Tuesday, August 26, 2014

Record Number of FINRA Enforcement Cases Expected

Last month we learned that FINRA Enforcement fines were up, and set to surpass last year's fines. If you need any more convincing that now is the time to insure that your policies and procedures are compliant, FINRA is saying that it is on pace to file “a record number of cases this year.”

According to FINRA the top compliance failures are in the areas of suitability, cybersecurity and anti-money laundering andFINRA continues to see a “significant” number of single broker malfeasances, including petty theft, dishonesty, forgery and failure to report on their U-4.

FINRA enforcement continues to have a strong caseload, with a record number of cases on the same pace this year as last,” Brad Bennett, FINRA’s chief of enforcement,

For more information - FINRA on Record Enforcement Pace in ’13, Enforcement Chief Says

--- 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 and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Monday, August 25, 2014

California-Based Telecommunications Equipment Firm and Two Former Executives Charged in Revenue Recognition Scheme

The SEC announced charges against a Newport Beach, Calif.-based telecommunications equipment company and two former executives accused of improperly recognizing as revenue more than a million dollars’ worth of inventory that was shipped to a Florida warehouse but not actually sold.
They’re also accused of defrauding an investor from whom they secured a $2 million loan for the company based on misstatements and omissions associated with the inventory shipments.

The SEC’s Enforcement Division alleges that AirTouch Communications Inc., the former president and CEO, and former CFO orchestrated a fraudulent revenue recognition scheme that violated Generally Accepted Accounting Principles (GAAP), which establish that revenue cannot be recognized unless it is “realized or realizable” and “earned.”  When AirTouch reported net revenues of a little more than $1.03 million in its quarterly report for the third quarter of 2012, it included approximately $1.24 million in inventory that had been shipped to a company in Florida that agreed to warehouse AirTouch’s products in anticipation of future sales.  AirTouch’s revenue recognition was improper because the Florida company had not purchased the inventory, and AirTouch had not sold the inventory to any of its customers.  AirTouch would have had zero revenue to report for the quarter if it had not recorded the shipments as purported revenue from the Florida company.
“[The two individuals] created a facade of sales activity in AirTouch’s quarterly report to falsely depict a healthy and growing company when in fact it was struggling without any positive revenue,” said Michele Layne, director of the SEC’s Los Angeles Regional Office.  “They also deceptively obtained financing from an investor based on a similar false portrayal of the company’s sales activity.”
Read more here.

Bank of America Admits Disclosure Failures to Settle SEC Charges

The SEC announced a settlement in which Bank of America admits that it failed to inform investors during the financial crisis about known uncertainties to future income from its exposure to repurchase claims on mortgage loans.
Bank of America also is resolving securities fraud charges that the SEC filed last year related to a residential mortgage-backed securities (RMBS) offering.

Bank of America has agreed to settle the two cases by paying $245 million as part of a major global settlement announced today by the U.S. Department of Justice in which Bank of America will pay $16.65 billion to resolve various investigations involving violations of laws regulated by other federal agencies.
Read more here.

Friday, August 22, 2014

SEC Charges Former Bank Executive and Friend With Insider Trading Ahead of Acquisition

The SEC charged a former bank executive in Massachusetts and his friend with insider trading in advance of the bank’s acquisition of another financial institution.
The SEC alleges that the former executive, then a senior vice president at Eastern Bank, learned through his job responsibilities that his employer was planning to acquire Wainwright Bank & Trust Company.  He tipped his friend, a fellow golfer with whom he socialized at a local country club.  In the two weeks preceding a public announcement about the planned acquisition, the friend sold his shares in other stocks to accumulate funds he used to purchase Wainwright securities.  He had never previously purchased Wainwright stock.  After the public announcement of the acquisition caused Wainwright’s stock price to increase nearly 100 percent, the friend sold all of his shares during the next few months for nearly $300,000 in illicit profits.

According to the SEC’s complaint filed in federal court in Boston, regulators began requesting information from Eastern Bank and others about trading in Wainwright stock a few months after the trades occurred, and the former executive quit his job at Eastern Bank rather than respond to such inquiries.  The two men each were subpoenaed to testify in the SEC’s investigation but asserted their Fifth Amendment privileges against self-incrimination for every question asked of them, including whether they know one another.
For more information, click here.

Thursday, August 21, 2014

Securities Fraud Cases Can Be Criminal Cases

Defending a SEC securities fraud case is not simply about the civil charges and penalties. Most securities law violations are also criminal violations, and violators can be charged both civilly and criminally.

As securities litigators, we are aware of the issue, and sometimes the cases are not brought together. When resolving an SEC case, or even a FINRA enforcement case, we are always mindful of the potential for a criminal case, or  an enforcement proceeding from a state agency.

