Investor Lawyers Blog

SEC Adopts Rules to Protect Investors that Have Brokerage Firm-Held Assets

Published on: August 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a 3-2 vote, the SEC adopted rules to provide substantially more protections to investors who have assets held by registered broker-dealers. SEC Chairman Mary Jo White issued a statement saying she was confident the rules would give customers’ assets key “additional safeguards,” including the strengthening of audit requirements and enhanced oversight.

Under the new rules, broker-dealers would have to file reports with the Commission that are supposed to lead to greater compliance with financial responsibility rules. Brokerages have to start filing new quarterly reports with the regulator and yearly reports with the Securities Investor Protection Corporation by year’s end. Effective June 1, 2014, they will have to file yearly reports with the SEC.

These latest rules amend the Securities and Exchange Act of 1934’s Rule 17a-11 and Rule 17a-5. Per the rule amendments, a broker-dealer with custody of customers’ assets will have to file a compliance report with the Commission and work with an independent public accountant that is PCAOB-registered to put together a report based on a study of statements in the compliance report. Brokerage firms without custody of these assets need to submit an exemption report with the regulator noting its exemption from the requirements. Also, whether/not a broker-dealer has custody of clients’ assets, a firm has to let SRO or SEC staff look at the independent public accountant’s work papers if this information is needed to examine the brokerage firm and the accountant is allowed to talk about its findings with examiners.

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel

Published on: August 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A FINRA arbitration panel has decided that Citigroup (C) and Edward J. Mulcahy, one of the firm’s ex-branch managers, has to pay $11 million to investor John Fiorilla. Fiorilla is a legal adviser to the Holy See who went to Citigroup because he wanted to de-risk a $16 million stock position in Royal Bank of Scotland (RBS).

According to the claimant, he asked Citigroup to employ derivatives to assist in hedging his position against losses but the firm did not fulfill the request. When the market failed in 2008 his account suffered over $15 million in losses.

Fiorilla is claiming breach of contract, failure to control and supervise, breach of fiduciary duty, gross negligence, negligence, and other violations. His claim against Mulcahy is over an alleged failure to supervise.

Texas Money Manager Sued by SEC and CFTC Over Alleged Forex Trading Scam

Published on: August 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and the Commodity Futures Trading Commission have filed separate yet parallel securities fraud lawsuits against a Texas money manager accused of bilking investors in a foreign-exchange trading scheme. Kevin G. White allegedly took approximately $1.7 million of the $7 million of investor funds he raised by making false claims that his currency trading strategy had brought about returns of over 393% since it was first implemented in January 2009.

The Commission filed its Texas Securities case in federal court early last month. The regulator believes that White and his companies used bogus credentials and its “can’t miss trading strategy” to reel investors into its scam when, in reality, the money manager was experiencing forex trading losses and misappropriating customer funds.

The CFTC’s action seeks to freeze White’s assets, as well of those of RFF GP LLC, Revelation Forex Fund LP, and KGW Capital Management LLC. Like the SEC, this regulator wants trading bans, financial penalties, and disgorgement of ill-gotten gains.

Liquidators of Bear Stearns Hedge Funds Sue S & P, Moody’s and Fitch for $1.12B

Published on: August 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Liquidators are suing Moody’s Investors Service (MCO), Standard & Poor’s, and Fitch Ratings over their issuing of allegedly fraudulent and inflated ratings for the securities belonging to two offshore Bear Stearns (BSC) hedge funds. The plaintiffs are seeking $1.12 billion.

The credit raters are accused of misrepresenting their autonomy, the timeliness of their residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) ratings, and the quality of their models. Because of the purportedly tainted ratings for securities that were supposedly “high-grade,” the funds lost $1.12B.

The funds, which were operated by Matthew Tannin and Ralph Cioffi, failed in 2007. The US government later pursued the two men for securities fraud, but they were acquitted. They did, however, settle an SEC securities case over related allegations last year.

Oppenheimer & Co. to Pay $1.4M to FINRA For Allegedly Unregistered Penny Stock Sale & Anti-Money Laundering Violations

Published on: August 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that Oppenheimer & Co. (OPY) will pay a $1,425,000 fine for the purported sale of penny stock shares that were unregistered and for not having an anti-money laundering (AML) compliance program that was adequate enough to identify and report suspect transactions. The financial firm also must get an independent consultant to perform a comprehensive review of its AML procedures, systems, and policies and its penny stock.

According to the SRO, from 8/18/08 to 9/20/10, Oppenheimer sold over a billion shares of twenty penny stock that were low-priced and very speculative but were not registered or lacked an exemption that was applicable. Soon after opening accounts, customers deposited huge blocks of penny stock and then liquidated them, moving proceeds out of the accounts.

FINRA contends that each sale came with “red flags” that should have spurred the firm to additional review to find out whether or not these were registered sales but that adequate supervisory assessment did not happen.The regulator also believes that Oppenheimer’s procedures and systems over penny stock transactions were not adequate and that because its AML program wasn’t focused on securities transactions it was unable to detect patterns of suspect activity linked to penny stock trades.

Spotlight on the SEC: Regulator Sues China Entities for Fraud and Votes to Turn Down Falcone-Related Securities Settlements

Published on: July 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Two China Companies Slapped With SEC Securities Lawsuit For Allegedly Fraudulent Scams

In the U.S. District Court for the Southern District of New York, the Securities and Exchange Commission is suing consumer electronic company NIVS IntelliMedia Technology Group Inc., lighting company China Intelligent Lighting and Electronics Inc., and the Chinese companies’ CEOs Tianfu Li and Xuemei Li, who are siblings, for taking part in allegedly fraudulent scams to raise offering proceeds and then divert them. The regulator believes that they lied to auditors and made filings that were materially misleading to hide their purported misconduct.

