Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, September 3, 2011

Federal Housing Agency Sues 17 Banks for Misrepresenting Risks to Fannie and Freddie

The Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac (the Enterprises), filed lawsuits against 17 financial institutions, certain of their officers and various Unaffiliated lead underwriters. The suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities (PLS) to the Enterprises.

Complaints have been filed against the following lead defendants:

1. Ally Financial Inc. f/k/a GMAC, LLC
2. Bank of America Corporation
3. Barclays Bank PLC
4. Citigroup, Inc.
5. Countrywide Financial Corporation
6. Credit Suisse Holdings (USA), Inc.
7. Deutsche Bank AG
8. First Horizon National Corporation
9. General Electric Company
10. Goldman Sachs & Co.
11. HSBC North America Holdings, Inc.
12. JPMorgan Chase & Co.
13. Merrill Lynch & Co. / First Franklin Financial Corp.
14. Morgan Stanley
15. Nomura Holding America Inc.
16. The Royal Bank of Scotland Group PLC
17. Société Générale

The complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933, similar in content to the complaint FHFA filed against UBS Americas, Inc. on July 27, 2011. In addition, each complaint seeks compensatory damages for negligent misrepresentation.  Certain complaints also allege state securities law violations or common law fraud.

As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and conserving these companies’ assets and does so on behalf of taxpayers. FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities.

September 3, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)


The SEC obtained a temporary restraining order against National Stock Transfer, Inc. (National), National’s president Kay Berenson-Galster (Galster) and National’s owner, Roger Greer (Greer).  The complaint alleges that, for at least five years, National Stock Transfer, Inc., a transfer agent registered with the Securities and Exchange Commission, has been violating federal securities laws and important obligations it has as a transfer agent. The Complaint alleges, among other things, that National has failed to report lost or stolen securities in a timely manner, failed to maintain certain records, failed to maintain control books for all of its issuers and failed to file its annual report with the Securities and Exchange Commission. During the time period covered by the complaint, National acted as the transfer agent for 58 issues of common and preferred stock.

National has recently been physically locked out of its office by its creditor, Woodward Capital Partners, LLC, as part of a private state court case. The Commission has moved the court for a temporary restraining order and preliminary injunction against National and its principals, enjoining them from continued violations. The Court order granted the temporary restraining order against future violations of the federal securities laws regulating transfer agents, accelerated discovery and enjoined further litigation in the private state court action.

September 3, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)


The SEC announced that it obtained an emergency court order to halt an alleged $4.5 million investment scheme by a Los Angeles-based company that purports to broker life settlements.  According to the SEC's complaint, Daniel C.S. Powell and his company Christian Stanley Inc. have spent the past seven years creating the illusion that it was a legitimate company involved in the life settlement industry. Contrary to what investors were told, Christian Stanley has never purchased or generated any revenue as a result of brokering the sale of a single life settlement. Instead, Powell used the Christian Stanley name as a vehicle to raise at least $4.5 million in an unregistered offering of debenture notes and spent most of the money for purposes unrelated to its ostensible business operations. Powell misused investor funds to finance his stays at luxury hotels, visits to nightclubs and restaurants, and purchases of high-end vehicles.

According to the Commission’s complaint, Powell raised funds from at least 50 investors nationwide in the fraudulent debenture offering, promising investors fixed interest returns ranging from 5 to 15.5 percent annually for five-year terms. Powell claimed the notes were backed by assets such as a gold mine in Nevada and a coal mine in Kentucky that he said held coal deposits valued at $11.8 billion.

The U.S. District Court for the Central District of California yesterday granted the Commission’s request for a temporary restraining order and asset freeze against Powell and his companies. The court also appointed Robb Evans and Associates LLC as temporary receiver over the entities.

September 3, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, September 1, 2011

Fed Takes Action Against Goldman for Residential Mortgage Practices

The Federal Reserve Board announced a formal enforcement action against the Goldman Sachs Group, Inc. and Goldman Sachs Bank USA to address a pattern of misconduct and negligence relating to deficient practices in residential mortgage loan servicing and foreclosure processing involving its former subsidiary, Litton Loan Servicing LP.  Goldman Sachs sold Litton to Ocwen Financial Corporation on September 1, 2011 and has ceased to conduct residential mortgage servicing. Litton is the 23rd largest mortgage servicer in the United States.

