Investor Lawyers Blog

SEC Adopts Rules Improving Transparency in the Security-Based Swap Market

Published on: January 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has adopted rules mandating that security-based swap data repositories register with the regulator. They also prescribe public dissemination and reporting requirements for security-based swap transaction information.

The rules were mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII and they are supposed to increase transparency in the security-based swap market, while establishing a regulatory framework for “swap data repositories.”

The new rules require that data warehouses not only register with the Commission but also that they set up governance standards, appoint a chief compliance officer, and require the reporting of certain information to the public. For now, all swaps will have to be reported within 24 hours. This requirement could change as regulators examine the way this impacts the cost and ability of financial firms to execute large trades. The big banks that currently dominate the swaps market in the United States are Goldman Sachs Group Inc. (GS), JP Morgan Chase & Co. (JPM), Citigroup (C), Bank of America Corp. (BAC), and Morgan Stanley (MS).

Investment Adviser Fraud Cases Lead to Civil Charges, Criminal Convictions, and Investor Losses

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

SEC Accuses Elm Tree Investment Advisors, its Founder, of $17M Securities Fraud

The Securities and Exchange Commission has filed fraud charges against Elm Tree Investment Advisors LLC and its founder Frederic Elm for running a Florida-based securities scam that raised over $17 million in a little over a year. The regulator contends that Elm, his firm, and the funds Elm Tree Motion Opportunity LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Investment Fund LP misled investors and used the bulk of the funds to issue Ponzi-like payments. Elm also is accused of using the money to purchase expensive homes, jewelry, and autos, as well as cover his daily living expenses.

According to the SEC, Elm, his unregistered advisory firm, and the three funds violated the regulator’s anti-fraud rules as well as federal securities laws. The Commission wants relief for investors as well as the restoration of the purportedly ill-gotten gains and financial penalties.

Standard & Poor’s to Pay Almost $80 Million to Resolve SEC Charges Over Ratings Fraud Involving CMBSs

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

Standard & Poor’s has agreed to settle U.S. Securities and Exchange Commission charges accusing the credit rating agency of fraudulent misconduct when rating certain commercial mortgage-backed securities. As part of the settlement, S & P will pay close to $80 million—$58 million to resolve the regulator’s case, plus $12 million to settle a parallel case by the New York Attorney General’s Office, and $7 million to resolve the Massachusetts Attorney General’s case.

The SEC put out three orders to institute resolved administrative proceedings against the credit rater. One order dealt with S & P’s practices involving conduit fusion SMBS ratings methodology. The Commission said that the credit rating agency’s public disclosures misrepresented that it was employing one approach when a different one was applied to rate several conduit fusion CMBS transactions, as well for putting out preliminary ratings on two transactions. To resolve these claims S & P will not rate conduit fusion CMBSs for a year.

The SEC’s second order said that after S & P was frozen out of the market for its conduit fusion ratings in 2011, the credit rating agency published a misleading and false article claiming to show that it’s overhauled credit ratings criteria enhancement levels could handle economic stress equal to “Great Depression-era levels.” The Commission said that S & P’s research was flawed, were made based on inappropriate assumptions, and the data used was decades off from the Depression’s serious losses. Without denying or admitting to the findings, S & P has consented to publicly retract the misleading and false data about the Depression era-related study and rectify inaccurate descriptions that were published about its criteria.

FINRA Fines Fidelity $350K for Overcharging More than 20,000 Clients $2.4M

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

The Financial Industry Regulatory Authority says that Fidelity Investments must pay $350,000 for overcharging thousands of clients $2.4 million for transactions involving fee-based accounts in its Institutional Wealth Services Group. The overcharges are said to have occurred from 1/06 to 9/13. The group offers brokerage and trading services to investment advisers and their clients.

According to the self-regulatory organization, the inappropriate charges happened because of a supervisory oversight involving the way that Fidelity applies fees under its asset-based pricing model. The model typically charges according to assets, not transactions.

FINRA says that until 2013, the financial firm did not have a designated supervisory principal to oversee the group’s asset-based pricing program. As a result, a number of clients may have been charged excess commissions beyond the asset-based management fee or were double billed.

UBS Settles SEC Dark Pool Case for $14M

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

A UBS AG (UBS) subsidiary has consented to pay $14.4 million to resolve Securities and Exchange Commission claims that the firm committed violations involving the marketing and operation of its dark pool. The subsidiary, UBS Securities LLC, is accused of placing some players at an advantage in its alternative trading system the UBS ATS, which is the second largest dark pool in the United States.

According to the regulator, the Swiss bank failed to adequately disclose the way the dark pool worked to all of its clients, which allowed only some investors to know all of its rules. The SEC said that beginning in 2008 and into 2012, UBS let customers turn in orders at prices with denominations under a penny even though market rules dictate that all orders cannot be in any denomination below one cent.

UBS pitched the PrimaryPegPlus (PPP) order type, which let traders sell and purchase securities at the under the one cent increment prices, primarily to market makers and high-frequency trading firms. This let them get in front of orders that were made at the legal, whole-penny prices.

