Tuesday, October 31, 2017

SEC News - Fraud, Investment Scam, and a Million Dollar Award

Former Private Equity Firm Partner Charged With Secretly Billing Clients for His Vacations and Salon Visits
A former senior partner at Apollo Management L.P. has been charged with defrauding his fund clients by secretly billing them for approximately $290,000 in personal expenditures, including his family vacations, visits to a hair salon, and purchases of designer clothing and high-end elec

Rio Tinto, Former Top Executives Charged With Fraud
Mining company Rio Tinto and two former top executives have been charged with fraud for inflating the value of coal assets acquired for $3.7 billion and sold a few years later for $50 million.

SEC Announces Whistleblower Award of More Than a Million Dollars
A whistleblower has earned an award of more than $1 million for providing the SEC with new information and substantial corroborating documentation of a securities law violation by a registered entity that impacted retail customers.

Lawyers Charged With Assisting a Microcap Fraud Scheme
The SEC charged two lawyers it alleges helped facilitate a microcap fraud scheme involving undisclosed “blank check” companies secretly bound for reverse mergers.

SEC Files Charges in Snack Company Investment Scam
Three individuals defrauded investors in a company that falsely claimed to be developing a caffeinated chocolate snack and nearing an acquisition by Monster Energy or Coca-Cola Co.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Monday, October 30, 2017

UBS Ordered to Pay Florida Broker $3 Million for Defamation - AdvisorHub

The unlawful terminations of brokers, and then U-5 defamation, has been with us for decades. FINRA's decision to place unfounded, unproven and unsworn allegations on its website has only made matters worse.

UBS is probably one of the worse offenders, but that may be changing. An arbitration panel has ordered UBS to pay a former top producer in Florida $3 million for defamation as a result of its attempts to keep his clients after he left the company. The firms do this far too often. They trump up a reason to fire a broker, hold is U-5 to delay his registration at a new firm, and have the entire branch office call his clients the second he leaves the office.

Then to make sure the deal is done, the firm files a dirty U-5 which not only delays his registration at a new firm, but causes clients, and new employers, to look elsewhere.

The UBS award is reported to be one of the largest related solely to defamation and hopefully sends a message to these broker-dealers. Unfortunately in the case of UBS, it is not even a drop in the bucket.

UBS Ordered to Pay Florida Broker $3 Million for Defamation 

Tuesday, October 24, 2017

How Long Does an SEC Investigation Take?

One of the first questions my clients ask when faced with a subpoena from the SEC is how long is this going to take? While I hate to give the typical lawyer answer, that answer is, "it depends."

It depends on the case. Investigations where the SEC believes there is an ongoing harm can be in court in a matter of days. In fact, some investigations move to court before the target is even aware of the investigation.

But that is rare, and it is hard to say how long an investigation takes. All SEC investigations are conducted privately. Investigators attempt to obtain facts and evidence, first through informal inquiries, then by interviewing witnesses, examining brokerage records, and reviewing trading data.

There is a statutory requirement that the SEC is required to bring an action within 5 years

28 U.S.C. § 2462 states that “[e]xcept as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.” 

However, this is subject to interpretation, the most significant of which is "when the claim first accrued."

Using 5 years from the last date of an alleged violation is not very helpful to someone who is the subject of a subpoena. However, investigations are completed much earlier than that.

Investigations begin with a Formal Order of Investigation, which, among other things, allows the Staff to subpoena witnesses to testify and produce documents.

It is not until that process is completed that the investigation is "finished." At that time a decision is made to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial, and in others, the matter is simply dropped.

If there is a decision to charge someone, the Staff will typically send a Wells Notice to that individual or entity, notifying them that the Staff intends to file proceedings. However, when the SEC decides not to file a proceeding, there are limits on who the Staff is required to notify.

Specifically,  the Staff must notify anyone who:

  •  is identified in the caption of the formal order; 
  • submitted or was solicited to submit a Wells submission; or 
  • to the staff’s knowledge, reasonably believes that the staff was considering recommending an enforcement action against them.

