Securities Law Prof Blog

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

Wednesday, March 25, 2009

SEC Obtains Preliminary Injunction Against West Virginia-Based Ponzi Scheme

The SEC announced that on March 23, 2009, the federal district court in the Western District of Virginia entered a preliminary injunction order, by consent, against John M. Donnelly, Tower Analysis, Inc., Nasco Tang Corp., and Nadia Capital Corp.  The preliminary injunction restrains Donnelly and the other defendants from violating certain antifraud provisions of the federal securities laws. Also by consent, Judge Conrad ordered that the defendants' and relief defendants' assets remain frozen until further notice, except for a carve-out to provide one relief defendant with reasonable living expenses. The preliminary injunction order continues the relief originally obtained on March 11, 2009, in response to the Commission's emergency civil injunctive action that sought a temporary restraining order, an order freezing assets, disgorgement and civil penalties, and other relief against Donnelly and the other defendants based on their alleged violations of the federal securities laws.

The Commission's complaint alleges that from at least 1998, Donnelly fraudulently obtained at least $11 million from as many as 31 investors through the sale of securities in the form of limited partnership interests in three investment funds. The complaint alleges that Donnelly told investors that he would pool their funds to invest in, among other things, stock and bond index derivatives. According to the complaint, despite representations to investors that he had generated annual returns of as much as 22%, Donnelly has done almost no securities trading. The complaint alleges that instead of using investor funds to execute trades, Donnelly used investor funds to repay other investors, and paid himself approximately $1 million in salary and fees during the last three years alone. The preliminary injunction enjoins Donnelly and the other defendants from violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The defendants consented to the preliminary injunction and continued assets freeze, without admitting or denying the SEC's allegations.

March 25, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Obtains Asset Freeze Against Chicago-Based Investment Advisor

The SEC announced that on March 24, it obtained emergency relief against investment adviser The Nutmeg Group, LLC, and its principals Randall and David Goulding. In its complaint, filed March 23, the Commission alleges that Nutmeg, which controls and provides investment advice to 13 investment funds, and advises two additional investment funds, has misappropriated client assets, made misrepresentations to its clients, failed to comply with its custodial obligations and failed to keep required books and records.  According to the complaint, Nutmeg and the Gouldings misappropriated over $4 million in client assets by transferring them to third parties.  Based on the Commission's allegations, the United States District Court for the Northern District of Illinois entered an order (TRO) temporarily enjoining Nutmeg from violating provisions of the Investment Advisers Act of 1940 and freezes Nutmeg's assets.

 In addition to the emergency relief already obtained, the SEC is seeking preliminary and permanent injunctions and disgorgement against all defendants, and civil penalties against Nutmeg and Randall Goulding. The lawsuit also seeks disgorgement from relief defendants David Goulding, Inc., David Samuel, LLC, Financial Alchemy, LLC, Philly Financial, LLC, Samuel Wayne and Eric Irrgang. The matter is ongoing.

March 25, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 24, 2009

Bernanke and Geithner Testify Before Financial Services on AIG

Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner testified today before House Financial Services Committee on AIG and those bonuses.

March 24, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Wachovia for Customer Notification Violations

FINRA announced that it fined Wachovia Securities, LLC and First Clearing, LLC, both of St. Louis, MO, $1.1 million for the firms' failure to provide more than 800,000 required notifications to customers over a five-year period ending in 2008. As a part of the settlement with FINRA, the firms are required to retain an independent consultant to review their supervisory systems and processes.   At the time of the activity at issue, Wachovia Securities and First Clearing were both subsidiaries and non-bank affiliates of Wachovia Corporation. On Dec. 31, 2008, Wachovia Corporation was acquired by Wells Fargo & Company.

FINRA found that the failures by Wachovia Securities and First Clearing were the result of various computer programming and operational problems that went undetected by the firms' internal controls procedures and supervisors. Those failures included over 300,000 notifications of changes in investment objectives and approximately 340,000 notifications of changes of address.

