Saturday, April 30, 2016

Facebook Crushes Revenue Projections as Mobile Ad Sales Surge

Facebook's quarterly revenue rose more than 50 percent, beating Wall Street expectations as its wildly popular mobile app and a push into live video lured new advertisers and encouraged existing ones to boost spending.

The company's shares rose 9.5 percent in after-hours trading on Wednesday to $118.39, setting it on track to open at a new high on Thursday, at nearly triple its initial public offering four years ago.

Facebook also announced it will create a new class of non-voting shares in a move aimed at letting Chief Executive Officer Mark Zuckerberg give away his wealth without relinquishing control of the social media juggernaut he founded.

The company plans to create a new class of non-voting shares, which would be given as a dividend to existing shareholders. That would allow Zuckerberg, who wants to give away 99 percent of his wealth, to sell non-voting stock to fund philanthropy and keep the voting stock that assures his control.

Some 1.65 billion people used Facebook monthly as of March 31, up from 1.44 billion a year earlier. Zuckerberg said users were spending more than 50 minutes per day on Facebook, Instagram and Messenger, a huge amount of time given the millions of apps available to users.


Facebook revenue smashes expectations as mobile ad sales surge:

FINRA Reports on Effective Practices for Digital Investment Advice

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FINRA has issued a press release stating that financial services "firms' offerings of digital investment advice need sound governance and supervision, including effective means of overseeing suitability of recommendations, conflicts of interest, customer risk profiles and portfolio rebalancing."

The report also outlines lessons for investors and says training and education are crucial for financial professionals who use digital investment advice tools.

FINRA issued the report to share effective practices related to digital investment advice services and remind member firms of their obligations under FINRA rules. The report notes that global spending on digital wealth management services is expected to increase significantly."



FINRA Reports on Effective Practices for Digital Investment Advice 

Friday, April 29, 2016

SEC: Accounting Firm, Partner Conducted Deficient Surprise Exams

Seal of the U.S. Securities and Exchange Commi...
The Securities and Exchange Commission today announced that an accounting firm and one of its partners who conducted surprise examinations of client assets at an investment adviser have agreed to settle charges that they performed inadequately as the adviser’s president secretly stole money from accounts belonging to professional athletes.
The SEC’s order finds that Santos, Postal & Co. P.C. and Joseph A. Scolaro conducted deficient surprise custody examinations of SFX Financial Advisory Management Enterprises and did not adequately consider fraud risk factors.  They twice filed paperwork with the SEC that contained untrue statements.  In one instance they stated that they complied with certain procedures to verify client assets when in fact they never did.  In the second instance they stated that client assets were held with a qualified custodian when in fact they were not.
“Surprise custody exams of investment advisers serve a critical role in protecting against the misuse of client assets and uncovering such misuse when it occurs,” said Anthony S. Kelly, Chief of the SEC Enforcement Division’s Asset Management Unit.  “Santos, Postal & Co. failed to confirm with SFX’s clients the contributions made to and from their accounts and then made untrue statements about its custody exams.”
The SEC previously announced charges against SFX’s president Brian J. Ourand, who was later found by an administrative law judge to have misappropriated funds from client accounts in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.  In the initial decision issued last month, Ourand was ordered to pay disgorgement of $671,367 plus prejudgment interest and a $300,000 penalty, and he was barred from the securities industry.  SFX and its CCO separately agreed to settlements.
Santos, Postal & Co. and Scolaro consented to the SEC’s order finding that they violated Section 207 of the Advisers Act and engaged in improper professional conduct pursuant to Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice.  Without admitting or denying the findings, they agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Santos, Postal & Co. to apply for reinstatement after one year and Solaro after five years.
Santos, Postal & Co. also agreed to disgorgement of $25,800 in profits that the firm obtained for performing the exams plus interest of $3,276.76 and a penalty of $15,000.  Scolaro agreed to pay a $15,000 penalty.


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.

