Investor Lawyers Blog

FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court

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

The U.S. District Court for the Southern District of New York says that the Securities and Exchange Commission is not a doing a good enough job in providing oversight of $55 million in investor education funds and the way that the money is being disbursed. The funds come from the $1.4 Global Research Analyst Settlement that was reached with top investment banks, including Citigroup (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and others, in 2003, over securities research that had been allegedly flawed and biased. The case is SEC v. Bear Stearns & Co.

Now, Judge William H. Pauley III, who is tasked with supervising how the settlement is implemented, is contending that the SEC should have been raising red flags about the FINRA Investor Education Foundation’s “opaque” project spending and operational expenses. The court is asking the foundation and the SEC to turn in certain information, including detailed accounting of receipts and spending for 2011 and 2010, by the end of August. The foundation also has provided additional details about its operating costs.

The court has said that disbursing the funds has been a challenging process. After the Investor Education Entity, which was created to use the funds, failed to take off, in 2005 the court let the SEC move the $55 million to the foundation under the premise that the regulator would provide oversight while turning in quarterly reports.( As of December 31, 2011 the foundation had given out approximately $44.7 million of the funds through education and grant programs.)

However, in an opinion that issued in 2009, the court questioned why the foundation paid $800,000 in administrative expenses while giving just $6.5 million to grantees. And in this most recent decision, the court is once again asking why, considering the type of projects involved, the foundation seems to spend a “disproportionately high” amount. Pauley pointed to several examples, including a daylong seminar involving 130 attendees in West Virginia that cost $58,000 and a financial fraud conference last November that the foundation co-sponsored in DC that took place at a posh hotel.

The court also said that the quarterly reports that it has received are “bereft” of the details that they should provide, and it is wondering why the eight “primary” states that have been the target of the foundation’s educational activities don’t necessarily appear to be the ones with the “greatest investor education needs.”

FINRA Investor Education Foundation spokesperson George Smaragdis has said that the foundation will give over the information that the court is asking for but that it doesn’t agree with the majority of the court’s statements.

SEC v. Bear Stearns

FINRA Investor Education Foundation

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The SEC Penalties Act of 2012 Would Create Tough Financial Punishments for Securities Fraud, Stockbroker Fraud Blog, July 29, 2012

SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO, Stockbroker Fraud Blog, July 27, 2012
Stanford Ponzi Scam Investors File Class Action Lawsuit Suing The Securities and Exchange Commission, Stockbroker Fraud Blog, July 25, 2012 Continue Reading ›

Govt. Not Prepared for Next Inevitable Financial Crisis, Says Ex-SEC Chair

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

According to ex-Securities and Exchange Commission chairman Harvey Pitt, another financial crisis could happen before the end of the year and still the government isn’t more ready to deal with it than the last one. He shared his views at a US Chamber of Commerce-organized panel on July 25.

Pitt said that rather than the regulations in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, “three things” are required to keep future crises from happening.

1) A “steady flow” of pertinent information about anyone who takes funds from investors and may be able affect capital markets.

The SEC Penalties Act of 2012 Would Create Tough Financial Punishments for Securities Fraud

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

The Stronger Enforcement of Civil Penalties Act of 2012, is bipartisan legislation that seeks to enhance the Commission’s power to clamp down on violations of securities law while raising the statutory ceilings on civil monetary penalties by tying a penalty’s size to the degree of harm wrought and amount of investor losses sustained. This bill is S. 3416 and is also known as the SEC Penalties Act. It was introduced by Senators Chuck Grassley (R-Iowa) and Jack Reed (D-RI).

Currently, the SEC is only allowed to fine individuals that violate securities laws no more than $150,000/offense. Institutions can be penalized up to $725,000 maximum. If a case goes to federal court, the Commission has sometimes been able to determine a penalty according to the gross amount of gains that were ill-gotten.

The bill raises the cap per securities law violation offense to $10 million for entities and $1 million for individuals. If how much was made because of the misconduct and the penalty are linked, the Commission could up the penalty times three. Penalties could also be tripled for a recidivist that has had a securities fraud conviction or was the target of administrative relief by the SEC in the last 5 years. The Commission could assess in-house penalties for even cases not heard in federal court.

