Can FINRA Force Firms to Insure for Arbitration Awards?

Every once in a while a group of customer attorneys bemoan the fact that some arbitration awards go unpaid. It is true - some arbitration awards do in fact go unpaid. So do court judgments, and without the benefit of a study, I would bet that a significantly higher percentage of court judgements go unpaid than arbitration awards.

Let's keep in mind that only in the world of FINRA does a person or entity lose its ability to conduct business if it does not pay an award in 30 days. This concept is completely unheard of in the rest of the country. Only a FINRA firm, or broker, is required to pay an award in 30 days or risk the loss of the ability of the firm, and all of its employees, to earn a living.

Draconian for certain, but it gets awards paid. The ones that do not get paid result from claims that are brought against defunct firms. Well, shame on the attorney for bringing that case, since you knew from the day you filed that you were not going to collect unless you went to the bankruptcy court. And that is a risk of living and working in a capitalist society - companies go bankrupt and leave their creditors without a remedy. (Unless you owe money to the United States, then you always owe the money, regardless of your bankruptcy filing).

The solution? Someone came up with the clever idea - since we already force firms to pay awards in 30 days without us doing anything to enforce the award, lets see if we can force the firms to buy insurance to pay for those awards!

Of course this ignores the legal underpinnings of insurance, and the fact that such insurance undoubtedly does not exit. And why doesn't it exist?

If you couldn't guess, here is the FINRA spokesperson quote announcing that FINRA was not going to require firms to obtain insurance to pay arbitration awards:

We researched various types coverage in this area and found that insurance underwriters didn't necessarily want to cover 'higher' risk firms, precisely the ones about which we are most concerned.

We found that if an underwriter was to cover those firms, and would spread the risk across all firms, the cost became prohibitively high

Shocking - the cost of providing insurance to insure that all arbitration awards get paid if the firm goes out of business are too high.  Imagine the insurance payout for cases that were pending against Lehman Brothers!

Let's face it. Not getting paid is a risk that hundreds of thousands of  plaintiffs this county face every year. There is no reason make any exception for the 4,000 of those plaintiffs who have arbitrations against brokers and firms. Companies go out of business, individuals file for bankruptcy. It is a fact of life.

It happens.It is a risk. But with an experienced and diligent attorney, and hard work, that risk can be minimized. Bring good cases, bring them in a timely fashion, and don't litigate your adversary into bankruptcy.  Be creative in your settlements with firms who are in financial trouble.

Think out of the box.

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Mark Astarita is a securities arbitration attorney who has represented investors, firms and financial professionals, nationwide, in well over 600 arbitrations, for over 25 years. If you are interested in retaining him for a securities arbitration matter, before FINRA or any other forum, give him a call  at 212-509-6544 or email him.

SEC Suspends Trading in Nine Penny Stocks in Ongoing Initiative to Combat Microcap Fraud

The SEC has announced suspensions in trading for nine different penny stocks as part of an ongoing enforcement initiative to combat microcap fraud.

Trading suspensions provide the SEC with a means to immediately neutralize potential threats to investors when questions have arisen pertaining to the accuracy and adequacy of information about publicly traded companies.

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.  More information about the trading suspension process is available in an SEC investor bulletin on the topic.

Find out which companies are subject to the trading suspension.

SEC Charges Software Company in Silicon Valley and Two Former Executives Behind Fraudulent Accounting Scheme

The SEC charged a Silicon Valley-based software company and two former executives behind an accounting fraud in which timesheets were falsified to hit quarterly financial targets.

An SEC investigation found that the company vice presidents were atop a scheme at Saba Software in which managers based in the U.S. directed consultants in India to either falsely record time that they had not yet worked, or purposely fail to record hours worked during certain pay periods to conceal budget overruns from management and finance divisions.  The improper time-reporting practices enabled Saba Software to achieve its quarterly revenue and margin targets by improperly accelerating and misstating virtually all of its professional services revenue during a four-year period as well as a substantial portion of its license revenue.

Read more about this case here.

SEC Charges Two Florida-Based Attorneys for Roles in Offering Fraud by Transfer Agent

The SEC charged two Florida-based attorneys for their roles in an offering fraud conducted by a transfer agent that was the subject of an SEC enforcement action two months ago.

