Investor Lawyers Blog

SEC Warns About Investment Scams Involving Marijuana

Published on: May 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has put out a an investor alert warning about possible fraud involving microcap companies claiming they are involved in the marijuana industry. Scammers are using the latest growth in the pot industry to get investors to fork over their money in exchange for supposed high returns.

Already, the SEC has suspended five companies for allegedly committing this fraud, including Fusion Pharm Inc., which claims to make a professional cultivation system for cannabis cultivators to use. The Denver-based company was suspended because, according to the regulator, there are doubts about the accuracy of statements it made about assets, financial statements, revenues, financial condition, and business transactions. Other companies in which trading was suspended include: Cannabusiness Group Inc., GrowLife Inc., Petrotech Oil and Gas, and Advanced Cannabis Solutions Inc. Two of the companies were also suspended because of possibly illegal activity, including market manipulation and unlawful securities sales.

According to federal securities laws, the Commission can suspended trading in a stock for 10 days and prohibit a brokerage firm from soliciting investors to sell or buy the stuck until reporting requirements are fulfilled. Unfortunately, it is not uncommon for fraudsters to exploit the latest product, innovation, growth industry, or technology. Marijuana-related companies are typically not required to report to the SEC, which means investors usually have limited access to the kind of information they can get about management, products, services, and finances. This can make it easier for scammers to spread bogus information about a company, allowing them to profit.

FINRA Delays Submitting REIT Share Price Rule to the SEC, Revises Trading Surveillance System, Gets Approval to Rule Limiting Self-Trading

Published on: May 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is postponing when it will send to the U.S. Securities and Exchange Commission its proposed new rules that would give investors a more accurate overview of the costs involved in buying nontraded real estate investment trust shares. The proposed change to NASD Rule 2340, if approved by the SEC, would no longer allow brokerage firms to list a nontraded REIT’s per-share value at the common price of $10, which is the price that they are sold to clients.

Instead, the different fees and commissions that deal managers and brokers are paid would have to be factored in, which would lower each nontraded REIT’s share price in a customer’s account. Independent brokerage firms and their affiliated reps are the ones that would be most affected since practically all they sell is nontraded REITs. Unlisted private placements would also be impacted.

Although the comment period on the proposed rule changes ended in March, FINRA now says that it is not yet done looking at these comments. One group, the Investment Program Association, wants the proposed rule changes—in particular, the one that modifies to the way REIT valuations show up on client statements—delayed until 2015 so that nontraded REIT sponsors and brokerage firms that sell these investments have enough time to make their modifications so they are in compliance.

Insider Trading Headlines: Principal of Wynnefield Capital Now On Trial, Ex-Vitamin Company Board Member Settles His Case, and Clinical Drug Trial Doctors Face Charges Related to New Cancer Drug

Published on: May 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Wynnefield Capital Inc. Principal On Trial in SEC Insider Trading Case

Nelson Obus, the principal of Wynnefield Capital Inc., is accused of engaging in insider trading to make his hedge fund $1.3 million. The U.S. Securities and Exchange Commission says that he confessed twice that he received a tip that SunSource Inc. was going to be put up for sale. One of the confessions was purportedly to the CEO of SunSource.

In 2001, SunSource announced it was going to be bought by Allied Capital Corp. It’s stock price then doubled. Obus, who had purchased stock in the company, made $1.3 million.

SEC Roundup: The Regulator Charges Ex-Deloitte Chief Risk Officer with Auditor Rule Violations, Ex-Clearing Firm Officials With Regulation SHO Violations, & Rafferty Capital Markets with Illegal Trade Facilitation

Published on: May 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Deloitte LLP Chief Risk Officer Charged With Auditor Independence Rule Violations

The U.S. Securities and Exchange Commission is charging certified public accountant James T. Adams, an ex-chief risk officer, with violating auditor independence rules. The rules are there to make sure audit firms stay objective about their clients.

According to the SEC, while Adams was the advisory partner on Deloitte & Touche’s audit of a casino gaming corporation, he repeatedly accepted tens of thousands of dollars in casino markers. He then established a credit line with a casino operated by the gaming corporation client and used the markers to draw on that credit line.

SEC Investigates Merrill Lynch & Charles Schwab Over Allegations of Failures that Allowed Mexican Drug Cartels to Launder Money

Published on: May 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is investigating whether Merrill Lynch (MER) and Charles Schwab Corp. (SCHW) did not recognize signs that that some of their customers might have been laundering money because they didn’t do enough to find out who these clients were. Some of the purported money laundering has been linked to drug cartels in Mexico.

Bank of America Corp. (BAC) now owns Merrill Lynch. The SEC says that the two broker-dealers accepted as clients individuals who gave out fake addresses and shell companies. For example, one Charles Schwab client, a Texas rancher, had been moving funds to a holding company that was actually a shell company. Also, some account holders with Schwab were linked to drug money in Mexico. Certain accounts contained millions of dollars.

Broker-dealers must set up, document, and keep up steps so that it can identify its customers and confirm their identifies. Failure to do any of these can result in stiff penalties, such as the $1 million E*Trade Financial Corp. was ordered to pay in 2008. The firm did not check to confirm the identities of over 65,000 secondary account holders. Because of this failure false reporting occurred.

