Investor Lawyers Blog

SEC Reveals Plans to Examine Never-Before-Inspected RIAs

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

The Securities and Exchange Commission has unveiled its Never-Before-Examined Initiative, which will allow it to look at registered investment advisers that have yet to be examined. The SEC shared details of its plan in a letter to these unexamined advisers, of which there are about 4,000. Some of these firms have been registered with the regulator for more than three years.

The SEC says it intends to inspect a significant number of the advisers who haven’t been examined yet but that the agency will place its emphasis on those who have been registered for at least three years. Its initiative will employ two approaches-focused reviews and risk assessment. The former will look at RIAs’ compliance programs, disclosures, filings, portfolio management, marketing, and client asset safekeeping:

Compliance Programs: Examiners will look at the effectiveness of an RIA’s compliance program. They will also review records and advisory books to figure out if an adviser has properly identified interest conflicts and risks, put into place the appropriate measures and procedures and policies to manage and mitigate both, and hire a competent Chief Compliance Officer.

Credit Suisse Admits Wrongdoing and Will Pay $196M to Settle SEC Charges That It Provided Unregistered Services to US Customers

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

Credit Suisse (CS) is agreeing to pay $196 million and has admitted to wrongdoing as part of its settlement with the Securities and Exchange Commission over allegations that it violated federal securities laws when it gave cross-border investment advisory and brokerage services to US clients even though it was not registered with the regulator. According to the SEC’s order to institute resolved administrative proceedings, the financial firm gave cross-border securities services to thousands of clients in this country even though it hadn’t met federal securities laws’ registration provisions. In the process, Credit Suisse made about $82 million in fees even though its relationship managers that were involved had not registered with the Commission nor did they have affiliation to any registered entities.

The firm began providing cross-border brokerage and advisory services for customers in the US in 2002, setting up as much as 8,500 accounts that held about $5.6 billion in securities assets. Relationship managers visited the US about 107 times and serviced hundreds of customers when they were here. They would offer investment advice and effect securities transactions. When they were abroad, the managers worked with US clients via phone calls and e-mails. Also, some of the customers involved were Americans who had Swiss bank accounts at the firm. Criminal authorities continue to look into whether there were tax violations and if the clients were able to avoid paying taxes as a result.

Even though the firm knew about the registration requirements and made efforts to prevent violations, their initiatives didn’t work that well due to improper monitoring and the inadequate implementation of internal controls. The SEC says that it wasn’t until the civil and criminal probe into similar conduct by UBS (UBS) in 2008 that Credit Suisse started taking action to stop providing these cross border advisory services to UC clients. These types of activities were completely terminated but not until the middle of last year. During that time, the financial firm kept collecting investment adviser fees on some broker accounts.

SEC Charges Investment Banker in $950K Insider Trading Scam Involving Child Support Payments

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

The Securities and Exchange Commission has put out an emergency action against Frank “Perk” Hixon Jr., an investment banker based in New York. Hixon Jr. is charged with insider trading that garnered him $950,000 in illicit profits that he purportedly used in lieu of making child support payments to the mother of his son.

According to the regulator, Hixon Jr. regularly went into Destiny “Nicole” Robinson’s account and made trades using confidential information that he got from his job. Illegal trades or tips in three public companies’ securities were involved, including trading using nonpublic data about Titanium Metals Corporation before its merger announcement, trading prior to a number of big announcements by Westway Group, and trading in his firm Evercore Partners’ securities before record earnings were made public in early 2013. Hixon Jr. also allegedly made illegal trades in his dad’s brokerage account.

However, when asked by his employer about the suspicious trading in both accounts, Hixon Jr. denied that he knew either his father or Robinson. He even swore in a declaration that he didn’t recognize the name of the city where his father had been residing for over a quarter of a century. Hixon Jr. has since been fired.

