Investor Lawyers Blog

Some Private Fund Advisers are Exercising Inadequate Controls, Says SEC Commissioner Elisse Walter

Published on: December 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commissioner Elise Walter, examinations of newly registered private fund advisers has already revealed numerous instances of poor controls by a number of members, especially when expenses and fees are involved. Some of these instances, she reports, are on the border of misconduct. Walter, who President Obama named to take the place of current SEC Chairman Schapiro when she steps down this week, expressed her own views (which may not be the same as the regulator’s) at the Commission’s enforcement panel at the National Law Journal’s Regulatory Summit in DC earlier this month.

Over 1,500 advisers to hedge funds and private funds are now also SEC registered in the wake of rules adopted per the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raises the total number of those that have completed Commission registration to 4,061 private fund advisers and 11,002 investment advisers, with 37% offering advise to hedge funds and other private funds.

The Commission’s Office of Compliance Inspections and Examinations will perform adviser “presence” exams looking at certain risk areas for the next two years. This is a new process for advisers, which is why the SEC has been engaged in outreach to make sure expectations and procedures are clear.

CFTC Securities Headlines: Goldman Sachs Fined For Inadequate Broker Supervision in $118M Fraud, Firms Named in Precious Metal Scam, & Defendants to Pay $1.8M Over Off-Exchange Foreign Currency Scheme

Published on: December 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Fined$1.5 Inadequate Supervision in $118M Fraud
The Commodity Futures Trading Commission says that Goldman Sachs (GS) must pay $1.5M because it did not properly supervise trader Matthew Marshall Taylor, who allegedly got around internal systems to manually make fabricated trades that went straight to the financial firms’ records and books and not the exchange. Taylor is accused of defrauding the bank, which lost about $118.4M.

The agency says that Goldman failed to make sure that its risk management, supervision, and compliance programs were in alignment with its duties to diligently oversee its business as a registrant of the Commission. However, CFTC commissioner Bart Chilton has criticized the $1.5M fine, describing it as a wrist slap.

CFTC Names Firms and Individuals in Precious Metal Scam The Commission has filed a civil injunctive enforcement action against a number of firms, including Hunter Wise Credit, LLC, Lloyds Commodities Credit Company, Hard Asset Lending Group, Blackstone Metals Group, LLC, CD Hopkins Financial, Newbridge Alliance Inc., Harold Edward Martin Jr., United States Capital Trust, LLC, as well as related entities, and Fred Jager, Frank Gaudino, James Burbage, Chadewick Hopkins, Baris Keser, David A. Moore, and John King. They are accused of fraudulently marketing off-exchange commodity contracts that were illegal. Also, Hunter Wise Commodities, which allegedly orchestrated the fraud, is accused of having gotten least $46M in client funds since July of last year.

The defendants allegedly claimed that they were selling physical metals to retail clients in retail commodity transactions and that they would arrange loans for the balance of the purchase price. Customers were supposed to make down payments at 25% of the complete buying price for certain quantities of metal, which were to be placed in a safe depository. The CFTC contends, however, says that not only were certain statements found in the investment contract untrue, but also the transactions were merely paper transactions with no actual metals involved.

Defendants to Pay $1.8M in Off-Exchange Foreign Currency Scheme
Following a CFTC anti-fraud enforcement action, a permanent injunction order and default judgment has been issued against Forex Capital Trading Partners, Inc., Forex Capital Trading Group Inc., and Highland Stone Capital Management, LLC requiring that they pay a penalty of over $1.3M and disgorge $450,764 to benefit clients who were defrauded. The Commission says that the three firms made fraudulent solicitations to 106 clients that invested over $2.8M in forex trading.

These solicitations were allegedly made with false claims that they were engaging in this type of trading had been profitable for several years, including a falsely reported 51.94% customer gain in 2010, which was a year when the investors actually lost over 1.2M. In fact, says the Commission, customers actually lost over 93% of total invested principal via the defendants’ customer trading.