Thursday, April 28, 2016

Another Broker Promissory Note Win

As I have written before, broker promissory note cases are difficult to defend. The firms have had decades of experience writing the documents, and honing them to a fine point so that they are not defensible.
English: Morgan Stanley - logo

But the conduct of firm employees leading up to the signing of the note and the transition to the firm are not always up to snuff. Far too often we see cases where promises are made to entice a broker to leave a firm and join the new firm, only to find that the firm cannot live up to those promises.

The problem with some of those claims is that the promises are often difficult to prove. We had great success in a case against Merrill Lynch years ago, where an arbitration panel refused to enforce a $750,000 balance owed on a note, because the firm simply refused to allow the broker to conduct the business that she was hired to conduct.

In a recent FINRA arbitration, a panel refused to enforce a promissory note against a Morgan Stanley broker. The broker's defense and counterclaim involved claims of  breach of implied covenant of good faith and fair dealing, fraud and misrepresentation, and negligent misrepresentation. The broker claimed that the firm made several false representations to him in order to tempt him to leave his then-current employer and work for Morgan Stanley. He alleged that had the firm not made these representations, he would not have left his previous employer, nor executed a promissory note with the firm.

The defense and counterclaim were a success. The panel denied any relief to Morgan Stanley, and awarded the broker $300,000 on his counterclaim, plus interest. It also ordered Morgan Stanley to pay the costs and fees associated with the arbitration.

While it doesn't happen often, with the right evidence and the right facts, brokers can win promissory cases. The arbitration award is available at SECLaw.com- link.



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Mark Astarita is a New York securities lawyer who represents investors and financial professionals across the country in securities arbitrations and investigations, and has been doing so for over 25 years. Call him at 212-509-6544 or email him at mja@sallahlaw.com if you have any questions, comments or concerns regarding such matters.

Wednesday, April 27, 2016

SEC Seeks Public Comment on Plan to Create A Consolidated Audit Trail

The Securities and Exchange Commission today voted to publish for public comment a proposed national market system (NMS) plan to create a single, comprehensive database that would enable regulators to efficiently track all trading activity in the U.S. equity and options market. The plan for the database, known as the consolidated audit trail (CAT), was submitted jointly by the self-regulatory organizations (SROs) as required by Rule 613 of Regulation NMS.

“The Commission’s action to approve the proposed CAT plan for public comment is a major market structure milestone.  CAT will enable regulators to harness today’s technology to enhance the regulation and oversight of today’s trading markets,” said SEC Chair Mary Jo White.  “It will significantly increase the ability of regulators to conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct.”

The proposed NMS plan details the methods by which SROs and broker-dealers would record and report information, including the identity of the customer, resulting in a range of data elements that together provide the complete lifecycle of all orders and transactions in the U.S. equity and options markets. The proposed NMS plan also sets forth how the data in the CAT would be maintained to ensure its accuracy, integrity and security.

In seeking public comment on the NMS plan, the Commission also prepared a detailed preliminary economic analysis of the proposal, which includes a discussion of the economic effects, including costs of the creation, implementation and maintenance of the CAT as proposed by the SROs.

Public comments on the proposal should be received by the Commission within 60 days of its publication in the Federal Register.

*   *   *

FACT SHEET

SEC Seeks Public Comment on National Market System Plan to Create a Consolidated Audit Trail

SEC Open Meeting
April 27, 2016

Action

The Securities and Exchange Commission voted to publish for public comment a national market system (NMS) plan to create a single, comprehensive database–a consolidated audit trail (CAT)–that would enable regulators to more efficiently and accurately track trading in equity and option securities throughout the U.S. markets.  The proposed plan would increase the effectiveness of market research and monitoring, event re-construction, and the ability to identify and investigate market misconduct.  The plan is being submitted jointly by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to the Commission.