FINRA also found that First Clearing failed to send notifications of the existence of clearing agreements to over 54,000 customers and failed to send required margin disclosure statements to more than 50,000 customers. First Clearing also failed to provide customers with trade confirmations for certain bond transactions that accurately reflected the ratings of bonds; failed to provide required information to holders of certain debt, including information about partial call notifications; and, failed to send notifications to customers about certain asset transfers.  In addition, FINRA found that Wachovia Securities and First Clearing failed to have written policies or procedures in place relating to the required notifications and failed to assign supervisory review for various automated mailing systems. FINRA found that the violations went undetected because of the firms' failure to implement appropriate internal controls and testing. FINRA also found that Wachovia Securities and First Clearing failed to establish adequate supervisory systems and procedures relating to the required notifications.

 In settling these matters, Wachovia Securities and First Clearing neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

March 24, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Freezes Assets in Alleged Oil and Gas Scam

The SEC charged a Los Angeles man and two of his companies with securities fraud and obtained an emergency court order to freeze their assets and halt an alleged ongoing oil and gas investment scheme they have been operating out of a boiler room in Los Angeles.

According to the SEC’s complaint, Clement Ejedawe, a/k/a Clement Chad and his companies, Innova Energy LLC and Innova Leasing and Management, raised at least $1.3 million from over 30 investors by promising guaranteed returns on working interests in oil and gas leases or oil and gas drilling equipment. In fact, according to the SEC’s complaint, the defendants did not use investor funds for the oil and gas business but rather to pay Ejedawe’s personal expenses.  According to the complaint, Ejedawe is the subject of at least seven separate cease-and-desist or desist-and refrain orders relating to his unregistered offerings of securities, including orders from California, Alabama, Pennsylvania, Maryland, Kansas, and Washington. Defendants both misrepresented and failed to disclose these state orders to prospective investors.

The SEC obtained an order (1) freezing the assets of Innova Energy, Innova Leasing and Management, and Ejedawe; (2) requiring accountings; (3) prohibiting the destruction of documents; and (4) granting expedited discovery; and (5) temporarily enjoining the Innova entities and Ejedawe from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. A hearing on whether a preliminary injunction should be issued against the defendants is scheduled for April 6, 2009. The SEC also seeks permanent injunctions, disgorgement, and civil penalties against Ejedawe and the Innova entities.

March 24, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Managing Director at San Francisco Brokerage Firm Consents to SEC Fraud Charges

The SEC filed today a civil injunctive action in federal district court in San Francisco against David "Scott" Cacchione, a former Managing Director at San Francisco-based brokerage firm Merriman Curhan Ford & Co. ("Merriman"), alleging that he helped a friend bilk banks and private lenders out of approximately $45 million in 2007 and 2008. The SEC alleges that Cacchione provided Silicon Valley venture capitalist William J. "Boots" Del Biaggio III with Merriman customer account statements, which Del Biaggio doctored and used as collateral to obtain fraudulent loans. In the action, the SEC also charged Cacchione with defrauding his own customers by purchasing risky penny stocks in their accounts without their permission.

Cacchione, without admitting or denying the complaint's allegations, has agreed to a permanent injunction from violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. In addition, Cacchione has consented to the institution of public administrative proceedings against him in which he will be barred permanently, pursuant to Section 15(b) of the Exchange Act, from working as a registered representative at a brokerage firm. Finally, Cacchione also has agreed that, at a later date, the court in this matter shall determine the amount of ill-gotten gains (disgorgement) and civil monetary penalties that Cacchione will be required to pay.

The SEC sued Del Biaggio in December 2008 in an action titled Securities & Exchange Commission v. Del Biaggio, CV-08-5450 CRB (N.D. Cal. Dec. 4, 2008). A final judgment, by consent, was entered where Del Biaggio was permanently enjoined from further violations of the antifraud provisions of the federal securities laws. In a separate settled administrative proceeding, the SEC permanently barred Del Biaggio from serving as an investment adviser. Also in December 2008, the U.S. Attorney's Office filed criminal charges against Del Biaggio. Del Biaggio pled guilty to the criminal charges in February 2009 and is expected to be sentenced on June 10, 2009.

