Taking the SEC To Trial

The U.S. Securities and Exchange Commission, long known for settling enforcement actions without having to prove its case in court, is struggling to cope with a surge in the number of executives and companies willing to go to trial to defend themselves.

The SEC’s office in Washington is actively litigating about 90 cases, up more than 50 percent in the past year, Matthew Martens, the SEC’s chief litigation counsel, said in an interview. At the same time, Martens’ trial unit staff has stayed relatively flat at about 36. He recently added three more lawyers to his group and is looking to hire more.

Martens said its critical that his unit present a credible threat. “At the end of the day, if we can’t win cases, then people don’t settle. That’s the reality,” he said.

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FINRA Respondent Wins Case, Now Running for FINRA Board

Three years ago, Kevin Carreno was about to become the top securities regulator in Florida, by way of an appointment by the Governor. However, as the appointment was being announced, FINRA decided to file an enforcement proceeding against Mr. Carreno, and the appointment slipped away.
Kevin believed that the enforcement case stemmed from an animus that developed between him and some Finra officials over his earlier, rigorous defense of a broker-dealer client, and fought the charges. In a rare decision, the FINRA hearing panel threw out all of FINRA Enforcement's claims - but that was too late for the Florida securities post.
Now Kevin is running for a seat on the FINRA Board of Governors. I have known Kevin for many years,he is not only an attorney but a well known and respected compliance professional. His background, experience and knowledge will make him an excellent addition to the FINRA Board. Having witnessed first hand the harm that an abusive regulator can cause to even the most respected securities professional, his election might bring some balance to an organization that is too often abusive towards member firms - in particular small firms.
Kevin is running for one of three small firm seats on the FINRA Board. The small-firm seat became available earlier this month when FINRA Board member Joel Blumenschein, president of Freedom Investors Corp., resigned after settling failure-to-supervise charges brought by Finra enforcers last September. Mr. Blumenschein's term was due to expire in August. We wrote about his settlement, the fact that he remainded on the Board despite being suspended, and his ultimate resignation.
Potential candidates for the vacant seat have to collect signatures from 3% of the 4,059 small firms registered with Finra in order to get on the ballot.
Read the InvestmentNews Article - If you can beat 'em, join 'em: Finra target now running for board - InvestmentNews
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Morgan Stanley Cut Facebook Estimates Just Before IPO?

When I posted last week that the Facebook IPO was an opportunity for fraud, and quoted Jim Sallah, the well-known Boca Raton securities attorney, I was talking about stock scammers, not major brokerage firms.
Reuters is reporting, under a headline Morgan Stanley Cut Facebook Estimates Just Before IPO that in the run-up to Facebook's $16 billion IPO, Morgan Stanley the lead underwriter on the deal, unexpectedly  told some of its clients that the firm was reducing its revenue forecasts for the company.

It remains to be seen whether that was fraudulent conduct, but that information, if true, is certainly going to attract the interest of regulators and customer attorneys. The impact of such a statement, in particular coming from the lead underwriter might have contributed to the weak performance of Facebook shares, which sank on Monday and Tuesday - their second and third days of trading - to end more than 18 percent below the IPO price.

Institutions and major clients generally enjoy quick access to investment bank research, while retail clients in many cases only get it later. According to the article, it is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly. The company declined to comment when asked who was told about the research.

Corzine's Compensation - 8.5 Million Dollars in Salary and Options From MF Global in 2011

MF Global's bankrupcty court filings apparently disclosed that Chief Executive Officer Jon Corzine received approximately $8.5 million in compensation last year, including almost $5.4 million of stock options in the bankrupt brokerage firm. While some will point out that the options are now worthless, they were not worthless when they were given to Corzine, and his pay was still $3.1 million for 20 months of work.
And he did not do such a good job. Not only did he resign in the midst of regulatory probes, the firm cannot find $1 billion that vanished during his watch.

And why is there no pending civil or criminal cases against him and the others who ran MF Global? A billion dollars disappear, customer funds are missing - not lost in the market - missing, and no charges have been brought?

MF Global last year paid Corzine $8.5 million in salary, stock options

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Yahoo Executive and Mutual Fund Manager Charged With Insider Trading - Civil and Criminal.