In the usual case, if a criminal case is going to be filed, it is filed at or about the same time as the civil charges. Or, there is at least notice that a prosecutor is interested in the case. However, not always.

Case in point -  as a result of the investigation of Bernie Madoff's massive fraud, the SEC found that a former deputy dean of MIT's business school and his son were running a Ponzi scheme of their own. The father-son team settled fraud charges with the SEC in 2012 for $4.8 million and a permanent bar.

Last week, over two years later,  federal prosecutors announced that the duo are going to plead guilty to criminal charges. According to CNN they face between two and five years in prison. They could also be forced to pay as much as $290 million in fines plus payments to victims.

According to the government the duo falsely told clients that their hedge fund was delivering annual returns between 16% and 23%, enticing investors to entrust more than $500 million with them. They also falsely claimed that the money would be invested using a complex trading model based on research they conducted at MIT. In fact, they placed investor money with Bernie Madoff and the Petters Group Worldwide, both of which were later found to be Ponzi schemes.

Nearly $5 million in fines with the SEC, and then, two years later, up to 5 years in jail plus $290,000,000 in fines, PLUS repayment to victims.

Most of these schemes do not start out at schemes - they become schemes when the manager, trader, owner suffers a loss and thinks he can trade it way out of it. Regardless of how the scheme evolves, or what the oringinal good motives were, securities fraud cases carry significant civil and criminal consequences, and  require representation by securities law attorneys, with the knowledge and skill that only decades of experience can provide.

One side note - I continue to be amazed at what defendants say in emails.  Sending emails can sometimes be worse than a phone tap. In this case, the government alleges that emails between the defendants included these two gems:

We have mislead [sic] a lot of people with a range of statements that were incorrect simply to increase our income. . .
We are certainly sharing equally in this dad … Lots of our problems were caused by my good intentions but very poor actions when it came to true honesty.

 If you have an issue, if you need to respond to a subpoena or "voluntary" request from the SEC, call us.

And don't send emails to your co-workers or friends discussing the case.

Related Articles:

Ex-MIT dean and son plead guilty to hedge fund scam - Aug. 12, 2014

SEC Charges Father-and-Son Hedge Fund Managers April 20, 2012

If you are the victim of a Ponzi scheme or the subject of an SEC investigation, call our office. Our attorneys include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, We represent investors, financial professionals, and investment firms. For more information contact Mark Astarita at 212-509-6544 or email us.

SEC Announces Charges in Houston-Based Scheme Touting Technology to End Fracking

A Houston-based penny stock company and four individuals are being charged after the SEC discovered they were behind a pump-and-dump scheme that misled investors to believe the company was on the brink of developing revolutionary technology to enable environmentally friendly oil-and-gas production.
The SEC alleges that one individual involved orchestrated the scheme by creating a shell company called Chimera Energy, secretly obtaining control of all shares issued in an initial public offering (IPO) in late 2011, and launching an aggressive promotional campaign midway through 2012 to hype the stock to investors.  Chimera Energy issued around three dozen press releases in a two-month period about its supposed licensing and development of technology to extract shale oil without the perceived environmental impact of hydraulic fracturing known as fracking.  However, Chimera Energy did not actually license or even possess the technology it touted and had not achieved the claimed results in commercially developing it.  While the stock was being pumped by the false claims, entities controlled by the individual dumped more than 6 million shares on the public markets for illicit proceeds of more than $4.5 million.

The SEC suspended trading in Chimera Energy stock in 2012 and prevented the individual and his associates from dumping additional shares or misleading new investors into their scheme.

Wednesday, August 20, 2014

SEC Continues to Permit Reps to Sell their Company's Stock to Clients

Dually registered investment advisory and broker-dealer firms will be able to continue selling stock from their own accounts to some clients, the Securities and Exchange Commission said.

United States Securities and Exchange Commission

The SEC has announced it plans to extend by another two years, until December 31, 2016, this ability for dually registered firms with fee-based accounts, a posting on the regulator’s Division of Investment Management web site Monday revealed.

The permission only applies to accounts where the clients have the ability to accept or reject proposed sales and only under some situations.

This is the fourth time the regulator has moved to extend the permission since it was granted in 2007.

More details are available at SEC To Allow Dually Registered Firms To Continue Stock-Sale Practice.
The attorneys at Sallah Astarita & Cox, LLC include former SEC Enforcement attorneys and prosecutors and decades of experience representing all participants in the securities markets. To see if we can help you with your securities issue, call 212-509-6544.