Separately today, the U.S. Attorney's Office for the Northern District of California (USAO) also filed criminal charges against Cacchione arising from some of the same conduct that is alleged in the Commission's complaint.

March 24, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Panelists for Credit Rating Agencies Roundtable

The SEC announced the expected panelists for its April 15 roundtable relating to its oversight of credit rating agencies.  The roundtable will be held at the SEC's Washington, D.C., headquarters and will begin at 10 a.m. ET with opening remarks from SEC Chairman Mary L. Schapiro.  Discussion topics will include issues related to recent SEC rulemaking initiatives, such as conflicts of interest, competition, and transparency. The roundtable will consist of four panels.

Roundtable participants will include leaders from investor organizations, financial services associations, credit rating agencies, and academia.

10:10 a.m. — Panel One: Current NRSRO Perspectives: What Went Wrong and What Corrective Steps Is the Industry Taking?
Daniel Curry, DBRS
Sean Egan, Egan-Jones Ratings
Stephen Joynt, Fitch Ratings
Raymond McDaniel, Moody's Investor Service
Deven Sharma, Standard & Poor's

11:30 a.m. — Panel Two: Competition Issues: What are Current Barriers to Entering the Credit Rating Agency Industry?
Ethan Berman, RiskMetrics Group
James H. Gellert, RapidRatings
George Miller, American Securitization Forum
Frank Partnoy, University of San Diego
Alex Pollock, American Enterprise Institute
Damon Silvers, AFL-CIO
Lawrence J. White, New York University

1:15 p.m. — Panel Three: Users' Perspectives
Deborah A. Cunningham, Securities Industry and Financial Markets Association
Alan J. Fohrer, Southern California Edison
Christopher Gootkind, Wellington Management
James Kaitz, Association of Financial Professionals
Kurt N. Schacht, CFA Institute
Bruce Stern, Association of Financial Guaranty Insurers
Paul Schott Stevens, Investment Company Institute

2:45 p.m. — Panel Four: Approaches to Improve Credit Rating Agency Oversight
Richard Baker, Managed Funds Association
Jörgen Holmquist, European Commission
Mayree C. Clark, Aetos Capital
Joseph A. Grundfest, Stanford Law School
Glenn Reynolds, CreditSights
Stephen Thieke, Group of Thirty

March 24, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, March 23, 2009

Ketchum's Remarks on Risk Management

An excerpt from remarks by Richard G. Ketchum, Chairman & Chief Executive Officer, Remarks From the SIFMA Compliance & Legal Division's Annual Seminar:

   Let's talk about risk management.

 Several months ago on CNBC, John Gutfreund was asked about the leverage ratios employed by Solomon Brothers under his watch as the head of that organization. He replied that leverage ratios of eight to one gave him heart palpitations. Whatever the accuracy of that assertion, there is no question that leverage ratios rose to unsustainable heights and were rationalized under the banner of the more efficient use of capital. When the system is so leveraged and that leverage begins to unwind, then credit freezes, contract settlements cease, and no institution of any size in terms of revenue, cash flow or capital is safe—especially if that institution is dependent upon external sources of funding, which is the very nature of financial service institutions.

 And, of course, it wasn't only leverage itself, but also the nature of the assets being leveraged. A certain amount of financial hubris set into the belief that modeling risk essentially crowded out, what people now term in various ways—as "black swans," "idiosyncratic risk" or "fat tails." Whatever term you may use, it is the consideration of what happens when that portion of risk at the tail end of the curve happens to manifest. We also now understand correlational risk as perhaps never before—the risk that if there is a two percent modeled risk of default in an asset, the occurrence of that event substantially causes the market in that entire asset class to cease to exist. It is ongoing in an ever more complex financial world.

