Investor Lawyers Blog

NASAA Releases Investment Adviser Best Practices To Improve Compliance

Published on: October 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association has updated its best practices for investment advisers. The best practices were developed after a series of exams revealed several problem areas.

458 state-level investment advisers took part in examinations between January and May 2009. Some 1,887 deficiencies in 13 compliance areas, including the areas of books and records, registration, supervision, unethical business practices, and financials, were found.

NASAA President Denise Voigt Crawford says the best practices should help strengthen internal compliance programs. This will hopefully decrease the chances of regulatory violations (that can lead to securities fraud) while helping investment advisers provide better client services and meet compliance challenges.

NASAA Best Practices Recommendations for Compliance Procedures and Practices:

• Update contracts.
• Revise and update the disclosure brochure and form ADV every year.
• Back up information that is stored electronically.
• Ensure records are protected.
• Prepare and maintain financial records, other mandatory records, and client profiles.
• Develop a manual of relevant, written compliance and supervisory procedures.
• Make sure financials are always accurate.
• Each year, prepare and send out a current privacy policy.
• If necessary, maintain surety bond.
• If applicable, put into place the proper custody safeguards.
• Ensure that all advertisements are accurate.
• Look at disclosures, solicitor agreements, and delivery procedures.

At this time, state regulators are in charge of overseeing investment advisers who manage under $25 million. The Securities and Exchange Commission supervises investment advisers who manage over $25 million. NASAA is seeking to increase state oversight to include investment managers who oversee assets of up to $100 million. The Financial Industry Regulatory Authority also wants to expand its investment adviser authority.

Related Web Resources:
State inspectors find fewer problems among investment advisers, Investment News, September 29, 2009
NASAA Outlines Best Practices For Investment Advisers, NASAA.org Continue Reading ›

SEC Office of Administrative Services’ Office of Acquisitions Has Shortfalls that Could Impede Operation, Says Audit

Published on: October 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to an external audit of the SEC Office of Administrative Services’ Office of Acquisitions (OA), there exists “significant risk areas” that could affect operation and lead to improper accounting of federal resources. OA is responsible for the SEC’s contracting and procurement functions.

Shortfalls revealed included:

• Failure to submit accurate information in the Federal Procurement Data System • Failure to keep accurate information and records about contracting and procurement • Failure to engage in contract close-out procedures that are in accordance with Federal Acquisition Regulation and SEC regulations.
• Failure to properly manage and supervise personnel training and contract activities at regional offices
Per the report, shortfalls appear to have occurred due to a number of issues, including insufficient data for properly managing operations, poorly trained employees, and operational procedures that are not consistent.

Also, after checking the SEC’s Office of Financial Management records, the Audit found $13 million in contracts that were not identified in OA’s consolidated spreadsheet. In certain cases, OA had marked certain contracts as closed when OFM still noted them as open.

Following the audit, 10 recommendations were issued, including establishing new internal review processes, revising recordkeeping procedures, modifying operational processes, and coming up with a training plan for contracting obligations and personnel performing procurement duties.

SEC Inspector General H. David Kotz also issued a separate audit which found problems within the SEC’s Office of Freedom of Information. His audit found that the SEC had compliance issues with the Freedom of Information Act, which outlines procedures that have to by abided by when members of the public ask the federal agency for information.

Deficiencies included a lack of written procedures and policies for handling such requests, improper or inadequate procedures for disclosing documents that are not in compliance, failing to properly manage certain information, discriminating against certain entities asking for data, the improper processing of certain request, and failure to comply by rules requiring that an information request receives a response within 20 days.

Related Web Resources:
Watchdog:Flaws In SEC Acquisitions,Freedom Of Information Offices, Dow Jones, September 25, 2009
SEC Office of Administrative Services’ Office of Acquisitions

SEC FOIA/PA Program, The Freedom of Information & Privacy Act Office, SEC.gov Continue Reading ›

Make Credit Rating Agencies Collectively Liable for Inaccuracies, Proposes Lawmaker

Published on: October 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

House Financial Services subcommittee chair Paul Kanjorski introduced a new draft bill that proposes making credit ratings agencies collectively liable for inaccuracies. The agencies received a lot of heat when they failed to properly warn investors about the risks associated with subprime mortgage securities before the market fell.