Unfortunately, witnesses who have received subpoenas often never hear back from the SEC.

Monday, October 23, 2017

FINRA Fines on Pace to Drop 73% in 2017

FINRA appears to be softening its enforcement actions in 2017, as it’s on pace to deliver only a fraction of the fines it reported last year. During the first half of 2017, FINRA imposed $23.4 million in fines, compared to $79.4 million a year earlier, according to law firm Eversheds Sutherland.

If FINRA continues to assess fines in 2017 at the current rate, the year-end fines would total approximately $47 million, which would represent a 73% decrease from the total fines reported in 2016, and the lowest total since 2010, when FINRA ordered $42 million in fines."

FINRA Fines on Pace to Drop 73% in 2017

Wednesday, October 18, 2017

SEC Announces 2017 Government-Business Forum to Be Held at University of Texas at Austin

The Securities and Exchange Commission today announced it is partnering with the Herb Kelleher Center for Entrepreneurship, Growth, and Renewal at the McCombs School of Business at The University of Texas at Austin to host the SEC’s annual Government-Business Forum on Small Business Capital Formation on November 30.  This annual forum provides a platform to highlight additional measures to improve small business capital formation and address whether unnecessary, duplicative, or outdated regulations can be eliminated or reduced.

“The annual Government-Business Forum on Small Business Capital Formation provides the opportunity to hear directly from small businesses about their experiences interacting with investors and our regulatory system in a very important segment of our capital markets,” said Chairman Jay Clayton. “As a hub for innovation, Austin is a fitting place for this discussion. I look forward to the forum’s recommendations and will carefully consider them as we work to fulfill the SEC’s mission.”

The morning session will feature a panel discussion exploring how capital formation options are working for small businesses, including small businesses in Texas.  Participants will then work in groups to formulate specific policy recommendations.  Information on the panel participants and the full agenda will be announced in November and available on the forum webpage.

The forum will begin at 9 a.m. Central Time and will be open to the public. It will be held in the AT&T Executive Education and Conference Center on the campus of The University of Texas at Austin.  The opening remarks and panel discussion will be webcast live.  The breakout group sessions will not be webcast but will be accessible by teleconference for those not attending in person.  Anyone wishing to participate in a breakout group either in person or by teleconference must register online by November 27.

The online registration will soon be available on the forum webpage.

Members of the public are invited to suggest recommendations or topics to be discussed at the forum by calling the SEC’s Office of Small Business Policy at (202) 551-3460.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Tuesday, October 17, 2017

Rio Tinto, Former Top Executives Charged With Fraud

The Securities and Exchange Commission today charged mining company Rio Tinto and two former top executives with fraud for inflating the value of coal assets acquired for $3.7 billion and sold a few years later for $50 million.

The SEC’s complaint, which was filed in federal court in Manhattan, alleges that Rio Tinto, its former CEO Thomas Albanese, and its former CFO Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets.  Instead, as the project began to suffer one setback after another resulting in the rapid decline of the value of the coal assets, they sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto’s Board of Directors, Audit Committee, independent auditors, and investors.

“As alleged in our complaint, Rio Tinto’s top executives allegedly breached their disclosure obligations and corporate duties by hiding from their board, auditor, and investors the crucial fact that a multi-billion dollar transaction was a failure,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch.  They tried to save their own careers at the expense of investors by hiding the truth,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Based on the complaint’s allegations, Rio Tinto plc, Rio Tinto Limited, Albanese, and Elliott are charged with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws.  The SEC seeks permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants, and seeks to bar Albanese and Elliott from serving as public company officers or directors.