 In my short time in the industry, I participated in risk management exercises, and let me emphasize that I understand just how difficult that process is. But the painful lessons learned from the last 18 months cannot be forgotten. I will leave to the SEC and Fed to determine how leverage and capital requirements must be adjusted, but changes in the risk management process is equally important. First, scenario analyses need to be performed by independent risk managers that are not in love with the positions or the strategies. Second, scenarios must always evaluate cross-asset contagion risk. Third, the firm must react immediately when there are dramatic market and economic changes to reevaluate the exposures and maximum potential losses, with a careful appreciation of funding implications resulting from holding company exposures and careful concern as to how customers are being advised. And finally, this must be a task that is not delegated by the CEO and senior management of the broker-dealer no matter what the press of other business. Beyond each of these points, compliance must be an active participant in this process. The artificial border between risk management and compliance must end. No, you can't run the numbers, but your instincts and natural concerns regarding impacts on your customers are critical to effective risk management oversight.

 Similar to risk management, there are critical lessons learned for the compliance function rising from the market collapse and credit crisis. The classic example of this, of course, is the auction rate securities market. Investors didn't lose money simply because of a compliance failure on the part of firms, but the impending scarcity of new buyers at auction was, at some point, not a real secret.

 What is clear from the recent experience with auction rate securities is that every broker-dealer must understand the risk-reward quotient of products and that understanding must extend from the product originator to the furthest down-line firm marketing the product. Product review cannot be a static process and firms must understand when market forces render a change in the risks of a product at the earliest reasonable time.

 If we've learned anything from the ARS episode, it's that senior management at firms must be involved in compliance. Compliance officers need to have access to senior leaders and there needs to be a genuine demonstration in responding to potential problems, investing in technology solutions and, most important, providing adequate staffing in the area of compliance.

March 23, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Former Mercury Interactive CFO Settles Backdating Charges with SEC

The SEC today settled civil fraud charges against Sharlene Abrams, a former Chief Financial Officer of Mercury Interactive, LLC, arising from an alleged scheme to backdate stock option grants and from other alleged misconduct.  The SEC previously charged Abrams and three other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint alleges that during this period certain of these executives, including Abrams, backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

Without admitting or denying the allegations in the Commission's complaint, Abrams consented to the entry of a final judgment permanently enjoining her from violating and/or aiding and abetting violations of the antifraud, financial reporting, record-keeping, internal controls, false statements to auditors, securities ownership reporting and proxy provisions of the federal securities laws, and barring her from serving as an officer or director of a public company. Abrams will pay $2,287,914 in disgorgement, of which $1,498,822 represents the "in-the-money" benefit from her exercise of backdated option grants, and a $425,000 civil penalty. Under the terms of the settlement, Abrams' disgorgement of her "in-the-money" benefit—$1,498,822—would be deemed satisfied by her previous voluntary payment of that amount to Mercury. The settlement is subject to the approval of the United States District Court for the Northern District of California.

As part of the settlement, and following the entry of the proposed final judgment, Abrams, without admitting or denying the Commission's findings, has consented to the entry of Commission order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending her from appearing or practicing before the Commission as an accountant.

The Commission previously filed settled charges in this matter against Mercury and three former outside directors of Mercury. On May 31, 2007, the Commission filed civil fraud charges against Mercury based on the stock option backdating scheme and other fraudulent conduct noted above. Mercury, which was acquired by Hewlett-Packard Company on Nov. 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. See Litigation Release No. 20136 (May 31, 2007). On September 17, 2008, the Commission filed settled charges against three former outside directors of Mercury alleging that they recklessly approved backdated stock option grants and reviewed and signed public filings that contained materially false and misleading disclosures about the company's stock option grants and company expenses. The outside directors settled the matter by consenting to permanent injunctions and the payment by each director of a $100,000 penalty. See Litigation Release No. 20724 (Sept. 17, 2008). Mercury and the outside directors settled the charges without admitting or denying the allegations in the Commission's complaint.

The Commission's litigation against the other senior Mercury officers is continuing.