The action orders Goldman Sachs to retain an independent consultant to review foreclosure proceedings initiated by Litton that were pending at any time in 2009 or 2010. The review is intended to provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process. The foreclosure review will be conducted consistent with the reviews currently underway at the 14 large mortgage servicers that consented to enforcement actions brought by the banking agencies on April 13, 2011.

If Goldman Sachs re-enters the mortgage servicing business while the action is in effect, it will be required to implement enhanced corporate governance, risk-management, compliance, borrower communication, servicing and foreclosure practices comparable to what the 14 mortgage servicers are implementing.

As noted in the April press release, the Federal Reserve believes monetary sanctions are appropriate and plans to announce monetary penalties. These monetary penalties against Goldman Sachs will be in addition to the corrective actions that Goldman Sachs will be taking pursuant to today's action. Goldman Sachs has acknowledged in today's action that it will be responsible for satisfying any civil money penalty that the Board of Governors could have assessed against Litton for its conduct.

September 1, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Two More Congressional Hearings on the SEC Coming Up

The House Financial Services Committee recently announced two upcoming hearings on the SEC:

On September 13, 2011,  the Capital Markets and Government Sponsored Enterprises Subcommittee will hold a hearing on the regulation and oversight of broker-dealers and investment advisers.  The Subcommittee will examine studies mandated by the Dodd-Frank Act on the effectiveness of standards of care applicable to broker-dealers and investment advisers, and on the need for enhanced examination and enforcement resources for investment advisers.

On September 15, 2011, the Full Committee will hold a hearing on the structure and operations of the Securities and Exchange Commission and the need for reform of the SEC.

September 1, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

The Uniform Fiduciary Duty Standard for Securities Professionals -- Part II

In my August 31 post I described the January 2011 SEC staff report recommending adoption of the “uniform fiduciary standard,” which the study describes as follows:

“the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” 

In comments filed with the SEC in July, the Securities Industry and Financial Markets Association (SIFMA) stated that the SEC staff study “raised the serious concern among our member firms that the SEC may be contemplating an ‘overlay’ on broker-dealers of the existing Advisers Act standard.”  While SIFMA stated that it supports development of a uniform fiduciary standard, in fact its position (as it was in the debate that preceded enactment of Dodd-Frank) is that the different operating models of broker-dealers and investment advisers make a uniform standard of conduct inapposite.  Accordingly, in its comment letter SIFMA first reiterates its argument against the application of the Investment Advisers Act fiduciary duty to broker-dealers.  It then advocates for “a new articulation” of a uniform fiduciary standard, as follows:

[T]he general fiduciary duty implied under Section 206, which derives from the traditional, generally understood and accepted common law, would be newly articulated as the uniform standard.  Under Section 211 of the Advisers Act and Section 15 of the Exchange Act (as authorized by the Dodd-Frank Act), the SEC would issue rules and guidance to provide the detail, structure and guidance necessary to enable broker-dealers to apply the fiduciary standard to their distinct operational model. In addition, while many parallels would occur, existing Section 206 investment adviser case law, guidance, and other legal precedent would continue to apply to investment advisers, but would not likewise apply wholesale to broker-dealers, in recognition that broker- dealers provide a different range of products and services, and operate under a distinct operational model.

SIFMA’s approach, apart from invoking the rhetorical flourish of   “fiduciary duty,” would not impose many, if any, additional obligations or constraints on broker-dealers.  Conflicts of interest would not be eliminated, but should be addressed through disclosure and consent.  Principal trading would be expressly preserved.  Brokers would not owe a continuing duty of care to customers.  A broker-dealer’s obligations to a retail customer would be defined, and could be limited, in the customer agreement.  Traditional types of broker-dealer products (sale of proprietary-only products) and compensation arrangements (including not only commissions but annual marketing or distribution fees on mutual funds, revenue sharing or shareholder accounting) would not violate the standard of conduct so long as disclosed.

