The Securities Law Blog

Bank of America Still Causing Problems for Merrill Brokers

2012-01-30T09:05:00.000-05:00

Bank of America has always been a disaster in the brokerage business, with a long history of mistreatment of its brokers. That outrage became well known when it took over the failing Merrill Lynch in 2008. Bank of America forced brokers out of the firm, by reducing payouts, refusing to pay for business which had already been booked, and for generally not having a clue how to run a brokerage firm. Merrill Lynch was not much better, given the fact that it was virtually bankrupt by the fourth quarter of 2008.

The complete mismanagement of the firm, first by Merrill, compounded by Bank of America, forced brokers to leave the firm, and doing so at their own financial peril, leaving behind significant deferred compensation and outstanding promissory notes. Apparently, staying was even worse.

That trend continues, three years later. On Wall Street is reporting that UBS is hiring teams of Merrill Lynch brokers. In an article "UBS Hires Raft of Veteran Merrill Brokers" Ashley Lau reports that UBS had placed a premium on brokers from Merrill, Bank of America's brokerage unit, by increasing up-front bonuses offered to those who signed before the end of 2011. That move came at the same time that Merrill brokers were about to receive the last of two big payouts on previous incentive plans.

The article continues to say that industry analysts said in early January that they expect to see more defections from Merrill's "Thundering Herd" of brokers, many already frustrated with changes since Bank of America purchased the firm three years ago, after the award payments are made in late January and early February.

We have been representing brokers in transition, contract and promissory note matters for over two decades, and are presently representing former Bank of America and Merrill Lynch brokers with their transition and promissory note issues. We have set up a dedicated email address for inquires from brokers who need assistance with their employment issues with Merrill Lynch, or any other wirehouse - brokers@seclaw.com

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SEC Obtains Emergency Relief Against St. Louis-Based Private Investment Funds after Charging Them and Their Principal with Fraud

2012-01-27T11:24:00.000-05:00

The SEC has obtained an emergency court order to freeze the assets of St. Louis-based private investment funds and management firms after suing them and their principal for a scheme to defraud investors. It is alleged that the principal diverted more than $9 million of investors’ money to himself without their knowledge or consent. He recorded the transfers as ‘loans” in his companies’ books. He raised $88 million from investors who were told their funds would be invested in emerging financial services and technology companies.

“Morriss attempted to hide his illegal transfers of investor funds by calling them ‘loans’ when in reality he had no intention of paying back the money and instead went on a spending spree,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “It is fraud, pure and simple.”

SEC Obtains Emergency Relief Against St. Louis-Based Private Investment Funds after Charging Them and Their Principal with Fraud

SEC Charges Florida Bank Holding Company and CEO with Misleading Investors about Loan Risks During Financial Crisis

2012-01-27T09:00:00.001-05:00

The SEC charged a holding company for one of Florida’s largest banks and its top executive with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis. It is alleged that BankAtlantic Bancorp and it's CEO made misleading statements in public filings and earnings calls so as to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and the CEO then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans.

“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This is exactly the type of information that is important to investors, and corporate executives who fail to make that required disclosure will face severe consequences."

SEC Charges Florida Bank Holding Company and CEO with Misleading Investors about Loan Risks During Financial Crisis

FINRA Fines Merrill Lynch $1 Million for Failure to Arbitrate Disputes With Employees

2012-01-26T12:00:00.000-05:00

FINRA has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses. Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts.

After merging with Bank of America in January 2009, Merrill Lynch implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.

In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch's requirement to arbitrate disputes with its associated persons. Later that year, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, thus violating a FINRA rule that requires firms to arbitrate disputes with employees.

FINRA Fines Merrill Lynch $1 Million for Failure to Arbitrate Disputes With Employees

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

2012-01-26T09:00:00.000-05:00

FINRA has fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports (published from January 2007 through March 2010) and research analysts' public appearances. Due to technical deficiencies, the database Citigroup used to identify and create disclosures was inaccurate or incomplete. In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

Texas-Based Accountant Pleads Guilty to Lying to SEC Investigators

2012-01-25T13:29:00.002-05:00

The SEC announced that a Texas-based former audit partner at accounting and consulting firm BDO USA LLP has pled guilty to criminal charges for lying to SEC enforcement staff during investigative testimony. Last year the SEC issued subpoenas to BDO and the accountant who was responsible for auditing several hedge funds managed by an investment adviser that the SEC is investigating. The criminal information states that the audit is a central issue in the SEC inquiry, and investigators took testimony from the accountant to obtain information about his role in the audit process and assess his credibility. He was the subject of a 2005 NASD (now FINRA) proceeding alleging that he took $49,350 in funds from a former employer for his personal use.

The criminal information alleges that during questioning in September 2011, the Texas-based accountant falsely testified to SEC staff that he was not aware of a $49,350 payment made on his behalf to his former employer. In fact, hewas aware that his attorney had repaid the $49,350 to the former employer as reimbursement of the funds he had allegedly taken for his personal use. The payment was made at the accountant’s direction and with his funds.

Texas-Based Accountant Pleads Guilty to Lying to SEC Investigators

SEC charges UBS With Overstating Prices

2012-01-18T07:48:00.001-05:00

Yet another problem at UBS. What is going on over there? - SEC Charges UBS with Overstating Prices of Securities - some by 100%!

SEC charges UBS advisory arm with overstating prices of securities in three mutual funds - Securities Technology Monitor. - Financial Planning

Illinois-Based Adviser Charged by SEC in Social Media Scam

2012-01-11T13:30:00.002-05:00

The SEC alleges that an Illinois-based investment adviser offered more than $500 billion in fake securities through social media websites.

“Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes,” said Robert B. Kaplan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Social media is no exception, and today’s enforcement action reflects our determination to pursue fraudulent activity on new and evolving platforms.”

“More and more, investors are using social media to help them with investment decisions. While social media can provide many benefits for investors, it also makes an attractive target for fraudsters. The Investor Alert provides some useful tips to help investors look out for securities fraud online,” said Lori J. Schock, Director of the Office of Investor Education and Advocacy.

SEC Charges Illinois-Based Adviser in Social Media Scam

SEC Charges Life Settlements Firm and Three Executives with Disclosure and Accounting Fraud

2012-01-06T09:00:00.000-05:00

A Texas-based financial services firm, Life Partners Holdings Inc., and three of its senior executives have been charged by the SEC for their involvement in a fraudulent disclosure and accounting scheme involving life settlements. The firm failed to disclose risks, therefore misleading investors. Unknown to investors, the company was systematically and materially underestimating the life expectancy estimates, used to price transactions. These estimates have a large impact on the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders. It is also alleged that they also utilized improper accounting to increase the companies value.

SEC Charges Life Settlements Firm and Three Executives with Disclosure and Accounting Fraud

SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro

2012-01-05T09:00:00.000-05:00

The SEC charged the largest telecommunications provider in Hungary and three of its former top executives with bribing government and political party officials in Macedonia and Montenegro to win business and shut out competition in the telecommunications industry. The SEC alleges that three senior executives at Magyar Telekom Plc. orchestrated, approved, and executed a plan to bribe Macedonian officials in 2005 and 2006 to prevent the introduction of a new competitor and gain other regulatory benefits. Magyar Telekom's subsidiaries in Macedonia made illegal payments of approximately $6 million under the guise of bogus consulting and marketing contracts. The same executives orchestrated a second scheme in 2005 in Montenegro related to Magyar Telekom's acquisition of the state-owned telecommunications company there. Magyar Telekom paid approximately $9 million through four sham contracts to funnel money to government officials in Montenegro.

SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro

FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures

2012-01-04T09:00:00.001-05:00

FINRA has fined Credit Suisse Securities (USA) LLC $1.75 million for violating Regulation SHO and failing to properly supervise short sales of securities and marking of sale orders. As a result of these violations, Credit Suisse entered millions of short sale orders without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders. Reg SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order. Requiring firms to obtain and document this "locate" information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "Credit Suisse's Reg SHO supervisory and compliance monitoring system was seriously flawed. Millions of short sale orders were being entered in its systems without locates for over four years because the firm did not have adequate Reg SHO technology and procedures in place."

FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures

Agencies Extend Comment Period on Volcker Rule Proposal

2012-01-03T12:00:00.001-05:00

Four federal agencies today extended the comment period on a proposal to implement the so-called Volcker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act until February 13, 2012.

The Dodd-Frank Act requires regulators to implement certain prohibitions and restrictions on the ability of a banking entity and nonbank financial company to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. The comment period was extended as part of a coordinated interagency effort to allow interested persons more time to analyze the issues and prepare their comments.

Agencies Extend Comment Period on Volcker Rule Proposal

SEC Charges Securities Trader with Cross-Border Fraudulent Interpositioning Scheme

2012-01-03T09:00:00.000-05:00

The SEC alleges that a former securities trader acted in concert with a Mexican investment adviser, InvesTrust, and unnecessarily inserted a separate broker-dealer as a middleman into securities transactions in order to generate millions of dollars in additional fees. The former trader, who resided in Coronado, Calif., at the time and currently lives in Mexico, agreed to pay $1 million to settle the SEC’s charges. The SEC also charged his former firm Investment Placement Group (IPG) and its CEO with failing to properly supervise. IPG agreed to pay more than $4 million to settle the charges.

In an interpositioning scheme, an extra broker-dealer is illegally added as a principal on trades even though no real services are being provided. The SEC alleges that the former trader colluded with InvesTrust and needlessly inserted a broker-dealer based in Mexico into securities transactions between IPG and InvesTrust’s pension fund clients, causing the pension funds to pay approximately $65 million more than they would have without the middleman.

SEC Charges Securities Trader with Cross-Border Fraudulent Interpositioning Scheme

Can You Subpoena a Hashtag?

2012-01-03T08:58:00.000-05:00

They seem to think so in Boston. The Suffolk County District Attorney has subpoenaed Twitter for "All available subscriber information, for the account or accounts associated with the following information, including IP address logs for account creation and for the period December 8, 2011 to December 13, 2011.” The "information" includes two hashtags, #BostonPD and #d0xcak3.

Technically they are not serving the hastag, but what does this mean? They want the IP address of everyone who posted a tweet with those hashtags? I get it, they are investigating threats to the police, that's fine, but seeking the IP address of everyone who used those hashtags during a 6 day period?

SEC Charges GE Funding Capital Market Services with Fraud Involving Municipal Bond Proceeds

2011-12-30T12:04:00.000-05:00

The SEC charged GE Funding Capital Market Services with securities fraud for participating in a wide-ranging scheme involving the reinvestment of proceeds from the sale of municipal securities. They agreed to settle the charges by paying approximately $25 million, which will be returned to affected municipalities or conduit borrowers. The firm also entered into agreements with the Department of Justice, Internal Revenue Service, and a coalition of 25 state attorneys general and will pay an additional $45.35 million. In addition to fraudulently manipulating bids, GE Funding CMS made improper, undisclosed payments to certain bidding agents in the form of swap fees that were inflated or unearned. These payments were in exchange for the assistance of bidding agents in controlling and manipulating the competitive bidding process.

The settlements arise from extensive law enforcement investigations into widespread corruption in the municipal reinvestment industry. In the past year, federal and state authorities have reached settlements with four other financial firms, and 18 individuals have been indicted or pled guilty, including three former GE Funding CMS traders.

For a list of other financial institutions charged prior to the settlement with GE Funding CMS follow the link below.

SEC Charges GE Funding Capital Market Services with Fraud Involving Municipal Bond Proceeds

Judge Orders Plastics Executive to Pay $49.5 Million in SEC Case

2011-12-30T09:00:00.000-05:00

The SEC has announced the successful resolution of its trial against a plastics industry executive charged with lying in SEC filings regarding his ownership of Musicland Stores Corporation stock. The executive and a trust he controlled have been ordered by a federal judge to pay $49.5 million in a final judgment against them. The executive failed to file truthful 13D forms and neglected to make other required filings, which are required when a person acquires beneficial ownership of more than 5 percent of a voting class of a company's publicly traded stock. Because of this the execute and the trust thereby materially misrepresented their ownership of Musicland stock.

Following a 10-day trial in May in federal court in Newark, N.J., a jury returned a verdict finding the executive liable for securities fraud and disclosure violations on all counts against him. The jury also found the MAAA Trust controlled by him liable for disclosure violations.