One problem with the current system is that the firms issuing the securities are the ones paying the credit ratings agencies for rating the securities. Kanjorski’s draft bill lets investors pursue lawsuits against credit rating agencies that recklessly or intentionally did not examine key data to determine the ratings. He says that collective liability could compel the ratings agencies to provide reliable, quality ratings while providing the proper incentive for them to monitor each other.

Critics of the plan, including Republicans and industry executives, warned that collective liability could result in a slew of expensive complaints while decreasing competition even more in an industry that Fitch Ratings, Moody’s Investors Services, and Standard and Poor’s already dominate.

Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term

Published on: October 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A judge has ordered a former Merrill Lynch employee, San Antonio stockbroker Bruce E. Hammonds, to serve almost five years in prison and three years supervised release for Texas securities fraud. Bruce E. Hammonds also must pay $1.1 million in restitution to the Merrill Lynch investors he defrauded and almost $60,000 to two clients that he continued to defraud after the broker-dealer fired him in June 2008.

Hammonds reportedly did not deny the alleged fraud when Merrill Lynch confronted him about his activities. The broker-dealer has paid the investment fraud victims back in full.

According to the criminal complaint affidavit, Hammonds opened a working capital account under the name B & J Partnership.He was supposed to register the account in an internal monitoring system, which he never did. Instead of placing investors’ funds in a Merrill Lynch fund, he deposited $1.4 million of their money in his working capital account. He provided clients with charts demonstrating the performance of the B&J Partnership investment fund even though no such fund existed.

Hammonds pleaded guilty to federal securities fraud charges earlier this year after an investigation found that between August 2006 and October 2008, Hammonds didn’t invest clients’ funds in stocks and hedge funds. Instead, he used the money for personal purposes, including an alleged house-flipping business. He gave back $486,000 to clients so it would appear as if they had made money off their investments.

Related Web Resources:
Judge sends ex-stockbroker to jail for bilking investors, Business Journal, October 2, 2009
Stockbroker sent to prison for $1.4 million scheme, My San Antonio, October 3, 2009 Continue Reading ›

Colorado Sues Stifel, Nicolaus for Misrepresenting Auction-Rate Securities to Investors

Published on: October 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Colorado Securities Division is suing Stifel, Nicolaus & Co. for securities fraud. State regulators are accusing the broker-dealer of making false assurances to investors about auction-rate securities.

In its Colorado securities fraud complaint, the securities division accused Stifel Nifel, Nicolaus of violating the Colorado Securities Act by allowing investors to think that their ARS-investments would always be liquid, failing to properly supervise sales team members, and making unsuitable investment recommendations to clients.

The Division claims that Stifel, in the role of underwriter, knew that there were liquidity risks linked to ARS but never let its sales force know about them. Stifel brokers allegedly compared ARS to money market funds on a regular basis and sold them as if they were appropriate for cash management purposes. Investors were told they would always be able to access their funds as if it were cash. However, when the ARS market collapsed in February 2008, the Colorado investors that purchased auction-rate securities were unable to get their funds or sell their bonds.

Indiana Accuses Stifel Nicolaus & Co. of Auction Rate Securities Fraud

Published on: October 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Indiana Secretary of State’s Office filed an administrative complaint today accusing Stifel Nicolaus & Co.’s local office of securities fraud, failing to properly train members of its sales team, and failing to disclose risks associated with purchasing auction-rate securities. As a result, some 141 Hoosiers who had invested $54.0 million sustained losses when the ARS market fell apart last year and their securities were frozen.

92 of the ARS investors who were affected were Jeffrey Cohen’s clients. Cohen is the local Stifel office’s managing director. His clients had invested $45 million.

For violating the Indiana Securities Act, the broker-dealer could be ordered to pay a $10,000 fine/violation, as well as restitution to the securities fraud victims. Other states, including Colorado and Missouri, have made similar charges against Stifel Nicolaus.