Highlights of the Plan

Plan Processor and Central Repository    

The CAT NMS plan provides that a plan processor will build a central repository that would receive, consolidate, and retain the trade and order data reported as part of the CAT.  Among other things, the plan processor would be responsible for:

·         Operating, maintaining, and upgrading the central repository

·         Ensuring the security and confidentiality of all data reported to the central repository

·         Publishing technical specifications containing detailed instructions for the submission of data by the self-regulatory organizations (SROs) and broker-dealers to the central repository

Data Recording and Reporting

The CAT NMS plan applies to NMS securities as well as to over-the-counter equity securities.  At the various stages in the lifecycle of an order–e.g., origination, routing, modification/ cancellation, and execution–the SROs and broker-dealers would be required to submit certain information about the order to the central repository, such as:

·         A unique identifier, provided by the broker-dealer, for the customer submitting the order

·         An identifier, provided by the SRO, for the broker-dealer receiving, originating, routing, or executing the order

·         The date and time of the order event

·         The security symbol, price, size, order type, and other material terms of the order

Generally, the CAT NMS plan requires this data to be recorded contemporaneously with the order event and reported to the central repository by 8 a.m. on the day following the event.  The CAT NMS plan also requires CAT data to be time-stamped in increments as granular as those utilized by the SROs and broker-dealers, but with a minimum time stamp granularity of one millisecond for all order events except manual order events (in which case, the time stamp granularity must be a minimum of one second).  Further, the CAT NMS plan requires the SROs and broker-dealers to synchronize their business clocks to within 50 milliseconds of the time maintained by the National Institute of Standards and Technology. 

The CAT NMS plan sets an initial maximum error rate of five percent for data reported to the central repository, subject to quality assurance testing, adjustments at each initial launch date for CAT reporters and periodic review by the operating committee.  The CAT NMS plan also discusses a phased approach to lowering the maximum error rate with the ultimate goal of one percent for data reported to the central repository. 

To assist in reducing the error rate, the SROs propose that the plan processor, among other things, measure and report errors, provide reports to the SROs and other reporters, define educational and support programs, and provide error correction tools.

The CAT NMS plan also reflects exemptive relief from certain requirements of Rule 613 that the Commission previously granted.  This exemptive relief provides the SROs with the flexibility to propose approaches in the CAT NMS plan that could potentially be more efficient and cost-effective than those required by Rule 613 without adversely affecting the reliability or accuracy of CAT data.  Specifically, the exemptive relief permits the SROs to propose, in the CAT NMS plan, that:

·         Only options exchanges–but not options market makers–be required to report information to the central repository regarding options market maker quotations

·         Instead of requiring a universal customer identifier for each customer to be used by broker-dealers for all orders, each broker-dealer could assign a unique firm-designated identifier (FDI) to each trading account.  Under this approach, broker-dealers would be permitted to use an account number or any other identifier defined by the firm as the FDI, provided each identifier is unique across the firm for each business date.  The plan processor would then assign a unique customer identifier for each customer.

·         Instead of requiring a universal identifier for each broker-dealer reporting data to the CAT, a broker-dealer could use its existing SRO-assigned market participant identifier.  The plan processor would then assign a unique identifier for each reporting broker-dealer.

·         Instead of requiring broker-dealers to link a particular order or execution to an allocation, a broker-dealer could provide an allocation report that focuses on the shares allocated and the FDI of the applicable accounts or subaccounts

·         Instead of requiring the receipt of manual orders to be time-stamped to the millisecond, a time stamp to the nearest second be permitted

Governance

The SROs propose to conduct the activities of the CAT through a Delaware limited liability company, which they would jointly own.  An operating committee comprised of all the SROs–each with one vote–would manage the company.  In addition, an advisory committee consisting of, among others, broker-dealers of various sizes and specialties, investors, and a person with significant regulatory experience, would provide input to the operating committee.

Regulatory Access and Use

The CAT NMS plan provides that the SROs and the Commission would have access to the data contained in the central repository for regulatory and oversight purposes.  The CAT NMS plan provides that CAT data would be stored in a way that allows regulators to perform complex queries, such as reconstructing market events and the status of order books at various time intervals.  Regulators would have access to CAT data through both an online targeted query tool and user-defined direct queries and bulk extracts. 