Judge Orders Plastics Executive to Pay $49.5 Million in SEC Case

SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act

2011-12-28T15:17:00.002-05:00

The SEC has amended its rules to exclude the value of a person’s home from net worth calculations. These calculations are used to determine whether an individual may invest in certain unregistered securities offerings. The changes were made to conform the SEC’s definition of an “accredited investor” to the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act

SEC Adopts Dodd-Frank Mine Safety Disclosure Requirements

2011-12-26T12:00:00.000-05:00

The SEC has adopted new rules outlining how mining companies must disclose the mine safety information required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under Section 1503 of the Dodd-Frank Act, mining companies are required to include information about mine safety and health in the quarterly and annual reports they file with the SEC. The Dodd-Frank Act disclosure requirements are based on the safety and health requirements that apply to mines under the Federal Mine Safety and Health Act of 1977, which is administered by the Mine Safety and Health Administration (MSHA). To read the full rules, follow the link below.

SEC Adopts Dodd-Frank Mine Safety Disclosure Requirements

SEC Charges Executives at Clean Coal Technology Company for Misstatements to Investors

2011-12-26T09:00:00.000-05:00

The SEC charged the former CEO and CFO at a Minnesota-based clean coal technology company for making false and misleading statements to investors. The SEC separately charged a network of brokers who sold the company’s securities without being registered with the SEC to do so. Bixby Energy Systems raised at least $43 million from more than 1,800 investors through a series of purported private placement offerings of stocks, warrants, and promissory notes during a nine-year period. The company used this capital raising activity to help fund operations, pay salaries, and pay commissions to brokers that sold Bixby securities.

The SEC alleges that Bixby’s former CEO and former CFO made repeated misstatements both verbally and in writing to investors about the company’s core product – a machine that supposedly produced synthetic natural gas through a proprietary clean coal technology. They told investors that Bixby’s coal gasification machine was proven and operating when in fact it had substantial technological defects, did not function properly, and was at risk of self-destruction. The CEO and CFO never disclosed these problems to investors.

SEC Charges Executives at Clean Coal Technology Company for Misstatements to Investors

SEC Charges California Company, Co-CEOs, and Attorney in Series of Fraudulent Schemes Pumping Company Stock

2011-12-23T12:05:00.000-05:00

The SEC charged a purported heart monitoring device company and six individuals involved in a series of fraudulent schemes to artificially inflate the company’s stock. Among those charged are a former pro football player and a former Hollywood executive who were co-CEOs of Heart Tronics. An attorney who masterminded the scheme and brought in nearly $8 million in secret trades was also charged.

In addition to Heart Tronics, and the three individuals, the SEC charged three other individuals involved in the scheme, including the attorney ’s chauffer and handyman , who carried out the fraud with him. The SEC also charged a stock promoter, as well as the trustee and stockbroker for a number of nominee accounts that the attorney used to unlawfully sell Heart Tronics stock.

In a parallel criminal investigation, the U.S. Department of Justice today announced the arrest of the attorney.

SEC Charges California Company, Co-CEOs, and Attorney in Series of Fraudulent Schemes Pumping Company Stock

SEC Charges Longtime Madoff Employee with Falsifying Documents to Deceive Regulators

2011-12-23T09:00:00.000-05:00

The SEC charged a longtime Bernie Madoff employee with falsifying books and records in order to hide Madoff’s fraudulent investment advisory operations from regulators.

The SEC alleges that the employee, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 30 years, assisted in falsifying BMIS’s internal accounting records in order to misclassify hundreds of millions of dollars of income purportedly generated by BMIS’s investment advisory operations. The employee also falsified financial statements filed with the SEC and other regulators, as well as materials that were prepared to deceive SEC staff examiners, federal and state tax auditors, and other external reviewers.

“To keep his massive fraud alive, Madoff had to hide as many facts about his advisory operations as possible,” said George S. Canellos, Director of the SEC’s New York Regional Office. “Cotellessa-Pitz along with other senior BMIS personnel played a critical role in this effort by creating false documents to deceive federal and state regulators.”

The SEC previously charged BMI's Director of Operations with falsifying books and records to hide and obfuscate Madoff’s advisory operations. According to the SEC’s complaint against the employee, she played a central role in falsifying these records as directed by Madoff and the Director of Operations. Madoff used the false records to artificially improve the firm’s reported revenue and income as well as to deceive regulators who sought to review the firm’s operations and financial results.

SEC Charges Longtime Madoff Employee with Falsifying Documents to Deceive Regulators

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud

2011-12-22T13:45:00.000-05:00

The SEC has charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.

Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission wherein each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission's litigation against the former executives.

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division. "These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors."

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud

SEC Halts Father-Son Ponzi Scheme in Utah Involving Purported Real Estate Investments

2011-12-20T09:00:00.000-05:00

The SEC charged a father and son in Utah with securities fraud for selling purported investments in their real estate business that in reality was just a $220 million Ponzi scheme.

It is alleged that the father and son operated from a base in Fountain Green, Utah. They offered investors the opportunity to invest in LLCs to share ownership of large apartment complexes in eight states. The investors were solicited by word of mouth and through religious affiliation. The duo presented plans to buy apartment complexes, renovate and revamp, and then sell for a high profit. The investors were told they would share in the profit from the sales and also from rental income. The truth of the matter was that the investors money was really being depositing into large bank accounts, which were used for company and personal expenses, and to pay other investors. Since the complaint has been filed, the SEC obtained an emergency court order freezing the father and son's assets and companies. The scheme began in 2008 and involved 225 investors and more than $220 million.

SEC Halts Father-Son Ponzi Scheme in Utah Involving Purported Real Estate Investments

SEC Charges Options Trader for Illegal Short Selling Tactics

2011-12-19T12:00:00.000-05:00

An options trader in the Chicago area has been charged by the SEC with violating short selling restrictions when he failed to locate and deliver the shares involved in short sales to broker-dealers and their institutional customers. He has agreed to pay more than $2 million to settle the SEC’s charges.

George S. Canellos, Director of the SEC's New York Regional Office said, “[he] avoided the cost of borrowing shares while engaging in complex short selling transactions, thus earning significant profits with minimal risk and gaining an advantage over legitimate participants in the market. We’ll continue aggressively to pursue and punish abusive short sellers who attempt to circumvent regulatory requirements to make more money.”

SEC Charges Options Trader for Illegal Short Selling Tactics

SEC Charges Seven Former Siemens Executives with Bribing Leaders in Argentina

2011-12-19T09:00:00.001-05:00

Seven former Siemens executives have been charged by the SEC with violating the Foreign Corrupt Practices Act (FCPA) for their involvement in the company's decade-long bribery scheme to retain a $1 billion government contract to produce national identity cards for Argentine citizens. Siemens has previously been charged with FCPA violations by the SEC and has already paid $1.6 billion to resolve those charges.

The SEC alleges that the executives who maintained the scheme worked at Siemens and its regional company, Siemens Argentina. Siemens paid more than $100 million in bribes to such high-ranking officials as two former Argentine presidents and former cabinet members. The executives falsified documents and participated in meetings in the United States to negotiate the terms of bribe payments. In a parallel criminal action, the Department of Justice announced charges against former executives and agents of Siemens. They are charged with conspiracy to violate the FCPA and the wire fraud statue and wire fraud.

SEC Charges Seven Former Siemens Executives with Bribing Leaders in Argentina

SEC Charges "Shell Packagers" and Several Others in Penny Stock Scheme

2011-12-16T13:45:00.000-05:00

The SEC alleges that Belmont Partners LLC and its President utilized fabricated and backdated documents to convince a transfer agent and an attorney writing an opinion letter to issue free-trading shares of Alternative Green Technologies Inc. (AGTI). The SEC also charged AGTI, its CEO, a business partner and stock promoters for their roles in the scheme that resulted in unknowing investors purchasing fraudulently issued AGTI shares without the protections afforded by the securities laws.

“Shell packagers who buy and sell public companies for use by fraudsters have no rightful place in our markets,” said David Rosenfeld, Associate Director of the SEC’s New York Regional Office. “These shell packagers not only sold the shell company, but created the false documents necessary to cause the transfer agent to issue shares that should never have been sold to the public.”

According to the SEC’s complaint, false documents were submitted to a transfer agent and an attorney, who relied on them to conclude that free-trading shares of AGTI could legitimately be issued. The fraud was aided by Belmont Partner and their CEO creating and sometimes backdating the false documentation, including a sham assignment of debt and a fabricated and backdated corporate resolution and convertible note. Then AGTI's CEO then used the illegally issued stock certificates to fund promotional campaigns promoting their stock. The stock promoters were charged with selling the unregistered securities.

SEC Charges "Shell Packagers" and Several Others in Penny Stock Scheme

SEC Enforcement Director's Statement on Citigroup Case

2011-12-16T13:16:00.001-05:00

The SEC’s Director of the Division of Enforcement, Robert Khuzami, made the following statement on the Citigroup case:

Last month, a federal district court declined to approve a consent judgment because, in its view, the underlying allegations were ‘unsupported by any proven or acknowledged facts.’ As a result, the court rejected a $285 million settlement between the SEC and Citigroup that reasonably reflected the relief the SEC would likely have obtained if it prevailed at trial.

We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits. For this reason, today we filed papers seeking review of the decision in the U.S. Court of Appeals for the Second Circuit..."

The full statement can be found at: SEC Enforcement Director's Statement on Citigroup Case

Jon Corzine, Bernie Madoff, And Why The SEC Should Directly Regulate Investment Advisors - Forbes

2011-12-15T09:05:00.000-05:00

I have certainly been critical of FINRA in the past, and it certainly makes its share of mistakes, but this piece in Forbes is a bit aggressive and over the top.

The argument here is that because FINRA did not catch Madoff, and gave Corzine a waiver on his securities examinations, the SEC should regulate investment advisors. That, with all due respect to Forbes and the author, makes no sense.

First, let's be clear. My firm believe is that the SEC should regulated investment advisors, and I am even firmer in my belief that FINRA should not be allowed anywhere near investment advisors. That being said, the Forbes article is off base for a couple of reasons.

First, the SEC IS the entity that is responsible for regulating investment advisors, at least those with in excess of 30 million dollars under management.

Second, using Madoff as an example is not such a great example, since the SEC was the regulator with primary responsibiltiy for oversight of Madoff - the fraud occured for the most part at his investment advisory firm, which was regulated by the SEC, not FINRA.

And third, we are going argue against FINRA as a regulator because it waived examinations for Corzine? Really? I can think of at least a dozen reasons not to give FINRA oversight of investment advisors - waiving the examinations for Corzine, while a terrible move both on an regulatory and public relations front was a terrible idea, is not in the top 20 reasons to deny them that authority.

At the top, FINRA tries. Its executives talk a good game, but they are terrible at getting their message down to the staff, who still, in far too many instances, treat brokers and firms as if they are criminals, conducting exams with a "gotcha!" mentality, and constantly looking for the "career making" error in every examination they conduct. It is absurd, and not good regulatory policy. The Corzine incident was an embarrassment. The forging of documents during an SEC investigation is unforgiveable, and would result in a permant bar from the industry if a brokerage firm executive pulled such a stunt.

And, lets keep in mind that although you would never know it from dealing with them, FINRA is a membership organization, it is owned, operated and controlled by the big firms. Independent broker-dealers and investment advisors are NOT part of that association, and are competitors to the brokerage industry. In fact, I would imagine that many of the executives in the investment advisory world went to that side of the industry to get away from the very issues that FINRA cannot shake - it is owned, lock, stock and barrell by the large firms.

In what other industry would a regulated entity be permitted to continue in operations with tens of millions of dollars in fines, with multiple, systemic violations, year after year? That could only occur when the regulated entity is in control of the regulator.

We don't need FINRA expanding its power and authority over yet another facet of the financial industry, increasing its ability to quash competition. If we want sound regulatory oversight, it needs to come from an independent entity, not one that would love to see the regulated put out of business.