Judge Reject’s AIG’s Bid to Delay $8.5B Billion Mortgage Backed-Securities Settlement with Bank of America Corp. “Hostage”

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

Less than three weeks after a judge approved the $8.5 billion mortgage securities settlement between Bank of America Corp. (BAC) and investors, another judge has rejected insurance giant American International Group’s (AG) efforts to delay the deal over its objections that loan modifications were not included in the agreement. Supporters of the mortgage-backed securities deal had accused the insurer of holding the deal “hostage.”

AIG is one of the investors in the over 500 mortgage securities trusts involved in this case. In total there are 22 institutional investors, including BlackRock Financial Management Inc. (BLK), Goldman Sachs Asset Management LP, ING Capital LLC, and Invesco Advisers, Inc.

The insurance giant opposes the settlement and contends that it isn’t convinced that the agreement will offer enough compensation for the losses sustained. AIG and other objectors are also worried that the ruling could result in additional securities lawsuits related to modified loan claims.

Federal Reserve Passes New Rules for Deutsche Bank, UBS, and Other Foreign Banks

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

This week, the Federal Reserve passed new rules that could make large foreign banks increase their capital by billions of dollars. Per the regulations, Credit Suisse Group AG (CS), Deutsche Bank AG (DB), UBS AG (UBS), and Barclays PLC (BCS), and other lenders based overseas that have units in the US will have to meet requirements having to do with debt levels and capital, as well as satisfy yearly “stress tests.”

With the new rules, 20 banks will now be required to set up US holding companies. Foreign banks with more than $50 billion in US assets will need to keep up more loss-absorbing capital than what is required by other nations. This could compel them to raise more debt or equity for their units in this country. For example, reports the Wall Street Journal, Citigroup (C) analysts say that Deutsche Bank’s unit that has been running with essentially zero capital. Under the new rules, however, it will have to deal with a shortfall of about $7 billion.

Also, foreign banks with assets greater than $10 billion will have to take the Fed’s yearly stress-test process, which would necessitate stringent review of capital levels and assets. Foreign banks that fail to pass the test could find their business activities in the US restricted. Banks with assets of at least $50 billion would have to satisfy enhanced leveraged ratios (By January 2018), risk-management, and liquidity requirements.

Mixed Securities Verdict Reached in SEC Case Against Texas-Based Life Partners Holdings

Published on: February 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Even though jurors rendered a mixed verdict in the Securities and Exchange Commission’s financial fraud lawsuit in Texas against Life Partners Holdings Inc. (LPHI), the company still may have ended up with the better outcome because the Texas life-insurance investments seller won some of the bigger claims. Still, Even as Life Partners is declaring the securities case outcome a victory, Andrew Ceresney, the Commission’s enforcement director, said the agency was pleased that the defendants were found liable for defrauding shareholders and submitting SEC filings that were false.

In U.S. District Court in Austin, Texas, the regulator had accused Life Partners of disclosure and accounting fraud that purportedly went on for years and were related to misleading marketing practices that allegedly occurred during the sale of life-insurance investments to customers. While jurors turned down the SEC’s primary insider trading and fraud allegations, they found the company and two of its executives liable in a securities fraud violation of a narrower scope involving revenue-recognition practices. Also, Life Partners’ CEO Brian D. Pardo and general counsel R. Scott Peden were were found liable for their role in the filing of false reports, and Pardo also was found to have falsely certified company filings.

Meantime, Life Partners continues to be the defendant in a number of Texas securities cases, including one involving 207 plaintiffs in Dallas who went through the company to invest in life policies. State regulators also have a separate Texas securities fraud lawsuit against Life Partners they are appealing in the wake of the decision by a state judge to turn down some of the main claims it made in 2012. The Texas State Securities Board has been looking into allegations that the life settlement provider misled investors of life insurance policies.