CFTC Press Room

More Blog Posts:
CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012 Continue Reading ›

Securities Headlines: Credit Suisse & J.P. Morgan to Pay $400M Over RMBS Misstatements, Fox Network’s FOIA Request for AIG Emails Granted, Expedited Discovery Approved in Real Estate ‘Flipper’ Case, & NY Brokerage Owner is Linked to Affinity Scam

Published on: December 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse & J.P. Morgan to Pay $400M Over RMBS Misstatements

In SEC v. J.P. Morgan, the financial firm is accused of allegedly misstating information related to approximately 620 subprime mortgage loans’ delinquency status. The loans gave collateral for a $1.8M residential mortgage-backed securities offering that J.P. Morgan (JPM) underwrote six years ago and from which it was paid over $2.7 million in fees while investors lost at least $37 million. Now, the firm has agreed to pay nearly $297M to settle the allegations (without denying or admitting to them). The Commission is also accusing J.P. Morgan-owned Bear Stearns Cos. LLC of failing to disclose from 2005 to 2007 that it kept financial settlements from mortgage loan originators on problem loans that it sold into RMBS trusts.

Also settling RMBS Misstatement allegations with the regulator is Credit Suisse Securities (USA) LLC. In an administrative order, the SEC claims that between 2005 and 2010 the financial firm did not accurately disclose that it would keep cash from claims it settled against mortgage loan originators for issues involving loans that it had sold into RMBS trusts. Credit Suisse also allegedly misled investors about when it intended to buy back loans from trusts if those that borrowed did not make the initial payment. The firm has agreed to settle for $120M and is also not denying or admitting to the allegedly negligent conduct.

Insider Trading Headlines: Hedge Fund Manager Named in “Most Lucrative Tip” Ever, Ex-Real Estate Director & Friend Accused of Sharing Tips in Merger Targets Must Face SEC Charges, & Matter of Criminal Liability of Secondary Tippees is Clarified Again

Published on: December 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Hedge Fund Manager Named in “Most Lucrative Tip” Ever
Prosecutors have unsealed a criminal complaint in what is being called an insider trading scam that lacks historical precedent involving the “most lucrative inside tip of all time.” Ex-hedge fund manager Mathew Martoma allegedly made or avoided losses of $276M when trading securities in pharmaceutical companies Wyeth and Elan Corp. plc.

The insider information related to the potential ineffectiveness of an Alzheimer drug clinical that both companies were working on, which consultant Sidney Gilman allegedly provided to Martoma, is purportedly the reason that the former hedge fund manager liquidated his funds’ long position (about $700M) in the two companies and took short positions instead. Martoma, advisory firm CR Intrinsic Investors LLC, and an affiliated adviser allegedly avoided $194M in losses and $82M in profits when the drug trial results were made public and the companies’ stock dropped. The SEC has filed a parallel civil case against Martoma, CR Intrinsic Investors, and Gilman.

Ex-Real Estate Director & Tippee Friend in Merger Targets Must Face SEC Charges
Ex-Royal Philips real estate director Ralph J. Pirtle Ralph J. Pirtle and his friend Berco Realty President Morando Berrettini do, indeed, have to face Securities and Exchange Commission insider trading charges. The SEC had filed charges against them in 2008 because Pirtle allegedly provided Berrettini with insider information that came from the due diligence he was conducting for Royal Philips about possible merger targets. Berrettini then allegedly used the tips to trade in the stocks of three of the companies under consideration and he made “substantial profit” when two of them were acquired.

The defendants’ countered that in filing its case the SEC did not provide evidence that would cause a jury to find that Berrettini benefited from the insider information. However, Judge Robert M. Dow Jr. of the U.S. District Court for the Northern District of Illinois says that the SEC did adequately allege its claims elements and the insider trading charges will stand.

Criminal Liability of Secondary Tippees Gets Court Clarification Again
When is a secondary tippee criminally liable for insider trading? Holding the conclusion made earlier this year by Federal Judge Jed Rakoff, the U.S. District Court for the Southern District of New York said that it is when that tippee had a “general understanding” that the information received came from an insider who breached a confidentiality duty for personal benefit.