Jon Corzine, Bernie Madoff, And Why The SEC Should Directly Regulate Investment Advisors

SEC Charges GlaxoSmithKline Subsidiary and Former CEO With Defrauding Employees in Stock Plan

2011-12-15T09:00:00.000-05:00

Stiefel Laboratories Inc is a subsidiary of pharmaceutical company GlaxoaSmithKline and was the world's largest private manufacturer of dermatology products. The SEC alleges that the subsidiary omitted information from employees and lead them to believe their stock was worth much less than it truly was. They then bought back the stock for a greatly undervalued price.

Stiefel Labs purchased more than 750 shares of company stock from shareholders between November 2006 and April 2007 at a price of $13,012 per share. Stiefel Labs' CEO knew that five private equity firms had submitted offers to buy preferred stock in November 2006 based on equity valuations of Stiefel Labs that were approximately 50 to 200 percent higher than the valuation later used for stock buybacks. There were also an additional 1,150 shares that were bought between July 2007 - June 2008 and Dece 2008 - April 2009.

SEC Charges GlaxoSmithKline Subsidiary and Former CEO With Defrauding Employees in Stock Plan

Joint Statement on Regulation of OTC Derivatives Markets

2011-12-14T12:07:00.002-05:00

The SEC and other regulators released the following statement:

"Leaders and senior representatives of the authorities responsible for regulation of the over-the-counter (OTC) derivatives markets in Canada, the European Union, Hong Kong, Japan, Singapore, and the United States met yesterday in Paris.

The meeting included Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA); Jonathan Faull, Director General for Internal Market and Services at the European Commission; Ashley Alder, Chief Executive Officer of the Hong Kong Securities and Futures Commission; Masamichi Kono, Vice-Commissioner of the Japan Financial Services Agency; Teo Swee Lian, Deputy Managing Director (Financial Supervision) of the Monetary Authority of Singapore; Mary Condon, Vice-Chair of the Ontario Securities Commission; Louis Morisset, Superintendent of Securities Markets at l’Autorité des Marchés Financiers du Québec; Gary Gensler, Chairman of the United States Commodity Futures Trading Commission; and Mary Schapiro, Chairman of the United States Securities and Exchange Commission.

Since mid-2011, the authorities have engaged in a series of bilateral technical dialogues on OTC derivatives regulation. The meeting, held at ESMA headquarters in Paris, is the first time the authorities have met as a group to discuss their implementation efforts.

In the meeting, the authorities addressed the cross-border issues related to the implementation of new legislation and rules to govern the OTC derivatives markets in their respective jurisdictions.

At the conclusion of the meeting, the authorities agreed to continue bilateral regulatory dialogues and to meet as a group again in early 2012."

Joint Statement on Regulation of OTC Derivatives Markets

SEC Charges Wachovia with Fraudulent Bid Rigging in Municipal Bond Proceeds

2011-12-12T09:00:00.002-05:00

The SEC charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds. Over a period of eight years, the SEC alleges that Wachovia fraudulently rigged at least 58 municipal bond reinvestment transactions, generating millions of dollars in illicit gains.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Wachovia agreed to settle the charges by paying $46 million to the SEC, which will be returned to affected municipalities or conduit borrowers. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry.

SEC Charges Wachovia with Fraudulent Bid Rigging in Municipal Bond Proceeds

SEC Halts Prime Bank Scheme by Washington DC Law Firm and Pennsylvania Company

2011-12-09T12:00:00.000-05:00

The SEC announced that it has filed charges and obtained an emergency court order to halt a prime bank scheme in which the perpetrators stole investor funds to purchase luxury cars, take a trip to the Bahamas, and pay the bills of a Washington D.C. law firm. The two individuals being charged are a Pennsylvania resident and a Washington D.C. attorney who defrauded at least 13 investors out of more than $2 million since August 2010.

The SEC alleges that they offered investors risk-free returns of up to 20 times the original investment within as few as 45 days through the purported “lease” and “trading” of foreign bank instruments in highly complex transactions involving unidentified parties and secretive “trading platforms.” Yet all the bank instruments and trading programs were entirely fictitious. Investors in schemes like this are often told that details are too difficult for non-experts to understand, and that secrecy is required for success. In this case, they used vague and complex terms to confuse investors, and claimed that confidentiality concerns prevented them from providing more details regarding the status of the investment. The D.C. attorney and her law firm acted as counsel for the Pennsylvania resident.

SEC Halts Prime Bank Scheme by Washington DC Law Firm and Pennsylvania Company

SEC Announces National Seminar for Compliance Officers and Senior Personnel at Investment Management Firms

2011-12-08T14:05:00.004-05:00

The SEC announced the opening of registration for its national seminar to help chief compliance officers and other senior personnel at investment management firms enhance their compliance programs for the protection of investors. The event will be held on Jan. 31, 2012, at the SEC’s Washington D.C. headquarters, and will include panel discussions to analyze compliance and other significant issues being faced by investment advisers and registered investment companies.

SEC Announces National Seminar for Compliance Officers and Senior Personnel at Investment Management Firms

SEC Charges Multiple Hedge Fund Managers with Fraud in Inquiry Targeting Suspicious Investment Returns

2011-12-08T09:00:00.001-05:00

As part of the Aberrational Performance Inquiry, an initiative to combat hedge fund fraud by identifying abnormal investment performance, the SEC took enforcement action against three separate advisory firms and six individuals for various misconduct. The SEC alleges that they engaged in a wide variety of illegal practices in the management of hedge funds or private pooled investment vehicles, including fraudulent valuation of portfolio holdings, misuse of fund assets, and misrepresentations to investors about critical attributes such as performance, assets, liquidity, investment strategy, valuation procedures, and conflicts of interest.

Under the initiative, the SEC Enforcement Division’s Asset Management Unit uses proprietary risk analytics to evaluate hedge fund returns and red flags performance that appears inconsistent with a fund's investment strategy.

“We’re using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement — earlier detection and prevention,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This approach, especially in the absence of a tip or complaint, minimizes both the number of victims and the amount of loss while increasing the chance of recovering funds and charging the perpetrators.”

SEC Charges Multiple Hedge Fund Managers with Fraud in Inquiry Targeting Suspicious Investment Returns

SEC, US Attorney and FBI Announce 13 Charged in Connection with Securities Kickback Schemes

2011-12-07T09:00:00.001-05:00

The SEC, U.S. Attorney for the District of Massachusetts and FBI today announced parallel cases filed in federal court against several corporate officers, lawyers and a stock promoter. The cases allege that the 13 defendants used kickbacks and other schemes to trigger investments in various thinly-traded stocks. The kickbacks, concealed by sham consulting agreements, were given to an investment fund representation for buying stock in specific companies. This representation was actually an undercover FBI agent.

These charges follow a year-long investigation focusing on preventing fraud in the micro-cap stock markets, which have become an increasingly common area for fraud and abuse. Microcap companies are small publicly traded companies whose stock often trades at pennies per share. As a result, many microcap companies do not file financial reports with the SEC, which makes it more difficult for investors to find information. In October 2010 and June 2011 similar cases were filed.

“The public has a right to invest in an honest and fair market. Companies that agree to pay illegal kickbacks harm investors and undermine fair competition in the markets,” said United States Attorney Carmen Ortiz. “Hard working Americans who invest their savings should not be subjected to backroom deals like those alleged today.”

SEC, US Attorney and FBI Announced 13 Charged in Connection with Securities Kickback Schemes

Woman Sues Bank of America Over Its Foreclosure Procedures

2011-12-05T09:13:00.000-05:00

An Austin woman filed suit Thursday against Bank of America Corp., alleging the company fraudulently sought to foreclose on her home. The suit claims that the bank wrongly invalidated a loan modification agreement because it wasn't signed by her husband even though he died in 2007, more than three years before the agreement was made. Filed in state District Court in Travis County, the lawsuit by Maria Gonzales comes on the same day a Massachusetts lawsuit accused five of the nation's largest banks — including Bank of America — of deceptive foreclosure practices.

http://www.statesman.com/business/austin-woman-sues-bank-of-america-over-foreclosure-2007435.html

FINRA Fines Wells Investment Securities $300,000 for Misleading Marketing Tools

2011-12-02T10:00:00.000-05:00

FINRA announced that it has fined Wells Investment Securities, Inc. $300,000 for using misleading marketing materials in the sale of Wells Timberland REIT, Inc., a non-traded Real Estate Investment Trust (REIT). As the wholesaler, Wells Investment Securities had the responsibility to review, approve and distribute the marketing materials. From May 2007 to September 2009 the 116 materials that were distributed contained misleading, unwarranted or exaggerated statements. The advertisements at issue did not make it clear to potential investors who might be seeking such favorable tax treatment, that the investment at issue was not yet a REIT. Therefore, it would not be able to offer the desired tax benefits at the time the ads were being used. The investigation has also found that Wells supervisory procedures failed to ensure the security of customer and proprietary information that was stored on laptops.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "By approving and distributing marketing materials with ambiguous and equivocal statements, Wells misled investors into thinking Wells Timberland was a REIT at a time when it was not a REIT. Firms need to be mindful that investors rely on marketing materials to disclose truthful, accurate and up-to-date information to help inform their investment decisions."

FINRA Fines Wells Investment Securitites $300,000 for Use of Misleading Marketing Materials for REIT Offering

SEC Penalizes Investment Advisers for Compliance Failures

2011-12-01T09:00:00.000-05:00

The SEC charged three investment advisers for failing to put in place compliance procedures designed to prevent securities law violations. This results from an initiative to actively prevent harm to investors by working with agency examiners to ensure that compliance programs are in place at firms. In two of the cases, the firms had been previously warned about compliance deficiencies.

The SEC Press Release states that "Under Rule 206(4)-7 of the Investment Advisers Act, which is known as the “Compliance Rule,” registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent, detect, and correct securities law violations. The Compliance Rule also requires annual review of the policies and procedures for their adequacy and the effectiveness of their implementation, and designation of a chief compliance officer to be responsible for administering the policies and procedures. " Specific details on the three cases can be found at the link below.

SEC Penalizes Investment Avisers for Compliance Failures

SEC Charges Perpetrator of Washington-Area Ponzi Scheme

2011-11-23T11:30:00.002-05:00

The SEC charged a Bethesda, Md. man, several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area. The SEC alleges that middle-class residents were lured by false pretenses and powerpoint presentations to invest in promissory notes. Many were encouraged to refinance their homes and utilize their personal savings and retirement funds to come up with more to invest. They were promised returns as high as 20 percent per year and told their investments were protected. Instead, the companies issuing the notes were engaged in high-risk, speculative options trading and suffered massive losses. Money from new investors was used to pay the returns to earlier investors and also for personal expenses.

The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors over a five year period. The scheme ultimately collapsed in the fall of 2010. The Bethesda man and five others have been charged.

SEC Charges Perpetrator of Washington-Area Ponzi Scheme

SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

2011-11-23T09:00:00.002-05:00

The SEC filed an emergency enforcement action to stop a fraudulent scheme targeting investors seeking coveted stock in Internet and technology companies like Facebook and Groupon in advance of a public offering.

Several individuals utilized a newly-minted hedge fund (The Praetorian Global Fund) to claim to own shares worth tens of millions of dollars in companies such as Facebook and Groupon. The companies targeted were expected to soon hold an initial public offering. Taking advantage of investor interest in pre-IPO shares that are virtually impossible for company outsiders to obtain, the individuals solicited funds and gave investors a false sense of comfort that their money was protected by telling them that an escrow service was receiving their funds.

Yet in reality the individuals never owned the promised pre-IPO shares in these companies. The escrow service only served to transfer investor funds to personal accounts controlled by two of the involved individuals. The funds were then used for lavish personal expenses (private jets, cars, art) and to pay off other individuals involved.

The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of the matter, filed criminal charges against the lead individual, a Florida resident. The Florida resident has been the subject of prior SEC enforcement action and several state criminal actions.

SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

SEC Charges Longtime Madoff Employee with Creating Fake Trades

2011-11-22T14:58:00.005-05:00

The SEC charged a longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The SEC alleges that the employee, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for nearly four decades, was asked by Madoff to provide the firm’s investment advisory operations with backdated arbitrage trade information to be made into fictitious trading on investors’ account statements. The employee’s own account at BMIS was among those in which backdated trades were entered, and he withdrew nearly $10 million in “profits” from the fictitious trading over several years. According to the allegations against the employee filed in U.S. District Court for the Southern District of New York, others implicated in Madoff’s investment advisory operations used the information provided by the employee to formulate fictitious trades to appear on investor account statements.