March 23, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Censures Cornerstone Capital Management

The SEC issued anOrder Making Findings and Imposing Remedial Sanctions Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (Order) against Cornerstone Capital Management, Inc. (Cornerstone Capital), a registered investment adviser, and its sole principal, Laura Jean Kent (Kent), of Redwood City, California.  In the Order, the Commission finds that from 2003 through 2007 Cornerstone and Kent, despite knowing that the value of certain illiquid securities (also referred to as alternative private investments) in which they had invested approximately $15 million of their clients' funds were severely impaired, continued to assure their clients that the investments retained their full value. Even after the principals behind some of those investments were convicted of criminal fraud, Kent continued to charge an assets-under-management fee based on the original cost of the failed investments, collecting $335,758 in inflated fees from her clients.

Based on the foregoing, the Order finds that Cornerstone and Kent willfully violated Sections 206(1) and 206(2) of the Advisers Act, which make it unlawful to employ any device, scheme, or artifice to defraud any client or prospective client; and to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.

The Order censures Cornerstone and Kent, and requires them to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act. The Order also requires Cornerstone and Kent to disgorge improper management fees of $335,758 and prejudgment interest of $80,000, for a total of $415,758, but waives payment of such amount except for $335,758 and declines to impose a penalty based on Cornerstone's and Kent's sworn representations concerning their financial condition. The Order directs Cornerstone and Kent to pay their disgorgement quarterly over a three-year period, and also requires Respondents to develop a plan to distribute the disgorgement ordered.

In addition, the Order requires Cornerstone and Kent to comply with undertakings to retain an independent consultant to value all of Cornerstone's alternative private investments, if any, for a three-year period. Cornerstone and Kent agreed to the issuance of the Order without admitting or denying its factual findings. (Rel. IA-2855; File No. 3-13199)

March 23, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Asset Freeze Against Alleged Investment Fraud

The SEC today obtained an emergency court order to halt an ongoing scheme by a Palmdale, California company and two individuals who have defrauded investors through a series of false claims including that Warren Buffett is associated with the company.  According to the SEC's complaint, International Realty Holdings, Inc. (IRH), Ottoniel Medrano (a prison guard at California City Correctional Center), and Leticia Isabel Medrano have raised hundreds of thousands of dollars from investors in several states since October 2008. The defendants defrauded investors by falsely claiming, among other things, that Warren Buffett is IRH's "Honorary Chairman," that Berkshire Hathaway and Credit Suisse are involved in the investment, and that IRH has $4.8 billion in total assets and owns various properties throughout Asia. After obtaining money from investors, the Medranos transferred funds to offshore bank accounts.

The SEC's complaint, filed in federal district court in Los Angeles, CA, charges IRH and the Medranos with raising at least $485,000 and likely more than $700,000 in selling preferred stock in IRH. The rate at which the defendants have raised funds has increased substantially over the last two months, averaging about $250,000 per month. According to IRH's offering materials, defendants intended to raise up to $6 billion in the offering.

In its lawsuit, the SEC obtained an order (1) freezing the assets of IRH and the Medranos; (2) requiring the repatriation of assets; (3) requiring accountings; (4) prohibiting the destruction of documents; (5) granting expedited discovery; and (6) temporarily enjoining IRH and the Medranos from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against IRH and the Medranos. A hearing on whether a preliminary injunction should be issued against the defendants is scheduled for April 2, 2009 at 2 p.m.

March 23, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Palmiter & Taha on Manipulation of Mutual Fund Performance

Star Creation: The Manipulation of Mutual Fund Performance through Incubation, by Alan R. Palmiter,  
Wake Forest University - School of Law, and Ahmed E. Taha, Wake Forest University - School of Law, was recently posted on SSRN.  Here is the abstract:

The article argues that some mutual fund companies mislead investors by marketing new funds with artificially high returns. These companies create a number of small, new mutual funds that initially operate out of public view. After a period of incubation, the strong performers are actively marketed to the public while the weak performers are quietly terminated. By highlighting the successful incubator funds and hiding the unsuccessful ones, these companies create the illusion that that the successful funds' returns were the result of skill rather than luck. In addition, some companies subsidize their incubator funds to further artificially boost their performance. When the successful incubator funds are opened to the public, investors flock to them, attracted by the high advertised returns. However, the funds' luck and subsidies soon end, and thus so too do their high returns.