The SEC alleges that the two attorneys were designated to receive wire transfers of funds from investors who were solicited by cold callers using boiler room tactics to convince them their investments would yield high rates of return.  Wiring the money to a licensed attorney bolstered the appearance of safety in the investment opportunity and concealed from investors how the money was really being spent after one of them received the funds.  The individuals  merely kept 2 percent of the funds they received from investors and transferred the remaining amounts to another individual, who promptly used it for personal expenses or to make Ponzi-like payments instead of investing in the high-yield investments or discounted stock promised to investors.  The SEC charged one of the attorneys and his firm International Stock Transfer Inc. (IST) with fraud in July.

The two attorneys were arrested earlier today in parallel criminal actions brought by the U.S. Attorney’s Office for the Eastern District of New York.

Read more here.

SEC Charges Purported Health Food Company and CEO with Issuing False Press Releases in Microcap Fraud

The SEC charged a Florida-based penny stock company and its CEO with defrauding investors by issuing false and misleading press releases proclaiming large sales and fantastic revenue projections while the purported health food company actually was a failing enterprise.  

The SEC alleges that Heathrow Natural Food & Beverage Inc. touted sales of natural health food products that the company had not even manufactured as well as non-existent distribution agreements with major retail chains.  Meanwhile, its CEO was prompting the illegal, unregistered distribution of billions of shares of company stock to several people or entities, including himself.  The CEO profited by more than $150,000 by selling 877 million of his shares into the market as the false press releases were stimulating public demand for Heathrow stock.  The CEO is also charged with insider trading because he sold his shares while in possession of material nonpublic information about the falsehood of the press releases.

Read the full article here.

SEC Charges Barclays Capital with Systemic Compliance Failures After Acquiring Lehman’s Advisory Business

The SEC charged Barclays Capital Inc. with failing to maintain an adequate internal compliance system to ensure the firm did not run afoul of any federal securities laws after its wealth management business in the U.S. acquired the advisory business of Lehman Brothers in September 2008. 

Investment advisers are required to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules.  An SEC examination and subsequent investigation found that Barclays failed to enhance its compliance infrastructure to integrate and support the acquisition and rapid growth of the advisory business from Lehman.  The deficiencies in its compliance systems contributed to other securities law violations by Barclays.

To settle the SEC’s case, Barclays agreed to pay a $15 million penalty and to undertake remedial measures, including engaging an independent compliance consultant to conduct an internal review.

Find more information here.

SEC Charges Brooklyn Man for Facilitating Insider Trading Scheme Via Post-It Notes at Grand Central Terminal

The SEC charged a Brooklyn man with facilitating a $5.6 million insider trading scheme that typically involved the passing of illegal tips via napkins or post-it notes at Grand Central Terminal.

Earlier this year, the SEC charged a stockbroker and a law firm managing clerk with insider trading and alleged they were connected by a mutual friend who served as a “middleman” in an effort to keep the two unlinked.  In a separate complaint filed in U.S. District Court for the District of New Jersey, the SEC has identified the middleman.  The SEC alleges that the middleman received material nonpublic information from another individual about 13 impending corporate deals involving clients of the law firm where he worked.  The middleman then tipped his stockbroker who used the confidential information to illegally trade for himself and for the middleman and other customers.  The middleman allocated a portion of his ill-gotten profits for eventual payback to the tipper for the inside information.

To read more, click here.

SEC Charges Eight for Roles in Widespread Pump-and-Dump Scheme Involving California-Based Microcap Company

The SEC charged a ring of eight individuals for their roles in an alleged pump-and-dump scheme involving a penny stock company based in California that has repeatedly changed its name and purported line of business over the past several years.

The husband and wife duo who orchestrated the scheme are being charged by the SEC in the case along with others enlisted to buy, sell, or promote stock in the company now called Gepco Ltd.  The husband in this case installed some of these associates as officers and directors of Gepco while he secretly ran the company behind the scenes.  Collectively, they amassed large blocks of shares of Gepco common stock while the couple manipulated the market to create the appearance of genuine investor demand, allowing an associate to sell his stock at inflated prices to make hundreds of thousands of dollars in illicit profits.

The SEC has obtained an emergency court order to freeze the assets of the couple and others who profited illegally through the alleged scheme.