Data Security and Confidentiality

The CAT NMS plan establishes data security requirements regarding connectivity and data transfer, encryption, storage, access, breach management, and personally identifiable information (PII).  In addition, the plan processor would be responsible for:

·         Requiring individuals with access to the central repository to agree to use CAT data only for appropriate surveillance and regulatory activities and to employ safeguards to protect the confidentiality of CAT data

·         Developing a comprehensive information security program as well as a training program that addresses the security and confidentiality of all information accessible from the CAT

·         Designating one of its employees as Chief Information Security Officer, who would be responsible for creating and enforcing appropriate policies, procedures, and control structures regarding data security

Retirement of Duplicative Rules and Systems

As required by Rule 613, the CAT NMS plan contains a method to eliminate rules and systems that will be rendered duplicative by CAT, including identification of such rules and systems.

The CAT NMS plan estimates that market participants would have duplicative audit trail data reporting responsibilities for a period of up to 2.5 years after industry members begin reporting data to CAT.

Implementation Schedule

The CAT NMS plan provides for the following implementation schedule:

·         Within two months of  Commission approval of the CAT NMS plan, the SROs would be required to select the plan processor from among the remaining bidders through a two-round voting process in which each SRO has one vote

·         Within one year of Commission approval of the CAT NMS plan, the SROs would be required to begin reporting data to the central repository 

·         Within two years of  Commission approval of the CAT NMS plan, large broker-dealers would be required to begin reporting data to the central repository 

·         Within three years of  Commission approval of the CAT NMS plan, small broker dealers would be required to begin reporting data to the central repository  

Background

On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS under the Securities Exchange Act of 1934.  Rule 613 requires the SROs to jointly submit a national market system plan to create, implement, and maintain a CAT that would capture–in a single, consolidated data source–customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.  Rule 613 outlines a broad framework for the CAT, including the minimum elements the Commission believes are necessary for an effective CAT, while allowing the SROs to draw upon their expertise to develop the details of the CAT.

What’s Next?

The notice of the CAT NMS plan will be published on the Commission’s website and in the Federal Register. Comments should be received within 60 days of publication in the Federal Register. Consistent with Rule 608, if the Commission makes the necessary findings, the Commission must approve the CAT NMS plan within 180 days.



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.

SEC News - Fraud Charges and Hiding Financial Troubles


SEC Announces Financial Fraud Cases
The SEC has announced a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.

Litigation Marketing Company Charged With Bilking Retirees
A Los Angeles-based litigation marketing company and its co-founders have been charged with defrauding retirees and other investors who were told their money would be used to help gather plaintiffs for class-action and other lawsuits and they would earn hefty investment returns from settlement proceeds.

SEC Case Freezes Assets of Ski Resort Steeped in Fraudulent EB-5 Offerings
Fraud charges and an asset freeze have been announced against a Vermont-based ski resort and related businesses allegedly misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program.

Town Officials in New York Hid Financial Troubles From Bond Investors
Ramapo, N.Y., its local development corporation, and four town officials now face fraud charges for allegedly hiding a deteriorating financial situation from their municipal bond investors.




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.

Tuesday, April 26, 2016

Thursday, April 21, 2016

SEC Issues Order Modifying and Extending the Pilot Period for the National Market System Plan to Address Extraordinary Market Volatility

The Securities and Exchange Commission today issued an order to extend for one year the pilot period of the National Market System Plan to Address Extraordinary Market Volatility, commonly known as the limit up-limit down (LULD) plan.  

The Commission also approved a modification to the manner in which the LULD plan establishes the reference price in cases where a security does not trade in the opening auction on the primary listing exchange.  In these circumstances, a security’s reference price will now be the previous trading day’s closing price or, if no closing price exists, the last reported sale on the primary listing exchange.  The Commission believes that this modification is appropriate to potentially prevent unnecessary trading pauses that are unrelated to extraordinary volatility.