We argue that the SEC must do much more to prevent fund companies from using a manipulated incubation process to mislead investors. We also propose different regulatory approaches to this problem.

March 23, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

State Securities Regulators Testify Before Financial Services Committee

Delaware Securities Commissioner James Ropp and Massachusetts Secretary of the Commonwealth William Galvin appeared before the House Financial Services Committee on Friday, March 20. The hearing, led by Committee Chairman Barney Frank (D-MA), brought together federal and state securities regulators and law enforcement officials to discuss the enforcement of investor protection laws at the federal and state levels.

Testifying on behalf of the North American Securities Administrators Association (NASAA), Commissioner Ropp urged Congress to support the valuable contributions of state securities regulators through federal grants. “  Ropp also suggested deputizing state securities attorneys to serve as special prosecutors for complex securities cases; allowing states to review securities offerings currently exempt from state oversight under Rule 506 of Regulation D; including representatives from the state banking, insurance and securities regulatory agencies on the President’s Working Group on Financial Markets; toughening civil and criminal penalties for those who commit financial crimes, especially those who target senior investors; and increasing opportunities for victims of fraud to seek private actions.

Secretary Galvin, the top securities official in Massachusetts, urged the committee to “give the states the tools we need to maintain and enhance our ability to regulate effectively and protect investors.” Galvin also asked Congress to require that brokerages be in a fiduciary relationship to their individual retail customers. Under current law, broker-dealer firms deal with their customers on an arm’s-length basis, subject to an obligation of fair dealing. This means that customers cannot rely on their brokers to meet fiduciary obligations of loyalty, care and competence. In contrast to brokers, investment advisers work solely for their customers and have an acknowledged fiduciary duty to them.

March 23, 2009 in State Securities Law | Permalink | Comments (0) | TrackBack (0)

FINRA Fines 25 Firms for Breakpoint Failures

FINRA announced that it fined 25 broker-dealers a total of $2,145,000 for failures related to their completion of FINRA's (then NASD's) firm self-assessment of mutual fund breakpoint discount compliance.  All firms settled the charges without admitting liability.

 The self-assessment required firms that sold front-end load mutual funds to review their compliance in providing breakpoint discounts to customers during 2001 and 2002 and report those results to FINRA. Breakpoint discounts are volume discounts applicable to front-end sales charges (front-end loads) on Class A mutual fund shares. The self-assessment followed findings by NASD, the NYSE and the Securities and Exchange Commission that nearly one in three mutual fund transactions that appeared eligible for a breakpoint discount did not receive one.

The findings made in today's settlements result from FINRA's review of firms' compliance with the self-assessment requirements. The violations include failing to accurately report information; failing to send timely notices and responses to customers concerning the availability of breakpoint discounts; failing to provide timely refunds for missed breakpoints to customers; and failing to correctly calculate such refunds.

 In addition, FINRA found that three firms — Fox & Company Investments, Inc., First Midwest Securities, Inc. and Chase Investment Services, Corp. — failed to deliver breakpoint discounts during a later review period and continued to fail to have reasonable written supervisory procedures in place to assure that appropriate breakpoint discounts would be delivered to their customers during that later period.

 In its review, FINRA found that 14 firms — J.J.B. Hilliard, W.L. Lyons Inc., New England Securities, SunAmerica Securities, Inc., Multi-Financial Securities Corporation, H. Beck, Inc., Leonard & Company, Fox & Company Investments, Inc., Investors Capital Corp., vFinance Investments, Inc., FSC Securities Corporation, National Securities Corporation, Advantage Capital Corporation, Steven L. Falk & Associates, Inc. and Securities America, Inc. — failed to accurately and/or fully complete their self-assessments.

 FINRA further found that six of the firms — Multi-Financial Securities Corporation, Intersecurities Inc., SWS Financial Services, Spelman & Co. Inc., Securities America, Inc., and SIGMA Financial Corporation — failed to accurately complete a comprehensive trade-by-trade review of transactions. The trade-by-trade review was a required part of their customer remediation process following the self-assessment.