Colorado’s securities regulator also filed its auction-rate securities complaint against Stifel Nicolaus today alleging that the broker-dealer failed to fully inform local investors about ARS risks. The securities fraud lawsuit also accuses the broker-dealer of violating the Colorado Securities Act, misrepresenting ARS as short-term investments that were liquid, and providing clients with unsuitable recommendations.

Missouri’s complaint, filed in March by Secretary of State Robin Carnahan, claims that over 1,200 investors suffered losses when ARS worth $180 million were frozen.

Auction-Rate Securities
Many investors throughout the US were shocked to discover that the ARS they had purchased were not, as broker-dealers had told them, investments that were liquid like cash. Our stockbroker fraud law firm continues to work diligently with many ARS clients to recover their investments.

Related Web Resources:
Local Stifel office accused of securities fraud, IBJ, October 1, 2009
Colorado charges Stifel unit with ARS sales fraud, Reuters, October 1, 2009
Continue Reading ›

Texas Securities Fraud: Investment Firm Employee Accused of Making $8.6 Million from Dell Insider Trading

Published on: September 29, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging trader Reza Saleh with Texas securities fraud. The agency is accusing the Perot Systems employee of buying call options contracts just two weeks before Dell announced it was acquiring the services company. The SEC says that as a result of insider trading, Saleh made $8.6 million in illegal profits.

Call options allow a buyer to purchase stock at a certain price on a specific day in the future. Right after Dell announced the tender offer on September 21, Reza sold his call options. By this time, Perot Systems’s stock price had gone up by about 65%.

Soon after, the Options Regulatory Surveillance Authority identified Saleh as a suspicious trader. He also allegedly told a Perot Systems director that he bought the options because he knew Dell was going to make the announcement.

Filed in federal court in Dallas, the SEC complaint alleges that Saleh bought 9,332 Perot Systems call options contracts between September 4 and 18, 2009. The call options contracts would expire in October 2009 and January 2010.

The SEC is accusing Saleh of violating the Securities Exchange Act of 1934’s anti-fraud provisions. The SEC wants to place an emergency freeze on Saleh’s assets. It also is seeking a preliminary injunction and a final judgment enjoining the trader from violating relevant provisions of federal securities laws in the future. The agency wants Saleh to pay financial penalties in addition to disgorgement of ill-gotten gains.

Dell announced it was purchasing Perot Systems for $3.9 billion or $30/share in cash. Dell’s tender offer is asking for outstanding Perot Class A common shares. The deal will likely close by the end of January 2010.

Related Web Resources:
SEC: Insider trading charges in Dell deal, CNN, September 24, 2009
SEC Charges Perot Company Employee in $8.6 Million Insider Trading Scheme, SEC.gov, September 23, 2009
Securities Exchange Act of 1934
Continue Reading ›

UBS Securities, Citigroup Global Markets, and Deutsche Bank Securities Agree to FINRA Sanction Over Vonage IPO

Published on: September 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets, Deutsche Bank Securities, and UBS Securities have agreed to pay fines for Financial Industry Regulatory Authority sanctions over their handling of Vonage LLC stock’s initial public offering in 2006. FINRA says that the firms’ failure to adequately supervise communications with customers cost investors hundreds of thousands of dollars. By agreeing to settle, none of the broker-dealers are agreeing to or denying wrongdoing.

The three firms acted as the Vonage offering’s lead underwriters. A “directed share program” was included. Clients used accounts with the broker-dealers to purchase about 4.2 million shares.

An external company designed and administered a Web site for DSP participants that the firms’ clients used to communicate about the IPO. According to the SRO, however, inadequate supervision and the failure to follow procedures regarding outside sourcing and directed share programs resulted in the broker-dealers being unable to respond appropriately or take effective action when certain clients obtained misinformation about their orders.

By the time customers were finally notified that shares were allocated to them, the Vonage stock price had dropped significantly compared to the offering price. In addition to paying the higher price, investors sustained financial losses when the stocks were sold.