The Commission extended the pilot period in order to allow the plan participants to conduct further analysis regarding the LULD plan’s operation, including how it operated during the market volatility on Aug. 24, 2015.  In particular, the Commission has directed the self-regulatory organization (SRO) participants to submit to the Commission further recommendations, as necessary, relating to: 

  • The appropriate harmonization of the SRO clearly erroneous execution rules with the plan such that trades that occur within the LULD price bands would not be broken absent legitimate technical failures
  • The establishment of specific provisions relating to the trading of exchange-traded products
  • Other changes deemed warranted in light of the market volatility on Aug. 24, 2015, including the impact of double-wide price bands during the opening period, and the advisability of coordinated reopening procedures
  • Potential enhancements to the categorization of securities into different tiers

The order is effective immediately.  The pilot period will expire on April 21, 2017.  



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, April 19, 2016

SEC Announces Financial Fraud Cases

The Securities and Exchange Commission today announced a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.

In one case, technology manufacturer Logitech International agreed to pay a $7.5 million penalty for fraudulently inflating its fiscal year 2011 financial results to meet earnings guidance and committing other accounting-related violations during a five-year period.  Logitech’s then-controller Michael Doktorczyk and then-director of accounting Sherralyn Bolles agreed to pay penalties of $50,000 and $25,000, respectively, for violations related to Logitech’s warranty accrual accounting and failure to amortize intangibles from an earlier acquisition.  The SEC filed a complaint in federal court yesterday against Logitech’s then-chief financial officer Erik Bardman and then-acting controller Jennifer Wolf alleging that they deliberately minimized the write-down of millions of dollars of excess component parts for a product for which Logitech had excess inventory in FY11.  For Logitech’s financial statements, the two executives falsely assumed the company would build all of the components into finished products despite their knowledge of contrary facts and events. 

In the other case, three then-executives at battery manufacturer Ener1 agreed to pay penalties for the company’s materially overstated revenues and assets for year-end 2010 and overstated assets in the first quarter of 2011.  The financial misstatements stemmed from management’s failure to impair investments and receivables related to an electric car manufacturer that was one of its largest customers.  Former CEO and chairman of the board Charles L. Gassenheimer, former chief financial officer Jeffrey A. Seidel, and former chief accounting officer Robert R. Kamischke agreed to pay penalties of $100,000, $50,000, and $30,000, respectively.

“We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “In these two cases, we allege deficiencies in Ener1’s failure to properly impair assets on its balance sheet and Logitech’s failure to write down the value of its inventory to avoid the financial consequences of disappointing sales.”

In the Ener1 case, the SEC also found that Robert D. Hesselgesser, the engagement partner for PricewaterhouseCoopers LLP’s audit of Ener1’s 2010 financial statements, violated PCAOB and professional auditing standards when he failed to perform sufficient procedures to support his audit conclusions that Ener1 management had appropriately accounted for its assets and revenues.  Hesselgesser agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Hesselgesser to apply for reinstatement after two years.

“Auditors play a critical role regarding the accuracy of financial statements relied upon by investors, and they must be held accountable when they fail to do everything required under professional auditing standards,” said Michael Maloney, Chief Accountant of the SEC’s Division of Enforcement.

In the Logitech case, former CEO Gerald Quindlen was not accused of any misconduct, but has returned $194,487 in incentive-based compensation and stock sale profits received during the period of accounting violations, pursuant to Section 304(a) of the Sarbanes-Oxley Act.

The companies and executives who agreed to settlements neither admitted nor denied the charges.

The SEC’s investigation of Logitech was conducted by Paul Gunson and Matthew Finnegan, and supervised by Douglas McAllister.  The litigation is being led by Paul Kisslinger and Kevin Lombardi, and supervised by Bridget Fitzpatrick.

The SEC’s investigation of Ener1 was conducted by Carolyn Winters, Richard Haynes, and Deena Bernstein, and supervised by Douglas McAllister.  



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.