Read more here.

Boost Your Retirement Savings by 60%

This article makes a number of assumptions, but the suggestions are on the mark. These relatively painless investing tweaks can put you on the path to a secure retirement, even if you just do one or two of them.

More details are available at 3 Easy Moves That Can Boost Your Nest Egg By 60% | Money.com.

 

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters and  represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

SEC Charges Tacoma, Wash.-Area Firm for Undisclosed Principal Transactions and Misleading Performance Advertisements

The SEC charged an investment advisory firm located outside Tacoma, Wash., with engaging in hundreds of principal transactions through its affiliated broker-dealer without informing clients or obtaining their consent. 

Strategic Capital Group LLC, which is additionally charged with distributing false and misleading advertisements to investors, agreed to pay nearly $600,000 to settle the SEC’s charges.  The firm’s CEO was charged with causing some of the firm’s violations, and agreed to pay a $50,000 penalty to settle the charges against him.

In a principal transaction, a firm acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They also must obtain the client’s consent.

Read the full article here.

Former Hedge Fund Manager in Bay Area Charged With Taking Excess Management Fees to Make Lavish Purchases

The SEC is charging a former hedge fund manager with fraudulently taking excess management fees from the accounts of fund clients and using their money to remodel his multi-million dollar home and buy a Porsche. 

An SEC Enforcement Division investigation found that the individual improperly withdrew more than $320,000 from a hedge fund he managed for San Francisco-based investment advisory firm WestEnd Capital Management LLC.  While WestEnd disclosed to clients the withdrawal of annual management fees of 1.5 percent of each investor’s capital account balance, the individual actually withdrew amounts that far exceeded that percentage.  He then transferred the money to personal bank accounts so he could spend it freely.  His misconduct occurred for a two-year period until he ceased misappropriating fund assets when the SEC began an examination of WestEnd in April 2012.

WestEnd, which expelled the individual and reimbursed the hedge fund once it became aware of his scheme, is being charged separately by the SEC for failing to effectively supervise him.  The firm agreed to pay a $150,000 penalty to settle the SEC’s charges.

Read more here.

SEC Charges N.Y.-Based High Frequency Trading Firm With Violating Net Capital Rule For Broker-Dealers

The SEC charged a New York-based high frequency trading firm with violating the net capital rule that requires all broker-dealers to maintain minimum levels of net liquid assets or net capital.  The firm’s former chief operating officer is charged with causing the extensive violations.

An SEC investigation found that Latour Trading LLC operated without maintaining its required minimum net capital on 19 of 24 reporting dates during a two-year period, and the firm missed the mark by large amounts ranging from $2 million to $28 million.  During this period, Latour’s trading at times accounted for as much as 9 percent of the trading volume in equity securities for the entire U.S. market.  

To settle the SEC’s charges, Latour agreed to pay a $16 million penalty, the largest ever for violations of the net capital rule.  The previous high was $400,000 in an enforcement action in 2004.  Latour’s chief operating officer when the series of violations began agreed to pay a $150,000 penalty to settle the charges against him.

For more information visit the SEC website.

SEC Obtains Asset Freeze Against Company in Turks and Caicos Islands Behind South Florida-Based Ponzi Scheme

The SEC announced an emergency asset freeze against a company located in Turks and Caicos Islands in connection with its operation of a South Florida-based Ponzi scheme.

The SEC’s request for the emergency asset freeze against Abatement Corp. Holding Company Limited was granted in the U.S. District Court for the Southern District of Florida last week.  The SEC’s complaint alleged that Abatement Corp. and its now-deceased principal falsely promised investors safe, guaranteed returns while engaging in an offering fraud and Ponzi scheme from November 2004 until the principal's death on May 15, 2014. 

“Unknowing investors were led to believe that Abatement Corp. and Laurer were watching out for their financial best interests when, in fact, they were callously stealing their hard-earned money,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

Read the full article here.

Alibaba Is Largest IPO in History - $25 Billion

Alibaba issues additional shares to raise IPO total to $25 billion - report | Reuters

The underwriters of Alibaba Group Holding Ltd's IPO have issued additional shares, according to the Wall Street Journal, bringing the IPO's size to about $25 billion (15.3 billion pounds) and making it the largest initial public offering in history.

