Investor Lawyers Blog

Ex-Money Concepts Registered Representative Faces SEC Charges For Running Astrology-Influenced Ponzi Scam

Published on: June 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Gurudeo “Buddy” Persaud,” an ex-Money Concepts registered representative, with financial fraud. The SEC alleges that while running a Ponzi scam involving transactions influenced by his astrological beliefs, Persaud lost $400,000 of investor money in trades while diverting at least $415,000 to cover his personal spending. The Commission is seeking Persaud’s alleged ill-gotten gains and wants injunctive relief and financial penalties imposed against him. (A spokesperson for Money Concepts, which is based in Florida, says that none of the investors that were bilked in the scam were its clients at the time.)

According to the SEC, Persaud believes that the gravitational forces of the earth can influence stock prices, while the moon can make people feel like selling their securities. When he made trading decisions between 6/07 and 1/10, he is accused of mainly depended on an online service that offers directional market forecasts according to the earth’s gravitational pull and the moon’s cycles. Clients were not aware that he was using astrology to make trades.

Persaud raised about $1 million from 14 investors, while drawing in investments through White Elephant Trading Co., his now defunct company that sold and offered securities in investment contract form for its supposed private equity fund. The Commission says that to hide his involvement with White Elephant, Persaud appointed two of his sons as its only managing members even though he was the one who ran the company, made all trading decisions, controlled is bank and brokerage accounts, and had contact with its clients.

Persaud’s alleged victims included family and friends, who were told that their money would be placed in stock, debt, real estate markets, and futures and bring in 6-18% percent returns. The Commission says that Persaud used investors’ money to pay other investors while he generated bogus account statements to make clients feel secure and conceal trading losses. He promoted the fund as an investment opportunity that was a risk-free/low risk way to make high returns within a short time frame, while presenting White Elephant as employing strict financial management strategies.

One investor who was allegedly told he would get an 18% return at year’s end gave Persaud $50,000. Another prospective client received a marketing document called the White Elephant Trading Co. LLC, Conservative Fixed Income Fund that said White Elephant planned to raise up to $10 million and built Persaud up as an experienced, licensed certified financial planner. The Commission contends that Persaud violated sections of the Securities Act of 1933, the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, the Investment Advisers Act, and Advisers Act Rules (2) and 206(4)-8(a)(1).

SEC Charges Rep for Running Astrology-Based Ponzi Scheme, Financial Planning, June 21, 2012

Read the SEC Complaint (PDF)

More Blog Posts:
Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

Ponzi Scam Receiver Can Go Forward with Securities Claim Against Texas Investor Who Benefited From the Fraud, Stockbroker Fraud Blog, June 26, 2012

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme, Stockbroker Fraud Blog, May 28, 2012 Continue Reading ›

Should Retail Investors Be Given Greater Access to IPO Information?

Published on: June 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At a Senate Banking Subcommittee hearing last week, the topic of whether retail investors should get more access to IPO information to even out the initial public offering process for both institutional and ordinary investors was discussed. One of the reasons the hearing was called was to look at the issues involving the recent IPO of Facebook (FB), which opened on the Nasdaq a few weeks ago.

There are some who believe that the social networking giant’s underwriters gave favored clients negative material information prior to the offering while leaving other investors out in the cold. Soon after trading began, Facebook shares declined sharply. At the hearing, Securities Subcommittee chairman Sen. Jack Reed (D-RI) spoke about the need to make sure that ordinary investors and sophisticated investors are subject to the same rules, including providing everyone with access to the same disclosures and data (or, at the very least, equivalent versions of both).

Among the witnesses who support giving retail investors more access to information about IPO’s is DePaul University finance professor Ann Sherman. She suggested making issuers publish online at least two Q and A sessions from the IPO road show so that retail investors would be getting the same amount of information as the typical institutional investor that usually attends one such meeting. While she acknowledged that there are reasonable grounds for limiting how much access is given to analyst forecasts that tend to be “speculative,” she said that lawmakers should either make this data available to no one or to everyone.

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations

Published on: June 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed securities charges against Harbinger Capital Partners LLC and its owner Philip A. Falcone. The SEC is accusing them of a number of charges, including engaging in market manipulation and client asset misappropriation. Also facing SEC charges for allegedly helping them is former Harbinger COO Peter A. Jenson.