UBS, Citigroup, and Deutsche Bank have agreed to fines totaling $845,000. UBS will pay a $150,000 fine and a maximum of $118,000 to 26 clients who are potentially eligible. In addition to its $175,000 fine, Citigroup will pay 284 potentially eligible customers a maximum of $250,000. Deutsche Bank will pay 59 potentially eligible clients a maximum of $52,000, plus its $100,000. Customers are to be compensated the difference between Vonage stock’s price when clients found out they had been allocated shares and the $17/share IPO price that they paid.

Related Web Resources:
FINRA Fines Citigroup Global Markets, UBS and Deutsche Bank $425,000, Orders Customer Restitution for Supervisory Failures in Vonage IPO, FINRA, September 22, 2009
Citi, UBS, Deutsche Fined Over Vonage IPO
Continue Reading ›

Securitization of Life Insurance Settlements Might Lead to Next Financial Crisis, Say Lawmakers

Published on: September 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

House Financial Services capital markets subcommittee chairman Rep. Paul Kanjorski recently warned that unless “additional safeguards” are put in place, the growing securitization of life insurance settlements could lead to the next financial crisis. During a hearing on the issue, Kanjorski said regulators, Congress, and credit ratings agencies should have done a better job moderating the high demand for subprime mortgage backed securities. He says their failure to supervise contributed to the financial debacle.

Life settlements, also known as viaticals, are not securities, but they do fall under the purview of the Securities and Exchange Commission when they are pooled and put up for sale in the capital markets. They are, however, at this time not subject to a registration requirement and have been sold during private offerings. Because of this, the SEC only has limited authority over life settlements.

The agency has set up a task force to assess the issues involving life settlements. The task force will determine whether regulatory changes need to be made and if Congress should expand the SEC’s authority.

According to the SEC Division of Corporation’s associate director Paula Dubberly, life settlements investors need full disclosure so they can understand the risks that arise with the viaticals’ securitization. The task force will examine the “tension” between the insured’s privacy rights and providing investors with this type of disclosure.

Credit Suisse’s Life Finance Group global head Kurt Gearhart says that as only 35 states regulate life settlements, consumers are lacking protection in 15 states. National Association of Insurance Commissioners vice president Susan E. Voss, however, disagrees with Gearhart’s figures. He says there is some form of life settlement regulation in 45 states. Meantime, Life Partners Holdings Inc. chairman and chief executive officer Brian D. Pardo is calling for stronger federal regulation.

Related Web Resources:
AARP

Panel To Look At Life Settlement Securitization
Continue Reading ›

Regions Bank Settles SEC Charges Over Latin American Investment Fraud Scam

Published on: September 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Regions Bank has agreed to a $1 million fine to settle SEC allegations that it helped defraud some 14,000 investors. Most of the affected investors are based in Latin America.

According to the SEC, Regions Bank helped two unregistered broker-dealers, U.S. College Trust Corp. and U.S. Pension Trust Corp., commit securities fraud against Latin American investors.

Beginning October 2001, Regions Bank played the role of “trustee” to the broker-dealers’ investment plans. It continued to accept USPT clients until January 2008. The SEC contends that this affiliation with a US bank gave the securities fraud scheme an aura of “legitimacy” and became a big draw for Latin American investors.

The SEC says that by taking on the role of trustee, Regions Bank formed individual trust relationships with investors, processed client contributions, and bought mutual funds on their behalf.

Investor had the option of paying one lump sum or making yearly contributions. Investors were not notified until March 2006 that USPT deducted substantial chunks of investors’ contributions-up to 85% of initial contributions made by investors who took part in an annual plan and up to 18% of single contributions-and used the money to pay for commissions and other fees.

The SEC says that Regions Bank either knew or should have known about USPT’s deceptive sales practices. The Commission is accusing Regions Bank of dispatching representatives to Latin America to meet prospective investors and allowing USPT to use the bank’s name in marketing and promotional materials.

The $1 million penalty will be placed in a Fair Fund to compensate investment fraud victims. Regions bank has also agreed to a cease-and-desist order.

SEC charges Regions Bank for role in Latin American fraud scheme, Investment News, September 21, 2009
Read the SEC Complaint (PDF)
Continue Reading ›