SEC Charges IT Employee at Law Firm With Insider Trading Ahead of Merger Announcements

The SEC charged an employee in an international law firm’s IT department with insider trading ahead of several mergers and acquisitions involving firm clients being advised on the deals.

The SEC alleges that the employee, a senior information technology professional at Wilson Sonsini Goodrich & Rosati, had access to nonpublic information in the firm’s client-related databases and garnered more than $300,000 in illicit profits by trading in advance of merger announcements.  He began by insider trading in accounts in his own name, but shifted course when a lawyer at his firm was charged by the SEC and criminal authorities in an entirely separate insider trading scheme.  After immediately liquidating the remaining securities that he had purchased on the basis of nonpublic information, the employee waited about 18 months and then continued his insider trading in a brokerage account held in the name of a relative living in Russia.  His concealment efforts failed, however, when SEC investigators were able to dissect a suspicious pattern of trades and trace them back to him.

“Insider trading by employees of law firms and other professional organizations is an important enforcement focus for us,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “We’ve enhanced our detection capabilities and we’re refining our investigative approaches to enable us to more easily identify those who abuse their positions of trust and confidence.”

Read more here.

Townhall Meeting for Receivership Held in Palm Beach

Jim Sallah of Sallah Astarita & Cox, LLC is the court appointed receiver of a number of entities who are accused of being part of a $70 million Ponzi scheme. At a town hall meeting Jim spoke to investors to explain the receivership process, and the work that has been done so far.

The Palm Beach Post has a video interview with Jim, explaining the process, and a lengthy article praising Jim, Sallah Astarita & Cox, and the rest of the receiver's team for the work done thus far.

Jupiter Ponzi scheme investors get update at town hall meeting

Tennessee-Based Animal Feed Company Agrees to Pay $18 Million to Settle Accounting Fraud Case

The SEC announced that a Tennessee-based animal feed company has agreed to pay back $18 million in illicit profits from an accounting fraud that resulted in an SEC enforcement action earlier this year.

AgFeed Industries, which is currently in Chapter 11 bankruptcy, was charged by the SEC in March along with top company executives for repeatedly reporting fake revenues from the company’s China operations in order to meet financial targets and prop up AgFeed’s stock price.  The company obtained illicit gains in stock offerings to investors at the inflated prices resulting from the accounting scheme.  The SEC also alleged that U.S. managers learned of the accounting fraud, but failed to take adequate steps to investigate and disclose it to investors. 

The $18 million to be paid by AgFeed to settle the SEC’s case will be distributed to victims of the company’s fraud.  Details of the settlement were presented to the bankruptcy court in Delaware earlier today, and the settlement is subject to court approval by the bankruptcy court as well as the district court in Tennessee where the case was filed.

Read the full article here.

CALPERS Withdrawing Its Hedge Fund Investments - Too Expensive, Too Complicated

The California Public Employees' Retirement System, the largest U.S. pension fund, said on Monday that it will pull all $4 billion it has invested in hedge funds because it finds them too costly and complicated. The $300 billion fund, known as Calpers, invests with firms including Och-Ziff Capital Management , Deepak Narula's Metacapital Management and Bain Capital's Brookside Capital and plans to pull the money out over the next year. The fund will also exit from fund-of-funds Pacific Alternative Asset Management Co and Rock Creek Group.

For more information visit Calpers dumps hedge funds citing cost, to pull $4 billion stake - Yahoo News

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

SEC Announces $300,000 Whistleblower Award to Audit and Compliance Professional Who Reported Company’s Wrongdoing

The SEC announced a whistleblower award of more than $300,000 to a company employee who performed audit and compliance functions and reported wrongdoing to the SEC after the company failed to take action when the employee reported it internally.

It’s the first award for a whistleblower with an audit or compliance function at a company.

“Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption.  They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one,” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower.  “These individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.”

This particular whistleblower award recipient reported concerns of wrongdoing to appropriate personnel within the company, including a supervisor.  But when the company took no action on the information within 120 days, the whistleblower reported the same information to the SEC.  The information provided by the whistleblower led directly to an SEC enforcement action.

Read more here.