George S. Canellos, director of the SEC's New York Regional Office said "Kugel helped Madoff maintain the elaborate and enduring facade that his clients were engaged in actual trading when in fact no such trading occurred. Kugel withdrew millions of dollars of phony profits that he knew weren't from actual trading activity."

SEC Charges Longtime Madoff Employee with Creating Fake Trades

FINRA and Ontario Securities Commission Sign Regulatory Cooperation Arrangement

2011-11-19T12:56:00.004-05:00

FINRA and the Ontario Securities Commission (OSC) today announced they have entered into a Memorandum of Understanding (MOU). The MOU will facilitate the exchange of information with respect to regulated entities that operate across the U.S.-Canadian border. It was signed in Toronto on Nov. 10, 2011, and establishes a strong framework to improve the ability of the OSC and FINRA to oversee securities firms and markets. The arrangement will aid the exchange of information on firms and individuals under common supervision, support collaboration on investigations and enforcement matters, and provide a more complete view of market activity.

Mr. Wetston, Chair of the OSC, said, "Cross-jurisdictional regulatory coordination is essential for protecting investors in today's global marketplace. This framework acknowledges the interconnectedness of our markets and represents our commitment to working collaboratively with our international regulatory partners to address threats to investors and markets."

FINRA and Ontario Securities Commission Sign Regulatory Cooperation Arrangement

SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement

2011-11-18T12:00:00.000-05:00

The SEC charged Morgan Stanley Investment Management (MSIM) with violating securities laws. This occurred in a fee arrangement that repeatedly charged a fund and its investors for advisory services from a third party that they weren’t actually receiving.

The SEC’s investigation found that MSIM represented to investors and the fund’s board of directors that it contracted a Malaysian-based sub-adviser to provide advice, research and assistance to MSIM. In reality, the sub-adviser did not provide these purported advisory services, yet the fund’s board annually renewed the contract based on these ghost services for more than a decade. The total cost was $1.845 million to investors.

MSIM has agreed to pay more than $3.3 million to settle the charges.

“We want to take the advisory fee setting process out of the shadows by scrutinizing the role of investment advisers and fund board members in vetting fee arrangements with registered funds,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement

SEC Cracking Down on Tarted-Up ADVs

2011-11-17T12:09:00.000-05:00

This catchy headline is from InvestmentNews.com. Apparently the Commission has started targeting investment advisers who have lied on their registration forms. The SEC is quoted as saying that it has begun reviewing registration documents to find advisers who have not accurately portrayed their education, assets under management and other aspects of their firm.

According to the Commission, the goal is to stop larger frauds - the director of enforcement is quoted as saying '“If they come face to face with inspectors early on … they're going to know that we're watching, and they're going to be unlikely to graduate to larger frauds.”

Can the Commission really be this naive? Checking Form ADV for lies is going to prevent significant securities fraud? I am pretty sure that those who are committing fraud are not lying in any obvious way on Form ADV, and they are certainly aware that the Commission is "watching," to the extent that the Commission is watching at all.

Liars clubbed? SEC cracking down on tarted-up ADVs

FINRA Orders Chase to Reimburse Customers $1.9 Million

2011-11-17T09:00:00.002-05:00

FINRA announced that it has ordered Chase to reimburse customers more than $1.9 million for losses incurred from recommending unsuitable sales of unit investment trusts (UITs) and floating rate loan funds. FINRA also fined Chase 1.7 million.

FINRA's investigation found that Chase brokers made recommendations to unsophisticated customers with little or no investment experience and conservative risk tolerances, without having reasonable grounds to believe that those products were suitable for the customers. FINRA also found that Chase failed to properly supervise its sales of UITs and floating rate loan funds.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "With the growing number of complex products in the market today, it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers. Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase's customers."

FINRA's also found that WaMu Investments, Inc., which merged with Chase in July 2009, made similar unsuitable recommendations to customers. FINRA found that like Chase, WaMu failed to provide adequate training and failed to reasonably supervise the sale of floating-rate loan funds to customers.

FINRA Orders Chase to Reimburse Customers $1.9 Million for Unsuitable Sales of UITs and Floating-Rate Loan Funds

Former CEO to Return $2.8 Million in Bonuses and Stock Profits Received During CSK Auto Accounting Fraud

2011-11-16T10:29:00.002-05:00

The SEC announced that the former chief executive officer and chairman of CSK Auto Corporation has agreed to return $2.8 million in bonus compensation and stock profits that he received while the company was committing accounting fraud.

The former executive officer was not personally charged by the SEC for the company’s misconduct, however he is still required under Section 304 of the Sarbanes-Oxley Act (SOX) to reimburse CSK Auto for incentive-based compensation and stock sale profits that he received during the company’s fraudulent period. This marked the agency’s first SOX clawback case against an individual who was not alleged to have otherwise violated the securities laws.

Robert Khuzami, Director of the SEC's Division of Enforcement said, "CEOs should know that they can be deprived of bonuses or stock profits they received while accounting fraud was occurring on their watch."

Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office, added, “[He] received incentive-based pay while CSK Auto was fraudulently overstating its income to shareholders. His bonuses and stock profits are now being rightfully returned to the company for the benefit of the shareholders."

Former CEO to Return $2.8 Million in Bonuses and Stock Profits Received During CSK Auto Accounting Fraud

SEC Charges China-Based Longtop Financial Technologies for Deficient Filings

2011-11-11T14:36:00.004-05:00

The SEC's Division of Enforcement charged China-based Longtop Financial Technologies Limited with failing to file current and accurate financial reports with the SEC. The Division of Enforcement alleges that Longtop failed to comply with its reporting obligations after failing to file an annual report for its fiscal year that ended March 31, 2011. Furthermore, Longtop’s independent auditor stated in May 2011 that its prior audit reports on Longtop’s financial statements contained in annual reports for 2008, 2009 and 2010 should no longer be relied upon.

Antonia Chion, Associate Director of the SEC’s Division of Enforcement said, “We are taking this action to protect investors because it appears there is no current and reliable information available to the investing public about Longtop."

If the administrative law judge revokes the registration of Longtop’s securities, no broker-dealer may execute any trades in those securities. This would also abolish Longtop as a public shell company so that it could not be sold and used as a vehicle for future fraud.

SEC Charges China-Based Longtop Financial Technologies for Deficient Filings

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales

2011-11-11T14:04:00.004-05:00

The SEC charged UBS Securities, LLC for inaccurate recording practices when providing and recording “locates” to customers seeking to execute short sales. UBS settled the enforcement action by agreeing to pay an $8 million penalty and retain an independent consultant. A“locate” represents an approval by a broker-dealer that it has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. It is common practice for a customer to ask a broker-dealer to locate stock for short selling. Broker-dealers are required under Regulation SHO to accurately record the basis for locates given out.

According to an SEC press release, "UBS employees routinely recorded the name of a lender’s employee even when no one at UBS had actually contacted the employee to confirm availability. The SEC’s investigation found that UBS employees sourced thousands of locates to lender employees who were out of the office and could not have provided any information to UBS on those days."

Broker-dealer employees often use electronic availability feeds sent by lenders to judge the availability of locates. At times it is necessary to directly speak with lenders to confirm the availability. According to the SEC's order, UBS's "locate log" inaccurately portrayed which locates had been based on electronic feeds or direct confirmation.

According to the SEC’s order, in judging the availability of shares for locates, broker-dealer employees often utilize electronic availability feeds that are sent by lenders to many different broker-dealers. At times, reliance on those feeds might not be reasonable, and it may be necessary to contact lenders directly to confirm actual availability of the security. UBS’s locate log purported to show which locates were granted based on direct confirmation of availability with a lender and which locates were based on electronic feeds. This practice made it difficult to discern whether UBS had reasonable basis for granting locates. The SEC’s order does not find that UBS executed short sales without reasonable basis for believing that it could borrow the stock to fulfill its settlement obligations.

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales

SEC Charges San Diego-Based Investment Adviser and Its President with Fraud

2011-11-11T13:44:00.004-05:00

The SEC charged a San Diego-based investment advisory firm and its president with fraud for failing to disclose a conflict of interest to clients and materially misrepresenting the liquidity of a hedge fund.

The SEC’s Division of Enforcement alleges that when Western Pacific Capital Management LLC and its president pushed clients to invest in a security, they did not disclose that Western Pacific would receive a 10 percent commission. Western Pacific and its president also failed to register as a broker, failed to provide required written disclosures to clients, improperly redeemed one hedge fund investor’s interest ahead of another’s, and made material misstatements and omissions to clients regarding the fund’s liquidity.

“Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them,” said Marshall S. Sprung, Assistant Director in the SEC Enforcement Division’s Asset Management Unit. “[they] breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed.”

SEC Charges San Diego-Based Investment Adviser and Its President with Fraud

Three Former Directors at Military Body Armor Supplier Settle SEC Charges

2011-11-11T13:36:00.003-05:00

The SEC announced that three former directors of Pompano Beach, Fla.-based DHB Industries have agreed to more than $1.6 million in monetary sanctions to settle charges that they were involved in an accounting fraud. The settlements impose permanent officer-and-director bars in addition to the monetary sanctions. The settlements are subject to court approval.

Eric I. Bustillo, Director of the SEC's Miami Regional Office said, “These directors failed to comply with their responsibilities by ignoring the repeated red flags of the massive accounting fraud that senior management orchestrated at DHB. While we won’t second guess the good-faith efforts of most company directors, we will hold accountable those who completely abdicate the duties they owe to the companies and shareholders they represent.” DHB Industries is currently known as Point Blank Solutions.

Three Former Directors at Military Body Armor Supplier Settle SEC Charges

SEC Charges Feeders to Ponzi Scheme

2011-11-11T13:19:00.006-05:00

The SEC charged two Minnesota-based hedge fund managers and their firm for facilitating a multi-billion dollar Ponzi scheme operated by a Minnesota businessman.

The SEC alleges that three parties (two individuals and a business) invested more than $600 million in hedge fund assets with the Minnesota businessman while collecting more than $42 million in fees. The Commission alleges that the three falsely assured investors and potential investors that the flow of their money would be safeguarded by the operation of collateral accounts when in reality the process did not exist as explained. When the Minnesota businessman was unable to make payments on investments held by the funds they managed, the three parties helped to conceal this by entering into secret note extensions with the Minnesota businessman.

This is the fourth enforcement action that the SEC has brought against hedge fund managers that collectively fed billions of dollars into the Ponzi Scheme.

SEC Charges Feeders to Ponzi Scheme

SEC Approves New Rules to Toughen Listing Standards for Reverse Merger Companies

2011-11-10T12:56:00.002-05:00

Today the SEC approved new rules of the 3 major U.S. listing markets that raise the standards that companies going public through a reverse merger must meet in order to be listed on those exchanges.

The press release states that "under the new rules, Nasdaq, NYSE, and NYSE Amex will impose more stringent listing requirements for companies that become public through a reverse merger. Specifically, the new rules would prohibit a reverse merger company from applying to list until:

The company has completed a one-year “seasoning period” by trading in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange following the reverse merger, and filed all required reports with the Commission, including audited financial statements.

The company maintains the requisite minimum share price for a sustained period, and for at least 30 of the 60 trading days, immediately prior to its listing application and the exchange’s decision to list."

SEC Chairman Mary L. Schapiro said of the change, “Placing heightened requirements on reverse merger companies before they can become listed on an exchange will provide greater protections for investors.”

SEC Approves New Rules to Toughen Listing Standards for Reverse Merger Companies

SEC Obtains Record $92.8 Million Penalty Against Hedge Fund Manager

2011-11-09T11:39:00.002-05:00

Today the SEC obtained a record financial penalty of $92.8 million against a billionaire hedge fund manager for widespread insider trading.

The final judgment entered today by the Honorable Jed S. Rakoff of the U.S. District Court for the Southern District of New York finds the manager liable for a civil monetary penalty of $92,805,705, which marks the largest penalty ever assessed against an individual in an SEC insider trading case. The charges were brought against the manager on October 16th and alleged that he and several others engaged in a massive insider trading scheme. This action is part of a larger insider trading probe, which has resulted in civil charges against a total of 29 individuals and entities. The SEC alleged insider trading in the securities of more than 15 publicly traded companies for more than $90 million in illicit profits or losses avoided.

