Investor Lawyers Blog

SEC Takes Action to Stop Alleged Fraud Involving Transfer Agent

Published on: May 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC announced that it is filing fraud charges against IST Shareholder Services, a transfer agent based in Illinois, and its owner Robert G. Pearson. The regulator also obtained an emergency asset freeze in this matter. IST Shareholder Services is registered with the SEC under the name Illinois Stock Transfer Company.

The transfer agent and Pearson are accused of a misappropriation scam that bilked clients of over $1.3 million. The fraud was discovered when the Commission examined the firm. Pearson eventually admitted to the scam during questioning by SEC examiners.

Stock issuers usually use transfer agents to keep track of the entities and individuals that own the bonds and stocks. The agents document changes to securities ownership, keep up the security holder records for issuers, give out dividends and issue/cancel securities certificates. Now, the SEC is claiming that Pearson and his company misused money that belonged to clients and their shareholders to pay for their own business obligations and fund payroll.

SEC Files Charges in Penny Stock Scams

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

The U.S. Securities and Exchange Commission has filed charges in a number of penny stock scams involving microcap companies, promoters, and officers. As of March 22, the regulator had charged 25 companies and 48 individuals in probes that originated out of its regional office in Miami. The agency has been working with the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of Florida to expose the financial fraud. Many of those charged by the SEC are also contending with criminal charges.

Two of those facing SEC charges are stock promoters Stephen C. Bauer and Kevin McKnight of Boca Raton. They are accused of market manipulation fraud involving Environmental Infrastructure Holdings Corp.’s (EIHC) penny stock. According to the regulator, they made it seem as if there was market interest EIHC to get investors to buy the stock, which artificially raised trading volume and price.

Also named in an SEC complaint is Richard A. Altmare from Boca Raton for market manipulation involving Sunset Brands Inc. (SSBN) stock. In an unrelated penny stock case, the SEC is charging Jeffrey M. Berkowitz, who is from Jupiter, Florida with participating in a market manipulation scheme, this one over Face Up Entertainment Group (FUEG) stock.

SEC Judge Bans Money Manager For Misleading Morningstar and the Public

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

U.S. Securities and Exchange Commission judge Cameron Elliot has banned Max E. Zavanelli, a separate-account money manager from the securities industry. Now, Zavanelli and his firm, ZPR Investment Management Inc., must pay $660,000 for misleading research firm Morningstar Inc. and the public.

ZPR Investment Management, in its filing with securities regulators, names over $200 million in assets from 119 accounts. Its clients include pension plans, high net worth individuals, and charitable organizations.

According to Judge Elliot, Zavanelli misrepresented and left out important information in newspaper ads, newsletters, and reports to Morningstar. Firm performance data is believed to have falsely implied compliance with the Global Investment Performance Standards. These are the standardized, voluntary ethical principals for investment advisers that call for fair representation and full disclosure. It also includes guidance for advertisements that maintain they are in compliance with GIPS.

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.