Investor Lawyers Blog

Investment Adviser Pleads Guilty to Involvement in $2M Cherry Picking Securities Scam

Published on: October 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Noah Myers waved his right to indictment and pleaded guilty to defrauding clients of over $2M. The investment adviser admitted to his involvement in a cherry picking scam. Myers, 43, owns MiddleCove Capital LLC, which is located in Connecticut. He faces up to 20 years behind bars and a maximum fine of $5 million.

As part of his guilty plea, Myers admitted to taking profits from investments for himself and other accounts he favored. Losses were distributed to accounts he did not favor. He accomplished this imbalanced distribution by waiting to assign a trade to an account until after he was able to determine whether it was profitable.

Because of his securities scam, clients lost over $2 million. Meantime, he made $460,000 in profits. A lot of the investors he bilked were retired and had asked MiddleCove to involve them in investments that were low risk.

European Commission Takes Action Against JPMorgan, UBS, RBS & Credit Swiss for Cartel Conduct

Published on: October 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The European Commission has found that Royal Bank of Scotland (RBS), JPMorgan (JPM), UBS AG (UBS) and Credit Suisse (CS) engaged in cartel behavior. Except for RBS, which received immunity from having to pay any fines by disclosing the cartel conduct, the other banks were fined $120 million for their activities. For cooperating, UBS and JPMorgan received fine reductions. Along with Credit Suisse, both banks got a 10% reduction for consenting to settle.

All four financial institutions are accused of running a cartel involving bid-ask spreads of Swiss franc interest-rate derivatives in the European Economic Area. Banks and companies typically use interest rate derivatives to manage interest rate fluctuation risks. A “bid-ask spread” is the difference between how much a market maker is willing to sell and purchase a product.

According to the European Commission, between May and September ’07, the four banks agreed to quote to third parties wider fixed bid-ask spreads on certain short-term, over-the-counter Swiss franc interest rate derivatives while keeping narrower spreads for trades between them. The purpose was to reduce their transaction costs and keep liquidity among themselves, as well as keep other market makers from competing on equal terms in the Swiss franc derivatives market. In one action, JPMorgan Chase (JPM) was fined €61.7 million euros for purportedly manipulating the Swiss franc Libor benchmark interest rate in an illegal cartel with RBS, which, again, had immunity from fees.

SEC Fines E*TRADE Subsidiaries Over $1M Penalty for Unregistered Microcap Securities Sales, Puts Out Risk Alert Regarding Broker-Dealer Duties To Clients

Published on: October 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the U.S. Securities and Exchange Commission put out a Risk Alert reminding brokerage firms about their duties when they take part in unregistered transactions for customers. The guidance came, along with the announcement that the agency had filed an enforcement action against former and current E*TRADE Financial Corporation (ETFC) brokerage subsidiaries that did not successfully act as gatekeepers and improperly engaged in the unregistered sales of microcap stock for customers.

According to the SEC, E*TRADE Capital Markets and E*TRADE Securities sold billions of penny stock shares for customers between 2007 and 2011. During this time, there were numerous occasions when they disregarded red flags indicating that the offerings were taking place without an applicable exemption from federal securities laws’ registration provisions.

The two brokerage firms consented to repay over $1.5 million in disgorgement plus prejudgment interest from commissions they made on the improper sales. They also have to pay a $1 million combined penalty.

73 Swiss Banks Want the US to Modify Proposed Tax Amnesty Deals

Published on: October 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Lawyers for 73 Swiss banks are questioning the terms of self-disclosure program that would allow them to achieve amnesty for having helped Americans avoid paying taxes to the U.S. government. In a request to the Justice Department, the attorneys objected to certain terms while recommending changes to the model accord.

The program wins bank participants a guarantee that they won’t be prosecuted if they disclose accounts belonging to Americans that had previously gone undeclared. While the bank could still be slapped with penalties the equivalent of up to half of what was in the hidden funds, they might be able to negotiate the amount down.

One of the requirements under the plan is that banks have to cooperate with other foreign or domestic law enforcement agencies that become involved in any probe over a tax evasion matter. However, Bloomberg reports, according to a number of the lawyers, this requirement wasn’t in the program when some 100 firms signed up so they could win non-prosecution deals in exchange for their cooperation. The banks claim that such a stipulation turns a program having to do with U.S. tax issues into a global agreement that doesn’t include guarantees or safeguards for them.

Rajaratnam Brother Settles Insider Trading Charges Involving Hedge Fund Advisory Firm Galleon Management

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

Rajarengan “Rengan” Rajaratnam, the brother of Raj Rajaratnam, has consented to pay over $840,000 to settle insider trading charges filed, against him by the U.S. Securities and Exchange Commission. Rengan, who has not admitted to or denied wrongding, also has agreed to an industry bar. A court must still approve the settlement.

Rengan was a portfolio manager at Galleon. He also co-founded Sedna Capital Management, which is another hedge fund advisory firm. Raj was convicted of insider trading in 2011.

It was in 2013 that the SEC filed charges against him for his involvement in the insider trading scam conducted by his brother Raj and Galleon Management.

SEC to Reject BlackRock Inc. Proposal for Nontransparent Exchange-Traded Fund

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

In a preliminary ruling, The U.S. Securities and Exchange Commission said it expects to reject BlackRock Inc.’s (BLK) proposal to put out a nontransparent exchange-traded fund. BlackRock sought permission to sell the ETF from the regulator in 2011.