FINRA's New Head of Dispute Resolution Search Narrows

With the retirement of Linda Fienberg, Reuters is reporting that FINRA has narrowed its search for a new head of its arbitration unit to two of its own long-time officials, according to a person familiar with the matter. FINRA, Wall Street's industry-funded watchdog, will replace the retiring chief of its arbitration unit with either Richard Berry,the unit's director of case administration, or Kenneth Andrichik, its mediation director.

We have had extensive dealings with both gentlemen, and are sure that both will be excellent in that role.

For more information - Exclusive: Wall Street watchdog to pick insider as arbitration head - source | Reuters

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the well over 600 securities arbitrations, on behalf of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Investor Alert - Frontier Funds

FINRA has issued an investor alert regarding "Frontier funds" which are funds that invest in securities of companies in countries with developing securities markets—like Argentina, Lebanon, Nigeria, Slovenia and Vietnam.

According to FINRA, some see investing in frontier funds as a way to diversify assets—going beyond funds that invest in established international and other more developed emerging markets. Frontier funds are also sparking the interest of some investors who are lured predominantly by potential gains.  

FINRA is issuing this alert to caution those interested in funds that invest in frontier markets to carefully consider the heightened risks in these markets. Frontier fund investments may provide potential diversification and periods of higher returns than can be obtained through more traditional investments. But products or asset niches that promise higher returns nearly always carry more risk—and the past performance of any fund is never a guarantee of future results.   Frontier Markets  

For more information - Investor Alert - Frontier Funds—Travel with Care - FINRA

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

SEC Charges Offshore Business and Two Individuals Behind Scheme to Conceal Ownership of Microcap Stocks

The SEC charged two individuals managing an offshore business intended to help clients evade U.S. securities laws with concealing the ownership of certain microcap stocks as part of a larger money laundering scheme alleged by criminal authorities.

Under the federal securities laws, beneficial owners of more than 5 percent of certain stocks are required to report their acquisition and ownership of those stocks to the SEC and the investing public.  The SEC alleges that two Belize residents through a company called IPC Corporate Services have helped clients who own significant amounts of thinly-traded microcap stocks avoid these reporting requirements.  They created associated companies through which the clients could hide their ownership and spread the shares so that none of them contained more than 5 percent of the stock of any particular microcap issuer.  They stressed to their clients the importance of staying below the 5 percent reporting threshold for each associated entity.  However, because one of the individuals and IPC owned the associated entities used in this arrangement, they assumed beneficial ownership of all the clients’ shares of these microcap stocks.  Therefore, IPC and the owner were themselves required to report their beneficial ownership of more than 5 percent in each stock. 

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced criminal charges against these same individuals for violations of other federal laws extending beyond the SEC’s purview.

Read the full report here.

SEC Charges Minneapolis-Based Hedge Fund Manager With Bilking Investors and Portfolio Pumping

The SEC charged a Minneapolis-based hedge fund manager, his investment advisory firm, and an accomplice with bilking investors in two hedge funds out of more than $1 million under the guise of research expenses and fees. 

The SEC alleges that as the management fees earned by Archer Advisors LLC were shrinking due to the funds’ worsening performance, the firm’s owner and an employee implemented a scheme to enrich themselves at the expense of investors in the funds.  The owner routinely caused the funds to reimburse Archer for fake research expenses, and he eventually routed much of that money to his personal checking account and spent it on country club dues, boarding school tuition, and a Lexus among other luxury items.  Furthermore, the firm's owner devised a way to essentially charge fund investors twice for the same fake research expenses.  First, he billed the funds directly by falsely claiming that Archer had paid the specified employee to conduct “research” for the funds.  Second, he and the employee improperly diverted soft dollars from the hedge funds to the employee for the same purported “research” under the additional pretense that the employee was an independent consultant.  Soft dollars were supposed to be used to buy third-party investment research that benefited the funds.  The employee conducted no third-party research as an Archer officer whose main duties were placing trades and helping the owner find new investors.

The SEC’s complaint filed in federal court in Minneapolis also charges the two individuals with conducting a separate scheme to manipulate the stock price of the funds’ largest holding in order to inflate the monthly returns reported to investors and conceal the true extent of the funds’ mounting investment losses.

Read more here.

SEC Charges L.A.-Based Immigration Attorneys With Defrauding Investors Seeking U.S. Residency

The SEC charged a Los Angeles-based immigration attorney, his wife, and his law firm partner with conducting an investment scheme to defraud foreign investors trying to come to the U.S. through the EB-5 Immigrant Investor Program.