The court rulings involved jury instructions in the criminal case against hedge fund manager Doug Whitman, who was convicted on securities fraud and conspiracy charges related to tips he received from tippees that got their information from the employees of three public companies. The court found that in addition to having this “general understanding,” a secondary tippee such as Whitman does not have to know the specifics of the breach or the benefits that the insider obtained to be held criminally liable. He/she, however, must have had a “specific intent” to defraud the company that the information is related to of that data’s confidentiality.

SEC Charges Former Corporate Director of Real Estate and Real Estate Broker For Insider Trading, SEC, April 1, 2010

More Blog Posts:
Texas Securities Case: Mark Cuban Asks District Court To Reconsider Compelling the SEC to Produce Documents Related to Insider Trading Allegations Over Mamma.com Stock Offering, Stockbroker Fraud Blog, June 19, 2012

Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition, Stockbroker Fraud Blog, September 28, 2012

LIBOR Investigation Leads to Three Arrests

Published on: December 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Anti-fraud and police in Britain have made three arrests related to the global interest rate rigging scandal involving the London Interbank Offered Rate (LIBOR). The three men are Thomas Hayes, an ex-Citigroup Inc. (C) and UBS AG (UBSN.VX) trader, and James Gilmour and Terry Farr, who both worked at RP Martin, an interdealer broker. All of them are British nationals.

The Canadian Competition Bureau regulator claims that Hayes and others tried to manipulate yen Libor, which is the average interbank interest rates that banks are willing to lend in unsecured funds that are in Japanese yen denominations to each other. The regulator is also accusing Hayes of reaching out to traders at other banks in London and trying to persuade them to manipulate yen rates.

Regulators and prosecutors in Europe, Canada, the US, and Japan have been probing how traders have been able to rig interbank lending rates, including LIBOR, and whether banks may have changed submissions that are supposed to set benchmarks so they could make money off interest-rate derivatives-related bets or make lenders appear more financially healthy.

Investment Advisor Securities Roundup: Two Firms Settle SEC Claims That They Impeded with Examinations, FINRA Defends SRO Model, IA Allegedly Duped Private Equity Investors, & CDO Misrepresentation Accusations Against GSCP Executive Are Dismissed

Published on: December 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment advisory firms EM Capital Management and Barthelemy Group have settled SEC administrative charges that they got in the way of Commission staff examinations. Both cases were settled without the parties involved denying or admitting to the allegations.

According to the SEC, Barthelemy Group and Evens Barthelemy allegedly misled examiners by inflating claimed assets under management to make it appear as if the firm qualified for SEC legislation. To settle the claims, Barthelemy has consented to a securities industry bar. He can reapply for admission again in two years. His firm consented to a censure.

As for the proceedings against Em Capital Management and Freeman, they allegedly waited a year and a half to produce the records and books for the firm’s mutual fund advisory business. Both have consented to pay a $20,000 penalty and be censured.

FHFA Lawsuits Against Barclays Bank, Morgan Stanley, & Deutsche Bank Over RMBS to Proceed to Trial

Published on: December 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York is allowing the Federal Housing Finance Agency’s residential mortgage-backed securities lawsuits against Deutsche Bank AG, Morgan Stanley (MS), Barclays Bank PLC (BCS), and RBS Securities to go to trial even while granting the dismissal of some of the motions having to do with alleged misstatements about owner-occupancy information and loan-to-value ratio. FHFA is the conservator for Freddie Mac and Fannie Mae against numerous financial institutions for alleged securities law violations related to the sale and offer of RMBS.

According to the complaints, which are part of 17 FHFA lawsuits that were brought in September 2011, from 2005 to 2007 the offering documents used to sell RMBS to the government sponsored enterprises included material misstatements or omissions about LTV, owner-occupancy status, and mortgage-underwriting standards. (Based on these allegations, the SEC made claims under the Virginia Securities Act, the 1933 Securities Act, and the District of Columbia Securities Act) In the FHFA’s complaints against Morgan Stanley, Deutsche Bank, and in four of the other cases, the agency is making New York common law claims of aiding and abetting fraud and fraud on the basis of three categories of alleged misstatements that the securities law claims were based upon.

