Investor Lawyers Blog

Ohio Stockbroker Jerry Cicolani Finally Barred From Financial Industry

Published on: May 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

After pleading guilty to two criminal counts of selling unregistered securities, The Financial Industry Regulatory Authority (“FINRA”), the agency primarily charged with regulating the nation’s stockbrokers, finally barred former stockbroker, Jerry A. Cicolani, Jr. (“Cicolani”) from the securities industry. According to FINRA’s website, “FINRA has permanently barred [Cicolani] from acting as a broker or otherwise associating with firms that sell securities to the public.”

Sadly, the bar came much too late for many of Cicolani’s former clients. For years, FINRA, had largely overlooked numerous customer complaints and other accusations of bad conduct in Cicolani’s formal record. By the time he was barred, Cicolani had amassed nearly 70 complaints over a 13 year period. The final straw seemed to be the suit brought by the U.S. Securities & Exchange Commission (the “SEC”) in May 2014 for Cicolani’s alleged role in a Ponzi scheme that defrauded dozens of investors out of roughly $7 million. Four months after the suit was filed, FINRA finally took action and barred Cicolani.

For the affected customers, FINRA did not take action fast enough, especially given the warning signs. A FINRA spokesperson, Michelle Ong, seemingly recognized this sentiment when noting, “[W]e regret that we did not bring a formal action against Mr. Cicolani earlier.” Many of Cicolani’s complaints originated from his time working for Merrill Lynch. From 1991 to his resignation from Merrill Lynch in 2010, Cicolani was named in over 60 customer complaints during that time period. Yet, time and time again, these complaints were largely overlooked by both his employer and regulators. In 2004, Cicolani was subject to an SEC inquiry based on his handling of customer accounts, yet Merrill Lynch did not terminate his employment because the SEC never sanctioned Cicolani for his conduct. Instead, Cicolani resigned years later after another investigation, this time initiated by Merrill Lynch.

Dallas Trader is Sentenced in $3.5M Texas Securities Fraud Case Involving Institutional Investors

Published on: May 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Texas man was sentenced to 30 months in prison after pleading guilty to securities fraud. At the time of the fraud, Daniel Lutz Bergin was an equity trader for Cushing MLP Asset Management, which is located in Dallas.

While at the registered investment adviser, Bergin had discretionary assets under management of about $2.5B. He serviced institutional investors and high net worth individuals through portfolio and advisory management services.

However, from 2010 until he was fired in May 2013, Bergin engaged in a front-running scam involving the misuse of inside information when making trades in his wife’s brokerage account. He would use non-public, material data about big orders that he was able to access from Cushing. The information was supposed to be used for making trades on behalf of his clients. Instead, he also used the information to make trades through his wife’s account.

Massachusetts Securities Regulator Sues the SEC Over New Rules Affecting Small Company Stock Offerings

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

William Galvin, the securities regulator of Massachusetts, is suing the U.S. Securities and Exchange Commission. Galvin is seeking to stop new rules that he believes restricts state oversight of stock offerings made by emerging and small companies.

With the newly adopted rules, offerings starting at $20 million would only need to be filed with the SEC and not the states. With smaller deals, companies can opt for state-level assessment-or not, and contend with stricter disclosure requirements.

State regulators have long felt that the new rules pre-empt their oversight of a market at which they are the ones who can do the best job at overseeing. These SEC rules are not specific about who or what would qualify as the kind of investor that could buy these offerings. Because no salary restrictions or net worth is imposed, local businesses could easily target retail investors.

Deutsche Bank Ordered to Pay $55M for Misstating Financial Reports During the Economic Crisis

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

The U.S. Securities and Exchange Commission is ordering Deutsche Bank AG (DB) to pay $55M to resolve charges accusing the firm of misstating financial reports during the peak of economic crisis. The regulator believes that the financial institution did not factor the material risk for possible losses of billions of dollars.

According to the regulator, in its order instituting a resolved administrative proceeding, Deutsche Bank overvalued a derivatives portfolio the bank had used to buy protection against losses involving credit default. Due to the to the Leveraged Super Senior trades’ “leveraged” nature the collateral for the positions was minimal compared to the $98 billion in purchased protections.

This generated a “gap risk” that the protection’s market value could potentially go beyond the available collateral. Also, because the sellers that put down the collateral could choose to unwind the trade instead of putting more collateral down in such a situation, this meant that technically the bank was protected only up to its collateral level and not its credit protection’s full market value.

SEC News: New Rules for Investment Advisers & Companies Proposed, Pilot to Evaluate Tick Size Impact Approved, Outreach Program to Help Ensure Compliance Unveiled, and Cross-Border Swap Rules Approved

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

SEC Makes Proposals to Enhance Disclosure and Reporting by Investment Companies and Advisers

The U.S. Securities and Exchange Commission is proposing forms, amendments, and rules that will update and improve the way investment firms and their advisers disclose and report information. This would enhance the quality of data available to investors while allowing the regulator to do a better job of gathering information from firms and their advisers.

The proposals would affect data reporting for exchange-traded funds, mutual funds, and other registered investment companies, which would have to submit a monthly portfolio reporting form and a yearly one as well. Standardized and enhanced disclosure in financial statements would be required, and firms would be able to publish shareholder reports online. Also, investment advisers would have to provide more information to the SEC and investors in registration and reporting forms.