Institutional Investment Fraud Roundup: STEC Inc. CEO Sued for Insider Trading, Hedge Fund Adviser Indicted for Allegedly Misleading Investors, Two Brothers Settle Naked Short Selling Lawsuit for $14.5M, & Underwriters Get New Disclosure Obligations

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

In SEC v. Moshayedi, the Securities and Commission is suing the Chairman and CEO of computer device storage company STEC Inc. (STEC) for insider trading. Manouchehr Moshayedi allegedly traded in his company stock’s secondary offering because he had insider knowledge that there was a decline in the demand for an important product.

The SEC contends that Moshayedi was attempting avail of a sharp upward trend in the price of the company stock when he sold a significant amount of his shares, as well as shares belonging to his brother, who had co-founded the company with him. As a result of his actions, the Commission says that the siblings made gross proceeds of approximately $134 million each. Moshayedi has denied the allegations and intends to combat the case.

In another SEC case, two other brothers that were sued by the Commission for their alleged involvement in naked short selling have agreed to settle the administrative case against them by paying $14.5 million. Robert A. Wolfson and Jeffrey Wolfson are accused of not locating and delivering shares in short sales to brokerage firms. These naked-short selling transactions allegedly earned them about $9.5 million in illegal profits.

Golden Anchor Trading II LLC was also sued over this matter and has settled as well. While the Wolfsons are paying $13.4 million, the brokerage firm has agreed to pay $1.1 million. By settling, none of them are admitting to or denying the allegations.

Meantime, hedge fund adviser Chetan Kapur, who last year settled SEC administrative and civil charges over alleged misconduct related to allegations that he misled investors, has been indicted on the charges of investment adviser fraud, securities fraud, and wire fraud. Kapur was ThinkStrategy Capital Management LLC’s sole managing principal. The financial firm managed the hedge funds ThinkStrategy Capital Management LLC and ThinkStrategy Capital Fund.

According to the criminal charges, made in the U.S. District Court for the Southern District of New York, Kapur allegedly misled clients about the financial state of the two funds through material misstatements and omissions. He also is accused of giving false information about the funds’ performance, assets, longevity, due diligence, and personnel. If convicted, he faces up to 125 years in prison.

In other securities news, beginning August 2, underwriters will have to fulfill new disclosure obligations to local and state governments. This includes disclosing any actual or possible material conflicts of interest, any third party compensation, and any risks involving complex financial transactions that are recommended to clients. Earlier this month the Municipal Securities Rulemaking Board published guidance to assist underwriters in fulfilling these new duties.

SEC v. Moshayedi (PDF)

Short Selling Brothers Agree to Pay $14.5 Million to Settle SEC Charges, SEC, July 17, 2012

SEC v. Kapur (PDF)

MSRB Rule G-17 (PDF)

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SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO, Stockbroker Fraud Blog, July 27, 2012

Peregrine Financial Group Customers Were Victims of the “System,” Says CFTC Chairman Gensler, Institutional Investor Securities Blog, July 26, 2012

SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO

Published on: July 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Government Accountability Office, because the Securities and Exchange Commission has not yet adopted a final conflict minerals disclosure rule, the process of developing initiatives to assist the companies that would be affected by this has been delayed. The GAO said that, as a result, there is now uncertainty about the SEC’s due diligence and reporting requirements, which is making it hard for multilateral organizations, industry associations, and other stakeholders to “expand and harmonize” their in-region and global sourcing initiatives. The agency has recommended that SEC Chairman Mary Schapiro identify what steps need to be completed (and when) so that the Commission can finally put out a final rule.

Per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 1502, the SEC has to start holding the issuers of conflict minerals from the Democratic Republic and nearby countries accountable to enhanced disclosure requirements. (The Commission was supposed to make sure that this provision was implemented by April of last year.) This month, the SEC said it would consider whether to adopt a final conflict material during its open meeting in August.

The GAO has said the delay by the SEC to finalize a rule is a result of the Commission’s already heavy workload for rulemaking, the volume of stakeholder input, a high learning curve on a subject that staff wasn’t well-versed in, cost concerns by industry members, and the Commission’s concentration on cost-benefit analysis. Among the global initiatives that this delay has hampered, said the GAO, are the Conflict-Free Smelter Program and The Tin Supply Chain Initiative. The first looks to confirm that the sources of smelters processed-conflict minerals are conflict free, while the latter supports the responsible sourcing of materials from central Africa. Both provide assistance to downstream companies seeking to obtain minerals from conflict-free suppliers.

The regulator had put out a proposal about the requirements in December 2010. Back then, it estimated that out of 13,000 public companies, approximately 5,500 issuers would likely be affected. Industry opposition to the proposal was swift, with some contending that the Commission had underestimated the impact of the rule and the inevitable financial costs. Earlier this month, the U.S. Chamber of Commerce requested that the SEC issue a re-proposal of the requirements because previous cost estimates were “fundamentally deficient.”

“Events over the past few years should emphasize the need for reforms at the SEC. Most agree that the ‘securities police were not doing their job during the Madoff debacle and other widespread fraud,” said Securities Lawyer William Shepherd. “Current SEC Chairperson Shapiro was then in charge of the securities industry’s own self-regulatory organization, which had the primary duty to oversee the Madoff securities firm. Yet, she was subsequently promoted to head of the SEC. That agency is now bowing to pressure by the securities firms she was hired to police during this and other matters. Having the ‘fox in charge of the henhouse’ seems to apply here.”

Read the GAO’s report (PDF)

GAO: SEC Failure to Act on Conflict Minerals Hampers Initiatives to Aid Issuer Compliance, Bloomberg/BNA, July 17, 2012

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Peregrine Financial Group Customers Were Victims of the “System,” Says CFTC Chairman Gensler

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

According to Commodity Futures Trading Commission Chairman Gary Gensler, the customers of Peregrine Financial Group, also called PFG Best, were failed by the system, which neglected to protect them. Peregrine’s owner Russell R. Wasendorf Sr. is accused of embezzling close to $220M and defrauding clients. You can read an earlier post written by our investment fraud law firm about the CFTC’s lawsuit against Peregrine and Wasendorf on our site.

Per the Regulator’s securities case, the futures commission merchant and Wasendorf allegedly misappropriate client monies and submitted untrue statements in the financial statements they turned in to the CFTC. They also are accused of misrepresenting, during a National Futures Association audit, that Peregrine held over $200M in client funds when that figure was actually close to around $5.1 million. The regulator is not sure what happened to the rest of the money and is accusing both Wasendorf and the futures commission merchant of violating fund segregation laws with their alleged intentional deception of the NFA.

Gensler says that the CFTC will look at how NFA handles its responsibilities as they relate to the FCM and whether the CFTC does a good job in regulating the SRO. However, while noting during testimony front of the Senate Agriculture Committee on July 17 that the allegations against Wasendorf and Peregrine, if true, are crimes, he said that is not possible for market regulators to “prevent all financial fraud.” Gensler also talked about how the SRO system is part of the Commodity Exchange Act but that the CFTC doesn’t have enough funds to act as front-line regulator over the NFA, which is funded by dues.

The CFTC will review how NFA dealt with Peregrine examinations. NFA has hired a law firm to conduct its own review of audit procedures and practices, particularly those involving the exams for Peregrine.

Meantime, Peregrine’s bankruptcy trustee, Ira Bodenstein, has retained forensic accountants from PricewaterhouseCoopers to assist in determining how much of customers’ money is left. These clients have expressed frustration at the delays in their being able to recover even some of their funds. According to Michael Eidelman, who is the receiver for the assets of Wasendorf, a portion of the missing cash may be in property that can be sold so that some Peregrine customers can get their money back. (These clients haven’t tried to sell their claims against Peregrine because they still don’t know the extent of the firm’s liabilities and assets.)

The Peregrine securities fraud was confirmed after Wasendorf tried to kill himself on July 9. In his suicide note, he talked about how he bilked clients of over $100 million during a period lasting close to 20 years. He admitted that he used a rented PO box, inkjet printers, and Photoshop software to execute his scam. He also forged documents to hide the missing funds.

Scandal Shakes Trading Firm, The Wall Street Journal, July 11, 2012

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Texas Securities: SEC’s Bid To Get Stanford Ponzi Scam Victims SIPC Coverage is Denied by District Court, Stockbroker Fraud Blog, July 9, 2012

Stanford Ponzi Scam Investors File Class Action Lawsuit Suing The Securities and Exchange Commission

Published on: July 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Accusing The SEC of negligent supervision and failure to act, a number of Stanford investors have filed a putative class action seeking damages from the Commission. In Anderson v. United States, the plaintiffs submitted an amended complaint to the U.S. District Court for the Middle District of Louisiana earlier this month. They are bringing their securities case under the Federal Tort Claims Act.