The Commission accused Falcone, who is a hedge fund adviser headquartered in New York, of paying his taxes with fund assets, getting involved in a “short squeeze” that was not legal to manipulate the prices of bonds, and secretly favoring some clients to the disadvantage of other clients. The SEC contended that after short selling equity securities during a period that was restricted, Harbinger then illegally purchased the same ones in a public offering.

The Commission claims that rather than use legal means to cover the $113.2M in personal taxes that he owed, Falcone fraudulently used fund assets by borrowing that amount from Harbinger Capital Partners Special Situations Fund, L.P. (investors had been suspended from redeeming from this fund). The regulator says that all of this was done without investors’ permission.

The Commission also contends that Harbinger and Falcone waited about five months to reveal the loan because they were worried that making the hedge fund adviser’s financial state known could negatively impact both investors’ withdrawals and Falcone’s ability to bring in more investments for the other Harbinger funds.

The SEC is accusing Harbinger and Falcone, with Jenson’s help, of making a number of key omissions and misrepresentations in getting legal counsel and when communicating with investors about: the financing options that had been available to Falcone, the reasons why he needed the loan, the fund’s ability to not harm investors while covering the loan, the loan’s conditions and terms, and the part that Harbinger’s legal counsel played. Falcone paid back the loan last year after the SEC started investigating this matter. In connection with this alleged scam, the SEC separately filed and settled cease-and-desist and administrative proceedings against Harbinger.

The Commission also filed another civil case contending that between ‘06 through early ‘08, two Harbinger entities and Falcone engaged in market manipulation of distressed high-yield bonds issued by MAXX Holdings Inc. The three of them allegedly took part in a “short squeeze” that was not legal and, on Falcone’s order, Harbinger bought a huge position in the bonds in 4/06 and 6/06.

When he heard rumors that a financial services firm was shorting the bonds and suggesting that its clients follow suit, Falcone allegedly decided to retaliate by telling the funds that were managed by Harbinger to purchase every bond that was available, which caused the funds’ stakes to go up about 13% more than what was actually available.

The financial services company and its clients were then told that they had to settle their MAAX short sales that were outstanding, which was not really possible given the circumstances. As the financial services company went on to bid for the bonds every day, the bond price doubled. Falcone is accused of then taking part in transactions, at prices that were both inflated and arbitrary, with a number of short sellers.

SEC Complaint: Harbinger Capital Partners LLC; Philip A. Falcone; and Peter A. Jenson (PDF)

SEC Complaint: Philip A. Falcone, Harbinger Capital Partners Offshore Manager, L.L.C., and Harbinger Capital Partners Special Situations GP, L.L.C. (PDF)

More Blog Posts:
Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading, Stockbroker Fraud, November 12, 2011

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011

Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund, Institutional Investor Securities Blog, May 1, 2012

Securities Law Roundup: Merrill Lynch Pays Customers $32M For Allegedly Overcharging Them with Unwarranted Fees, Brookstone Securities is Accused of $1.6M in Fraudulent CMO Sales to Elderly Retirees, and Planner Loses CFP Designation Following After Maine

Published on: June 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that it is fining Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8M in the wake of certain alleged supervisory failures that the SRO says led to the financial firm billing clients unwarranted fees. The financial firm paid back the $32M in remediation to affected clients, in addition to interest.

According to FINRA, from 4/03 to 12/11, Merrill Lynch lacked a satisfactory supervisory system that could ensure that certain investment advisory program clients were billed per the terms of their disclosure documents and contract. As a result, close to 95,000 client account fees were charged.

Also, due to programming mistakes, Merrill Lynch allegedly did not give certain clients timely trade confirmations. These errors caused them to not get confirmations for over 10.6 million trades in more than 230,000 customer accounts from 7/06 to 11/10. Additionally, FINRA contends that Merrill Lynch failed to properly identify when it played the role of principal or agent on account statements and trade confirmations involving at least 7.5 million mutual fund buy transactions. By settling, Merrill Lynch is not denying nor admitting to the charges. It is, however, agreeing to the entry of FINRA’s findings.