SEC Charges N.Y.-Based Brokerage Firm With Overcharging Customers in $18 Million Scheme

The SEC is charging New York-based brokerage firm Linkbrokers Derivatives LLC with unlawfully taking secret profits of more than $18 million from customers by adding hidden markups and markdowns to their trades.
According to the SEC’s order instituting administrative proceedings, certain representatives on Linkbrokers’ cash equity desk defrauded customers by purporting to charge them very low commission fees, but in reality extracting fees that in some cases were more than 1,000 percent greater than represented.  These brokers hid the true size of the fees they were collecting by misrepresenting the price at which they had bought or sold securities on behalf of their customers.  The scheme was difficult for customers to detect because the brokers charged the markups and markdowns during times of market volatility in order to conceal the false prices they were reporting to customers.

Linkbrokers has agreed to pay $14 million to settle the SEC’s charges. The SEC previously charged four former brokers on the cash equities desk at Linkbrokers, and three of them later agreed to settle those charges by consenting to judgments ordering more than $4 million in disgorgement plus interest.
Read more here.

Tuesday, August 19, 2014

Avoiding Marijuana Stock Scams

It seems that whenever something new comes along, there are investors willing to jump on a perceived opportunity to profit from the next new thing. It seems that medical marijuana is that next new thing.

Medical marijuana Acapulco goldWe wrote about marijuana stock scams last year, and just last week the SEC filed charges against promoters who the Staff believes were "pumping and dumping" stocks of companies in the medical marijuana business. The SEC charged four promoters with manipulating marijuana-related stocks and the stocks of other tiny companies through a scheme the SEC described as "a carefully planned operation."

According to the SEC, prices of a number of penny stocks were manipulated using illegal trading methods combined with aggressive promotional campaigns designed to pump up the price of the stocks. When the stock prices rose, the promoters "dumped" their shares, leaving investors with shares of virtually worthless stock.

FINRA has now released an article designed to help investors and advisers from becoming a victim of such schemes. For the details, see FINRA's Ways to Spot Potential Marijuana Stock Scams.

The attorneys at Sallah Astarita & Cox, LLC include former SEC Enforcement attorneys and prosecutors and decades of experience representing all participants in the securities markets. To see if we can help you with your securities issue, call 212-509-6544.

Considering a Direct Private Placement?

As the markets and the economy recovers, we start to see more requests for assistance in capital raises, either for investments in hedge funds, private equity groups, or in issuers through private placements.

On occasion, we are contacted by business people who are interested in raising capital, but who want to do so without paying a fee to a brokerage firm, and who believe they can raise sufficient funds on their own, using their existing contacts.

The securities laws do in fact permit such an offering - a properly documented and structured Regulation D offering can be conducted by the officers and directors of the issuer. The question is not whether it is permitted, but rather, should it be done.

The process can be time consuming, and loaded with potential pitfalls and securities law violations. While the SEC has tried to make the capital raising process easier for small businesses, there has not been much success in practice. The simple fact is that business owners are business people, not securities sales people. They do not have the knowledge or business acumen to enable them to successfully, and legally, sell securities.

Additional issues arise in the structure of the offering. Many entrepreneurs learn that they were unable to raise sufficient capital, that they spent far too much time on the offering rather than operating their business, and, adding insult to injury, that the amount that they intended to raise was not enough to address their business needs.

For more detail on those issues, Professor William K. Sjostrom has published an excellent paper on the topic, Direct Private Placements, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2442522.

Penny wise, pound foolish? If you are looking to take on investors, hire a securities lawyer to assist you in the process, and retain an experienced broker-dealer to conduct the offering for you. You can concentrate on running your company, and your professionals can run your offering.

Related Articles

Introduction to Private Placements

Questions? Comments? Considering a private placement? Call me to see how we can help - 212-509-6544 or send me an email - mja@sallahlaw.com

SEC Charges Atlanta-Based Accountant With Insider Trading on Confidential Information From Client

The Securities and Exchange Commission announced charges against an accounting firm partner in Atlanta for insider trading in the stock of a restaurant company based on confidential information he learned from a client on the board of directors who came to him for tax advice in advance of a tender offer announcement.

SEC investigators also identified and charged three other traders who traded illegally on tips from the accountant.  The traders were discovered by comparing trading records from stock exchanges with names on the accountant’s client list.
The insider trading activity garnered illegal profits of more than $160,000. The four individuals involved have agreed to pay a combined total of more than $420,000 to settle the SEC’s charges.

Monday, August 18, 2014

SEC Charges Kansas for Understating Municipal Bond Exposure to Unfunded Pension Liability

The SEC announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors.  According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.
Shortly after its nationwide review of municipal bond disclosures began, the SEC brought its first-ever enforcement action against a state when it sanctioned New Jersey for failing to disclose to investors that it was underfunding the state’s two largest pension plans.  Around the same time, the SEC began questioning the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.  As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities.  Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures.

The SEC also charged Illinois last year for its misleading pension disclosures, and the state similarly implemented a number of remedial actions.
Read more here.