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The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a “limit up-limit down” proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

According to Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro, the two federal agencies didn’t know that JPMorgan & Chase (JPM) had sustained $2 billion in trading losses until they heard about it through the press in April. Schapiro and Gensler testified in front of the Senate Banking Committee on May 22. Both agency heads noted that trading activities aren’t within the purview of the CFTC and the SEC. They also pointed out that the risky derivatives trading did not happen through JPMorgan’s futures commission merchant arm or broker-dealer arm.

The SEC has no authority over the credit default index derivatives that were involved in the trades, and although, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will eventually regulate the swap dealing activities of banks, the rules to make this authority law have not yet been written.

Now, the CFTC is probing JPMorgan’s trading transactions. It recently issued subpoenas asking for the firm’s internal documents related to the financial firm’s massive loss. The probe is being run by the agency’s enforcement division and, according to Reuters, will revolve around what JPMorgan traders told internal management staff and their supervisors as the bets began to sour. (However, per the Wall Street Journal, the inquiry is in the beginning phases and not limited to what traders said or didn’t say. It also doesn’t necessarily mean that JPMorgan or certain individuals will be subject to any civil enforcement action.)

Meantime, Schapiro has said that the SEC is also looking into whether JPMorgan’s financial reporting and public disclosure were accurate in regards to what the financial firm knew and when it had this knowledge. She told Sen. Robert Menendez (D-N.J.) that it was too early to tell whether JPMorgan’s activity would have violated the Volcker rule, which calls for banks to have their proprietary trading activity limited to risk-mitigation hedging. While JPMorgan has said that its transactions were hedges, experts are divided over this assessment. (The Volcker rule, which is part of Dodd-Frank, has not yet been implemented and there are critics fighting its current incarnation.) Menendez, in turn, said that Schapiro should look to JPMorgan’s trading loss as a reason for constructing strong verbiage when implementing the rule. However, Sen. Bob Corker (R-Tenn.), who was also at the hearing, wondered whether employing this approach might backfire-initially causing the legislation to “look good,” while ultimately creating a situation where highly complex institutions would be placed situations to “not appropriately hedge their activity.”

IMPLEMENTING DERIVATIVES REFORM: REDUCING SYSTEMIC RISK AND IMPROVING MARKET OVERSIGHT, Banking.Senate.gov, May 22, 2012

Regulators Say They Learned Of J.P. Morgan Losses from news reports, Los Angeles Times, May 22, 2012

CFTC subpoenas JPMorgan over trading loss: WSJ, The Republic, May 31, 2012

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Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012

JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ, Institutional Investor Securities Fraud, May 19, 2012

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012 Continue Reading ›

The American Bar Association is in strong favor of self-funding for both the Commodity Futures Trading Commission and the Securities and Exchange Commission. It is calling on Congress to quickly deal with this need to increase the agencies’ resources.

In a letter to lawmakers on the House Financial Services Committee and the Senate Banking Committee, ABA Task Force on Financial Markets Regulatory Reform co-chairs William Kroener III and Giovanni Prezioso talked about how not having sufficient funding sources for the SEC and the CFTC is going to substantially hurt the regulators’ ability to complete their assigned regulatory missions. The ABA believes that self-funding would effectively deal with this problem.

Both the CFTC and SEC have acknowledged that they are short on funds. The two regulators have partially attributed this to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which doesn’t authorize self-funding despite the fact that SEC Chairman Mary Schapiro, past SEC chairmen, certain senators, and securities lawyers had pressed for it.

According to a senior FINRA enforcement official, the Financial Industry Regulatory Authority appears on schedule this year to bring about 1,500 enforcement actions-that’s about the same amount a last year, when this was then considered a record number. He said that the actions tend to be “isolated cases,” with dishonesty playing a factor.

The FINRA enforcer, who spoke at an enforcement panel during the SRO’s yearly conference in DC on May 23 (panelists were not identified by name), also noted that the self-regulatory organization is concentrating on complex products. He talked about how important it was for firms to fully comprehend the products that they are selling.

Meantime, another FINRA enforcer encouraged brokerage firms to pay attention to recent actions involving four firms that consented to pay $9.1 million to settle allegations that without supervision they sold leveraged and inverse exchange-traded funds valued at billions of dollars. (The SRO had accused the Wall Street broker-dealers of not having “reasonable” grounds for recommending these instruments to retail clients.) The FINRA official said that similar FINRA cases are expected-a clear indicator that it is integral for financial firms to supervise the products that they sell. She also talked about how when examining real estate investment trusts and private placements under regulation D, FINRA is looking at the areas of supervision, advertising, due diligence, suitability, misstatements, training, risk disclosure, and product understanding.

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott
Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

Read the SEC Complaint (PDF)

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Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Continue Reading ›

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

The Securities and Exchange Commission has filed charges against fund manager Jason J. Konior and his Absolute Fund Management and Absolute Fund Advisors for running a Ponzi-like investment scheme that was supposed to maximize investors’ profits and instead allegedly funneled $2 million of clients’ money to pay for earlier investors’ redemption requests, as well as business and personal expenses. The SEC is charging Konior and his two firms with violating the Securities Exchange Act of 1934’s antifraud provisions. The Commission is seeking financial penalties, permanent injunctive relief, and disgorgement of ill-gotten gains.

According to SEC, beginning at least last November, Konior and the two firms raised about $11 million from investors by selling them Absolute Fund LP limited partnership interests. Konior allegedly touted this investment vehicle as having $220 million in trading capital. He and his two companies also allegedly made false claims that the fund would contribute millions of dollars as a promised match to clients’ investments (Konior had told investors that Absolute would put in up to nine times what they originally contributed), combine new investors’ money with its principal, and put their cash in brokerage accounts that investors could use to trade securities through. This “first loss” trading program investors was supposed to allow investors to significantly up their potential profits.

Per Absolute Fund Advisors’ marketing collateral, Absolute would give seed capital allocations to emerging and new hedge funds, which would then buy limited partnership interests in the fund. Absolute was supposed to match the investments by an up to 9:1 ratio. This means that if a hedge fund invested $1 million in Absolute then the fund would match it with $9 million, which means there would be $10 million in investment capital.

Absolute was to put this mix of funds in a brokerage firm sub-account to be managed by the hedge fund investor. Per the “first loss model” trading losses in the sub-account would be 100% allocated to the hedge fund investor up to the sum of its capital contribution. The hedge fund investor was then supposed to get 50-70% of trading profits.

Unfortunately, this trading program that was promised never went into operation. The investment fund not only neglected to match investors’ funds but also it failed to return their money when they asked to withdraw their investments.

Last week, the SEC secured an asset freeze order against Konior and his two companies. All three parties have consented to this order without denying or admitting to the securities charges. The Commission says that the current assets of Absolute are only a “fraction” of how much investors are still owed.

SEC Shuts Down $11M Ponzi Scam, May 25, 2012

Read the complaint (pdf)


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Financial Industry Regulatory Authority Inc. arbitrator Alvin Green is ordering David Lerner Associates Inc. to pay claimants Florence Hechtel and Joseph Graziose $24,450 for the Apple REITs that they bought from the firm. They will get the money after returning the Apple REIT 9 shares to the company. The Apple REIT is the 14th largest nontraded real estate investment trust in the US. David Lerner & Associates also will have to reimburse them their $425 FINRA claim filing fee.

According to Graziose and Hechtel, the financial firm misrepresented the Apple REIT 9, as well as breached its fiduciary duty and contract to them. Other Apple REIT investors have made similar claims. However, of the hundreds of arbitration claims (there are also securities lawsuits) that have been pending, this is the first one to go to hearing.

Per FINRA, since 1992 David Lerner & Associates has sold close to $7 billion in Apple REITs, making about $600 million in revenue from the sales (60-70% of the firm’s business since 1996). It is the only distributor of Apple REITs.

Last year, the SRO charged the financial firm with soliciting investors to buy Apple REIT Ten shares (a $2 billion non-traded REIT) without performing a reasonable investigation to make sure the REITs were suitable for these clients. Many of its Apple REIT investors are not only unsophisticated investors but also they are elderly. David Lerner & Associates also allegedly offered misleading information about the distribution online.

Several months ago, FINRA also sued firm owner David Lerner for similar alleged misconduct, including misleading clients about the valuation and risk involved in their Apple REIT Tens. The complaint against Lerner follows statements he is accused of making to investors after FINRA made its charges against the financial firm.