Sometimes clients and prospective clients express disbelief when I tell them that violations of the securities acts can have criminal ramifications, and that simply because you do not often see criminal cases, that does not mean that violations of the acts are not crimes.
The most recent case in point came with the SEC's announcement on Monday that it charged a former executive at Yahoo! Inc. and a former mutual fund manager at a subsidiary of Ameriprise Financial Inc. with insider trading on confidential information about a search engine partnership between Yahoo and Microsoft Corporation.
The SEC alleged that Robert W. Kwok, who was Yahoo's senior director of business management, breached his duty to the company when he told Reema D. Shah in July 2009 that a deal between Yahoo and Microsoft would be announced soon. Shah had reached out to Kwok amid market rumors of an impending partnership between the two companies, and Kwok told her the information was kept quiet at Yahoo and only a few people knew of the coming announcement. Based on Kwok's illegal tip, Shah prompted the mutual funds she managed to buy more than 700,000 shares of Yahoo stock that were later sold for profits of approximately $389,000.
The SEC further alleges that a year earlier, the roles were reversed. Shah tipped Kwok with material nonpublic information about an impending acquisition announcement between two other companies. Kwok traded in a personal account based on the confidential information for profits of $4,754.
The SEC's press release reflects that Kwok and Shah have agreed to settle the SEC's charges. Although financial penalties and disgorgement will be determined by the court at a later date, Shah will be permanently barred from the securities industry and Kwok will be permanently barred from serving as an officer or director of a public company.
At the end of the press release, the SEC added that in a parallel criminal case Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charge. Both are awaiting sentencing.
The financial penalties alone will be interesting, since there are no allegations that Kwok received any money or benefit from tipping Shah, and there is no allegation that Shah directly profited from the tip, since the purchase was made in a mutual fund that Shah managed. However, the Commission may be attempting to use the profits from the reverse tip, of Shah to Kwok and the $4,000 profit there, as the basis for the fines.
SEC Charges Former Yahoo Executive and Former Ameriprise Manager With Insider Trading

Beam & Astarita Reviewing Claims For Facebook Trading Disaster

The world's largest IPO has turned into an unmitigated disaster for NASDAQ, which was unable to handle the volume of trading on Friday, the first day of trading in Facebook shares. According to press reports, NASDAQ has admitted that it bungled Facebook's offering, and acknowledge that technology problems affected trading in millions of shares.
Thus far it is estimated that the losses will be in the tens of millions of dollars for brokerage firms, traders and investors. Beam & Astarita is reviewing potential claims by brokerage firms and investors for losses that were occasioned on Friday and again today.
Thus far it appears that brokers and traders who entered orders on behalf of institutions and retail investors did not receive confirmation of executions until hours after the fact, and even then, the reports were not correct. That forced brokers to go back to their customers, who thought their trades were executed earier in the day, and to attempt to fix the trade discrepencies for those customers.
The issue clearly goes back to NASDAQ but brokers will have to deal with the issue with their customers, and customers are getting ready to file claims against their firms, and NASDAQ for their losses.
That put the onus on brokers to determine whether or not to make customers good on trades they thought had been completed hours earlier. Wholesale market makers, the major electronic order-handling operations that handle the trading of individual investors, were seen among the worst-hit by Nasdaq's glitches due to the large number of orders that needed to be fixed for customers eager to trade in Facebook's debut.
 Nasdaq OMX officials claim that clients would have to seek "accommodation" through the exchange's rules for handling disputed transactions, but a more direct route, through arbitration or traditional lawsuits, may be the ultimate dispute resolution.
If you have been damaged by the trading in Facebook IPO shares, give us a call at 212-509-6544 or 973-559-5566, or email our team at facebookipo@beamlaw.com.

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Introduction to Private Placements

Is the economy picking up?  One of SECLaw's most popular articles is getting hits like crazy. Here

Accredited Investor Definition

The question keeps coming up, so I thought a new blog post was in order. The question - what is the definition of an accredited investor for purposes of Reg D?
For years, the definitions that most are familiar with are:

• a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; OR

• natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

The confusion apparently stems from a 2011 amendment to the definition under Dodd Frank which excluded the value of the investor's home from the calculation of net worth. An investors' home is no longer included in the calculation.