Ponzi Scam Receiver Can Go Forward with Securities Claim Against Texas Investor Who Benefited From the Fraud

Published on: June 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. District Court for the District of Utah, R. Wayne Klein, the receiver of a Ponzi scam involving Winsome Investment Trust and US Ventures can go ahead with his claims to get back money from an investor who received more than she had invested. Judge Dale A. Kimball rejected Houston restaurateur and caterer Nina Abdulbaki’s claims that the fraudulent transfer claims of the receiver were not timely and that she isn’t subject to personal jurisdiction in the district.

Per the court, Winsome sent nearly $25 million to US Ventures, which allegedly bilked investors while claiming to be involved in commodity trading. Robert Andres, who ran Winsome Investment Trust, is accused of soliciting Abdulbaki for money to take part in a commodity futures pool.

She put $65,000 into Winsome and between 6/31/07 and 3/28/08 she received payments of $92,250. However, the court says that during the time that Abdulbaki was paid this amount, Winsome was not solvent because it was being run as a Ponzi scam.

Finding no merit to her claims that she isn’t subject to personal jurisdiction, the court said that federal receiver statutes allow for “nationwide service of process for in personam as well as in rem jurisdiction.” It also found that Abdulbaki’s statute of limitations defense does not succeed on a number of grounds, including that for this case equitable tolling is allowed under the doctrine of adverse domination. Per the doctrine, the statute of limitations for an entity’s claim is tolled when the entity is dominated and controlled by individuals taking part in behavior that harms it. The court found that the doctrine applies to this case because Andres had sole control of Winsome until the receiver’s appointment removed him. Therefore, says the court, the statute of limitations was tolled until the appointment of the receiver and his claims are, as a result, timely. (Before Klein’s appointment, receivership entities would not have been able to avail of their legal rights.)

Commenting on the court’s decision, Texas securities lawyer William Shepherd said, “The claw-backs system used in these cases is grossly unfair and treats fraud victims as if they were perpetrators! Money received years ago has been spent on necessities, invested into homes, businesses, or used to pay taxes or make donations. Un-ringing such bells can be very harsh! Innocent persons often receive benefits from others’ wrongdoing. While others die, many who use drugs with unknown dangers receive benefits. Resort owners profit from lavish events to entertain government employees. Crooks pay top dollar for homes and cars and tip excessively. The list of innocent persons who benefit from crimes is very long. At the very least, those who benefit from Ponzi schemes should be allowed to retain the interest they would have earned or profits they could have made if their funds had been properly invested.”

Klein v. Abdulbaki, D. Utah, No. 2:11-CV-0095

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
Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012

Houston, Texas-Based Forethought Financial Group to Purchase The Hartford Financial Services Group’s Annuities Units, Stockbroker Fraud Blog, May 4, 2012 Continue Reading ›

Federal Judge Approves $40M Residential Mortgage-Backed Securities Settlement In Class Action Against Former Lehman Brothers Holdings Executives

Published on: June 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court in Manhattan’s Judge Lewis A. Kaplan has approved a $40 million class action settlement in the residential mortgage-backed securities lawsuit against three individuals who used to be affiliated with Lehman Brothers Holdings Inc. (LEHMQ). The plaintiffs are pension and union groups, including Locals 302 and 612 of the International Union of Operating Engineers – Employers Construction Trust Fund, Boilermakers-Blacksmith National Pension Trust, and New Jersey Carpenters Health Fund. The deadline for class members to file their settlement claims is August 20, 2012.

The defendants, Samir Tabet, James J. Sullivan, and Mark L. Zusy, had previously worked for Lehman affiliate Structured Asset Securities Corp. They are accused of filing misleading Offering Documents about the credit quality of mortgage pass-through certificates that were worth billions of dollars. The certificates were issued in 2006 and 2007.

The plaintiffs had submitted their original institutional securities lawsuit prior to Lehman’s filing for bankruptcy in September 2008. This case is one of a number of class action complaints accusing the financial firm and its ex-executives of wrongdoing and negligence.

Per the terms of the RMBS settlement, the Lehman Brothers Estate is responsible for paying $8.3 million. Dow Jones News Services reports that an insurance policy for the financial firm’s ex-directors and former officers will pay the remaining $31.7 million.