Nationwide to Pay $8M Over Variable Annuity Pricing Violations

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

Nationwide Life Insurance Co. has ben ordered to pay an $8 million penalty to the U.S. Securities and Exchange Commission for purposely delaying variable annuity and life insurance policy orders and that this led to company’s failure to price these orders in a timely manner.

From 1995 to 2011 clients placed thousands of orders to Nationwide for variable insurance contracts and underlying mutual funds through First Class mail at an Ohio post office box. However, even though the majority of the mail was ready for Nationwide to pick up early in the morning, the company’s couriers were purportedly told to not collect the mail until after 4pm.

The SEC said that this violates the Investment Company Act of 1940’s Rule 22c-1, which mandates that a company price orders made prior to 4p at that day’s price while orders after 4 pm are to be priced at the next day’s price. The insurer is accused of going to the post office and stressing the need for variable contract mail to be delivered late. Certain couriers even purposely delayed when they’d arrive at the carrier’s home office by stopping to purchase food or get gas. Meantime, said the SEC, Nationwide managed to pick up and deliver mail for other its business units without such delays.

Gray Financial is Charged with Bilking Georgia Pension Funds

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

The SEC is accusing investment advisory firm Gray Financial, its co-CEO Robert C. Hubbard IV, and president/founder Laurence O. Gray with fraud. The regulator claims that the three of them of breached their duty to clients by directing certain pension funds to invest in a firm-offered alternative investment even while knowing that the investments were not in compliance with Georgia law.

The SEC’s order said that Gray Financial made the inappropriate recommendations to Atlanta’s:

• Firefighters’ Pension Fund

UBS Must Pay Investor $1M for Puerto Rico Bond Fund Portfolio

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

A Financial Industry Regulatory Authority Panel (“FINRA”) has ordered UBS Financial Services Inc. of Puerto Rico and UBS Wealth Management (collectively “UBS”) to pay a client from Puerto Rico $1 million to repurchase the Puerto Rico portfolio of proprietary bond funds sold to him and many other Puerto Rico investors. According to the Panel’s decision, Mr. Burgos Rosado, a senior investor at age 66, lost $737,000 in the beleaguered closed-end funds.

He had opened his account with UBS in 2011 and invested the money he made from running a bodega for years. After Puerto Rico municipal bonds failed in 2013, the original $1.1 million he invested had fallen in value to less than $4,000. Just in September of that year, when news that the bond funds were failing en masse, Burgos Rosado reportedly approached UBS because his balance had dropped some $200,000. He was encourage to stay with his portfolio.

The FINRA panel noted that while investors typically assume their account’s risks after they’ve been given sufficient notice of the risks, the arbitrators did not think this applied in the case of Burgos Rosado, who does not speak fluent English and was clearly relying on the recommendation of his UBS advisor. Even after Burgos Rosado asked for documents in Spanish, the brokerage-firm reportedly issued his monthly statements and other information in English.

UBS, J.P. Morgan, Citigroup, RBS, and Barclays to Pay $5.6B in Penalties Over Fx, Libor Investigations

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

Five global banks have consented to pay $5.6B in penalties to resolve claims related to a U.S. probe into whether traders at these institutions manipulated foreign-currency rates for their benefit. J.P. Morgan Chase & Co. (JPM), Royal Bank of Scotland (RBS), UBS AG (UBS), Citigroup Inc. (C), and Barclays PLC (BARC) will also plead guilty to criminal charges that they conspired to rig prices of U.S. dollars and euros.

According to officials involved with the Department of Justice investigation, which went on for 19 months, traders withheld offers or bids to avoid getting the rates going in directions that would hurt the open positions of other traders, with whom they were colluding. These traders, who were from the different banks, formed what they dubbed as “The Cartel.” They would meet in online chatrooms and communicate via coded language to coordinate efforts to manipulate rates. Hand signals also were reportedly used during calls with clients. Aside from the $5.6B in peanltlies, the firms are paying another $1.6 billion in fines to the U.S. Federal Reserve.

Citibank is paying the biggest criminal fine of $925M plus a $342M penalty to the Fed. The bank was allegedly involved in currency manipulation from the end of 2007 through the beginning of 2013. Meantime, J.P. Morgan will pay the DOJ $550M and the Fed $342M.

Morgan Stanley to Pay $2M for Violations Involving Short Sales and Short Interest Reporting

Published on: May 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Morgan Stanley & Co. LLC (MS) $2M for violations involving short sale and short interest reporting rules. The violations purportedly took place over six years. The financial firm is also accused of not putting into place a supervisory system designed in a reasonable enough manner that it could identify and prevent such violations.

Financial firms are supposed to report to the SRO on a regular basis their total short positions involving equity securities in proprietary firm and customer accounts. However, according to the self-regulatory organization, Morgan Stanley did not accurately and completely report such positions in certain securities that involved billions of shares. FINRA also said that the firm’s supervisory system was deficient.

Meantime, under U.S. Securities and Exchange Commission’s Regulation SHO for regulating short sales, firms are supposed to aggregate their positions in a security to determine whether they are short or long. Through an aggregation unit, Regulation SHO lets firms track positions in a security separate from other positions at the firm and via certain trading desks or operations.