“The penalty imposed today reflects the historic proportions of...illegal conduct and its impact on the integrity of our markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

SEC Obtains Record $92.8 Million Penalty

SEC-CFTC Statement on MF Global

2011-11-09T10:33:00.001-05:00

On October 31st, the SEC and CFTC made the following statement:

"For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global, Inc., a jointly registered futures commission merchant and broker-dealer, in anticipation of a transaction that would include the transfer of customer accounts to another firm. Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm. The SEC and CFTC have determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets. SIPC announced today that it is initiating the liquidation of MF Global under the Securities Investor Protection Act (SIPA)."

SEC-CFTC Statement on MF Global

Bank of America Backlash - Bank Transfer Day

2011-11-09T08:58:00.000-05:00

As we have noted in numerous posts in the past, Bank of America has made a series of significant, and sometimes astounding, mistakes in its business operations, causing significant losses to shareholders, and pain to its employees and customers.

Most of our observations have been on the brokerage side, and specifically with the handling of the Merrill Lynch acquisition, but their problems and mistakes extend to the banking side as well.

The arrogant announcement that the bank was going to impose a $5 a month fee for use of its debit cards was the most recent mistake. Not only is it outrageous to charge customers for access to their own money, the simple fact is that debit card use is hirer among lower wage earners than higher wage earners, and such a fee hits those who are least able to afford it the hardest.

We all know the end of the story - Bank of America dropped its plans for the fee after the huge backlash from consumers. However, what it could not avoid was Bank Transfer Day.

Bank of America's arrogance was nearly perfectly timed with the Occupy Wall Street protests. Say what you will about the protests and protesters, Bank of America played right into the protests hands. Wall Street once again preying on the little guy was a story line that was hard to ignore, and the combination of the protests with BofA's stupidity fueled the specific protest - Bank Transfer Day.

The media is giving credit to a variety of people for Bank Transfer Day, but regardless, it is not disputed that the event was a pure grassroots movement, by bank customers frustrated by one too many nickel-and-diming fees. According to the Motley Fool, LA gallery owner Kristen Christian created a Facebook event on Oct. 4 that called for people to move their money from banks to credit unions. Titled "Bank Transfer Day" and scheduled for Nov. 5, the event struck a chord with a large number of people. More than 70,000 RSVP'd in the month leading up to the action.

As noted in the article, the event might have been a larger success if planned for a weekday rather than a Saturday, but there is no denying that it was a success. According to media reports, and results from the Credit Union National Association, over 650,000 people joined credit unions since the day BofA announced its debit card fee.

Bank Transfer Day: A Resounding, If Unanticipated, Success for Credit Unions

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Wall Street Occupy Wall Street Rebuttal?

2011-11-07T08:50:00.000-05:00

A letter to the OWSers that was allegedly dropped from an office building at Zuccotti Park so the unemployed college students hanging out in the park would see it. A bit arrogant, but it makes a couple of interesting points. From Registered Rep. Editor-in-Chief David Aldo Geracioti's blog.

Go ahead and continue to take us down, but you're only going to hurt yourselves. What's going to happen when we can't find jobs on the Street anymore? Guess what. We're going to take yours. We get up at 5am and work till 10pm or later. We're used to not getting up to pee when we have a position. We don't take an hour or more for a lunch break. We don't demand a union. We don't retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we'll eat that.

More...

Interesting Stats on Income Inequality

2011-11-03T10:30:00.002-04:00

I never quite understood why people were linking taxation to the increasing spread between incomes of the super-rich and the middle class. An article from Investors Business Daily, quoting from the Congressional Budget Report might have the answer:

To the extent that income inequality is a problem, it's not clear what can be done to resolve it. Among the contributing factors:

Economic growth. Strong economic growth, rising stock prices and household income inequality tend to go hand in hand.

Technology. Tech advances have put a premium on skilled labor, according to a Congressional Budget Office report . Because the pool of skilled workers hasn't grown as much as demand, their wages have climbed faster.

Free trade and immigration. Cheap labor abroad and an influx in low-skilled immigrants can depress wages at the bottom, according to the CBO.

Women in the workforce. As the CBO put it, "an increase in the earnings of women could boost inequality by raising the income of couples relative to that of households headed by single people."

Tax policy changes don't explain the widening income gap. The CBO found that, by one measure, "the federal tax system as a whole is about as progressive in 2007 as it was in 1979."

Investor.com Article

Another 100 Uvest Brokers Headed Out the Door at LPL

2011-10-28T08:52:00.000-04:00

LPL Financial LLC expects to lose 100 bank brokers this quarter due to the continuing integration of Uvest Financial Services Group Inc., its broker-dealer that specializes in serving financial advisers that work with financial institutions. That is on top of 22 Uvest brokers who left the firm in the third quarter, Robert Moore, chief financial officer of the broker-dealer's holding company, LPL Investment Holdings Inc., said in an interview according to InvestmentNews.com. More...

Ex-Goldman director to face criminal charges

2011-10-26T12:01:00.000-04:00

Rajat Gupta, one of the most prominent business executives to be caught up in the government's wide-ranging insider-trading probe, had been named by prosecutors as an unindicted co-conspirator in the criminal case against hedge fund tycoon Raj Rajaratnam earlier this year. According to Reuters, the former Goldman Sachs director, who also was once the global head of elite consultancy McKinsey & Co, will surrender to the FBI on Wednesday to face criminal insider trading-related charges.

Grupta's attorney, Gary Naftalis is quoted in the Reuters article as saying "Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless. The facts demonstrate that Mr. Gupta is an innocent man and that he has always acted with honesty and integrity. He did not trade in any securities, did not tip Mr Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo."

Readers will recall that Rajaratnam, founder of the Galleon Group hedge fund, was convicted in May by a New York federal jury after a two-month trial and was sentenced to 11 years in prison, the longest recorded for insider trading.

Gupta, 62, well-known in the business world after 34 years at McKinsey, had won a seat in 2006 on the board of Goldman. The SEC dropped an administrative case against Grupta in August, but did not give up its ability to sue him civilly. That has not occurred, presumably because of the pending criminal charges.

According to various press reports, the wiretaps on Rajaratnam has him talking about a tip from a board member at Goldman, regarding a pending press release regarding Goldman's historic fourth quarter loss in 2008. Prosecutors presumably believe that the board member is Grupta. That view is bolstered by testimony at Rajaratnam's trial by Goldman's CEO Lloyd Blankfein that Gupta had leaked boardroom secrets, according to Reuters.

Putting those two comments together, there is certainly a basis for a case against Grupta, but the government has a much longer way to go to prove that Grupta leaked material, non-public information. And while it might be true that a defendant does not have to profit from leaking information to be guilty of insider trading, it is going to be extremely difficult to convict someone who might simply be a blabbermouth, if he did not receive anything of value, that is in fact what he did.

Ex-Goldman Direct to Fact Criminal Charges

SEC Charges Major Portuguese Bank for Violating Registration Provisions of U.S. Securities Laws

2011-10-26T10:21:00.003-04:00

On Tuesday the SEC charged multinational banking conglomerate Banco Espirito Santo S.A. (BES), based in Lisbon, Portugal, with violations of the broker-dealer and investment adviser registration provisions and the securities transaction registration provisions of the federal securities laws.

The SEC's enforcement action finds that between 2004 and 2009 BES offered brokerage services and investment advice to approximately 3,800 U.S.-resident customers and clients who were primarily Portuguese immigrants. However, during this time, BES was not registered with the SEC as a broker-dealer or investment adviser, and it offered and sold securities to its U.S. customers and clients without the intermediation of a registered broker-dealer. None of these securities transactions was registered and many of the securities offerings did not qualify for an exemption from registration.

Sanjay Wadhwa, Associate Director of the SEC's New York Regional Office, said, "Foreign entities seeking to provide financial or securities-related services in the U.S. must familiarize themselves with the statutory and regulatory framework in this arena. A failure to do so, as was the case here, can be a costly misstep."

BES agreed to settle the SEC's charges and pay nearly $7 million in disgorgement, prejudgment interest and penalties.

SEC Charges Major Portuguese Bank for Violating Registration Provisions of U.S. Securities Laws

Firms Must Protect Customer Information - Always

2011-10-26T09:10:00.000-04:00

Regulation S-P prohibits financial institutions from disclosing private personal information about their customers to third parties, without the customer's authorization, and is designed to protect consumers against unauthorized access to their personal information.

While the regulation has a noble goal, it is also a trap for the unwary brokerage firm, and I frequently see firms get caught in a Reg S-P violation without ever intending to do so. One example is in discovery. I handle a fair amount of employment litigation, representing firms and brokers in their employment disputes. Those cases often involve the exchange of customer records during discovery, and every so often I come across a firm which thinks nothing of producing customer account information in the litigation. That is a violation of Regulation S-P, regardless of the fact that the production is required in litigation. The information has to be redacted before production.

The SEC has provided another example of an unintentional violation, and charged three former brokerage executives for failing to protect confidential information about their customers. According to the Commission, when GunnAllen Financial Inc. was winding down its business operations last year, its former president and former national sales manager violated customer privacy rules by improperly transferring customer records to another firm. The SEC also accused the firm's compliance director with failing to enforce the supervisory procedures in an unrelated incident.

According to the settlement agreements, the president allowed 16,000 annuity and mutual fund account applications to be transfered to the Sales Manager's new firm. It appears that what actually happened is that the Sales Manager downloaded the applications, and once at his new firm, sent a letter to those customers, advising them that GunnAllen could no longer service their accounts, and that he and his new partners were going to service the accounts, and offering to let the customers opt out of the transfer of their account to the new firm.

While there is undoubtedly a proper motive behind these actions, and those customers do need to have someone handle their accounts, the procedure is backwards, and the letter should have been sent before the transfer, and should have been sent by GunnAllen, not the new firm. Customers would have been given the opportunity to opt out before the disclosure of their information, and the conduct would have been in compliance with Regulation S-P.

According to the settlement, GunnAllen did exactly that, sending a letter to the customers notifying them of the closing of the firm and providing them with information and choices as to how they wanted their accounts handled. But the Sales Manager jumped the gun, and two days after the letter was sent, arranged for the transfer of the accounts.

The individuals settled the charges with the SEC. The President and the Sales Manager each received a censure and a $20,000 fine. More...

SEC Charges Former CEO in Tulsa With Misleading Investors about Liquidity Risks

2011-10-21T12:22:00.008-04:00

The SEC has charged the co-founder and CEO of a Tulsa-based energy company with misleading investors in one of its subsidiaries about liquidity risks they faced from his energy trading. According to the SEC’s complaint filed in federal court in Tulsa, the individual was CEO and president of SemGroup L.P., which bought, transported and sold petroleum products and traded crude oil and related commodities and derivatives. The trading activities were managed by the CEO. In addition to these responsibilities, he was also a director of SemGroup’s subsidiary, SemGroup Energy Partners L.P. (SGLP), which owns midstream oil and gas assets such as pipelines and storage facilities. SGLP issues publicly-traded limited partnership units, and the CEO signed certain corporate filings that SGLP made with the SEC.

The SEC alleges that the filings assured investors that its revenue stream from SemGroup was “stable and predictable” and protected from volatility in oil prices. However, below the surface, the CEO's energy trading was increasingly draining SemGroup’s credit facilities and other liquidity sources and jeopardizing the company’s ability to fulfill its commitments to SGLP. Investors were never warned of these risks, which came to a head in July 2008 when SemGroup’s lenders canceled the credit facility and the company filed for bankruptcy. The price of SGLP’s limited partnership units subsequently declined more than 60 percent. It is alleged that the CEO should have been aware that filings he had signed were misleading about the reliability of SGLP's revenue stream and therefore did not adequately inform the investors of the risks.

The accused CEO has agreed to settle the SEC’s charges without admitting or denying the allegations by paying a $225,000 penalty and forfeiting his rights to SGLP limited partnership units currently worth more than $1.1 million. He also consented to entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933.