They contend that the losses they sustained in Stanford’s $7 billion Ponzi scam occurred because the SEC was negligent in supervising Spencer Barasch, who is the former enforcement director of the SEC’s Forth Worth Regional Office. They also are arguing that there was enough information available about R. Allen Stanford for the SEC to merit bringing an enforcement action or a referral to other agencies. The investors believe that an alleged failure to act by Barasch and the SEC let Stanford’s Ponzi scheme go undetected for years. They especially blame Barasch.

According to an April 2010 report by the Commission’s Office of the Inspector General, although the SEC’s Dallas office was aware as far back as 1997 that Stanford was running a Ponzi scam, it was unable to persuade the SEC’s Enforcement Division to investigate the scheme. The report also concluded that Barasch played a key part in a number of decisions to squelch the possible probes against Stanford.

After Barasch left the SEC, he represented Stanford on more than one occasion until 2006 when the SEC Office of Ethics told him that this was not appropriate. Earlier this year, he settled US Department of Justice civil charges over this alleged conflict of interest restrictions violation by paying a $50,000 penalty and consenting to a yearlong ban from SEC practice. (He did not, however, admit or deny wrongdoing.)

Now, the investor plaintiffs want the government to compensate them for their losses: Reuel Anderson is seeking $1,295,481.37, Timothy Ricketts wants $353,216.31, and Gary Greene is asking for his $443,302.09. The plaintiffs believe their class action securities complaint represents approximately 2,000 members.

This class action case comes more than a year after another group of plaintiff investors brought a similar securities lawsuit in the U.S. District Court for the Northern District of Texas. In Robert Juan Dartez LLC v. United States the plaintiffs sought to hold the government liable for losses they sustained in Stanford’s Ponzi scam. The district court, however, dismissed the case without prejudice due to lack of subject matter jurisdiction in that it found that the plaintiffs’ claims landed in the discretionary function exception of the Federal Tort Claims Act.

Approximately 30,000 investors bought fraudulent CD’s from Stanford International Bank in Antigua. That’s a lot of customers getting hurt financially by one scam.

Stanford Investors Sue SEC Over Losses, Citing Negligent Supervision, Failure to Act, Bloomberg BNA, July 16, 2012

Anderson v. United States (PDF)

Robert Juan Dartez LLC v. United States

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Ex-Stanford Group Compliance Officer, Now MGL Consulting CEO, Says SEC’s Delay Over Whether to Charge Him in Ponzi Scam is Denying Him Right to Due Process

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

According to Reuters, Bernerd Young, a former compliance officer for the Texas-based Stanford Group. Co., contends that the Securities and Exchange Commission’s lack of decision over whether to charge him in R. Allen Stanford’s $7 billion Ponzi scam is not only a denial of his right to due process but also has hurt his professional life. Young, who is now the CEO of MGL Consulting, also used to work as a regulator with the National Association of Securities Dealers in Dallas. NASD is now the Financial Industry Regulatory Authority.

While Stanford has already been sentenced to 110 years in prison over his use of bogus CDs from his Stanford International Bank in Antigua to defraud his victims, the SEC has been constructing cases against a number of executives and financial advisers that worked for Stanford Group. However, legal disagreements and recusals between SEC officials and commissioners have reportedly caused delays to these probes that have left not just the bilked investors but also certain possible defendants waiting for resolution one way or another.

Young maintains that he didn’t know about the Ponzi scam. He says that the SEC came after him in Houston about one year after he was told by other Stanford executives that the Antigua bank’s portfolio was comprised of at least $1.6 billion in personal loans to Stanford himself. The Commission contended that it had evidence linking his actions to investors who were wrongly led believe that their CD’s were insured. Young received a Wells notice in June 2010 notifying him that the SEC intended to recommend that charges be filed against him.

Although the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Commission six months to decide on a Wells notice, SEC lawyers are allowed to file extensions, which they have done in their potential case against Young. The Commission’s current extension of 180-days on the case will expire in September.

Meantime, Young believes that MLG Consulting losing 20% of its clients, regulators terminating the firms’ plans to expand, and its need to file for bankruptcy is a result of the stigma associated with the Stanford Ponzi scam probe. As for the investors who were victimized by the fraud and who have expressed dismay at the SEC’s delay in deciding whether/not to charge certain ex-Stanford employees, their worry is that these same individuals could go on to defraud other investors in the meantime.