The earnings definition remains the same, despite the passage of time, but the Commission is now required to review the accredited investor definition in its entirety every 4 years.

The original release is at SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act; 2011-274

The definition itself is contained in Rule 501(a) of the Securities Act of 1933.

Facebook IPO Opportunity for Fraudsters?

From the Sun-Sentinel, as the Facebook IPO arrives, not only are investors lining up for what they hope will be a golden opportunity, but so are scammers. The combination of heavy hype, potentially lucrative returns and starry-eyed novice players in the equities market have created ripe conditions for con artists to operate, according to financial regulators and securities attorneys. People are being warned to be especially careful about offers to purchase private shares of Facebook before the initial public offering (IPO) of stock expected later this week.

'It's the hottest IPO in years and anything that is hot will be exploited by scammers," said Jim Sallah, a Boca Raton securities attorney. "If you want to raise a quick $5 million, the quickest thing to do is start marketing Facebook pre-IPO shares."

Facebook's looming IPO a juicy opportunity for South Florida fraudsters, authorities say - South Florida Sun-Sentinel.com

JPMorgan's Big Loss: Explain it to Me

JPMorgan announced last week that it lost 2 billion dollars over the past six weeks. The local newspapers and talking heads made a huge deal about it. After all, it is 2 BILLION dollars, and the implied worries that the bank will go under, the economy will collapse and there were will be general mayhem abound.
However, that loss will not crash the bank, or anything else. According to the real money media, JPMorgan has more assets than any other bank in the country. Its net loss for the quarter is estimated to be $800 million and the bank made $5.4 billion in the first three months of the year alone.

But 2 billion dollars is a lot of money, and one has to wonder how in the world any one, or any financial institution, could lose that much money in a month. According to CNN Money and the Wall Street Journal, it is all caused by huge hedging transactions in credit default swaps. You remember them, they played a large part in the collapse in 2008 and 2009. According to the press, the credit default positions were so large that they caused unusual market movements, prompting hedge funds to take the opposite position.

So far, no one is saying that anyone did anything wrong, but we will have to wait and see on that one. But the back story is interesting, and starts at CNN Money - JPMorgan's big loss: Explain it to me 

Hollywood Movie Producer and Others Charged with Insider Trading - What is Going On Here?

There was a time when insider trading was limited to securities professionals with superior access to information. Then along came the employees in financial printing firms, who has superior access to information regarding tender offers and hostile takeovers. And then it became a thing with loading dock workers, NYC taxi drivers, pizza shop owners, computer repair techs and just about everyone.

Then the SEC cracked down, and at least from my perspective it got quiet. We would see an occasional investigation of a technical analyst who followed a handful of stocks for years and hit it big on two, and others who have been lucky over the years.

But lately, the cases are on the upswing. Recent cases have included traditional insiders - corporate officers andthe occasional attorney - but also hedge fund managers, scientists, and computer hackers. Check out the Insider Trading tag here at the Securities Law Blog for all of these stories on those who have been investigated and/or accused of trading on inside information. The question is, is the upswing the result of more insider trading, or is the SEC becoming more aggressive in investigating insider trading cases.

Of course, simply because the SEC charges someone with insider trading, that does not mean that the defendant actually broke the law. Like most government entities, the SEC is fond of attempting to expand its jurisdiction, and give itself more power. It therefore brings misguided cases on occasion, brought not for its regulatory agenda, but for a political and power agenda. The SEC's ongoing battle with Mark Cuban demonstrates the point. The SEC should lose that case, but it keeps on punching, filing appeals, and moving toward trial. 

Others have noticed the trend as well. One commentator blames it on the regulations arguing that insider trading is governed by rules that are unclear at best and erratically enforced. He also points out that corporate executives, directors and other insiders blab all sorts of undisclosed material information to anyone who wants to know. Take a look at Steve Tobak's editorial at CBS News - Is insider trading still rampant?

And the cases continue. The SEC announced charges against a Hollywood movie producer along with his brother, cousin, and three others in his circle of friends and business partners for insider trading in the stock of a company for which he served on the board of directors.