SEC Charges Former CEO in Tulsa with Misleading Investors about Liquidity Risks

Citigroup to pay $285 Million for Misleading Investors

2011-10-21T10:44:00.011-04:00

The SEC has charged Citigroup Global Markets Inc. with misleading investors about a $1 billion CDO called Class V Funding III. When the U.S. housing market was showing signs of distress, Citigroup structured and marketed Class V III and exercised significant influence over the selection of $500 million of the assets included in the CDO. Citigroup then took a proprietary short position with respect to those $500 million of assets. That short position allowed Citigroup to profit in the event of a downturn in the housing market and gave Citigroup economic interests in the Class V III transaction that were adverse to the interests of investors. Without admitting or denying the SEC’s allegations, Citigroup has consented to settle.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

The SEC has also instituted settled administrative proceedings against Credit Suisse Asset Alternative Capital, LLC (CSAC), Credit Suisse Asset Management, LLC , and the Credit Suisse protfolio manager responsible for the transaction, based on their conduct in the Class V III transaction. The SEC has also brought a litigated civil action against a former Citigroup employee.

Citigroup To Pay $285 Million to Settle SEC Charges For Misleading Investors About CDO Company Profited From Proprietary Short Position Former Citigroup Employee Sued For His Role In Transaction

SEC Charges California-based Investment Adviser with Fraud and Breach of Fiduciary Duty

2011-10-21T10:31:00.004-04:00

On October 18, 2011, the SEC filed a complaint in United States District Court in Riverside, California against Copeland Wealth Management (a financial advisory corporation), Copeland Wealth Management (a real estate corporation), and a certified public accountant (Copeland's founder), for fraud and breach of fiduciary duty. As an investment adviser registered with the SEC, the financial advisory corporation manages approximately $125 million in assets under management. The assets under management are primarily mutual funds and real estate funds. The involved real estate company, an unregistered investment adviser, is the general partner for 21 limited partnerships primarily invested in real estate. Lastly, the certified public accountant involved, is the founder, co-owner and officer of both the corporation and the real estate company.

It is alleged that the three parties made material misrepresentations and omissions regarding: the use of investor funds, conflicts of interest, guaranteed returns, the unauthorized trading of put options, and the payment of undisclosed real estate commissions and other related compensation. The parties have not yet admitted or denied the allegations.

SEC Charges California-based Investment Adviser with Fraud and Breach of Fiduciary Duty

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis

2011-10-12T11:00:00.004-04:00

Today the SEC charged former bank executives with misleading investors about mounting loan losses at San Francisco-based United Commercial Bank in 2008 and 2009 during the height of the financial crisis.

The SEC alleges that the bank’s former chief executive officer, chief operating officer and senior officer concealed losses on loans and other assets from the bank’s auditors, causing the bank’s public holding company UCBH Holdings Inc. to understate 2008 operating losses by at least $65 million (approximately 50 percent). Soon continued declines in the value of the bank’s loans led the bank to fail. The California Department of Financial Institutions closed the bank and appointed the FDIC as receiver. United Commercial Bank was one of the 10 largest bank failures of the recent financial crisis, causing a loss of $2.5 billion to the FDIC’s insurance fund.

Robert Khuzami, Director of the SEC’s Division of Enforcement, said, “Today’s charges reflect an all too familiar pattern – corporate executives once seen as rising stars embrace deception to avoid losses and conceal negative news, with investors and the FDIC insurance fund left to pick up the pieces, but accountability for these executives begins today.”

Today the U.S. Attorney for the Northern District of California announced parallel criminal charges against former employees of the bank, and the FDIC announced enforcement actions against 13 individuals for violations of federal banking regulations.

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis

SEC Files Action to Halt Green-Product Ponzi Scheme

2011-10-07T10:32:00.004-04:00

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that a convicted felon and others defrauded investors in PermaPave Companies, a group of firms based on Long Island, N.Y.

About 140 individuals, many working in the construction or landscaping business, invested in the scheme between 2006 and 2010, the SEC alleged. Investors were told that PermaPave Companies had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns to investors of 7.8% to 33%. In reality, the complaint states that there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

The defendant and two other accomplices used new investments to make payments to earlier investors and then siphoned off much of the rest, buying luxury cars, gambling trips to Las Vegas, and jewelry. In addition, the complaint alleges that the defendant used investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty to conducting in 2000.

The three men were arrested earlier today and criminal charges have been filed.

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme

SEC Charges Fund Manager with Fraud In PIPE Transactions

2011-10-05T13:33:00.005-04:00

The SEC has charged a Long Island-based investment adviser with defrauding investors in hedge funds investing in PIPE transactions and misappropriating more than $1 million in client assets for his personal use. A “PIPE” transaction involves “private investment in public equity.” Microcap public companies often engage in PIPE transactions to raise capital.

The SEC alleges that the advisor and his firm The NIR Group LLC repeatedly lied to investors to hide the truth that his PIPE investment and trading strategy was failing during the financial crisis. The advisor misused investor money by writing checks to pay for personal services and luxury items such as a Lexus, Mercedes, and Rolex watch.

SEC Charges Long Island-Based Hedge Fund Manager with Fraud Involving PIPE Transactions

Bank of America's Continued Mis-Steps

2011-09-30T13:00:00.000-04:00

We are having a tough time keeping up with the nonsense at BofA. Adding to their recent problems, they have now announced that they are going to start charging their own customers $5.00 a month if they want to use their debit cards. Yup, BofA is going to charge it's own customers $60 a year to access their own money.

I don't know much about banking. My issues with BofA are on the brokerage side, which I do know something about. But this new fee demonstrates some of the problems on the brokerage side for BofA - they simply do not have a clue.

Smaller banks are jumping for joy at BofA's latest move; others are as well. The Retail Industry Leaders Association (RILA) claims that the bank earns a profit of 1100 percent every time a debit card is swiped, and have cost merchants over 20 billion dollars last year. “Crying poverty and adding fees, all while collecting a 600 percent profit on every transaction is one heck of a public relations strategy,” according to Katherine Lugar, the RILA's executive vice president for public affairs. “Bank of America's new fee is great news for every other bank in America. If Bank of America wants to charge account holders to access their own money, every other bank, particularly credit unions and community banks will welcome the flood of customers in search of a new bank,” added Lugar.

Senator Richard Durbin, architect of debit card interchange fee reform, bashed the proposed monthly fee. "Bank of America is trying to find new ways to pad their profits by sticking it to its customers," he said in a statement. It's overt, unfair, and I hope their customers have the final say."

Bank of America to charge debit card use fee | Reuters

UBS Trader Loses 2 BILLION Dollars

2011-09-27T12:01:00.002-04:00

I really thought it was going to be Merrill Lynch that would be the next firm to have problems, given the disaster known as Bank of America, but I might have been wrong.
Then again, no one could really expect me to know, or even guess, that UBS would allow a trader to lose 2 BILLION dollars. Now, it is UBS that is in the news, and the target of rumors and speculation regarding how long it can hold on.
In just the last few days:
Trader scandal may hamstring UBS' recruiting - apparently the wealth management business is getting hurt by the losses. Quite frankly, there is a serious disconnect here, if wealthy individuals are staying away from UBS because a trader in Europe lost 2 BILLION dollars, but apparently that is happening.

UBS 'business model is gone' — and rich clients could follow - according to this analysis, Ermotti will have" to rebuild investor confidence shaken by the failure of the bank's risk controls. He will have to shrink an investment bank to conserve capital as well as bolster the bank's wealth management operations, which generate about 41 percent of the bank's revenue. There, he will have to prevent wealthy clients from pulling funds from the country's largest wealth manager."

New UBS boss: U.S. brokerage not for sale -not an unexpected rumor, but interesting that there was a denial.

UBS Chief Resigns Over Rogue Trader Affair - this might have been overkill, but bravo! for taking responsibility for mistakes made during your watch.

Line of the Day

2011-09-27T09:11:00.000-04:00

Over at Above The Law, they are debating the question of whether insider traders should go to jail. One reason for sending people to jail is deterence. Matt Levine, the editor of DealBreaker, argues that deterrence makes sense, claiming that "[p]eople who work at hedge funds really don’t want to go to jail. Compared to their Greenwich homes, jail has worse food, more violence, and fewer golden retrievers."

True statement, and he finishes with:

"Also they get ordered around by people with less education than them, which is why they left BofA in the first place."

Is Bank of America so bad that it is now part of a running joke?

Read the whole article, it is a good discussion of the insider trading issue. DealBreaker Debate: Insider Trading Sentencing.

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Court Confirms Scope FINRA Arbitration Jurisdiction

2011-09-26T12:01:00.000-04:00

The federal appellate court in New York has rules that an issuer who used UBS' auction rate securities services can force UBS to arbitrate a dispute over those services under the mandatory arbitration provisions under FINRA's rules.

The securities industry is the only industry in the United States where its firms and employees are forced to arbitrate disputes with their customers, and between themselves, by government regulation. This decision clarifies the scope of that requirement, which only requires a firm to arbitrate disputes with "a customer."

Some commentators, including my friends at the ADRProfBlog, are calling the decision an expansion of FINRA arbitration jurisdiction. I don't agree, and do not believe there was ever a serious dispute over the definition of "customer" in the FINRA rules. As the Court pointed out, every definition of "customer" is basically one who purchases goods or services. The Isssuer in the case was clearly purchasing UBS' services in connection with the maintenance and operation of its auction rate securities auctions, and as an underwriter, was a customer.

There is a more interesting aspect to this decision however. The Issuer filed a FINRA arbitration against UBS alleging fraud in connection with the auction rate securities program organized and operated by UBS. UBS is losing arbitration claims left and right, over auction rate securities and Lehman Principal Protection Notes. UBS did not want to go to a FINRA arbitration, and filed in Court to stop the arbitration. The Federal District Court denied the request, ruling that the Issuer is a customer. UBS appealed again, to the Second Circuit, which again ruled that the Issuer was a customer. Which, as noted above, was the only answer that the Court could reach under these circumstances.

Is this a case of UBS attempting to run up its adversary's legal costs in order to achieve a result to which it would not obtain from a court? Perhaps, and in this case the adversary had the funds to fight. What happens when they engage in such conduct with an employee, or a customer?

Second Circuit expands FINRA’s arbitration jurisdiction

SEC Charges Former Goldman Sachs Employee and His Father with Insider Trading

2011-09-22T11:12:00.001-04:00

More Insider Trading allegations from the SEC. This time it is a Goldman Sachs employee who worked on Goldman's ETF desk. According to the Commission's allegations, the defendant obtained non-public details about Goldman’s plans to purchase and sell large amounts of securities underlying the SPDR S&P Retail ETF (XRT). He tipped his father, and they then traded those securities.

The case marks the SEC’s first insider trading enforcement action involving ETFs.

SEC Charges Former Goldman Sachs Employee and His Father with Insider Trading; 2011-188; September 21, 2011

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CEO Tells Congress He Was Fined For Hiring Too Many People

2011-09-22T11:06:00.001-04:00

Only in the securities industry could this nonsense occur. The CEO of Euro Pacitic Capital, a broker-dealer, testified before Congress about job creation, and testified that

securities regulations have prohibited me from hiring brokers for more than three years. I was even fined fifteen thousand dollar expressly for hiring too many brokers in 2008. In the process I incurred more than $500,000 in legal bills to mitigate a more severe regulatory outcome as a result of hiring too many workers. I have also been prohibited from opening up additional offices. I had a major expansion plan that would have resulted in my creating hundreds of additional jobs.

Typical FINRA. Rather than assist compliant firms from growing their business, it continually finds ways to stop the expansion, and in this case, to prevent the creation of new jobs. More than anyone else, I understand the regulations that Schiff is referring to, and understand the reasons for those regulations. The reasons are valid. The rigid enforcement of the regs, rather than working with the firm to permit the expansion, is the problem.

Schiff's full remarks are at http://www.forbes.com/sites/greatspeculations/2011/09/13/peter-schiffs-prescription-for-job-creation/

At the same time, you have to be amused at the spin some bloggers are putting on this story. Like this headline link to the exact same story: "CEO Testifies Obama Fines Their Firm for Creating Jobs." Of course, the regulations that Schiff is referring to have been in place for decades, Obama has nothing to do with the enforcement of those regulations, and neither does the federal government. FINRA is a private organization, which regulates the financial industry with SEC oversight, but not day to day involvement. But don't let the facts get in the way of a good presidential bashing.