These Investors have also had to deal with a federal district judge’s recent decision to reject the SEC’s request that the Securities Investor Protection Corporation start liquidation proceedings to compensate Stanford’s victims, some of whom sustained millions of dollars in losses. SIPC had argued that it only protects customers against losses involving missing securities or cash that had been in the in custody of insolvent or failing brokerage firms members of the protection corporation. While Stanford Group was a SIPC member, Stanford International Bank in Antigua was not.

Former Stanford executive says in limbo as SEC case drags, Reuters, July 22, 2012

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Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court

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

The U.S. District Court for the Southern District of New York has ruled that a Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amendment to Section 806 of the Sarbanes-Oxley Act of 2002 must be applied retroactively to clarify congressional intent. The amendment specifies that public company subsidiary employees, and not just parent company employees, are protected under the whistleblower statute. The court, however, did not reach merits of the plaintiff’s claim regarding his firing and told the parties to turn in a joint letter about what steps will need to happen to get the matter ready for trial.

The lawsuit, Leshinsky v. Telvent GIT SA, involves whistleblower claims made by plaintiff Phillip Leshinsky. He contends that Telvent GIT SA (TLVT), Telvent Caseta Inc., Telvent Farradyne Inc., and a number of individuals wrongly fired him while violating Sarbanes-Oxley’s whistleblower provisions. Leshinsky, who was employed by nonpublic subsidiaries of the publicly traded Telvent GIT, contends that he was let go when he expressed opposition to using allegedly fraudulent information to secure a contract with the New York Metropolitan Transit Authority. His claims pertain to a period prior to the 2010 Dodd-Frank amendment.

The court noted that while before the Dodd-Frank amendment, Sarbanes-Oxley only protected employees who worked for publicly traded companies from retaliation when they blew the whistle, the 2010 revision does apply retroactively “as a clarification of the statute.” Leshinsky is therefore covered under Section 806.

No SIPA Coverage for Soft Dollar Credits, Says Bankruptcy Court

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

The U.S. Bankruptcy Court for the Southern District of New York has decided that claims stemming from soft dollar credits aren’t qualified to avail of Securities Investor Protection Act. According to Judge James Peck, this is the first time a court has had to determine whether soft dollar claims qualify as customer claims under SIPA.

The motion was filed by James Giddens, the Lehman Brothers Inc. trustee, who sought to affirm the denial of securities claims made by dozens of hedge funds and money managers seeking to get back soft dollar credits in their accounts with Lehman. Soft dollars are commission credits that can be used for buying research and brokers services that fall under the Securities Exchange Act of 1934’s Section 28(e)’s “safe harbor” parameters. (Generally, a soft dollar arrangement includes an understanding or agreement through which a discretionary money manager obtains research or other services from a broker-dealer. This is done in return for brokerage commission from transactions involving the accounts of discretionary clients.) While Giddens decided that these claims did not have SIPA protection and were “general unsecured claims,” a number of claimants disagreed.

The bankruptcy court, however, sided with Giddens. The court said that not only are soft dollar credits not securities and can only be used for the purposes identified under the Securities Exchange Act of 1934’s Section 28(e), but also, soft dollar accounts are “exclusively” available to “brokerage and research services” that a broker provides and cannot go toward the purchase of securities. Therefore, said Judge James Peck, Soft Dollar Claimants’ claims involving their Soft Dollar Accounts can’t be dealt with as if they were customer claims made under SIPA.

The bankruptcy court disagreed with claimants’ argument that because the credits could be used for research that would direct the clients in their purchase of securities there was a “sufficient connection” between a securities purchase and the soft dollars. The claimants had argued that this type of link made them customers under SIPA’s meaning. The court said no, finding that under the statute, the definition of a customer is meant to be “narrowly construed” and credits that can only go toward market research expenses are not tangential or direct enough to fulfill SIPA’s definition of what is a customer.

The court also disagreed with the claimants’ argument that the credits, which are proceeds of securities that have been sold or converted, should be considered customer property under SIPA. The court said that soft dollar credits are associated not with securities trade proceeds but with broker-dealer commissions. Peck also said that considering their character and source, the “credits are not customer property.” The court said that the claims were “really breach of contract claims” falling under the unsecured claims umbrella.

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