MetLife Sues Regulators Over Systemic-Risk Designation

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

MetLife Inc. (MET) has filed a lawsuit seeking to overturn a U.S. finding that forces the insurer to be subject tougher oversight under the Dodd-Frank Act. This case is the first challenge of its kind by a non-bank financial firm. MetLife, which was given the systematically important financial institutions (SIFI) designation by the U.S. Financial Stability Oversight Council (FSOC), is opposing the label, which earmarks it as “too big to fail.”

In a statement, MetLife said that the label is “premature,” and that it doesn’t consider itself an SIFI. Companies given the SIFI label are subject to tougher oversight by the Federal Reserve, including stricter leverage, capital, and liquidity requirements. Other non-banks that have been designated SIFIs include:

• American International Group (AIG)

SEC Accuses Canadian Man of Fraudulent Trading Scam, Use of “Layering” Strategy

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

The Securities and Exchange Commission is charging a Canadian citizen with running a market manipulation scam that involved making orders to trick others into selling or purchasing U.S. publicly traded stocks at prices that were depressed or artificially inflated. The strategy is known as “layering.” U.S. Attorney’s Office for the District of New Jersey has filed criminal charges against Aleksandr Milrud in a parallel action.

According to the SEC’s complaint, submitted in a federal court, Milrud started recruiting online traders primarily in Korea and China beginning at least as early 2013 and giving them the cut of the profits made from the scheme. He purportedly gave traders access to trading accounts and told them how to avoid coming under the regulatory scrutiny when layering.

To avoid detection, Milrud would wire funds to an offshore account and have the money delivered to him in a suitcase, as well as use middlemen. He also allegedly had traders use multiple user names, addresses, computers, and Internet protocols (IP).

JPMorgan Suspends Forex Trader for Alleged Disclosures Involving Royal Bank of Scotland-Related Activities

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

Bloomberg is reporting that according to a source, JPMorgan Chase & Co. (JPM) has suspended currency dealer Gordon Andrew for alleged wrongdoing involving his work at Royal Bank of Scotland Group Plc. (RBS). According to The Wall Street Journal, people familiar with the matter say that the firm discovered evidence that Andrew disclosed trading data to employees of other banks. The forex trader does a lot of work converting huge amounts of euros into pounds at benchmark rates related to subsidies that the EU pays to British farmers every year.

Andrew began working for JPMorgan in October 2012 after Richard Usher, an RBS colleague, also switched to the firm. Usher was JPMorgan’s chief currency dealer in London until 2013 when he was put on leave during a global probe into foreign exchange market manipulation. He left the firm the following year. Regulators in the U.K. and the U.S. have since fined JPMorgan $1 billion related to the rigging probe. RBS was ordered to pay a $634 million fine.

Today, the WSJ reported that the probes into currency market manipulation have led to new signs of possible wrongdoing. Sources tell the newspaper that JPMorgan has even put aside another $900 million to cover investigation-related costs as well as legal bills. Meantime, broker-dealer Tullett Prebon PLC (TLPR) has started an internal review into its currency market practices. One of its brokers was allegedly referred to as a trade conduit in one chat room. That broker still works for the firm. In 2014, British fraud prosecutors charged an ex-Tullet broker with assisting other bank traders in manipulating trades.

Investment Adviser News: Barred Representative is Now a Finance Coach, Bellingham Man Gets Prison Term for Bilking Seniors

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

According to the Securities and Exchange Commission, ex-investment adviser Sherwin Brown is continuing to offer financial advice even though the regulator barred him from the industry and ordered him to pay $1.3 million for allegedly diverting client monies. Brown now calls himself a “money coach” and has kept his Jamerica Financial Inc. in operation, receiving compensation for his services. At a certain point, the firm, which has since been ordered inactive, had nearly $30 million in assets under management.

The regulator contends that between 6/11 and 5/14, a Wells Fargo & Co. (WFC) account in Jamerica Financial’s name received over 120 deposits totaling $330,000. The deposits were payable to Brown and his company. Notes in check memo lines indicated that the money was for investment advisory services.

Brown, who was barred from the industry in 2011, operates TheOfficialMoneyCoach.com, which includes a blog on investing. The site also promotes his investment books.

BATS Global Market Settles Stock Exchange-Related Claims Involving High-Frequency Traders for $14M

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

The U.S. Securities and Exchange Commission is charging BATS Global Markets Inc. $14 million to resolve claims that two of the exchanges that the company purchased last year did not disclose important information to investors about the way the markets work. The settlement resolves the regulator’s probe into the way Direct Edge Holdings LLC gave certain high-speed traders the upper hand over others by withholding details about certain orders. Direct Edge and BATS merged together in 2014.

Order types are the directions investors use to trade on exchanges. High-frequency traders will often use complex versions of order types to compete in today’s fast markets. In 2009, Direct Edge offered up a number of new order types after talking with two high-frequency trading firms. However, what it purportedly did not do was properly disclose to the pubic the way the order types worked.

In the SEC order, the agency notes that one trading firm, whose name was not disclosed, told Direct Edge that if it introduced a certain order type, the firm would up the number of orders by over four million more.