 Six firms — ProEquities, Inc., FSC Securities Corporation, Lincoln Investment Planning, Inc., New England Securities, Gary Goldberg & Co., Inc., and Leonard & Company — failed to provide timely refunds of breakpoint discounts to their customers. In addition, five firms — Leonard & Company, Gary Goldberg & Co., Inc., Financial West Group, GunnAllen Financial, Inc. and ProEquities, Inc. — failed to notify their customers on a timely basis — or failed to notify them at all — of the potential for reimbursement for missed breakpoint discounts. In addition, GunnAllen and ProEquities did not timely respond to customer inquiries about breakpoint discounts.

March 23, 2009 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

SEC Charges Escala Group and former officers with fraud

The SEC filed a disclosure and accounting fraud case against then-NASDAQ National Market issuer Escala Group, Inc.; its founder and former CEO Gregory Manning, and its former CFO Larry Lee Crawford, alleging fraudulent related party transactions between Escala and its parent company, Afinsa Bienes Tangibles, S.A. ("Afinsa"). Escala is a network of companies in the collectibles market specializing in stamps, among other things. Afinsa was a privately held Spanish company that sold investments in portfolios of stamps in Europe. According to the complaint, the fraudulent related-party transactions ceased after May 2006, when Spanish authorities raided Afinsa's offices and charged Afinsa and certain individuals with engaging in a massive unlawful pyramid scheme. 

The SEC complaint alleges a fraudulent business scheme based upon the secret and dramatic manipulation of collectible stamp values.  The complaint alleges that these false and misleading disclosures and omissions were material in that the related-party transactions contributed over $80 million to Escala's revenues and allowed Escala to meet its forecasts for either revenue or pre-tax net income for the third quarter and for year-end of fiscal year 2004, and for the first quarter and year-end in fiscal 2005. According to the complaint, as a result of these transactions, Escala went from trading at $1.47 per share on January 23, 2003, to a $32-per-share company with a purported market cap of $898 million in the span of a few years.

Simultaneous with the filing of the complaint in a Consent and proposed Final Judgment submitted for the Court's consideration, without admitting or denying the allegations in the complaint, Escala consented to a permanent injunction against future violations of these provisions.

The complaint charges defendants Manning and Crawford with violations of Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, [17 C.F.R. §§ 240.10b-5, 240.13b2-1, 240.13b2-2 and 240.13a-14], aiding and abetting Escala's violations of Sections 13(a), and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13, and seeks permanent injunctions against future violations, disgorgement of ill-gotten gains, prejudgment interest, civil penalties, and officer and director bars.

March 23, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Investment Management Director Addresses ICI Conference

Andrew J. Donohue, Director, Division of Investment Management, SEC, gave the Keynote Address, Investment Company Institute, 2009 Mutual Funds and Investment Management Conference, on March 23, 2009.

March 23, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Thursday, March 19, 2009

NY AG Says It Has List of AIG Bonus Recipients


"I have received the list of AIG FP employees who received retention payouts. Mr. Liddy testified in Congress yesterday that he intended to comply with our subpoena and expressed concern for employee safety. Mr. Liddy has in fact now complied with the subpoena. We are aware of the security concerns of AIG employees, and we will be sensitive to those issues by doing a risk assessment before releasing any individual’s name. The Attorney General's Office is a law enforcement agency and is experienced in making these assessments.

"As we perform our review, we will simultaneously be working with AIG over the next few days to determine which employees received payments and which chose to return the money they received.

"The Attorney General's Office will responsibly balance the public's right to know how their tax dollars are spent with individual security, privacy rights, and corporate prerogative.

"At this moment, with emotions running high, it is important that we proceed diligently, with care, reflection, and sober judgment.

"We thank AIG for their compliance."