Lehman Brothers Holdings’ $767M Mortgage Settlement to Freddie Mac is Approved by Judge

Published on: February 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A judge in US bankruptcy court has approved the $767 million mortgage securities settlement reached between Lehman Brothers Holdings Inc. and Freddie Mac (FMCC). The deal involves a $1.2 billion claim over two loans made by the mortgage giant to Lehman prior to its collapse in 2008.

As part of the accord, Freddie will provide loan data to the failed investment bank so that Lehman can go after mortgage originators over alleged misrepresentations. Lehman will pay the $767 million in a one-time transaction.

Its bankruptcy was a main trigger to the 2008 global economic crisis. According to Matthew Cantor, chief general counsel of the unwinding estate, the bank has already paid creditors $60 billion, with more payouts.

Three Ex-Barclays Employees Charged by UK Prosecutors in Libor Rigging Scandal

Published on: February 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Prosecutors in the United Kingdom are charging three ex-Barclays Plc (ADR) employees with conspiring to manipulate the London interbank offered rate. The Serious Fraud Office charged Jonathan James Mathew, Peter Charles Johnson, and Styilianos Contogoulas with conspiring to defraud. These are the first criminal charges involving the manipulation of the US dollar Libor.

Over a dozen firms are under investigation by regulators and prosecutors around the world over collusion in rigging the London interbank offered rate and related benchmarks. Mathew and Johnson were employed by Barclays, the first firm fined ($450 million) over Libor by UK and US authorities two years ago, between 2001 through September 2012. Contogoulas, who worked with Barclays from 2002 through 2006, was with Merrill Lynch (MER) after that through September 2012.

Previous to the allegations against Contogoulas, Johnson, and Mathew, criminal charges against persons in the UK and the US solely had involved an alleged rate-manipulating ring led by trader Tom Hayes, a former Citigroup Inc. (C) and UBS AG (UBS) employee. He pleaded not guilty to US charges. With this latest criminal case against the three men, 13 individuals now face criminal cases in the UK probe into Libor.

Hedge Funds Interested in Upcoming Puerto Rico Bond Offering Want The Territory to Borrow Money To Last Two Years

Published on: February 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of Puerto Rico’s plans to sell $2 billion of general-obligation debt to try to balance its beleaguered budget, the hedge funds planning to get involved in this latest bond offering are asking the US territory to raise enough funds to last two years. Reportedly, the hedge funds also want the Commonwealth to surrender its sovereign immunity, which would let bondholders sue in New York court instead of dealing with the Puerto Rican judicial system.

The reported hedge funds’ requests point to the awareness that risks involving Puerto Rico have gone up. Just this month, Moody’s Investors Service, Fitch Ratings, and Standard and Poor’s all downgraded the U.S. territory to junk status. Aside from the planned Puerto Rico bond offering, which is being underwritten by Morgan Stanley (MS), Barclays Plc (BCS), and RBC Capital Markets (RBC), legislation is in the works to give the Commonwealth up to $3.5 billion of borrowing capacity.

As of the end of June, the US territory and its agencies had outstanding debt of roughly $70 billion. The downgrades by the credit rating agencies led to $940 million of accelerated payments on swap fees and debt, with close to half due in 30 days.

SEC Charges Two Wall Street Traders With Securities Fraud in “Parking” Scam

Published on: February 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Ryan King and Thomas Gonnella with securities fraud over a bogus “parking” scam. According to its Enforcement Division, the two Wall Street traders tried to get a round a firm policy that places a penalty for holding securities too long, and one of them purportedly placed securities in the trading books of the other so such fees wouldn’t be imposed and end up affecting his annual bonus.

The two men worked at different firms. According to the SEC, Gonnella asked King to help him get around his firm’s policy by arranging for the latter to buy securities that he would then later buy from King’s firm at a profit. By parking the securities in King’s trading book to reset the holding period, Gonnella was seeking to avoid charges to his trading profits and bonus as a result of inventory.

Per the administrative orders, Gonnella parked about 10 securities with King. The alleged round-up trades purportedly caused Gonnella’s firm to lose about $174,000.