Securities, charged them.

The SEC said that Lee Grant claimed it was First Wilshire Securities Management Inc. that was recommending that clients move their assets to Sage with him. Wilshire Securities Management was the investment adviser managing the assets of these clients at Wedbush. The regulator contends, however, that First Wilshire Securities never made such a recommendation.
Continue Reading ›