The SEC alleges that the three individuals raised nearly $11.5 million from two dozen investors seeking to participate in the EB-5 program, which provides immigrants an opportunity to apply for U.S. residency by investing in a domestic project to create jobs for U.S. workers.  They informed investors that they would be EB-5 eligible if they invested in an ethanol production plant they would build and operate in Ulysses, Kan.  However, investors’ money was misappropriated for other uses instead of the ethanol plant project.  The plant was never built and the promised jobs never created, yet they continued to misrepresent to investors that the project was ongoing.

In a parallel action, the U.S. Attorney’s Office for the Central District of California today announced criminal charges against the attorney.

To read more, visit: SEC Charges L.A.-Based Immigration Attorneys With Defrauding Investors Seeking U.S. Residency

Houston-Based Investment Advisory Firm and Co-Owners Charged With Failing to Disclose Conflict of Interest to Clients

The Securities and Exchange Commission today announced fraud charges against a Houston-based investment advisory firm accused of recommending that clients invest in particular mutual funds without disclosing a key conflict of interest: the firm was in turn receiving compensation from the broker offering the funds.

An SEC Enforcement Division investigation found that Robare Group Ltd. received a percentage of every dollar that its clients invested in certain mutual funds through an undisclosed compensation agreement with the brokerage firm.  Therefore, unbeknownst to investors, Robare Group and its co-owners had an incentive to recommend these funds to clients over other investment opportunities and generate additional revenue for the firm.  Robare Group ultimately received approximately $440,000 in such payments from the brokerage firm during an eight-year period.    

“Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive.”

The Asset Management Unit has undertaken an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers.  For example, the SEC previously charged an Oregon-based investment adviser for failing to disclose revenue sharing payments and other conflicts of interest to clients.

For more information, visit Houston-Based Investment Advisory Firm and Co-Owners Charged With Failing to Disclose Conflict of Interest to Clients

SEC Charges Two Information Technology Executives With Mischaracterizing Resale Transactions to Increase Revenue

The Securities and Exchange Commission today charged two executives at a Dallas-based information technology company with mischaracterizing an arrangement with an equipment manufacturer to purport that it was conducting so-called “resale transactions” to inflate the company’s reported revenue.

An SEC investigation found that the then-CEO and then-CFO caused the disclosure failures at Affiliated Computer Services (ACS), which has since been acquired by Xerox Corporation.  ACS provided business process outsourcing and information technology services.  Shortly before the end of its first quarter in fiscal year 2009, ACS faced a scenario where the company’s revenue was set to fall short of company guidance and consensus analyst expectations, so ACS arranged for an equipment manufacturer to re-direct through ACS pre-existing orders that the manufacturer already had received from one of its customers.  This gave the appearance that ACS was involved in resale transactions, but ACS in fact had no such involvement.  ACS went on to report $124.5 million in fiscal year 2009 revenue from these transactions as though it had resold the equipment itself. 

The two individuals have agreed to pay nearly $675,000 to settle the SEC’s charges that they and ACS did not adequately describe the arrangement in its financial reporting, and the purported revenue in turn allowed ACS to publicly report inflated internal revenue growth (IRG).  They emphasized the inflated IRG as a key metric in earnings releases and other public statements to investors, and a portion of their annual bonuses was linked to IRG.

Read more here.

SEC Charges Investor Relations Firm Executive With Insider Trading Ahead of News Announcements By Clients

The SEC charged a director of market intelligence at a Manhattan-based investor relations firm with insider trading ahead of impending news announcements by more than a dozen clients.  The individual being charged garnered nearly $1 million in illicit profits.

An SEC investigation and ongoing forensic analysis of the director's work computers uncovered that he repeatedly accessed clients’ draft press releases stored on his firm’s computer network prior to public announcements.  The SEC alleges that the director, who had no legitimate work-related reason to access the draft press releases, routinely purchased stock or call options in advance of favorable news and sold short or bought put options ahead of unfavorable news. 

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against the same individual.

“Employees of investor relations firms have access to sensitive information about their clients, and exploiting that information for personal gain is not an option,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. 

Read more here.