Per the amended complaint, Lerner wrote to over 50,000 clients to “counter negative press.” This letter also talked about a potential opportunity for Apple REIT shareholders to take part in a listing or a sale on a national exchange to get rid of their shares at a reasonable price. Also, at a seminar he hosted Lerner allegedly made statements to investors that were misleading.

For the last nine months, our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD, LPP has been investigating claims on behalf of investors who sustained losses in Apple Real Estate Investment Trusts that they bought from David Lerner Associates. For many investors, these non-traded REITs were unsuitable for them.

First Apple REIT case goes against Lerner, Investment News, May 23, 2012

FINRA Charges David Lerner & Associates With Soliciting Investors to Purchase REITs Without Fully Investigating Suitability; Lerner Marketed REITs on its Website With Misleading Returns, FINRA, May 31, 2011

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David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission’s practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

A district court has approved ex-Morgan Stanley (MS) executive Garth Peterson’s civil settlement with the Securities and Exchange Commission over alleged Foreign Corrupt Practices Act violations. In SEC v. Garth Peterson, the plaintiff agreed to pay $241,589 in disgorgement and give up his interest in an apartment building in China. He is to work with an SEC-appointed receiver. Peterson has entered a guilty plea to related criminal charges.

According to the Commission, while working at Morgan Stanley’s real estate investment and fund advisory business, Peterson secretly obtained real estate investments worth millions of dollars from the financial firm’s funds not just for himself but also for others, including the ex-chairman of a Chinese state-owned entity that could influence Morgan Stanley’s real estate business in that country. Peterson, the official, and a Canadian lawyer are accused of acquiring a direct interest in the Jin Lin Tiandi Serviced Apartments. The Commission has said that Peterson violated the FCPA’s anti-bribery and internal control provisions, as well as aided and abetted violations of the 1940 Investment Advisers Act’s antifraud provisions.

In other allegations of Foreign Corrupt Practices Act violations, Wal-Mart (WMT) is accused of not just committing them but also of covering up its alleged misconduct. An investigation into the accusations was opened up in April.

Wal-Mart executives are accused of concealing possible corruption (including bribery) by company executives and officials in Mexico, where the retail chain has been working to build its presence. Now, House Energy and Commerce Committee ranking member Henry Waxman (D-Calif.) and House Oversight Committee ranking member Elijah Cummings (D-Md.) want the store’s CEO Michael Duke to let a former general counsel cooperate with their investigation.

In a letter to Duke, the two lawmakers said that there are several hundred internal documents that seem to confirm early reports of the scandal. At the time of the alleged cover up, then-Wal-Mart general counsel Maritza Munich had tried to get company’s board to expand its probe into the accusations and put into place a tough anticorruption policy. However, when she left Wal-Mart in 2006, Albert Mora, the person who replaced her, chose not to investigate further. Now, Waxman and Cummings want Wal-Mart to allow Munich to get involved in the current probe. They also are once more putting forward an earlier request that the retail giant give them a “substantive briefing” about the specific bribery allegations related to Mexico.

Meantime, Sentry Global Securities and Red Sea Management principal Jonathan Curshen has been sentenced to two decades behind bars for his conviction in a pump and dump stock manipulation scheme. He was found guilty of wire fraud, conspiracy to commit securities fraud, mail fraud, and conspiracy to commit international money laundering. He also has to forfeit about $7.3 million.

Curshen, stock promoter Nathan Montgomery, and their co-conspirators are accused in taking part in coordinated trades while with issuing false statements to the press. According to the US Department of Justice, the alleged misconduct, which is said to have occurred in 2007, was committed to raise the price of C02 Technologies stock. While co-conspirators “pumped,” Curshen and others “dumped” by selling the shares through his two Costa Rica brokerage companies. The shares then virtually lost all their value.

SEC v. Garth Peterson

Foreign Corrupt Practices Act, US DOJ
Read the letter to lawmakers’ Wal-Mart CEO Duke, BNA, (PDF)

CO2 Tech’s Curshen receives 20 years in jail, Stockwatch, May 14, 2012


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UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam, Stockbroker Fraud Blog, May 11, 2012

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