SEC Charges Former Jefferies Executive with Defrauding Investors in Mortgage-Backed Securities

The SEC charged a former executive at New York-based broker-dealer Jefferies & Co. with defrauding investors while selling mortgage-backed securities (MBS) in the wake of the financial crisis so he could generate additional revenue for his firm.

According to the SEC’s complaint filed in federal court in Connecticut, the former executive arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies.  The SEC alleges that the former executive would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm.  On other occasions, he misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price.  Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information. 

The SEC alleges that the former executive generated more than $2.7 million in additional revenue for Jefferies through his deceit.  His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm.

“Brokers must always tell their customers the truth, particularly in complex securities transactions in which it is difficult for investors to determine market prices on their own,” said George Canellos, Deputy Director of the SEC’s Division of Enforcement.  “[The former executive] repeatedly lied to his customers and invented facts to bring additional profits into his firm and ultimately his own pocket at their expense.”

For more information, visit SEC Charges Former Jefferies Executive with Defrauding Investors in Mortgage-Backed Securities.

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SEC Charges Trader in Houston-Area Investment Scheme Targeting Lebanese and Druze Communities

The SEC charged a day trader in Sugar Land, Texas, with defrauding investors in his supposed high-frequency trading program and providing them falsified brokerage records that drastically overstated assets and hid his massive trading losses.

The SEC alleges that the day trader particularly targeted fellow members of the Houston-area Lebanese and Druze communities, raising more than $6 million during a five-year period from at least 33 investors. The day trader told prospective investors that he would pool their investments with his own money and conduct high-frequency trading using a supposed proprietary trading algorithm. He promised annual returns of 30 percent and assured investors that his program was safe and proven when in reality it was a dismal failure, generating $1.5 million in losses. As he failed to deliver the promised profits, the day trader told investors that his funds were tied up in the Greek debt crisis and the MF Global bankruptcy among other phony excuses.

The SEC is seeking an emergency court order to halt the scheme and freeze the day trader‘s assets and those of his firm, FAH Capital Partners.

“[The day trader’s] affinity scam preyed upon people’s tendency to trust those who share common backgrounds and beliefs,” said David R. Woodcock, Director of the SEC’s Fort Worth Regional Office. “[He] raised money by creating the aura of a successful day trader among friends and family in his community, and he continued to mislead them and hide the truth while trading losses mounted.”

For more information, visit SEC Charges Trader in Houston-Area Investment Scheme Targeting Lebanese and Druze Communities.

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New Trends in Securities Class Action Suits

The Harvard Law School Forum provides an analysis of a study of class actions through 2012.  At the end of November, 195 securities class actions were filed in federal courts—a pace that, if continued through December, would lead to a total of 213 cases for the full year. According to the study, that would put 2012 filings just slightly below their average rate over the previous five years.

The article, and the underlying study provide an excellent analysis of those cases, and the trend over the years of filings, settlements and awards.

The full details are at 2012 Trends in Securities Class Actions

SEC To Propose Rules on Political Spending

The SEC has indicated that it plans to issue a Notice of Proposed Rulemaking on requiring public companies to disclose their spending on politics. The Harvard Law School Forum on Corporate Governance and Financial Regulation has an analysis of the issues - SEC to Propose Rules on Corporate Political Spending by April 2013

FINRA Year in Review

FINRA released it's "year in review" where it crows about its successes during the past year. The "review" is at their web site for those who are interested, but the main takeaway for our firm and clients:

• In 2012,Office of Fraud Detection and Market Intelligence referred 692 matters involving potential fraudulent conduct to the SEC and other federal or state law enforcement agencies, including 347 insider trading referrals and 260 fraud referrals.

• FINRA brought 1,541 disciplinary actions (an increase of 53 from 2011) against registered individuals and firms, levied fines totaling more than $68 million and ordered resititution of $34 million to harmed investors. In addition, FINRA expelled 30 firms from the securities industry, barred 294 individuals and suspended 549 brokers from association with FINRA-regulated firms

And for those of you who complain that FINRA is an industry organization that coddles the financial industry, the opening remarks from Richard Ketchum, FINRA's Chairman and CEO:

"FINRA fulfilled its role as the first line of defense for investors through a comprehensive and aggressive enforcement program, supported by a realigned and more risk-based examination program and the provision, for the first time, of cross-market surveillance programs that more effectively detected electronic manipulative trading. Protecting investors and helping to ensure the integrity of the nation's financial markets is at the heart of what we do every day."