CEO Tells Congress He Was Fined For Hiring Too Many People

Moody Lowers Bank of America's Debt Rating

2011-09-21T13:09:00.001-04:00

Not much of a surprise here - Moody's Investors Service has lowered Bank of America Corp.'s debt ratings, saying it is now less likely that the U.S. government would step in and prevent the lender from failing in a crisis.

Still watching for the Merrill spinoff........

Moody's lowers BofA's debt ratings, shares tumble

Mack to Leave Morgan Stanley

2011-09-16T12:02:00.001-04:00

Shakeups in the wirehouse world are becoming an every-day occurance. The WSJ is reporting that John Mack will resign as Chairman of Morgan Stanley at the end of the year. The last couple of years have been turmoil at Morgan Stanley, with infighting among the various factions at the firm from the Mack camp vs. the Purcell camp.

That infighting resulted in terminations, early resignations and huge distractions to the firm and its management. Add to that the mortgage trading which almost closed the firm, and the firm's involvement in the auction rate securities debacle, and it is no wonder why the firm's stock price has been crushed.

But all will be well for Mr. Mack. The article also mentions that Mack is going to write a book about his career, and is considering a goverment career, perhaps as Treasury Secretary.

Morgan Stanley's Mack to Leave at Year's End - WSJ.com

Mack to Leave Morgan Stanley

2011-09-16T12:02:00.000-04:00

But all will be well for Mr. Mack. The article also mentions that Mack is going to write a book about his career, and is considering a goverment career, perhaps as Treasury Secretary.

Morgan Stanley's Mack to Leave at Year's End - WSJ.com

Faith in UBS Goes Rogue

2011-09-16T09:01:00.000-04:00

Can someone explain how a major international bank can be the victim of fraudulent trades by an employee that cause losses of 2 BILLION dollars? How does that happen? Where are the internal controls that would prevent a trader from placing trades of the size or frequency that could result in losses of that magnitude?

You would think we were talking about Bank of America, but no, this time it is UBS, another bank that cannot run a brokerage firm or investment bank.

UBS has proven itself to be a disaster, and it is amazing that more individual at UBS have not gone to jail, or at least been banned from the securities industry. From Auction rate securities, Lehman Principal Protection Notes, Tax Evasion, rigging municipal bond transactions in 36 states, UBS has been accused of all sorts of fraud in the past few years, and the fines alone have totaled millions of dollars. One can only imagine the losses that some of this activity caused to its clients.

Now its own employee has caused losses of 2 BILLION dollars.

HEARD ON THE STREET: Faith in UBS Goes Rogue - WSJ.com

Faith in UBS Goes Rogue

Bank of America is Doomed. Just File Bankruptcy Now

2011-09-12T09:01:00.000-04:00

While I still have a problem with Henry Blodget still participating in the financial industry, even as a columnist, great article on Bank of America's imminent bankruptch. The full title is BANK OF AMERICA IS DOOMED, Says Chris Whalen-Stop Firing People and Just Declare Bankruptcy Now.

Whalen is arguing for a government seizure of the bank, and a reorganization. I am not so sure that is possible, but he makes a great point -

Bank of America is rearranging chairs on the deck of the Titanic. And firing thousands of people who don't need to be fired.

BANK OF AMERICA IS DOOMED, Says Chris Whalen—Stop Firing People And Just Declare Bankruptcy Now

Merrill Brokers Next Target for BofA?

2011-09-08T09:01:00.000-04:00

The forced departure of Sallie Krawcheck may be a sign of more than just problems at Bank of America - we may be seeing the start of an internal attack on Merrill Lynch brokers.

We all know the contempt that Bank of America has for it's own securities firm employees - witness what it did to its bank brokers when it cut their pay in half, but industry media is speculating that two of the reasons Krawcheck was canned was first, her refusal to force Merril Lynch brokers to push Bank of America products on their customers, and two, her opposition to a move to radically alter compensation at Merrill Lynch by altering the commission structure and putting brokers on a salary plus bonus.

I am sure that she was opposed to the salary and bonus plan, most right-thinking industry executives know that such a compensation scheme does nothing to benefit the broker, and will cause long term damage to the business. Bank of America will undoubtedly wrap itself up in the American flag and claim that it is a move designed to align the broker's interests with the customer, but that is simply nonsense. Wrap fee accounts did that - the broker is compensated for his success in managing the assets. Putting brokers on salary is simply a money grab - taking money from your own employees to shore up your abysmal failure on the banking side.

We all know that Bank of America is failing, and that the only profitable piece of its operations is Merrill Lynch. Again, rather than fix its problems on the banking side, it is going to attempt to cannibalize the brokerage side, and take compensation from its employees.

That is not a coghent business plan. Has BofA really forgotten what happened when it pulled a similar stunt on its bank brokers? They left in droves.

Watch for Merrill brokers to do the same.

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Krawcheck Bounced at Bank of America

2011-09-06T19:20:00.001-04:00

I can't say I am shocked. Sally Krawcheck has been forced out of Bank of America. It is barely two years ago that she was brought in to head global wealth and investment management at Bank of America, otherwise known as Merrill Lynch. InvestmentNews is reporting that she has been forced out.

InvestmentNews is reporting that it is a reorganization, but that sounds like a codeword for a sale. There was talk last week of a tracking stock, but that appears to be a bad idea that has been abandoned.

More to follow, but here is the original article -

http://www.investmentnews.com/article/20110906/FREE/110909973/-1/INBreakingNews01

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The Problem with Knee Jerk Legislation

2011-09-06T12:01:00.002-04:00

Instapundit calls it the problem with naming laws after dead people. True, but it is also the problem with rushing to pass new laws to make the public feel good. Not only do you look foolish, sometimes you actually create mini-disasters. See, e.g. Sarbanes-Oxley and Dodd-Frank.

"Murder victim’s mother blames ‘bath salts’ drugs for her daughter’s death. New Jersey rushes to pass a ban on bath salts, names law after victim. Now: Tests show accused killer had no bath salts in his system.”

Laws Named After Dead People | The Agitator

Odd: Man Tries Surgery on Himself with a Butter Knife

2011-08-30T09:08:00.001-04:00

A 63-year-old Southern California man, suffering from a painful hernia, apparently stuck a butter knife into his abdomen in an attempt to remove it. He then attempted to catherize the incision with a lit cigarette. No crime commited, but he is being held for observation.

LA Times: Hernia Surgery

Bank of America To Sell Merrill Lynch?

2011-08-29T14:12:00.001-04:00

Interesting timing of this new rumor - BofA may have to sell or spin off Merrill Lynch. That would undoubtedly be good news for Merrill Lynch brokers and advisors.

BofA's woes making life difficult for Merrill advisers - InvestmentNews

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Schwab Pitches its Clients' Clients

2011-08-29T12:01:00.000-04:00

According to On Wall Street, Charles Schwab has long said that it doesn’t solicit the investor clients of the financial advisors who custody assets with the firm. It’s a stance it repeated just a month ago when discussing its upcoming franchise program.

Whoops. Last week, Schwab did exactly that, ending an email to its clients' clients pitching portfolio products to retirement plan sponsors who were clients of retail financial advisors and turnkey asset management programs that have custodial relations with Schwab.

The firm apologized, claimed it was an accident, that it never intented to solicit its advisors' clients, and admitted that doing so "that would be a breach of our partnership."

It certainly would be, and advisors who have been damaged by that pitch are surely looking for securities counsel.

Schwab Apologizes Over Sales Pitch to Advisor Clients

Bank of America Finally Jumps the Shark - Massive Layoffs on Tap

2011-08-29T09:28:00.001-04:00

You knew this was going to happen. Since taken over by Bank of America, Merrill Lynch has got to be one of the most mis-managed brokerage firms in existence. The firm has been in complete mayhem since the takeover, principally because the Bank of America bankers do not have a clue as to how to run a brokerage firm. Now, with the stock in the trash (the stock is down FIFTY PERCENT this year alone), Bank of America has announced that they are going to lay off 10,000 employees. Ten Thousand.

And you know it is not the bank executives that are going to go; its going to be the brokerage side, and according to media reports, those layoffs include brokers. Evidence of the complete incompetence of Bank of America to run a broker firm abound.

Remember when Bank of America decided it would be a clever cost savings measure to cut the payouts of its branch brokers? It took their industry low 25% payout, and cut it to 12.5%. Half. Those bank brokers, who bust their butts trying to get bank customers to convert their CDs to mutual funds, had their pay cut in half. The result? Brokers left the bank in droves - they had no choice, their pay was cut in half at the same time the bank cut the referrals from the bankers to the brokers. A true mess. Even Sallie Krawcheck referred to Bank of America's pay policies as "stupid."

Or how about the other clever move when BofA took over Merrill - it cut Merrill brokers off from their own potential customers. Brokers who were in the process of transitioning from US Trust, or <gasp> Bank of America itself were prohibited from bringing their old customers over to Merrill Lynch. I wrote about that in my column "BofA In a Panic?"The arbitrations over that escapade are still going on.

Bank of America's poor decision making was evident from day one. It's retention bonuses to Merrill Lynch brokers were so poorly planned, and so low that there was a massive exodus of brokers from Merrill Lynch. Bank of America decided that a bonus of less than one times trailing 12 was going to keep brokers at the firm, when its competitors were offering 2 times trailing twelve for them to leave Merrill Lynch. Incredibly, Bank of America was surprised that brokers left.

That was October 2008. Then in August 2009 Bank of America decided that chasing million dollar producers away was not a good idea, and it announced that it was looking to hire brokers of all production levels. We discussed that disaster in "Is Merrill Schizophrenic?"

That apparently did not work out either, so in 2010 Merrill announced that it was going to hire rookie brokers, because it did not want to pay for talent. That apparently did not work out too well, since now it is those rookie brokers who are undoubtedly going to be on the firing line.

During all of this, Bank of America refused to join the Broker Recruiting Protocol, which raised the ire of many in the industry, including other firms. It suffered through that mini-fire storm, and then merged all of its brokers into Merrill, resulting in....wait for it....them joining the Broker Recruiting Protocol.

But we are not done. In 2011, Bank of America realized that they were having trouble recruiting new brokers and keeping existing ones . I know, it was no shock to those of us in the industry, but apparently Bank of America was baffled. A rational approach to the problem would be to step up recruiting, sweeten pay packages, and otherwise transform your firm into a business where brokers were proud to say they worked, and were clients were being properly taken care of.

But no, not a Bank of America. Rather than doing anything to make their operating units a better place for clients and employees, Bank of America changed its focus from trying to hire brokers, to attempting to stop the few that they had from leaving. In March of this year, BofA announced unilateral employment restrictions on US Trust advisors. Bank of America gave those advisors an ultimatum - a demand that they sign a new agreement that would effectively sideline them for up to eight months if and when they decide to leave the firm or else risk losing not only their 2010 bonuses but their jobs as well. I discussed all of this back in March, in "BofA In A Panic? Unilaterally Imposes Garden Leave Provisions."

Now, after three years of disasters (we haven't even touched on the employee arbitrations Merrill Lynch has lost, the customer arbitrations that it has lost, and the millions of dollars of fines that have been imposed) Bank of America has undoubtedly jumped the shark - it has reached the point where it is beyond recovery.

Bank of America announced that it will be laying off 10,000 employees, on top of the 2,500 layoffs that it instituted earlier this year.

A damn shame. When I started working with financial professionals in the 1980s, Merrill Lynch was THE brokerage firm. Brokers were proud to work there, clients were well treated, and the firm was well respected.

That is certainly old news, at least from by broker-centric view.

Bank of America and layoffs

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SEC Whistleblower Information and FAQ

2011-08-15T09:05:00.000-04:00

We just posted an introduction to the SEC Whistleblower Program at our new site, for those of you who are interested.

SEC Whistleblower Program

Don't Google "Insider Trading" or "10b-5" Before Trading on Inside Information

2011-08-15T09:00:00.000-04:00

More insider trading cases from the commission. This time the SEC charges that the defendant used information that he gleaned or stole from his girlfriend who was working for Disney on it acquisition of Marvel Entertainment in 2009.