In a release, the SEC says that NIV and CIL are US issuers that raised about $21.5 million and $7 million, respectively, in public registered offerings in American capital markets in 2010. The siblings then allegedly took most of the funds from the companies’ accounts and diverted the offering proceeds from what the offering documents said they would be used for. The Commission wants disgorgement and prejudgment interest, injunctive relief, civil penalties, and other relief that is deemed appropriate.

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor

Published on: July 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Government Accountability Office is recommending that the SEC look at eight other criteria for who should qualify as an accredited investor for purposes of the 1933 Securities Act Regulation D Rule 506. The criteria is divided into two categories: understanding financial risk and financial resources. The independent, nonpartisan agency that works for Congress put out its recommendations to the regulator on July 18.

Under the 1933 Act, accredited investors can take part in certain private and limited exempt offerings. To qualify as an accredited investor a person needs to have at least $200,000 for each of the last two years or a net worth of $1 million without factoring in his/her main residence. While market participants that were surveyed agreed that net worth was the most essential criterion, they indicated that having an investment advisor and liquid investments could balance capital formation interests and investor protection.

Investor advocates and state securities regulators consider this criteria to be outdated and they are calling for substantive changes. Even SEC Commissioner Elisse Walter told broker-dealers at a recent gathering that the agency “desperately” must modify the definition of an accredited-investor.

Morgan Stanley to Pay New Jersey Regulators $100K for Selling Exotic ETFs to Investors, Including Seniors

Published on: July 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley will pay $100,000 to the New Jersey Bureau of Securities for allegedly selling exotic exchange-traded funds to investors. The state’s regulators say that the firm’s financial advisers were not properly trained and sold inverse and leveraged ETFs to senior investors that wanted to earn additional income. These clients instead would go on to sustain losses. A state official contends that the financial firm did not properly supervise staff that was dealing with ETF transactions.

Commenting on the securities settlement, Morgan Stanley said it was “pleased’ to have arrived at a resolution and that since the period in question-1/07 to 6/09, the brokerage firm has overhauled its process involving these products. The amount includes $65K in civil penalties, $25K to pay the state back for its investigative expenses, and $10,000 toward investor education. Already, the broker-dealer has paid $96,940 in restitution to investor in New Jersey.

Last year, Morgan Stanley consented to pay close to $2.4 million to settle Financial Industry Regulatory allegations over the firm’s handling of ETFs. According to the SRO, from 1/08 to 1/0, the firm did not set up or maintain a supervisory system and written procedures to ensure compliance with FINRA and NASD rules related to the sale of inverse, leveraged, and inverse leveraged ETFs.

Investor Sues Berthel Fisher Over TNP 2008 Participating Notes Program LLC

Published on: July 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Investor Jon Hanson is suing Berthel Fisher & Co. Financial Services Inc. for allegedly not conducting the necessary due diligence on the TNP 2008 Participating Notes Program or making the proper disclosures to parties like him that backed the high-risk investment. The private placement went into default in 2012.

The independent brokerage firm, which not so long ago settled the majority of investor claims over real estate deals involving Diversified Business Services and Investments Inc., (a real estate manager that is now bankrupt), could be facing a class action securities case involving a failed deal with Tony Thompson, the real estate investor. This would be the first time that a broker-could be hit with a class action over a Thompson National Properties LLC-sponsored product.

According to Hanson’s securities fraud lawsuit, Berthel Fisher allegedly know there were misrepresentations and omission in the TNP 2008 Participating Notes Program memorandum yet did not probe further into the red flags. Instead, the financial firm used the “misleading TNP 2008 PPM” to help collect about $26.2M from more than 200 investors. Although the independent broker-dealer did not sell all of the TNP 2008 Notes Program and not all of the $26M was sold to its clients, it is a defendant of this private placement case because it was the underwriter of the deal.

Both Sides Rest in Ex-Goldman Sachs Bond Trader Fabrice Tourre’s Trial For Alleged Mortgage-Backed Securities Fraud

Published on: July 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In federal court, both the Securities and Exchange Commission and former Goldman Sachs Group (GS) vice president Fabrice Tourre have both rested their case in the civil trial against the bond trader. Tourre is accused of MBS fraud for his alleged involvement in a failed $1 billion investment connected to the collapse of the housing market. After the SEC finished presenting its evidence, U.S. District Judge Katherine Forrest turned down Tourre’s bid to have the securities case against him thrown out. He denies wrongdoing and says that his career is in now in shambles.

According to the regulator, Tourre purposely misled participants in the Abacus 2007-AC about the involvement of John Paulson’s hedge fund Paulson and Co. The Commission contends that Tourre concealed that Paulson helped select the portfolio of the subprime MBS underlying Abacus—a $2 billion offering linked to synthetic collateralized debt obligations. The latter then shorted the deal by betting it would fail.

The SEC’s complaint points to Tourre as primarily responsible for the CDO, which it says says he devised and prepped marketing collateral for and was in direct contact with investors. The regulator believes that by failing to disclose Paulson’s role, Tourre broke the law. They also contend that instead the bond trader instead told customers that as an Abacus investor, Paulson’s hedge fund expected the securities to go up.