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In December FINRA’s new Rule 5123 went into effect.  The Rule requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used. The Regulatory Notice, which includes the text of the rule is available here - Private Placements of Securities SEC Approves New FINRA Rule 5123 Regarding Private Placements of Securities.

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SEC Charges Three Former Bank Executives in Virginia for Understating Loan Losses During Financial Crisis

The SEC charged three former executives at Norfolk, Va.-based Bank of the Commonwealth for understating millions of dollars in losses and masking the true health of the bank’s loan portfolio at the height of the financial crisis.

The SEC alleges that the CEO was responsible along with the CFO and the executive vice president for misrepresentations to investors by the bank’s parent company Commonwealth Bankshares. The consistent message in Commonwealth’s public statements and SEC filings was that its portfolio of loans — which comprised approximately 94 percent of the company’s total assets in 2008 — was conservatively managed according to strict underwriting standards aimed at keeping the bank’s reserved losses low during a time of unprecedented economic turmoil.

In reality, the SEC alleges that internal practice deviated significantly from what the public was being told. The CEO knew the true state of Commonwealth’s rapidly-deteriorating loan portfolio, yet he worked to hide the problems and engineer the misleading public statements, particularly those made in earnings releases. The CFO knew of the activity to mask the problems with the company’s loan portfolio and the corresponding effect these masking practices had on the bank’s financial statements and disclosures, yet she signed the disclosures and certified to the investing public that they were accurate. The executive vice president oversaw the bank’s largest portfolio of construction and development loans and was involved in the masking practices.

“During times of financial stress, it’s more important than ever for executives to make full and honest disclosure to the investing public,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “Commonwealth’s executives did the opposite and hid the company’s worsening performance from shareholders through masking practices that understated the losses on its most troubled loans.”

For more information, visit SEC Charges Three Former Bank Executives in Virginia for Understating Loan Losses During Financial Crisis.

Five Clients You Should Fire

I changed the title of this article from Inc. Magazine since lawyers have "clients" and not "customers" but the 5 clients to fire is spot on. In particular number 3.More...

Penson Files for Bankruptcy

Penson Worldwide Inc, once a securities clearing broker that has since divested most of its operations, filed for Chapter 11 bankruptcy on Friday, according to court documents. More...

FSA and FINRA Competing on Fines?

Has this become  a contest to see who can inflict the most pain on an industry? FT Adviser has an article today titled "FSA Fines Put US in the Shade" which compares fines levied by the UK's FSA and the US' FINRA, pointing out that the FSA has issued $500 million in fines in 2012 compared to $68 million by FINRA.

No one needs to be encouraging FINRA to increase its fines, and with so many egos at play in the organization, these comparisons might just do that. And this misinformation coming from an industry publication does additional harm in that it sends a message to the public that the US regulatory system is not doing an effective job.

But lets look at reality. You can't compare the FSA, a government entity with sole responsibility for regulating the UK's financial markets, with FINRA, a self-regulatory, private entity, which regulates part of the US financial industry.

The better comparison, if such a comparison is useful, is the FSA with the combined FINRA/SEC/CFTC/NFA. (why we have four regulatory agencies to do the work of one in the UK is another question that needs to be addressed, but not here).

Incredibly, despite the headline, the article does mention that the difference in the numbers in part because the FSA fined firms over the Libor Scandal, and in the US the fines came from the SEC. The article doesn't do the math, but add in the SEC Libor fines, and the numbers are UK $500 million, US, $420 million (assuming the articles numbers are correct).

But that is still not an accurate comparison because it overlooks the fact that the SEC obtained over $2.2 BILLION in monetary relief in 2012. That is BILLION, compared to the FSA's 300 MILLION.

Let's keep this all in perspective. We haven't added in the state  regulators, nor have we added in the various exchange regulators. But the point is the US regulators are doing just fine in the fine wars. They don't need any encouragement.