The fund wants to keep its investments secret, which go against SEC rules. BlackRock proposed using a blind trust to manage the securities of a portfolio without revealing the contents. It sought exemption from the agency’s rules, which mandate that disclosure be provided daily. Instead, BlackRock would have disclosed its holdings with the nontransparent ETF on a quarterly basis. One reason that certain fund managers are pushing for less frequent disclosure is their worry that daily disclosures could allow investors to imitate the trades.

Now, however, the SEC is saying that without portfolio transparency such as a plan does not guarantee that that the ETF would trade consistently or near net asset value. The regulator said that the proposed structure sets up substantive risk that ETF share market prices might materially deviate from the ETF’s NAV/share, especially during stressful periods in the market. This could “inflict substantial cost on investors,” noted the Commission.

During Fiscal Year 2014, SEC Files Record Number of Enforcement Actions

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

According to the U.S. Securities and Exchange Commission, the agency filed a record number of enforcement actions in 2014. Concluding the fiscal year on September 30, the regulator announced that it filed 755 SEC enforcement actions and obtained orders of $4.16 billion in disgorgement and penalties. Last year, the agency filed 686 actions and brought in $3.4 billion in fines.

The SEC credited new investigative strategies and innovations with analytical tools and data as playing a part in contributing to what it considers a solid year for enforcement. There were also first-ever cases, including actions over market access rules, “pay-to-play” for investment advisers, whistleblower retaliation, and stopping a municipal bond offering.

During fiscal year 2014, the SEC said that it charged over 135 parties with reporting and disclosure-related actions, focused resources on fighting microcap fraud and market manipulation-including penny stock scams-fought international fraud schemes, pursued firms for not setting up adequate risk controls, obtained the biggest penalty yet against an alternative trading system, enhanced oversight of dark pools, and imposed penalties for net capital rule violations.

SEC, Federal Reserve, HUD Approve Laxer Mortgage-Lending Rule

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

The U.S. Securities and Exchange Commission, the Department of Housing and Urban Development, the Federal Reserve, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have jointly approved a new rule for mortgage-backed securities and collateralized loan obligations. The regulation completes what had been a delayed provision of the 2010 Dodd Frank Act.

The rules are supposed to enhance the quality of loans by providing banks with a financial impetus to make sure the mortgages can be repaid. An earlier version of the proposed rule had obligated banks to retain either 5% of the risks of mortgages sold and packaged to investors or require a 20% borrower down payment.

Regulators, however, were concerned that these stipulations could hurt the housing market and they have since rescinded that 20% down payment requirement. The 5% of the risk on banks’ books when securitizing loans, however, still stands. And banks can get around the 5% risk retention requirement as long as they confirm the borrower’s ability to repay the loan and remain in compliance with other requirements, including debt payments that aren’t above 43% of income.

Wells Fargo to Pay $5M Over Inadequate Controls, Altered Documents

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

Wells Fargo Advisers LLC has consented to pay $5M to resolve U.S. Securities and Exchange Commission charges accusing the firm of not keeping up adequate controls so that one of its employees would be unable to use a customer’s nonpublic information to engage in insider trading. Wells Fargo also was charged with taking too long to produce documents during the SEC’s probe and giving the regulator an altered document related to a review of a broker’s trading activities.

Federal law mandates that investment advisers and broker-dealers set up, keep up, and enforce procedures and policies so that material nonpublic data of customers is not misappropriated. This is the first time the Commission has charged a brokerage firm for not protecting a customer’s material, nonpublic data. Wells Fargo is settling the charges without admitting or denying wrongdoing.

The agency says that Wells Fargo broker Waldyr Da Silva Prado Neto found out in confidence from a customer that private equity firm 3G Capital Partners Ltd. was acquiring Burger King in 2010. The client had placed $50 million in the fund that would go on to acquire the hamburger chain. Prado then traded on the information before it was made public. The regulator filed insider trading charges in 2012.

UBS Brokers Are Still Selling Puerto Rico Muni Bonds

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

Even after the slew of municipal bond fraud arbitration claims from investors blaming UBS AG (UBS) for their losses sustained in Puerto Rico municipal bonds, the brokerage firm has told its brokers to continue selling the funds to clients. However, notes the broker-dealer, representatives should make sure to evaluate their recommendations in a way that is in line with UBS policies and those of the Financial Industry Regulatory Authority.

The instructions to keep selling the bond funds were documented in a four-page, unsigned memo from UBS. The firm also instructed brokers to direct any questions about the suitability of any investment recommendations to the compliance department or a branch manager. According to Financial Adviser Magazine, a UBS spokesperson said that individual financial plans are customized to a client’s goals and wealth management needs. She also pointed out that Puerto Rico municipal bonds and closed-end funds had for over a decade rendered excellent returns and tax benefits.

Nevertheless, over the past twelve months, the losses from both Puerto Rico bonds and UBS’s closed-end bond funds tied to Puerto Rico debt have been huge. Already, UBS has been named in over 500 arbitration claims after there was a sharp drop in the value of Puerto Rico bonds last year. According to Reuters, FINRA intends to add another 800 arbitrators in Puerto Rico to hear these securities cases. Previously, there were about 70 arbitrators designated to preside over the muni bond fraud claims.