A slightly different twist on the classic insider trading case. According to the SEC he used his brother's account to make the trades. Did he think that was going to fool investigators? But just before many of his purchases he searched the Internet for terms such as “insider trading,” “material, non-public information,” and “Rule 10b-5.”So much for a defense of lack of intent or knowledge of the acquisition.

According to the SEC’s complaint the defendant's girlfriend worked on the Marvel acquisition as an extern in Disney’s corporate strategy department, and she possessed confidential details about the pricing and timing of the deal, and the SEC is alleging that the defendant illegally traded on this non-public information in breach of his duty of trust and confidence to his girlfriend.

The misappropriation theory has certainly taken us a long way from the wording of the statute - that the fraud must be in connection with the purchase or sale of a security.

The SEC Complaint is at the Commission's site.

SEC Charges Former Investment Fund Employee with Insider Trading in Marvel Stock Prior to Disney Deal; 2011-166; August 11, 2011

SEC Investigating S&P On Insider Trading Issues

2011-08-12T09:00:00.000-04:00

According to a short piece from Reuters his morning, the SEC has asked rating agency Standard & Poor's (S&P) to disclose which employees knew of its decision to downgrade U.S. debt before it was announced last week, the Financial Times said, citing people familiar with the matter. The article also states that the Commission is not aware of a leak, nor is it aware of aberrational trading.

More...

SEC Charges Former Baseball Player and Others with Insider Trading;

2011-08-11T09:05:00.000-04:00

Lawyers, doctors, even scientists and now baseball players - it seems that no one can escape the allure of trading on inside information. It is truly an amazing phenomenon, since presumably all of these people know it is illegal. Given the draconian penalties, you would think they would not take the risk.

The SEC has charged former professional baseball player Doug DeCinces and three others with insider trading ahead of a company buyout. The SEC alleges that DeCinces and his associates made more than $1.7 million in illegal profits when Abbott Park, Ill.-based Abbott Laboratories Inc. announced its plan to purchase Advanced Medical Optics Inc. through a tender offer.

The SEC alleges that DeCinces, who lives in Laguna Beach, Calif., received confidential information about the acquisition from a source at Santa Ana, Calif.-based Advanced Medical Optics. DeCinces immediately began to purchase shares of Advanced Medical Optics in several brokerage accounts, buying more throughout the course of the impending transaction as he received updated information from his source. During this time, DeCinces also illegally tipped three associates who traded on the confidential information – physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach.

DeCinces agreed to pay $2.5 million to settle the SEC’s charges, and the three others also agreed to settlements.

“Time and again, we see reputable people engaging in insider trading and risking their good names in order to enrich themselves and those around them ...People need to understand that we are watching for suspicious trading activity, and they will pay a heavy price when we catch them insider trading.” Daniel M. Hawke, Chief of the SEC Division of Enforcement’s Market Abuse Unit and Director of the Philadelphia Regional Office.

The SEC Complaint is online, as is the Commission's press release

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From 10,600 to 11,200 in an hour and 15 minutes.

2011-08-09T16:01:00.001-04:00

Talk about a roller coaster, down 200 to up 400 in 75 minutes

^DJI Technical Analysis | Dow Jones Industrial Average Stock - Yahoo! Finance

S&P Downgrades US Credit For First Time

2011-08-06T12:00:00.000-04:00

Citing "political brinkmanship” which has made the government's ability to manage its finances “less stable, less effective and less predictable” S&P dropped the credit rating for the United States government.

Our politicians have completely and utterly screwed us, once again. When are we going to learn? They have no interest in serving the people, their interest is in winning a political battle, while losing the entire war.

S&P downgrades U.S. credit rating for first time - The Washington Post

Calling All Wall Street Wives

2011-07-22T17:33:00.000-04:00

I never really understood the popularity of the "wives" series of reality shows, except perhaps in the same way folks stare at gruesome car accidents, but maybe this will help. According to CNBC, casting is currently underway for "Wall $treet Wives," a new reality show that will feature the women behind the men on Wall Street.

According to a casting notice that went out earlier this week, women who wish to apply for the show should have "a fun and attractive personality," and be married or previously married to a man who worked on Wall Street. Do lawyers' wives count?

Calling All Wall Street Wives

SEC Raises Dollar Limits For Performance Fees

2011-07-13T09:01:00.000-04:00

The SEC issued an order that raises, to adjust for inflation, two of the thresholds that determine whether an investment adviser can charge its clients performance fees. The order carries out a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 205-3 under the Investment Advisers Act allows an investment adviser to charge a client performance fees if the client meets certain criteria, including two tests that have dollar amount thresholds. The SEC has now rasied the dollar amounts and now an investment adviser will be able to charge performance fees if the client has at least $1 million under the management of the adviser, or if the client has a net worth of more than $2 million. Either of these tests must be met at the time of entering into the advisory contract. The previous thresholds were $750,000 and $1.5 million respectively, and were last revised in 1998.

The Dodd-Frank Act requires that the Commission issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011 and every five years thereafter. The Commission published a notice of its intent to issue the order on May 10, 2011. The Commission also proposed amendments to rule 205-3, which are currently under consideration.

The order will be effective on September 19, 2011, which will be approximately 60 days after its publication in the Federal Register.

Did JP Morgan Get a Break in CDO Case?

2011-06-24T09:26:00.001-04:00

The SEC has filed a complaint against JPMorgan Securities for failing to disclose a material fact in connection with the creation, sale and distribution of a product. We commented on it earlier this week - JP Morgan to Pay $153.6 Million to Settle SEC Charges. In essence, the Commission alleged that JP Morgan failed to inform investorsin a CDO that it created that a hedge fund helped to select the assets in in the CDO portfolio, and the hedge fund was short those same assets. As a result, according to the SEC, the hedge fund was poised to benefit if the CDO assets defaulted.

The allegation was familiar, since the Commission brought almost identical charges against Goldman Sachs last year. We discussed that case at SECLaw.com -The Impact of the SEC CDO Fraud Complaint against Goldman Sachs and here - Goldman's Defense to SEC Fraud Case

JP Morgan settled by paying $153.6 million (and no executives were harmed in the settlement). Goldman initially fought the case, and ultimately settled for $550 million.

Now commentators are questioning the disparity between the two penalties. Bloomberg's Jason Weil writes that JP Morgan caught a break. Aside from the money, the charges against JP Morgan were for negligence, the charges against Goldman Sachs were for fraud.

Without knowing the intimate details of the two cases, if there was a difference in the scienter, or intent, part of the violation, then that would explain the disparity in the fine. Also, as litigators are well aware, defendants often get a better deal settling early.

But that doesn't explain the signficant difference in the fines, nor does it explain why there was no individual at JP Morgan included in the sanctions, whereas individuals were included in the Goldman Sachs case.

Bloomberg says that the SEC won't explain the disparity, but also notes that the Commission will have to have the approval of United States District Judge Richard Berman before the settlement is effective. If Judge Berman asks, the SEC will be forced to explain.

JPMorgan Gets a Break Where Goldman Got Nailed: Jonathan Weil - Bloomberg

SEC Says Congressional Insider Trading Not Illegal

2011-06-24T08:51:00.001-04:00

It is always nice to be told you are right, and having the SEC tell a securities attorney that he is right about a securities law issue is even nicer. Senators buying stock based on non-public information regarding pending legislation is not illegal, and it is not insider trading.

But isn't this the entire point? Why is it permissible for a Senator who is on a committee and who knows, before a public announcement, that the Senate is going to approve a billion dollar program for solar energy, and then buys stock in the two largest solar energy companies?

I am not so sure that the actual instances of this type of trading is as prevalent as the media is making it out to be, but it is certainly outrageous.

Congressional Trading on Advance Info Not Illegal: SEC - CNBC

SEC Adopts Rule Under Dodd-Frank Act Defining “Family Offices”; 2011-134; June 22, 2011

2011-06-24T08:35:00.001-04:00

The SEC approved a new rule to define “family offices” that are to be excluded from the Investment Advisers Act of 1940.
“Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.

The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The new rule adopted by the SEC enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act.

The rule is effective 60 days after its publication in the Federal Register."

SEC Adopts Rule Under Dodd-Frank Act Defining “Family Offices”

Small Broker-Dealers Closing At Fast Pace

2011-06-24T07:34:00.000-04:00

Over 500 broker-dealers are expected to close in the coming year. That is not a good sign for the industry or for our collective financial health. If investors are limited to dealing with the banks for their investment and financial lives we will see more travesties like Lehman Principal Protection Notes, auction rate securities, CDOs and other "products" that allow the firms to take a position that is opposite what they are telling clients to do.

A large part of the problem, if not the entire problem, is over zealous regulation. While FINRA talks a good game, that message has not filtered down to the field, and there is far too much of a "gotcha" mentality. Its the regulations and overzealous enforcement that is going to put the firms out of business. I just wrote about this problem - FINRA Targeting Small Firms and Brokers?

FINRA needs to wake up. Smaller firms provide the advice, attention and real-deal financial counseling that individual clients need. Sure, there are some great financial advisers at the wire-houses - I represent tons of wire house reps all of whom care deeply for their clients - but the firms themselves are just poorly run machines with no regard for anything other than making a buck. Driving the small firms and brokers out of business with expensive and unnecessary compliance programs, coupled with outrageous fines and penalties for bookkeeping errors is harming our economy, not helping it.

Broker-dealer shrinkage: Closures rapidly outpacing new entrants

PLI's Securities Arbitration Program Announced

2011-06-23T12:25:00.001-04:00

Professor Jill Gross over at the ADR Blog has a post announcing that registration is open for PLI's program on Securities Arbitration, which she chairs. I have been on a few panels at this event, and it is a great program.

From Professor Gross' post:

Annual PLI Securities Arbitration Program

In the past year, FINRA sought SEC approval of major rule changes empowering customers to choose an all-public panel in their cases and significantly improving the Discovery Guide, and the Supreme Court once again reaffirmed its interpretation of the Federal Arbitration Act as codifying a strong national policy favoring arbitration. To get the latest information on FINRA Dispute Resolution’s rule changes, website changes and updates to arbitrator training materials, don’t miss Securities Arbitration 2011.

This year’s program will once again include an expanded series of panels featuring FINRA’s Director of Arbitration and his staff. You’ll also receive practical tips from arbitrators, mediators, experienced attorneys who represent both customers and industry players, and regulators and academics on:

Drafting claims and answers
Preparing witnesses and exhibits
Using pre- and post-hearing briefs
Initiating settlement discussions

SEC's Insider Trading Loss Story Has Legs

2011-06-23T09:02:00.000-04:00

We posted last week about Sallah & Cox's jury verdict in the SEC insider trading case against Dr. De La Maza. Sallah and Cox defended Dr. De La Maza in the SEC trial after he was charged with insider trading by the Commission.

The defense verdict is a bit unusual - after all, the SEC gets to pick and choose the cases it brings, so it has, almost by definition, a high success rate. However, new reports are coming out criticizing the SEC for the way it handled this matter - and the defamation of Dr. De La Maza.

Walter Pavlo at the Forbes While Collar Crime Blog points out today that at the time of the filing of the complaints the SEC staff made some very strong comments about Dr. De La Maza, comments which might actually be defamatory, including: “[t]hese individuals traded on confidential information with reckless disregard for the fairness of the markets and utter disrespect for their jobs or close-knit relationships. But their greed left a trail for investigators to follow” and "[t]hese individuals chose money over integrity as they abused their positions of trust and misused privileged information. Whether they learned about the pending mergers through business, family, or friends, they exploited those relationships to make an easy buck.”

I am certainly not an expert on tort law or defamation, but at a minimum, someone owes Dr. De La Maza an apology.

SEC Loses Insider Trading Case — You Can’t Win’em All - Walter Pavlo - White-Collar Crime - Forbes

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Insider Trading Not Illegal for Congress and Their Staff - STOCK Act Introduced to Stop Trading on The Congressional Knowledge Act

Insider Trading Probe Sparks Paranoia in Traders

2011-06-22T07:25:00.001-04:00

The trader in this article needs a securities lawyer, or at least some time on my sites to understand what insider trading really is. Best line of the piece - the paranoia is a feature, not a bug.

Insider Trading Probe Sparks Paranoia in Traders - CNBC

Hat tip to Securities Docket.