Per the Federal Housing Finance Agency v. Deutsche Bank AG, the financial firm, a number of its corporate affiliates, and associated individuals were named defendants for acting as lead underwriter for 40 securitizations, as well as a depositor and sponsor for 35 of them. The defendants submitted motions to dismiss the fraud claims and claims, pointing to DC law and Virginia law as basis.

SEC Working to Create $50M Reg A Offering Cap to Commissioners ASAP

Published on: December 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the SEC Division of Corporation Finance’s Office of Small Business Policy chief Gerald LaPorte, Commission staff are working hard to create under Reg A a new $50 million offering cap as soon as possible, even without a hard deadline. LaPorte, who expressed his own views at a Jumpstart Our Business Startups Act rulemaking panel at the American Bar Association Business Law Section, said that a lot of people had “high expectations for this exemption.”

Right now, public offerings of up to $5 million get registration exemption under the regulation. Under the JOBS Act’s Title IV, the SEC has to allow for exempt offerings as high as $50 million under Reg A.

Per LaPorte, the Commission will have plenty of discretion regarding how to put Title IV into effect. He said that SEC staff is looking into questions that commenters have sent in via pre-rulemaking letters, including whether reporting companies should be able to apply the new exemption, there should be a periodic reporting regime for the new cap, who should trigger reporting duties, and how similar Reg A reporting should be to crowdfunding reporting. LaPorte said that too many similarities could cause confusion for market participants.

Decreased Ability to Process Risk and Danger Make the Elderly Easy Fraud Targets, Says Study

Published on: December 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a study conducted by UCLA psychologist Shelley Taylor, one reason that older adults may be more easily prone to being deceived is that there appears to be less activity in the part of their brains that processes subtle danger and risk. She wanted to find out how well older people recognize visual clues indicating that someone may be scamming them.

Taylor brought in 119 seniors over the age of 55 and 24 people in their twenties. The two groups looked at 30 photographs that showed one of three faces: a neutral looking face, an untrustworthy one, or a trustworthy one. Taylor found that while the seniors and younger adults rated the neutral and trustworthy faces about the same, the elder adults had a more difficult time identifying the untrustworthy cues, rating them as more trustworthy than did their younger counterparts.

A follow-up study she then conducted using brain imaging showed the seniors exhibiting less activity in the risk processing area of the brain. She also said determined that people’s propensity to focus more on the positive as they grow older might too be causing them to miss deception cues (such as a smile that doesn’t include the eyes or someone who leans backward and/or looks away.)

Houston-Based Receiver Files $1.8B Class Action Filed Against Law Firms Accused of Helping R. Allen Stanford Carry Out His $7B Ponzi Scam

Published on: December 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Ralph Janvey, the Stanford receiver based in Houston, has filed a putative class action lawsuit against Hunton & Williams LLP and Greenberg Traurig LLP, two law firms accused of playing roles that allowed R. Allen Stanford to execute his $7B Ponzi scam. The securities complaint, which was filed in the U.S. District Court for the Northern District of Texas, is seeking $1.8 billion in damages and $10 million that it claims Stanford gave to the law firms during their years of working together. The plaintiffs are contending Texas Securities Act violations, aiding and abetting participation in a fraud scam, aiding and abetting breach of fiduciary duty, and conspiracy.

Also named as a defendant is Yolanda Suarez, who was not only a former Greenberg Traurig associate but also she served as Stanford Financial Group’s general counsel and later as chief of staff. Janvey says that Stanford could not have kept his scam going for over 20 years without these parties’ help.

Per the Texas securities case, Carlos Loumiet, an ex-Greenberg Traurig partner who later went to work for Hunton & Williams (he is now a DLA Piper partner and is not a defendant in this lawsuit), had a “very close personal relationship” with Stanford and played a part in helping the now convicted fraudster run his global scam. This included helping him establish sales and marketing offices in the US. Loumiet and Greenberg Traurig also allegedly helped Stanford set up the transactions that would allow the Ponzi mastermind to use the money he took from Stanford International Bank Ltd. in Antigua and invest them in “speculative venture capital” deals and property in the Caribbean. The law firm is also accused of giving Stanford securities law counsel and advice on a regularly basis.