The SIFMA comment is largely fighting battles that it already won in the debate leading up to enactment of § 913.  First, Congress considered, but rejected, a legislative repeal of the broker-dealer exemption in the Advisers Act that would have effected ipso facto a truly uniform standard.  Second, § 913(g) expressly protects broker-dealers from a rigorous application of a fiduciary duty in three respects:  (1) “The receipt of compensation based on commission or other standard compensation for the sale of securities  shall not, in and of itself, be considered a violation of such standard applied to a broker or dealer;” (2) “Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities;” and “The sale of proprietary or other limited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the standards….” Third, by authorizing the SEC to adopt conduct standards “no less stringent than the standard applicable to investment advisers under sections 206(1) and (2),” but not including section 206(3), Congress may have intended to withhold from the SEC the power to prohibit broker-dealers from principal trading.  Although the broker-dealer industry fared well in Congress, apparently SIFMA has heard its membership express anxiety that these previously-won victories may be in jeopardy.

I will describe the positions of the investment adviser community in future posts.


September 1, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 31, 2011

SEC Halts Fraud by Manager of Startup Quantitative Hedge Fund

The SEC announced an asset freeze against a Chicago-area money manager, Belal K. Faruki, and his advisory firm Neural Markets LLC .  The SEC charged them with lying to prospective investors in their startup quantitative hedge fund. A federal court today entered a preliminary injunction order in the case, which was unsealed earlier this week.

The SEC alleges that defendants solicited sophisticated individuals to invest in the "Evolution Quantitative 1X Fund," a hedge fund they managed that supposedly used a proprietary algorithm to carry out an arbitrage strategy involving trading in liquid exchange-traded funds (ETFs). Faruki and Neural Markets falsely represented the existence of investor capital and that trading was generating profits when, in fact, losses were being incurred. They defrauded at least one investor out of $1 million before confessing the losses, and were soliciting other wealthy investors before the SEC obtained a court order to halt the scheme.

The SEC filed its complaint under seal on Aug. 10, 2011, and that same day the court granted the SEC's request for emergency relief including a temporary restraining order and asset freeze. The court lifted the seal order on August 29, and the preliminary injunction order entered today with the defendants' consent continues the terms of the temporary restraining order until the final resolution of the case.

August 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Seeks Comment on Asset-Backed Issuers and Mortgage-Related Pools Under Investment Company Act

The SEC seeks public comment on the treatment of asset-backed issuers as well as real estate investment trusts (REITs) and other mortgage-related pools under the Investment Company Act.  Through an advance notice of proposed rulemaking, the SEC is seeking public input on possible amendments the agency might consider proposing to Rule 3a-7, which excludes certain issuers of asset-backed securities from having to comply with the requirements of the Investment Company Act.

Through a separate concept release, the SEC is seeking public interpretations of a provision in the Act – Section 3(c)(5)(C) – that may be used by some companies engaged in the business of acquiring mortgages and mortgage-related instruments such as some REITs.

Public comments should be received within 60 days from the date of publication in the Federal Register.

August 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Seeks Comment on Use of Derivatives by Mutual Funds

The SEC seeks public comment on a wide range of issues raised by the use of derivatives by mutual funds and other investment companies regulated under the Investment Company Act.  The SEC is seeking public input through a concept release and will use the comments received in response to this concept release to help determine whether regulatory initiatives or guidance is needed that would continue to protect investors and fulfill the purposes underlying the Investment Company Act.  The concept release is a continuation of the SEC’s ongoing review of mutual funds’ use of derivatives announced last year.

Public comments should be received within 60 days from the date of publication in the Federal Register.

August 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

The Uniform Fiduciary Standard for Securities Professionals -- Part I

It is well documented that retail customers are confused about the different titles, services and duties of the securities professionals who offer them investment advice.  Through history and evolution, two different regulatory systems that turn on an increasingly incoherent distinction between investment advisers and broker-dealers are in place to regulate investment advice providers.  If we were designing a regulatory system from scratch, it is hard to imagine that the current version would get many votes.  Accordingly, Dodd-Frank § 913 required the SEC to conduct a study to evaluate: 

The effectiveness of existing legal or regulatory standards of care (imposed by the  Commission, a national securities association, and other federal or state  authorities) for providing personalized investment advice and recommendations  about securities to retail customers; and 
Whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or  regulatory standards in the protection of retail customers relating to the standards  of care for providing personalized investment advice about securities to retail  customers that should be addressed by rule or statute.