When Lehman filed for Chapter 11 bankruptcy, this was considered a major catalyst for the global financial crisis that ensued. The firm, which emerged from bankruptcy protection this March, is now a liquidating company that is expected to spend the next years repaying its investors and creditors that have asserted over $300 billion in claims. Depending on the type of debt owed, a creditor may receive 21 cents/28 cents on the dollar. Also, Lehman is still a defendant in several securities lawsuits related to its bankruptcy and there are other claims against it that need to be resolved.

Last month, Judge Kaplan approved the use of $90 million in insurance to settle another lawsuit against Fuld, ex-finance chief Erin Callan, ex-president Joseph Gregory, former CFO Ian Lowitt, ex-chief risk officer Christopher O’Meara, and several former Lehman directors. The plaintiffs include pension funds, companies, and individuals located abroad. The investors had purchased $30 billion in Lehman debt and equity prior to the firm’s bankruptcy filing and their investments later failed.

Kaplan had initially refused to let the plaintiffs’ insurers pay the $90 million because he wanted to determine whether the securities settlement was a fair one. Now that the federal judge has signed off on it, the plaintiffs will not have to pay for the settlement out of pocket and they are released from the investors’ securities claims.

Judge Approves $40M Settlement with Ex-Lehman Execs, WSJ, June 22, 2012

The Lehman Settlement

Ex-Lehman Executives’ $90 Million Settlement Approved, Bloomberg, May 24, 2012

More Blog Posts:
Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills, Stockbroker Fraud Blog, October 19, 2011

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008

Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process

Published on: June 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Jumpstart Our Business Startups Act’s Title II eliminates the general solicitation and general advertising ban for offers and sales of private offerings under 1933 Securities Act Rule 144A and Reg D Rule 506 as long as the offerings’ buyers are accredited investors. Now, five investor groups have written a letter to the Securities and Exchange Commission recommending that when the regulator implements this change, it should “enhance the standards” that issuers have to adhere to when confirming that only accredited investors are buying the offerings. The groups are the Consumer Federation of America, Fund Democracy, AFL-CIO, Consumer Action, and Americans for Financial Reform. They believe that such enhancements are necessary because removing the ban will significantly decrease investor protections even as fraudulent behavior is likely to increase.

Right now, the SEC is in the process of writing rules for the new requirements that come with the statute. It has 90 days from April 5, when the JOBS act was enacted, to implement Title II. While under the statute’s Rule 506, the offerings’ issuers are required to take “reasonable steps” to confirm that buyers are accredited, Rule 144A issuers only have to “reasonably believe” that the buyers are qualified institutional purchasers. In their letter, the investor groups argued that Congress most certainly intended for the Commission to set up more rigorous the standards for identifying accredited investors. They are recommending that at the very least, the SEC substantially increase the Rule 506’s accredited investor standard for individual investors in each of the two most recent years to at least $400,000 in yearly income (up from at least $200,000) or $2.5 million in net worth, with the primary residence’s value subtracted (up from $1 million). They also said that the Commission should mandate that issuers that decide to engage in general solicitation and advertising file Form D in advance, enhance filing and recordkeeping requirements having to do with buyers’ accredited investor status, and think about excluding non-accredited investors from taking part in all Rule 506 offerings.

Offering different perspectives from these investors groups are securities lawyers and business groups. For instance, the National Investment Banking Association is pressing the SEC to make sure that any rule promulgated on the verification process is one that issuers of all sizes can meet. Meantime, the Securities Industry and Financial Markets Association wrote a letter to the SEC in April arguing that the steps that Title II requires shouldn’t create a greater burden than the existing “reasonable belief” standard of Rule 506. The American Bar Association Business Law Section’s Federal Regulation of Securities Committee said in its letter that what are considered reasonable steps should be determined by circumstances, facts, and the accredited investor category that applies. The group believes that the Commission’s rules should reflect existing practices and customs that take such factors into consideration.