R.P. Martin To Pay $2.2M in Libor Rigging

Published on: May 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission and Britain’s Financial Conduct Authority are fining R.P. Martin over $2 million for misconduct related to manipulating the London Interbank Offered Rate (Libor). The brokerage firm will pay $1.2M to the CFTC and approximately $1M to the British regulator. The latter said the fine could have been bigger but the financial unit showed that it couldn’t afford to pay more.

Libor helps determine what the borrowing costs are for trillions of dollars in credit cards, loans, and mortgages. According to regulators, the British broker-dealer helped a UBS (UBS) trader manipulate Libor as it was tied to the yen. RP Martin is accused of making misleading recommendations to its own employees. The latter issued the submissions used to establish Libor.

In return for RP Martin’s help, its brokers are said to have accepted over $400,000 in payments through wash trades that were actually just to give commissions to the brokerage firm. RP Martin’s brokers are also accused of turning in cash bids that weren’t real so that this would affect the yen Libor while benefitting the trader from UBS.

FINRA Conducts 170 Probes Into Possible Algorithmic Abuse

Published on: May 21, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that is looking to identify and stop trading incidents linked to algorithmic abuses. The self-regulatory agency is currently conducting about 170 investigations into this matter.

FINRA wants to find out if any brokerage firms either engaged in algorithmic abuses to trade or did not properly supervises advisers who committed such abuses. The SRO is worried that there are algorithms that are specifically intended set off illegal, manipulative behaviors on the market.

The use of algorithms to influence the markets have garnered lots of attention lately, specially with the release of author Michael Lewis’s book, “Flash Boys: A Wall Street Revolt.” He contends that high-frequency traders have the greater advantage because their extremely fast computers can manipulate stock prices to their benefit.

Man Convicted in $46M Michigan Ponzi Scam

Published on: May 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

David McQueen, of Byron Township in Michigan, was found guilty of 15 felony charges, including those involving money laundering, mail fraud, and failure to file taxes. McQueen is accused of running a $46 million Michigan Ponzi scam that bilked over 800 victims. Many of them gave him their retirement money, cashed in IRAs, and mortgaged their homes so they could invest.

McQueen, a former insurance salesperson, began investing people’s money in Multiple Return Transactions, which promising investors 10% returns. It wasn’t until later that he found out that the MRT was actually a Ponzi scam. However, instead of telling investors in his company, Accelerated Income Group, that MRT was a scam, he told them their funds were secure and growing. He then found new investors and took their money to pay off earlier investors.

According to Assistant U.S. Attorney Matthew Borgula, McQueen paid himself a salary of $100,000 from investor funds. He also gave these customers bogus account statements to make them think that their investments were profitable. The government said that when McQueen discovered that his Michigan Ponzi scam was about to fail, he took 30% of the investors’ money and placed them in highly speculative investment and other scams.

Credit Suisse to Pay $2.6B, Pleads Guilty to DOJ Charges Over U.S. Tax Evasion

Published on: May 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse (C) will pay $2.6 billion to the federal government and financial regulators in New York after pleading guilty to charges that it illegally helped thousands of American clients avoid paying taxes to the Internal Revenue Service. The U.S. Department of Justice said that for decades through 2009 the Swiss bank ran an illegal cross-border banking business.

This is the first time in years that a financial institution has pleaded guilty to a crime. Among the accusations was that Credit Suisse knew and agreed to help thousands of Americans set up accounts and help them hide their income and assets. Attorney General Eric Holder claims that the bank even got rid of account records, hid transactions, and failed to perform even the most basic steps to make sure clients were in compliance with US tax laws.

The DOJ contends that even after the 2008 US crackdown on Swiss accounts that compelled UBS AG (UBS) and Credit Suisse to become stricter about what services they offer American customers, the latter kept getting in the way of investigators looking into tax evasion allegations. Some Credit Suisse managers even purportedly helped clients transfer their assets to other offshore banks so their assets could stay concealed. Key documents to the DOJ’s probe were either lost or destroyed. Eight ex-Credit Suisse employees have been criminally charged with aiding in the tax evasion.

Insider Trading Roundup: Lawson Software Founders Pay $5.8M to Settle SEC Allegations, Three Sales Managers Face SEC Charges, and Kentucky Mayor Will Turn Over Illicit Profits

Published on: May 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Lawson Software Founders Resolve SEC Insider Trading Case

Richard Lawson, his brother William, and John Cerullo have agreed to pay $5.8 million to resolve U.S. Securities and Exchange Commission allegations that they engaged in insider trading prior to the merger between Lawson Software Inc. and two companies: Info Global Solutions and a Golden Gate Capital affiliate. The three men founded the software company.

According to the insider trading case, Richard tipped William and Cerullo that despite media and analyst reports the company was not the focus of a bidding war. This resulted in their selling of 1.8 million in company shares at prices that were inflated because of the speculation. They purportedly made illicit profits of $2 million when they sold the shares.