The SEC staff completed the required study in January 2011.

While the statute does not mandate that the SEC take any action, SEC Chair Mary Schapiro recently stated that she hopes that the agency will release for public comment this fall a proposal for a uniform fiduciary standard for all securities professionals that provide retail investment advice. This rulemaking will be a long and controversial process as it involves the future regulation of two industries that take pride in their different traditions and compete head-on for the retail investors’ business.  Moreover, if final rules are adopted and challenged in court, the D.C. Circuit has made it abundantly clear that it will critically review the SEC’s assessment of the costs and benefits of rules implementing Dodd-Frank; see Business Roundtable v. SEC (D.C. Cir. July 22, 2011).

Because of its importance to retail investors, I plan to devote a number of posts to this topic in the weeks ahead.  This post describes the January 11, 2011 SEC staff study’s recommendations.  (Parentheticals refer to the report’s page numbers.)  Future posts will describe responses to the report and other recent developments relating to the regulation of investment advisers and broker-dealers under Dodd-Frank.

The Bottom Line

The SEC staff study recommends that the SEC promulgate rules that would apply “expressly and uniformly to both broker-dealers and investment advisers, when providing personalized investment advice about securities to retail customers, a fiduciary standard no less stringent than currently applied to investment advisers under Advisers Act Sections 206(1) and (2)” (v-vi).  In particular, the SEC should adopt the “uniform fiduciary standard,” which the study describes as follows:

“the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice” (vi). 

The staff considered, but ultimately rejected recommending, alternatives to the uniform fiduciary standard, such as repealing the broker-dealer exclusion in the Investment Advisers Act and imposing the standard of conduct and other requirements of the Investment Advisers Act on broker-dealers.

The study sets forth a number of recommendations to implement through rulemaking or interpretive guidance the uniform fiduciary standard and its component duties of loyalty and care.  These recommendations are phrased generally and thus postpone the difficult task of working out the standard’s specific contours, e.g.:

• The SEC “should identify specific examples of potentially relevant and common material conflicts of interest in order to facilitate a smooth transition to the new standard by broker-dealers and consistent interpretations by broker-dealers and investment advisers” (vi).

It is worth noting that “ [t]he Staff is of the view that the existing guidance and precedent under the Advisers Act regarding fiduciary duty, as developed primarily through Commission interpretive pronouncements under the antifraud provisions of the Advisers Act, and through case law and numerous enforcement actions, will continue to apply” (vi-vii). This suggests that the existing law is well-developed.  To the contrary, since the Investment Advisers Act does not provide customers with a private right of action for faulty investment advice, there is a paucity of case law addressing investors’ remedies outside of Rule 10b-5, which requires scienter.

Duty of Loyalty

Conflicts of Interest.   “A uniform standard of conduct will obligate both investment advisers and broker-dealers to eliminate or disclose conflicts of interest. The Commission should prohibit certain conflicts and facilitate the provision of uniform, simple and clear disclosures to retail investors about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interest” (vii).  More specifically, the study provides:

 Elimination of Conflicts:
The SEC should consider “whether rulemaking would be appropriate to prohibit certain conflicts, to require firms to mitigate conflicts through specific action, or to impose specific disclosure and consent requirements” (vii)


The SEC should consider the most effective means of disclosure, i.e., “which disclosures might be provided most effectively (a) in a general relationship guide akin to the new Form ADV Part 2A that advisers deliver at the time of entry into the retail customer relationship, and (b) in more specific disclosures at the time of providing investment advice (e.g., about certain transactions that the Commission believes raise particular customer protection concerns)” (vii)

The SEC also should consider “the utility and feasibility of a summary relationship disclosure document containing key information on a firm’s services, fees, and conflicts and the scope of its services (e.g., whether its advice and related duties are limited in time or are ongoing)” (vii)

Principal Trading.  The SEC “should address through interpretive guidance and/or rulemaking how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading” (vii)
Duty of Care

The SEC “should consider specifying uniform standards for the duty of care owed to retail investors …. Minimum baseline professionalism standards could include, for example, specifying what basis a broker-dealer or investment adviser should have in making a recommendation to an investor” (vii)