Institutional Investment Roundup: FINRA Lets Ex-UBS Broker Keep $1M Signing Bonus, Court Approves Settlement Reached By Ex-Bear Stearns Hedge Fund Managers & SEC, Madoff Investors’ Securities Suit Against the Govt. is Dismissed

Published on: June 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Arbitration panel has decided that ex-UBS Financial Services broker Pericles Gregoriou can keep $1 million of the signing bonus he was given when he joined the financial firm even though he left the company earlier than what the terms of the hiring agreement stipulated. Gregoriou worked for the UBS AG (UBS) unit from ’07 to ’09.

This is an unusual victory for a broker. They usually find it very challenging to contest demands by a financial firm to give back unpaid bonus money. However, the FINRA panel said that Gregoriou was not liable for the $1 million damages. Also, the
panel denied Gregoriou’s counterclaim against UBS and a number of individuals. He had sought $3.24 million.

In a securities fraud case involving two former Bear Stearns employees against the SEC, “reluctantly,” the U.S. District Court for the Eastern District of New York approved a settlement deal involving Matthew Tannin and Ralph Cioffi. The defendants are accused of making alleged representations about two failing hedge funds.

The ex-Bear Stearns managers faced civil and criminal charges in 2008 for allegedly misleading bank counterparties and investors about the financial state of the funds, which ended up failing due to subprime mortgage-backed securities exposure in 2007. Cioffi and Tannin were acquitted of the criminal allegations in 2009.

Senior Judge Frederic Block approved the agreement wile noting that the SEC has limited powers when it comes to getting back the financial losses of investors. He asked Congress to think about whether the government should do more to help victims of “Wall Street predators.”

Per the terms of the securities settlement, Tannin will pay $200K in disgorgement and a $100K fine. Meantime, Cioffi will also pay a $100K fine and $700K in disgorgement. Although both are settling without denying or admitting to the allegations, they also have agreed to not commit 1933 Securities Act violations in the future and consented to temporary securities industry bars—Tannin for two years and Cioffi for three years.

In other securities law news, the U.S. District for the District of Columbia dismissed the lawsuit that investors in Bernard Madoff’s Ponzi scam had filed against the government. The reason for the dismissal was lack of subject matter jurisdiction.

The investors blame the SEC for allowing the multibillion dollar scheme to continue for years and they have pointed to the latter’s alleged gross negligence” in not investigating the matter. The plaintiffs contend that the Commission breached its duty to them. Judge Paul Friedman, however, sided with the government in its argument that the investors’ claims are not allowed due to the Federal Tort Claims Act’s “discretionary function exception,” which gives the SEC broad authority in terms of when to deciding when to conduct probes into alleged securities law violations.

While recognizing the plaintiffs’ “tragic” financial losses, the court found that investors failed to identify any “mandatory obligations” that were violated by SEC employees that executed discretionary tasks. The plaintiffs also did not adequately plead that the SEC’s activities lacked grounding in matters of public policy.

Meantime, the SEC has named ex-Morgan Stanley (MS) executive Thomas J. Butler the director of its new Office of Credit Ratings. The office is in charge of overseeing the nine nationally recognized statistical rating organizations that are registered, and it was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The office will conduct a yearly exam of each credit rating agency and put out a public report.

UBS loses case to recoup bonus from ex-broker, Reuters, February 6, 2012

Former Exec to Head Office of Credit Ratings, The Wall Street Journal, June 15, 2012

More Blog Posts:
SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG

Published on: June 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel is ordering Morgan Stanley Smith Barney to pay $5 million to Todd G. Vitale and John P. Paladino, two of the brokers that the financial firm had wooed from UBS AG (UBS) in 2008. The two brokers are alleging fraudulent misrepresentations, breach of written and oral contract, promissory fraud, negligent misrepresentation, fraudulent omission and/or concealment, intentional interference with existing and prospective economic advantage, negligent omission and/or concealment, California Labor Code violations, breach of implied covenant of good faith and fair dealing, promissory estoppel, constructive fraud, negligent supervision, and failure to supervise. They both still work for Morgan Stanley Smith Barney.

Both brokers were recruited a few months before Morgan Stanley merged with Citigroup Inc.’s (C) Smith Barney. Per the terms of their recruiting agreement, Vitale was promised that within six months of joining the financial firm he would become a salaried manager. Paladino would then inherit Vitale’s book, which would come with significant revenue.