The SEC alleges that Mohammed Mark Amin, prior to a company board meeting, learned confidential information about expanding business opportunities for DuPont Fabros Technology Inc., which develops and manages highly-specialized and secure facilities that maintain large computer servers for technology companies through long-term leases with them. Amin tipped his brother Robert Reza Amin, cousin Michael Mahmood Amin, and long-time friend and business manager Sam Saeed Pirnazar with nonpublic details about three new leases that DuPont Fabros was negotiating and three loans it was obtaining to develop new facilities. The three illegally traded on the basis of that inside information. Reza Amin went on to tip his friends and business associates Mary Coley and Ali Tashakori, who also illegally traded. Together they made more than $618,000 in insider trading profits when DuPont Fabros stock rose 36 percent after the company issued an earnings release highlighting the development of these new facilities.

The SEC says that they earned $618,000 in profits. They agreed to settle the Mark Amin and the five others agreed to settle the SEC’s charges by collectively paying nearly $2 million.

The SEC's Insider Trading Complaint is at the SEC's website.

Ponzi Scheme Fugitives Captured

According to an AP news story out this morning, US Marshals in Arizona put an end to an Illinois couple's life on the lam, a dozen years after they fled punishment for running a Ponzi scheme that targeted friends, the elderly, and even family members, authorities said.

The two were arrested by deputy marshals Saturday afternoon in Tonopah, a desert community 50 miles west of Phoenix. Officials believe they hid in Arizona for the past couple years. "The 12-year run from justice of the Hallahans, also known as the 'Mini Madoffs,' has come to an end," U.S. Marshal for Arizona David Gonzales said in a statement. "Their investment scams involving family, friends, and the elderly, ruined many lives.

The couple pleaded guilty in Illinois federal court to bank and mail fraud conspiracy charges and money laundering. They didn't show up for their sentencing and began life on the run. The government alleges that while living in Peoria, Ill., the couple promised their victims significant returns on investments,  but they were actually running a Ponzi scheme, repaying earlier investors with proceeds from new ones.

The Marshal Service said the couple netted millions of dollars from victims. As is typical of these cases, where the authorities often overstate the use of the proceeds, the government claims that the couple maintained a lavish lifestyle, buying yachts, luxury vehicles, designer clothes and jewelry.
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Facebook's Wall Street Tour Begins

Wall Street revved into high gear Friday preparing to sell Facebook Inc. But while riches await the company's biggest holders, the deal won't prove nearly as lucrative for banks.

Facebook executives including finance chief David Ebersman began a tour of Wall Street banks Friday morning, starting with a visit to Morgan Stanley's midtown headquarters in Manhattan at 8 a.m. EDT, people familiar with the matter said. More...

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FINRA Director Calls It Quits

I posted an article last week about this case - a FINRA Director entered into an AWC with FINRA over the operation of his brokerage firm, paid a fine and received a 90 day suspension. That in and of itself is not terribly notable - but he remained on FINRA's Board of Directors. THAT was notable. My article, FINRA Board Member Fined - Wrist Slap for a Prominent Member? analyzed the case, the fine and the penalty, and posed the question, What was FINRA thinking when they let him stay on the Board?

Well, he stepped down this week. At least he had more sense than his organization did. The Wall Street Article is here - Finra Director to Step Down- complete with a quote from me.

FINRA Fines Citi, Morgan, UBS and Wells $9.1 Million for ETFs

FINRA announced that it has fined Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

We have represented investors who lost significant sums of money in leveraged ETFs, which are securities which seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms' registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

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Bank Of America Shareholders Lose Again - To Their Own Company

Readers will remember back in 2008 when Bank of America damaged its own shareholders by refusing to disclose the nature and scope of Merrill Lynch's losses. Those losses, of 15 billion dollars, and the hiding of them by BofA, were made worse by the fact that Merrill was paying nearly 4 billion in bonuses at the same time. Bank of America did not disclose the Merrill Lynch losses until after the shareholders approved the merger. 

Typical of Bank of America, and the shareholders sued. As we all know, Bank of America's stock is in the trash, at 8 dollars and falling, and down over 30% in the last 12 months alone.

Shareholders sued, and now some are objecting to a proposed $20 million settlement of the litigation, accusing the Board of collusion with the lead plaintiffs in the suit.

Judge Castel in the Southern District of New York will decide the issue this month.

BofA directors fight back over $20 million settlement