Personalized Investment Advice About Securities

The SEC “should engage in rulemaking and/or issue interpretive guidance to explain what it means to provide ‘personalized investment advice about securities’” (vii)

Harmonization of Regulation

  The staff also identified other areas where regulation of investment advisers and broker-dealers differs and recommended that the SEC consider whether regulation in those areas “should be harmonized for the benefit of retail investors”(viii)

• Advertising and Other Communications
• Use of Finders and Solicitors
• Supervision
• Licensing and Registration of Firms
• Licensing and Continuing Education Requirements for Persons Associated with Broker-Dealers and Investment Advisers
• Books and Records


With respect to benefits, the study states that “the Staff believes that the uniform fiduciary standard and related disclosure requirements may offer several benefits, including the following:

• Heightened investor protection;
• Heightened investor awareness;
• It is flexible and can accommodate different existing business models and fee structures;
• It would preserve investor choice;
• It should not decrease investors’ access to existing products or services or service providers;
• Both investment advisers and broker-dealers would continue to be subject to all of their existing duties under applicable law; and
• Most importantly, it would require that investors receive investment advice that is given in their best interest, under a uniform standard, regardless of the regulatory label (broker-dealer or investment adviser) of the professional providing the advice” (viii)


The study notes that it is “sensitive to the costs that could be incurred by investors, broker-dealers, investment advisers, and their associated persons due to any change in legal or regulatory standards related to providing personalized investment advice to retail investors” (143).   It also observes that “costs associated with possible regulatory outcomes are difficult to quantify” and that the rulemaking process would provide commenters the opportunity to provide information on costs (144).  The study then goes on to discuss costs associated with three options: eliminating the broker-dealer exclusion (which it identifies as the most expensive and which it does not recommend), adopting a uniform fiduciary standard, and additional harmonization of the regulatory regime.

 With respect to adopting a uniform fiduciary standard, the study reviews various options broker-dealers might take in response to new regulation and sums up by stating the obvious:

[T]o the extent that broker-dealers respond to a new standard by choosing from among a range of business models, such as converting brokerage accounts to advisory accounts, or converting them from commission-based to fee-based accounts, certain costs might be incurred, and ultimately passed on to retail investors in the form of higher fees or lost access to services and products. Any increase in costs to retail investors detracts from the profitability of their investments (162).

Similarly, with respect to additional harmonization, the study states:

Ultimately, the costs associated with additional harmonized standards would depend on various factors, including which and how many standards are harmonized, whether the harmonization had an overall greater impact on broker-dealers or on investment advisers, how broker-dealers and investment advisers decide to respond to such harmonization (e.g., by pursuing any of the potential outcomes described above, or others not contemplated in this Study), and the extent to which any increased costs on intermediaries (i.e., broker-dealers and investment advisers) were passed on to retail customers (163).

Future posts will review and assess responses to the SEC staff study on Section 913.





August 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 30, 2011

Former Beazer CFO Agrees to Give Up Bonus Compensation

The SEC announced a settlement with James O'Leary, the former chief financial officer of Beazer Homes USA, to recover his bonus compensation and stock sale profits from the period when the Atlanta-based homebuilder was committing accounting fraud.  According to the SEC’s complaint, O’Leary is not personally charged with misconduct, but is required under Section 304 of the Sarbanes-Oxley Act to reimburse Beazer more than $1.4 million that he got after Beazer filed fraudulent financial statements during fiscal year 2006.

Without admitting or denying the SEC’s allegations, O’Leary agreed to reimburse Beazer $1,431,022 in cash within 30 days of entry of the court order approving the settlement. This amount includes O’Leary’s entire fiscal year 2006 incentive bonus: $1,024,764 in cash incentive compensation and $131,733 previously received from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. The settlement amount also includes $274,525 in stock sale profits. The SEC’s settlement with O’Leary is subject to court approval.