After the merger occurred, however, a number of key management changes happened, and four years after they were hired, Vitale still hasn’t been promoted to manager while Paladino has yet to get his book. Also, Paladino’s monthly income has been reduced.

Ruling on the case, the FINRA arbitration panel awarded $2 million to Paladino and $2.6 million to Vitale. $355,000 in legal fees was also awarded to the two men.

This arbitration proceeding is one of numerous cases of late involving investment advisers claiming that financial firms had wooed them with promises that were never fulfilled. Brokerage firms often make verbal commitments when recruiting and they protect themselves by not including these agreements in the actual employment contract.

“Successful financial advisors and brokers can manage tens of millions or even hundreds of millions of dollars of their clients’ assets and securities firms are willing to pay, or promise to pay, them millions of dollars to bring their clients’ accounts to a new firm,” said Shepherd Smith Edwards and Kantas, LTD, LLP Partners and FINRA Arbitration Attorney William Shepherd. “Just as firms are not always honest with investors, these firms do not always keep their promises to advisors and brokers. Because licensed representatives and their firms are required to sign agreements to arbitrate disputes, cases of this type must be decided in securities arbitration. Our law firm has represented both investors and investment professionals in securities arbitration proceedings in their disputes with financial firms.”

Meantime, Morgan Stanley Smith Barney has issued a statement saying that the financial firm’s disagree with the panel’s decision and the facts support the ruling. However, there are internal firm memos documenting the recruiting deal.

Former Morgan Stanley Smith Barney Brokers Win $5M Employment Dispute Arbitration Award, Forbes, June 20, 2012

Panel Says MSSB Must Pay Recruited Brokers $5 Million, Wall Street Journal, June 20, 2012

More Blog Posts:
Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012
Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum, Stockbroker Fraud Blog, June 14, 2012

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012 Continue Reading ›

SEC Investor Advisory Committee Members Warn the Commission Not to Neglect Its Rulemaking Duties Even While Working to Implement the JOBS Act

Published on: June 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Members of the Securities and Exchange Commission’s Investor Advisory Committee are cautioning that it is imperative that the SEC not ignore its rulemaking obligations that it was tasked under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act even as it seeks to implement the new capital formation statute. The Jumpstart Our Business Startups Act was enacted in April.

The investor advisory committee, which is a new group at the SEC that was created under Dodd-Frank to provide the Commission advise about regulatory priorities, disclosure requirements, and investor protections, held their inaugural meeting on June 12. The committee takes the place of a prior one that was disbanded in 2010.

The JOBS Act
The JOBS Act is focused on helping smaller businesses gain access to capital. Per the statute’s Title II, the SEC has to allow general advertising and solicitation for private placement sales and offers under 1933 Securities Act Rule 144A and Regulation D Rule 506 as long as the buyers are accredited investors. The SEC’s Division of Corporation Finance associate director and chief counsel Thomas Kim has said that staff members are in the process of trying to determine how to practically implement the requirements so that investor protection isn’t compromised even as issuers are given some flexibility. Also, seeing as status or assets have resulted in a number of “prongs” for determining which entities or individuals are “accredited investors,” Kim noted that it was “reasonable” that issuers would take different steps to confirm accreditation depending on the accredited investor’s category.

Kim also spoke about how the crowdfunding rulewriting deadline of 270 days, which the SEC was given (under Title III of the JOBS Act) to come up with a registration exemption for crowdfunding, which involves “crowds” of investors sourcing small fund amounts, would be challenging to meet. A regulatory framework currently exists for the Title II modification to Rules 144A and Rules 506. However, the SEC would have to essentially make up from “whole cloth” a regulatory structure that incorporates disclosure requirements, funding portals, and other aspects from a completely new category of exempt offerings.

“An intense battle is being fought in Congress over Dodd-Frank efforts to ‘re-regulate’ the securities industry after the debacle caused by the ‘deregulation’ of that industry over the previous decade,” said Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd. Many believe such changes, if any, are months if not years away. Meanwhile, legislation to lower the bar in the issuance of new securities is sailing through at breakneck speed – proof positive as to who our representatives represent.”

JOBS Act (PDF)

More Blog Posts:

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive, Stockbroker Fraud Blog, May 12, 2012