March 19, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Sues Silicon Valley Hedge Fund Manager for Fraud

The SEC sued Albert K. Hu, a hedge fund manager with ties to Silicon Valley, for falsely claiming that his funds were overseen by experienced attorneys, auditors and other professionals, and for misappropriating investor funds. As part of its suit, the SEC is seeking an emergency court order freezing Hu’s assets. Yesterday, Hu, a long-time Bay Area resident, was arrested in Hong Kong on related criminal charges filed by the United States Attorney’s Office in San Jose.

Since 2001, as alleged in the Commission’s complaint, Hu claimed to manage hedge funds known as “Asenqua” and “Fireside.” The SEC alleges that Hu, and entities he controls, lied to investors from the beginning of his scheme. Hu and the Asenqua hedge funds falsely claimed that several prominent international law firms served as legal counsel for the Asenqua hedge funds. In addition, the defendants identified an individual as “Chief Financial Officer” of the Asenqua hedge funds, when in fact the person had no association with the funds. Hu forged the signature of the purported Chief Financial Officer in communications with investors, according to the complaint. Further, the defendants provided investors with supposedly independently audited financial statements for two of the funds. In reality, Hu paid for a virtual office with an address in the San Francisco financial district for the “independent” audit firm.

According to the Commission’s complaint, Hu raised more than $5 million from investors with connections to Silicon Valley and transferred hundreds of thousands of dollars of investor funds into foreign bank accounts without informing investors. The SEC further alleges that recently, Hu has refused investors’ requests for the return of their funds.

The Commission’s complaint charges Hu and the entities he controls, Asenqua, Inc.; Asenqua Capital Management, LLC; AQC Asset Management, Ltd.; and Fireside Capital Management, Ltd., with violating the antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Additionally, the SEC’s complaint charges Hu with violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. In the action filed today, the Commission sought a temporary injunction against violations of the antifraud provisions, a temporary freeze of defendants’ assets, an accounting, and other relief.

March 19, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

University of Dayton Law Presents Program on Bailout

The University of Dayton Law School is presenting The Fallout from the Bailout: The Impact of the 2008 Bailout on Lending Regulation, Securities Regulation, and Business Ethics, a day-long program tomorrow. Former SEC Chairman Harvey Pitt is a featured speaker, and I am a panelist on the panel addressing the role of the SEC in the 2008 Financial Meltdown. For further information, see the Law School's website.

March 19, 2009 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

FINRA Hearing Panel Sanctions Mutual Services Corp. on VA Reviews

A FINRA hearing panel fined Mutual Service Corporation (MSC) of West Palm Beach, FL, more than $1.5 million for failing to conduct timely reviews of variable annuity transactions, falsifying various books and records of the firm to make it appear that the variable annuity transactions were reviewed in a timely manner, and providing false and misleading information to FINRA during its investigation. The hearing panel sanctioned six current and former MSC personnel for their roles in the wrongdoing.  Three current or former employees — Denise Roth, a manager in MSC's operations department; Gari Sanfilippo, a former senior compliance examiner; and Kevin Cohen, a former compliance examiner — were permanently barred from the securities industry for falsifying the books and records of the firm. MSC's former Chief Administrative Officer and Executive Vice President, Dennis S. Kaminski; its Director of Operations, Susan Coates; and its former Chief Compliance Officer and Vice President, Michael Poston each were sanctioned for their supervisory failures. Kaminski and Coates each were fined $50,000 and suspended for six months from associating with any securities firm in a principal capacity. Poston was fined $20,000 and suspended from serving in a principal capacity for seven months.  Cohen and Sanfilippo have appealed the ruling to FINRA's National Adjudicatory Council (NAC), while the NAC unilaterally has called Kaminski's case for review of the sanctions. Sanctions against all three have been stayed pending a ruling from the NAC.

 In determining MSC's sanction, the hearing panel cited several aggravating factors. It considered first the firm's disciplinary history of deficient supervision of variable annuity transactions, but found more disturbing the fact that MSC deceived FINRA staff regarding the status of its supervisory system and procedures. The hearing panel found that MSC's supervisory and record keeping violations were "egregious."

March 19, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)