August 30, 2011 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Seeks Judicial Review of the Definition of a Broker

The Eleventh Circuit will have an opportunity to weigh in on the elusive distinction between a "broker" and a "finder" if the SEC is successful in persuading a Florida federal district court to certify the issue in SEC v. Sky Way Global LLC (No. 8:09-cv-455-T-23TBM, Decided Apr. 1, 2011).  In this case, according to the district court, the SEC failed to meet its burden to show that the defendant Kramer "engaged in the business of effecting transactions in securities in the accounts of others." 

The SEC's allegations involve efforts on the part of Kramer to solicit sales of stock in Skyway Aircraft. Pursuant to a "cooperative"  agreement between Kramer andd another defendant Baker (through his company Affiliated Holdings) to share with each other business opportunities and split fees, Kramer introduced Talib, a registered broker, to Baker and Skyway.  Talib ultimately sold $14 million of Skyway shares to investors, for which Kramer received between $189,000 and $200,000.  This transaction, however, according to the court, did not make Kramer a broker because his only involvement was to bring the two parties together.  Specifically, Kramer did not participate in negotiations or in any way promote an investment in Skyway to Talib or his investors.

Kramer also told "a small but close group" about Skyway, directed them to Skyway's website, opined that Skyway was a "good investment" and received from Baker Skyway shares when he reported the number of Skyway shares members of this group purchased through registered brokers (20% of reported shares).  The court thought this activity was "odd, but not 'broker' activity."  The court concludes that Kramer's conduct was similar to the activity of an "associated person" of an unregistered broker, who, in this case, was Baker or his company Affiliated Holdings.  Kramer did not contact a broker to encourage the broker to sell Skyway shares, did not field investor inquiries, and did not counsel investors to purchase Skyway shares.

According to an BNA Securities Law Daily Report, the federal district court preliminarily agreed to certify as final the judgment to permit the agency to appeal the judgment.  Defendant Kramer has until August 31 to show cause wny the motion should not be granted.

The definition of a "broker" is an important one, and further judicial explication would be welcome.

August 30, 2011 in Judicial Opinions | Permalink | Comments (2) | TrackBack (0)

Monday, August 29, 2011

SEC Finds Broker Misrepresented Risks of Equity-Linked Notes

In an administrative proceeding the SEC and David G. Brouwer settled allegations that during 2007 and 2008, Brouwer recommended equity-linked notes to many of his customers and told customers that the equity-linked notes were safe when in fact they were not.  He also failed to disclose certain of the investment’s material risks and failed to adequately disclose that there was a possibility that the equity-linked notes would convert into the underlying securities at a value less than the invested principal. Further, Brouwer’s recommendations of equity-linked notes were unsuitable for at least two customers, based on their stated risk tolerance, investment objectives and other factors.

Based on the above, the Order bars David G. Brouwer from association with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization, and orders him to pay disgorgement of $33,000 and prejudgment interest of $6,137.25 and a civil money penalty in the amount of $33,000. David G. Brouwer consented to the issuance of the Order without admitting or denying any of the findings.

August 29, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Floridians with Running Ponzi Scheme Directed at Teachers and Retirees

The SEC charged two Florida men, John Davis Risher and Daniel Joseph Sebastian, with operating a Ponzi scheme that fraudulently raised approximately $22 million from more than 100 investors, many of whom were Florida teachers or retirees.   According to the SEC’s complaint, Risher and Sebastian marketed the fund under the names Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. They described themselves in fund offering documents as “two unique individuals” who used their expertise to “create an investment vehicle that would allow investors to capitalize from both bull and bear markets.”  Risher boasted to investors that he had substantial experience in trading equities and providing wealth and asset management services. In reality, Risher had a lengthy criminal history, spending 11 of the last 21 years in jail.

The SEC seeks permanent injunctions, disgorgement, and financial penalties against Risher and Sebastian.  The U.S. Attorney’s Office for the Middle District of Florida, which conducted a parallel investigation of this matter, has filed criminal charges against Risher.

August 29, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Additional Guidance on Social Networking Websites

In August 2011 FINRA issued Regulatory Notice 11-39, Guidance on Social Networking Websites and Business Communications, to supplement its January 2010 Regulatory Notice 10-06, which provided guidance on the application of FINRA rules governing communications with the public to social media sites. The 2011 Release is in response to additional questions from firms and provides further clarification concerning application of the rules to new technologies.

August 29, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)