As pointed out in the article:

“It is clear by the heightened level of financial penalties currently being issued against offenders globally that regulators have upped their game.”

Firms and brokers also need to up their own compliance efforts, or face extinction from an overzealous regulator looking up its game.

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Morgan Stanley to Cut Jobs, More Pain Ahead

Morgan Stanley plans to slash 1,600 jobs in what may be just the beginning of a new round of layoffs at large investment banks, this time driven by a deeper reassessment of Wall Street businesses in the face of new regulations and capital standards.

Morgan Stanley, the sixth-largest U.S. bank by assets, plans to begin letting go of the employees, many of whom work in its securities unit, starting this week, More...

In-House Counsel Looking to Switch to Small Firms

The legal publications are full of commentary about the problems with BigLaw's business model. I won't repeat those criticisms here, after all, some of my friends are at BigLaw. The large law firms have their place, and there are certain projects and clients that a small firm simply cannot handle.

However, with increasing frequency, and apparently vastly rising hourly rates, in-house counsel are turning to small boutique firms for their litigation and transactional needs. Above the Law has an interview with an "in-house insider" discussing the issue, which repeats in large part what those of us in the boutique world, and our clients, have known for years.

Looking to alternative vendors (small firms or Axiom) that can deliver equivalent service for less cost for labor-intensive tasks is part of the answer, keeping more work inside and alternative fee arrangements (more appropriate for litigation than transactional matters but I have had some success on the transactional side too) is another part....

Take a look at Buying In: An Interview with an In-House Insider at Above the Law.

License Revocation for Stock Manipulation

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The Final Chapter in Gupta Insider Trading Case?

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Employment Issues and Obamacare

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Securities Enforcement and Social Media

Securities enforcement defense is a significant part of our practice. Last month we saw an important development in the application of securities law to social media. For the first time, the Enforcement Division of the SEC issued a Wells Notice based on a social media communication. We covered the news and the interaction of the securities laws and Facebook when the story broke. On the surface, this doesn't appear to be much of a Reg FD issue, given the prior release of the information, and the vast following that Netflix's CEO has on Facebook.

But it does raise a number of interesting questions. Even more if you are a securities defense attorney who is a computer-geek-wannabe and something of a social media expert.

The Harvard Law School Forum on Corporate Governance and Financial Regulation examines the issue and  the potential for liability arising from disclosures by corporate officers through social media in its article
Applying Securities Laws to Social Media Communications

Parents and Computers

My Dad was a computer consultant before he retired so I don't have this issue, buy I thought this was pretty amusing.
I Swear to F***g God, If I Come Home This Christmas and Find Out My Parents are Still Unplugging Their Computer From the Wall When They Want to Turn It Off, I Will F***ing Snap by Jason M. Mustian

Advisors Prepare As We Go Over the Fiscal Cliff

While industry professionals understand that the "fiscal cliff" is not a cliff at all, and is simply a creation of Congress to allow them to avoid making decisions (or to force them to make a decision, depending on your point of view), investors are going to be nervous and have questions.

However, we have gone over that mythical cliff, and investors are going to be worried, and advisors will be asked to help their clients make important decisions regarding their finances.

At the outset, it is important to keep in mind that if Congress can stop playing politics in the next week or so, they can enact legislation to address the "cliff" and make that legislation effective as of January 1, 2013, avoiding the "cliff." If they wait much longer than that, there will be no retroactive fix, tax rates go up, automatic spending cuts go into place.

While there are a number of issues that are raised by the failure of Congress to act, there are two important aspects that will affect all investors.

Higher tax rates for everyone. Investors and advisors need to examine their tax related strategies, and re-visit ones that were considered and canned. With everyone's rates going up, the economics of tax advantages investments have changed. For clients with income over $250,000, to help pay for the new healthcare law, upper-income households will see a new 0.9% tax on ordinary income and a 3.8% tax on unearned income

Estate planning is all new now - The estate tax has jumped from 35% to 55%, and the exemption has shrunk from $5.12 million for a single filer to $1 million. Tens of thousands of investors will be effected by the federal estate tax, some or all of which can be avoided, by careful planning with an advisor and a tax advisor.

Be prepared.

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