According to the SEC’s complaint, in 2011, Rio Tinto acquired coal assets in Mozambique shortly after disclosing huge losses associated with its previous large-scale acquisition of Alcan.  Both acquisitions took place under Albanese’s leadership.  The second acquisition was also unsuccessful as it was based on the incorrect assumption that Rio Tinto could inexpensively mine, transport, and sell large quantities of high-quality coal, chiefly using barges for shipping.  The SEC’s complaint alleges that the project suffered setbacks almost immediately, as Rio Tinto, Albanese, and Elliott learned that there was less coal and of lower quality than expected, and that Mozambique had rejected its barge application. The complaint alleges that the drop in quantity and quality of coal, coupled with the lack of infrastructure to transport it, significantly eroded the value of the acquisition.

The complaint alleges that after already impairing Alcan twice, Rio Tinto, Albanese, and Elliott knew that publicly disclosing its second failure and rapidly declining value would call into question their ability to pursue the core of Rio Tinto’s business model to identify and develop long-term, low-cost, and highly-profitable mining assets.  Instead, they concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of U.S. debt offerings.  Rio Tinto raised $5.5 billion from U.S. investors, approximately $3 billion of which was raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary was likely worth negative $680 million.  The complaint alleges Albanese then repeated and reinforced the false positive outlook for the project in public statements.

The alleged fraud continued until January 2013, when an executive in Rio Tinto’s Technology & Innovation Group discovered that the coal assets were being carried at an inflated value on Rio Tinto’s financial statements.  After an internal review allegedly triggered by the executive’s report to Rio Tinto’s Chairman, Rio Tinto announced that Albanese had resigned and the company reduced the value of the coal assets by more than $3 billion, or more than 80 percent.  After a second reduction, Rio Tinto sold the Mozambique subsidiary for $50 million, billions of dollars below the acquisition price.

SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Friday, October 13, 2017

State-level fines and penalties hit 5-year high

State-level fines and penalties hit 5-year high

"The SEC has begun to work with the Department of Labor on a fiduciary rule proposal to harmonize the standards of conduct for advisors and broker-dealers, Jay Clayton, the agency's chairman, told members of the House Financial Services Committee.

Clayton's comments suggest that after months of collecting and reviewing comments on what a uniform fiduciary standard should look like, the commission is now moving forward on shaping a rule, marking the next stage in what figures to be a contentious process."

More Morgan Stanley Questionable Terminations

 Our readers may have missed this article, since the headline does not point out the problem. AdvisorHub has an article regarding a shakeup in the Morgan Stanley offices in Virginia. Apparently there is another shift in Branch Office Managers.

However, the article also references that the broker was discharged for “management loss of confidence related to sales practice concerns including delays in converting accounts to fee-based platforms.”

What? Not moving your accounts to fee based accounts quickly enough is grounds for termination?

Unfortunately, we are seeing more and more of this lately. We understand the benefits of fee based accounts, FOR SOME CLIENTS. In fact, we have been advising clients for years to move to a fee based model.

However, there are numerous types of accounts that do not benefit from that model - in fact, any account that does not trade on a regular basis probably doesn't benefit from the model, unless the broker is providing ongoing advice which would be paid for by the fee based model.

But that is not the point. Morgan Stanley is using the move to fee based portfolios as a reason for termination, and it is not just the broker in this article. "Management loss of confidence" is the new termination reason, and it is simply not enough to support a termination.

Of course, the firms don't care, they want assets, and arbitration panels do not take this scam seriously. Firms are doing this to steal assets, plain and simple. 

This is something of an industry wide issue, and always has been, at least with the wirehouses. A BOM actively recruits brokers from another firm, promises them all sorts of things, and claims that they can't put it in writing. The brokers rely on the BOM's promises, transition to the firm, and start moving their accounts.

Then the BOM is replaced, and the new BOM claims no knowledge of the oral promises, leaving the broker with no remedy.

The solution of course is to get it in writing, or don't move, but that doesn't happen.

Now we are seeing a variation. Management has a "loss of confidence" in something. Moving accounts to fee based, explaining charges, whatever. Is the next termination reason management's loss of confidence in a broker's ability to write neatly?

Senior Morgan Stanley Broker in Virginia Leaves Amid Branch Manager Shuffle - AdvisorHub: